In re Ausburn, 524 B.R. 816

Background

Debtors Fred and Janet Ausburn refinanced their Benton, AR home in 1988; mortgage waived statutory redemption rights. A later mortgage modification set maturity in 2018.
FSB (successor to lender) obtained an Agreed Order Granting Decree of Foreclosure on October 28, 2014, which (1) gave the debtors 10 days to satisfy the judgment and (2) stated it extinguished all redemption and ownership interests if not redeemed.
Debtors defaulted on the settlement terms and on a second mortgage; sale was set for November 18, 2014.
Debtors filed Chapter 13 on November 17, 2014 (one day before the commissioner’s sale). The commissioner’s sale occurred November 18, 2014; the state court confirmed the sale in an Order of Confirmation signed December 1, 2014 and filed December 3, 2014.
Debtors moved to void the sale and to determine an automatic-stay violation, arguing their property became estate property and they could cure under 11 U.S.C. § 1322(c)(1). FSB argued debtors’ redemption rights terminated prepetition and thus the property was not estate property.
The bankruptcy court held the postpetition sale violated the automatic stay and was void ab initio, granted the Amended Motion, and accepted the parties’ agreement that no damages would be awarded.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the residence was property of the bankruptcy estate under 11 U.S.C. § 541	Debtors: § 1322(c)(1) creates a federal right to cure until the residence is sold at a foreclosure sale, so the residence was estate property when petition filed	FSB: Debtors’ statutory and equitable redemption rights terminated prepetition under Arkansas law, so no property interest existed at filing	Court: § 1322(c)(1) confers a federal right to cure until foreclosure sale; residence was estate property at filing
Whether the commissioner’s sale conducted after petition filing violated the automatic stay (11 U.S.C. § 362)	Debtors: Postpetition sale proceeded despite filing; stay prohibited that action	FSB: Sale followed state foreclosure process and judgment; redemption rights had been terminated prepetition	Court: Sale occurred postpetition and thus violated the automatic stay; sale void ab initio
Whether § 1322(c)(1) is preemptive of state redemption law	Debtors: Congress intended § 1322(c)(1) to preempt conflicting state law and fix foreclosure-sale as cut-off	FSB: State law termination of redemption should control	Court: § 1322(c)(1) preempts state law timing and creates a federal right to cure until the foreclosure sale is completed under state law
When a foreclosure sale is "completed" for § 1322(c)(1) purposes in Arkansas	Debtors: Sale completion occurs at commissioner’s sale or at confirmation? Argued sale was postpetition	FSB: Relied on state law extinguishment provisions in decree	Court: Under Arkansas law foreclosure sale is complete only upon court confirmation; here sale and/or confirmation occurred postpetition, so federal right survived until confirmation

Key Cases Cited

In re Sugarloaf Prop., Inc., 286 B.R. 705 (Bankr. E.D. Ark. 2002) (state-law redemption rights determine property interests under § 541)
In re Brown, 282 B.R. 880 (Bankr. E.D. Ark. 2002) (Arkansas law treats judicial foreclosure sale as complete when court confirms sale)
In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999) (§ 1322(c)(1) preempts state law and fixes foreclosure sale as federal cut-off for cure right)
TD Bank, N.A. v. LaPointe (In re LaPointe), 505 B.R. 589 (1st Cir. BAP 2014) (discussion of gavel vs. sold rule and interpretation of § 1322(c)(1))
In re Connors, 497 F.3d 314 (3d Cir. 2007) (Congress added § 1322(c)(1) to establish foreclosure sale as uniform cut-off for cure right)
In re Roach, 824 F.2d 1370 (3d Cir. 1987) (prior rule treating foreclosure judgment as terminating cure right; overruled by § 1322(c)(1) interpretation)
In re Vierkant, 240 B.R. 317 (8th Cir. BAP 1999) (actions taken in violation of the automatic stay are void ab initio)