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The Gavel Falls
On Aug. 3, 2007, the United States Court of Appeals for the Third Circuit broke what it called a 'virtual tie' among the New Jersey bankruptcy and district courts over the application of Bankruptcy Code section 1322(c)(1): whether a Chapter 13 debtor can cure a default on a mortgage secured by the debtor's principal residence between the time the residence is sold at a foreclosure sale and the time the deed is delivered to the successful bidder. In re Connors, __ F.3d, (3d Cir. 2007), 2007 WL 2215606. Although the Third Circuit resolved the rule for New Jersey, the issue exists in any state where the deed is delivered or further judicial proceedings contesting the foreclosures sale can occur after the foreclosures auction. In Connors, the debtor executed a note and mortgage on his New Jersey residence. He subsequently defaulted on the note and, at a foreclosure sale, the property was sold to a purchaser who had tendered the 20% deposit as required by
New Jersey state law. Four days later, the debtor petitioned for relief under Chapter 13 of the Bankruptcy Code and two weeks after that filed a Chapter 13 plan that proposed to cure the pre-bankruptcy arrearages on the note. The debtor did not, however, exercise his right to object to the foreclosure sale as allowed under N.J. Ct. R. 4:65-5 (which allows ten days to object to a foreclosure sale) or redeem the property within the 60-day grace period conferred by section 108(b) of the Bankruptcy Code.
After the 60-day period under section 108(b) expired, the successful bidder moved to lift the automatic stay so that it could tender the remainder of the purchase price and receive the deed to the property. The Bankruptcy Court granted the motion, holding that the debtor no longer had the right to cure under section 1322(c)(1) and that his state law redemption period had passed. The District Court affirmed.
Section 1322 sets forth the requirements for a Chapter 13 plan. Subsection (b)(3) states that a plan may 'provide for the curing or waiving of any default', and subsection (b)(5) states that the plan may 'provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.' 11 U.S.C. ' 1322(b)(3)(5). Subsection (c)(1) limits these rights, however, by providing, in relevant part, that '[A] default with respect to, or that gave rise to, a lien on the debtor's principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.' 11 U.S.C.
' 1322(c)(1) (emphasis added).
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