2005 | Cited 0 times | D. New Hampshire | September 26, 2005


Theresa McAdam, the debtor in a bankruptcy proceeding beforethe United States Bankruptcy Court in the District of NewHampshire, filed a complaint seeking damages from Raymond Lordenfor violations of the Bankruptcy Code's automatic stay. See11 U.S.C. § 362 (2000). The bankruptcy court dismissed McAdam'scomplaint for failure to state a claim. McAdam appeals. For thereasons set forth below, I affirm the bankruptcy court'sdecision.


In October 2003, McAdam filed a Chapter 13 bankruptcy petition in this district.1 McAdam and her husband eachowned an undivided one-half interest in their residence inHollis, which they both occupied. Compl. ¶ 5. General ElectricCapital Corporation (GECC), a creditor with a claim secured by asecond mortgage on McAdam's residence, filed an emergency motionrequesting relief from the automatic stay to proceed with ascheduled foreclosure sale of the property. Id. ¶ 6-7. Thebankruptcy court granted the motion and Lorden was the successfulbidder at the foreclosure auction. Id. ¶ 8.

The foreclosure deed was recorded in the Hillsborough CountyRegistry of Deeds on November 7, 2003. Id. ¶ 9. Although theforeclosure sale was properly completed, McAdam and her husbandrefused to vacate the subject property. Id. Lorden then tookcertain actions, including filing a landlord/tenant evictionaction in the state district court, in an attempt to obtainpossession of the subject property. Id. ¶ 10.

On June 17, 2004, McAdam filed a complaint for damages forviolation of the automatic stay, alleging that Lorden failed to obtain relief from the automatic stay before taking theseactions. Id. McAdam sought an award of actual damages,including attorneys' fees and expenses, in the amount of $10,000plus punitive damages in the amount of $25,000 for Lorden'swillful violation of the automatic stay. See id.

Lorden moved to dismiss McAdam's complaint for failure to statea claim and McAdam objected. The bankruptcy court ruled that theautomatic stay did not apply to Lorden's actions and thusdismissed the complaint. McAdam appeals.


I review the bankruptcy court's dismissal of a complaint forfailure to state a claim de novo, "taking as true thewell-pleaded facts contained in the complaint and drawing allreasonable inferences therefrom in the plaintiff's favor."Garrett v. Tandy Corp., 295 F.3d 94, 97 (1st Cir. 2002); seealso Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 18 (1st Cir.2002). I may affirm, modify, or reverse a bankruptcy court'sdecision or remand for further proceedings. Fed.R.Bankr.P.8013. III. DISCUSSION

McAdam argues that she retained a protected interest in herresidence following the foreclosure sale by reason of hercontinued occupation and possession of the subject property.Lorden counters that the foreclosure sale and subsequentrecording of the foreclosure deed extinguished all of McAdam'slegal and equitable interests in the property. Alternatively,Lorden argues that the bankruptcy court should modify its orderretroactively to provide that the automatic stay would notprohibit his actions to obtain possession of the property.

The automatic stay has been described as "one of thefundamental debtor protections provided by the bankruptcy laws."Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Prot.,474 U.S. 494, 503 (1986) (quotation omitted). It bars "any act toobtain possession of property of the estate or of property fromthe estate or to exercise control over property of the estate."11 U.S.C. § 362(a)(3). Property of the estate includes "all legalor equitable interests of the debtor in property as of the commencement of the case."2 Id. § 541(a)(1). The staycontinues "until such property is no longer property of theestate." Id. § 362(c)(1).

The parties agree that McAdam's residence became part of thebankruptcy estate when she filed the bankruptcy petition. Thebankruptcy court nevertheless concluded that McAdam lost alllegal and equitable interests in the property when theforeclosure sale was completed and thus the subject propertyceased to be property of the estate at that time.

McAdam concedes that she lost any ownership interest in herresidence upon completion of the foreclosure sale. McAdam Br. at5-6 (Doc. No. 7). She also acknowledges that she could no longerexercise any right of redemption. McAdam Br. at 5-6 (Doc. No. 7);see N.H. Rev. Stat. Ann. ("RSA") § 479:18 (2001) ("All landsconveyed in mortgage may be redeemed by the mortgagor . . .before foreclosure." (emphasis added)). She argues, however,that she retained a possessory interest in the property as a holdover tenant or tenant at will, and that this interest isprotected by the automatic stay. I disagree.

First, the bankruptcy court's order allowing GECC to proceedwith the foreclosure sale appears to encompass all of McAdam'slegal and equitable interests in the subject property, includingany possessory interest that she may have had in the property.The bankruptcy court ordered that "GECC may exercise any and allof its rights against [McAdam] and her property pursuant to theterms, conditions and covenants of the Mortgage and applicablenon-bankruptcy law, including its foreclosure upon its mortgageagainst [McAdam's] residence." Ex. 1 (Order dated October 16,2003). Based upon this order, it does not appear that the courtintended that McAdam would retain an interest in the propertyafter the foreclosure sale that would remain subject to theautomatic stay. Accordingly, Lorden, as GECC's successor ininterest, had no reason to go back to bankruptcy court to againseek relief from the automatic stay, which his predecessor hadalready obtained.

From a practical standpoint, requiring the purchaser at aforeclosure auction to obtain separate relief from the automatic stay would deter potential bidders and would not serve thepurposes of the stay.

[T]he purpose of the stay is to give the bankruptcy estate and its fiduciary, either the trustee or the debtor-in-possession, an opportunity to (1) familiarize himself with the various rights and interests involved and with the property available for distribution, and (2) gather together the assets of the estate, determine their value, and liquidate or reorganize them. This goal is not achieved by applying the stay to a purchaser's attempt to obtain possession of residential real property wrongfully being held by the debtor/former owner, when the debtor has no good-faith, colorable claim to possession and the purchaser's right to possession is not in dispute.In re St. Clair, 251 B.R. 660, 667 (D.N.J. 2000), aff'd,281 F.3d 224 (3d Cir. 2001).

