February 2024

In a decision that has sent ripples through the Massachusetts default servicing industry, in February 2024 the U.S. Bankruptcy Court for the District of Massachusetts (Katz, J.) ruled that the Bankruptcy Code allows a borrower/debtor to avoid a pre-petition transfer of the debtor’s equity of redemption in a foreclosed residential mortgage.  In short, the Bankruptcy Code allows a mortgagor who files for bankruptcy protection to undo a foreclosure sale.  The case is Neiva v. LoanCare, LLC, 2024 Bankr. LEXIS 337 (Bankr. D. Mass. February 9, 2024).

According to Carolyn Bankowski, Chapter 13 Trustee for the District of Massachusetts, “Considering cross-motions for summary judgment, the Court noted that under §544(a)(3) a transfer may be avoided unless the transfer of an interest in the debtor’s real property is so far perfected as to be effective against a bona fide purchaser under non-bankruptcy law and Massachusetts law is clear that a conveyance of an interest in real property must be evidenced by a recording at the relevant registry of deeds in order to be effective against third parties.”

“Although courts in Massachusetts have held that a mortgagor’s equity of redemption is extinguished when a memorandum of sale is signed at a foreclosure sale and that §1322(c)(1) only allows the cure of a mortgage on a primary residence prior to the foreclosure sale, the Court determined that those rulings were largely irrelevant to the issues before the Court.  The Court noted that there is no dispute that the foreclosure of the debtor’s equity of redemption occurred when the memorandum of sale was signed.  However, notwithstanding the completion of the foreclosure sale, the Bankruptcy Code through §522(h) and §544(a)(3) allows the debtor to avoid that transfer.  The Court determined that the fact that a debtor may avoid a completed foreclosure sale does not undermine the limitation on a debtor’s right to cure mortgage arrears under §1322(c)(1) when property has been sold at foreclosure and the foreclosure sale has not been avoided.  Instead, §1322(c)(1) applies only in determining whether a debtor has the right to cure mortgage arrears under a plan or whether a valid, unavoided foreclosure sale has occurred.  Accordingly, the Court held that the foreclosure of the debtor’s equity of redemption was a transfer of property of the debtor, that transfer was not evidenced by recording at the Registry as required to be effective against third parties under Massachusetts law, and was avoidable pursuant to §522(h) and §544(a)(3).  Consequently, the Court granted the debtor’s Motion for Summary Judgment.”

Default attorneys have discussed workarounds to shield their clients’ foreclosures from post-foreclosure Bankruptcy Code clawbacks.  However, none of the quick-and-easy options solve the problem.  Recording the memorandum of sale does not perfect the sale sufficiently to defeat the trustee’s avoidance powers under §522(h) and §544(a)(3).  Similarly, recording the certificate of entry does not perfect the sale because the certificate anticipates perfection of the sale by statute three (3) years after the sale occurred.  Therefore, the best option is to record the foreclosure deed and affidavit of sale as quickly as possible.

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