Second, I agree with the bankruptcy court that McAdam lost anyprotected interest that she had in the subject property when theforeclosure process was completed. Generally, state lawdetermines whether the debtor has any legal or equitable interestin property that is included in the bankruptcy estate, unlessfederal law requires a different result. Butner v. UnitedStates, 440 U.S. 48, 55 (1979); In re NTA, LLC, 380 F.3d 523,528 (1st Cir. 2004). Under New Hampshire law, a mortgagee may exercise the power ofsale to foreclose on a property when the mortgagor fails toperform a condition of the mortgage. RSA § 479:22 (2001). Theforeclosure process is completed when the foreclosure deed, acopy of the notice of the sale and the seller's accompanyingaffidavit are recorded in the registry of deeds. RSA § 479:26(2001). The title to the premises then passes to the purchaser"free and clear of all interests and encumbrances which do nothave priority over [the] mortgage." Id. ¶ III.

In Barrows v. Boles, 141 N.H. 382, 393 (1996), the NewHampshire Supreme Court held that the plaintiff did not retainany right to receive rent from tenants of his mobile home parksubsequent to foreclosure. The foreclosure auction occurred afterthe plaintiff filed a voluntary petition for bankruptcy and thebankruptcy court granted the mortgagee's request for relief fromthe automatic stay to proceed with the sale. Id. at 386. Theplaintiff claimed that the purchaser of the property tortiouslyinterfered with his contractual relationship with the tenants bysending a letter to the tenants instructing them to pay rentdirectly to the purchaser. Id. at 392. The letter was sent after the foreclosure auction but before the sale wascompleted. Id. Even though legal title did not pass to thepurchaser until the foreclosure deed was recorded, see RSA §479:26, III, the supreme court held that the debtor "possessedneither a legal nor an equitable interest in the property oncethe auctioneer's hammer fell and the memorandum of sale wassigned." Barrows, 141 N.H. at 393 (quotation omitted). I cannotsee why McAdam's situation is different merely because shewrongfully remained in possession of the property afterforeclosure.

McAdam nevertheless argues that because New Hampshire lawprovides some protection for holdover tenants, her possessoryinterest in the property should be protected by the automaticstay. State law provides that the purchaser at a mortgageforeclosure sale may recover possession from an occupant througha possessory action after providing notice in writing to quit thepremises. RSA § 540:12 (1997); see also RSA § 540:3, II (1997)(requiring thirty days' notice). Although state law may recognizeMcAdam's right to receive notice of the eviction proceedings,these statutes do not confer any rights upon the bankruptcy estate that would be protected by the automatic stay.See In re Crime Free, Inc., 196 B.R. 116, 119 (Bankr. E.D.Ark. 1996) (noting that under Arkansas law, debtor wrongfully inpossession of real property following foreclosure sale only has apossessory interest in the property which "amounts to no morethan the right to litigate eviction proceedings"); see also InRe Comis, 181 B.R. 145, 150 (Bankr. N.D.N.Y. 1994) (automaticstay does not apply to purchaser's claim to property acquired byforeclosure notwithstanding fact that debtor remains inpossession of foreclosed property).

McAdam also relies upon cases from other jurisdictions thathold that a debtor in possession of leased property has anequitable interest that may be included in the bankruptcy estateand protected by the automatic stay. See, e.g., Schewe v.Fairview Estates (In re Schewe), 94 B.R. 938, 946 (Bankr. W.D.Mich. 1989) (holding that the automatic stay is applicable todebtor's possessory interest in mobile home lot pursuant to amonth-to-month lease); In re Onio's Italian Rest. Corp.,42 B.R. 319, 321 (Bankr. S.D.N.Y. 1984) (holding that a debtor'sbare possessory interest in the premises without legal right is a residual interest and the court may stay an eviction warrant fora reasonable time for good cause). Likewise, courts haverecognized that a tenant's possessory interest in property isincluded in the bankruptcy estate when the bankruptcy petition isfiled and thus the landlord must seek relief from the automaticstay prior to terminating the lease or instituting evictionproceedings. See, e.g., In re Atlantic Bus. and Cmty. Corp.,901 F.2d 325, 328 (3d Cir. 1990); In re 48th St. Steakhouse,Inc., 835 F.2d 427, 430 (2d Cir. 1987). But see In reTurner, 326 B.R. 563, 573 (Bankr. W.D. Pa. 2005) ("[A] merepossessory interest (for instance, a `squatter' or tenant atsufferance) in an expired lease at the time of filing is notenough to sustain the protections of the automatic stay.")

None of these cases, however, squarely address the issue ofwhether a debtor retains a possessory interest in foreclosedproperty after the completion of a foreclosure authorized by thebankruptcy court. Although a tenant's possessory interest in realproperty may be recognized in some contexts, it is a verydifferent matter to hold that a debtor who refuses to surrenderpossession of property that is subject to a valid foreclosure sale has an interest in the property that is entitled toprotection under the automatic stay. The cases that McAdam citesthus do not support her claim against Lorden.

As discussed above, under state and federal law, McAdam's legaland equitable interests in the property terminated when theforeclosure process was completed. See In re Beeman,235 B.R. 519, 527 (Bankr. D.N.H. 1999); Barrows, 141 N.H. at 393. Thus,I conclude that McAdam's continued occupation of the subjectproperty after the foreclosure sale, without right to do so, doesnot create a property interest that is entitled to protection bythe automatic stay.

For the reasons stated above, the bankruptcy court's orderdismissing McAdam's complaint is affirmed.


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