Bankruptcy Challenges and SB 1079: California’s New Foreclosure Rules

Steven Ernest:

All right. It is 1130 on the appointed day and I appreciate everybody being here. My name is Steve Ernest. I am the director of litigation and bankruptcy at the GII Law Firm. Today I have a panel of super geniuses with me. One of them is Dave Goodrich, who is the chapter 7 trustee in the United States Bankruptcy Court in Los Angeles in the Central District of California. Really smart, tremendously accomplished. I have had the great pleasure of watching most of his career and seeing him grow. He's a tremendous person. We're very fortunate and pleased to have him with us today. So thank you Dave, and if you want to find Dave coincidentally enough, you can go on the internet and his website is called Go2.Law, which is super easy to remember. I'm sure you had to pay a lot for that one, so please use it.

Secondarily, we have Marina Fineman who is a tremendous bankruptcy resource for my law firm. She works with me and she's just as smart as a person can be. Both of these people are abundantly capable and they're great resources for us, so thank you both for being here. Ordinarily, the marketing people tell me that I'm supposed to wait two minutes to start, and I just hate doing that. It's my least favorite part of webinars, so I'm not going to do that. I gave these intros a little bit too long intentionally so that I didn't have to wait for people who are stragglers. If you are a straggler, you're not hearing this live, but good news, the whole program is going to be recorded so you can pick up the parts that you've missed. Those come at exactly the same price as this webinar. It is free, so if you're just riveted and you think there's something you missed or you think you want to watch it again, like my daughter watching Taylor Swift videos over and over again, you can do it.

You can watch it as many times as you want, absolutely free. The other thing to know is if you have questions for us, this is going to be a very complete program. I'm sure we're going to cover everything that you would want to know, but in the off chance you have a question about something we've said or something that's just happened to you in your practice or in your life, post those questions in the q and a. The queue is for questions. The answers are going to be provided by these guys no doubt, but in the q and a, not in the chat. If you wanted to answer, if you wanted to answer, put it in the q and a. If you put it in the chat, we're not going to probably even ever see it, so that's a bad place for it. Put it in the q and a.

Without further ado, though, these super genius, lovely folks who I have here with me today are about to take over, but I'm going to introduce what we're talking about just a little bit. SB 10 79, the SB Senate bill in California came into effect the 1st of January, five years ago, four years ago, January 1st, 2021, and it became codified as civil code section 2 9 24 M. It was meant by our state legislature to address California's housing crisis. It changed the non-judicial foreclosure bidding process in a few ways, and we're going to talk about, we'll get into the weeds about that today, but sort of the overview of what 29 24 M does is when property goes to foreclosure, if the property itself contains one to four residential units, if it's five or more, it's not affected by anything we're going to say today, but if it's one to four, it is, and it provides certain advantages to folks who are deemed eligible bidders over regular institutional bidders or anyone else who bids at foreclosure sales.

Eligible bidders consist primarily of prospective homeowners or nonprofits, at least ostensibly that's the way it was designed in practice. Whether that happens is certainly the subject of much litigation, but prospective homeowners, people who want to move in and live in these places or nonprofits who want to provide low cost housing, that's who it's designed to advantage as eligible bidders and the advantages they get, they get 15 days after the foreclosure sale. So you think that it's all over. The auctioneers gavel has come down 15 days after that. If during that period these eligible bidders file what's called a notice of intent to bid, then they get 45 days after the foreclosure sale to tender those funds. So it's changed bidding strategies a little bit. We don't necessarily use credit bids quite as much as we did, but you don't want to make your bid too low to stick it to your guarantor.

That strategy doesn't work very well because these eligible bidders can come in and buy it for a dollar more than whatever your bid was. So bidding strategy is something to consider pretty carefully what happens to the property during the 45 days between the foreclosure sale and the expiration of this tender period. You have to ensure it. Can you get the tenants out? Do you change the locks on the door? What do you do? Well, we're going to talk about some of those things today. It's all a little bit complicated, but like I said, these people are really smart and they're going to tell you about it, but this procedure allows eligible bidding eligible bidders to avoid competitive bidding at the sale. They can just wait and find out what the sale price was and tender $1 more than that later, and by operation of the statute, they get the house and it gives them a little bit of extra time to research the property and decide whether they want to bid and get their money together and things like that, which might seem unfair to a lender. The lenders might be right in that regard, but too bad that's what the legislature said. So without further ado, Marina Fineman, look at that. There's a slide that I just skipped. If you want to find that one, go back to the recorded thing, but that's most of the stuff that I was just talking about. So Marina, tell us about this.

 

Marina, you're muted.

Marina Fineman:

Sorry. Hi, thank you for that introduction. Appreciate that. Thanks for the opportunity to give this talk. Dave and I are here to explain how there are now even more pitfalls because of SB 10 79, this has grown a wrench into what has become an established practice in bankruptcy that a sale, a foreclosure sale is final and a debtor cannot undo that sale. It used to be that there was what we called a race to the courthouse after an auction, a foreclosure sale, the debtor would run to the courthouse to try and file for bankruptcy before the buyer was able to record the deed of trust, and that sort of went on until various states. But in California, civil code section 29 24 HC was enacted, and what it said was that as long as you record the trustee's deed within 21 days of the sale, the sale is deemed to have occurred at eight o'clock in the morning on the date of the actual auction.

So it relates back and that's solved this entire problem and the cases in the bankruptcy courts in the ninth circuit have held that this is fine. Even if you file in the recorded deed after the sale, after our bankruptcy is filed, as long as it's within the 21 days, you're okay. What happened was 29 24 M was enacted and Steve just gave a bit of that background, but basically you are now there for one to four unit residential properties and eligible bidder, which is defined in the slide. There are various categories, but primarily the focus is on people who actually want to live in the house as opposed to investors can go ahead and buy this, but then a whole process opens up. So if a property is sold, a residential property at a foreclosure sale, the title, the winning bidder at the auction is no longer deemed to be the winning bidder.

That is no longer what's called final. The sale now is delayed. The determination of finality goes for 15 days in the beginning, so a notice of intent to bid has to be submitted within 15 days of the sale. If no notice of intent is submitted, then the buyer at the foreclosure sale has seven days to record the deed and then it will be deemed to relate back to the date of the sale. That's the first part of 29, 24 H. Now because this has now opened this up to where if a notice of intent to bid is submitted within 15 days, then a 45 day period opens up from the date of the sale during the next 30 days, whoever submitted a notice of intent to bid can now submit a bid to the trustee. It's closed auction. You just submit your bid and you have to submit the check for the full amount.

And at the end of this 45 days, the trustee who handled the foreclosure will select the buyer, the winning bidder, and the sale will become final at that point and will issue the deed to that person or entity. And from that period that winning bidder has 15 days or until the 60th day from the sale in order to go ahead and record the trustee's deed in order to have it relate back to the date of the actual auction. Now the problem here was that the legislature, when they added the second part of relation back within the 60 days to account for 29 24 M made a typo. And so what they did was basically say that the only kind of time that it will relate back when there is a winning bidder under 29 24 M is if it is a bid, a notice of intent to bid submitted by a tenant buyer.

Otherwise no other kind of buyer was qualified for the relation back. The typo was fixed in 2024, but I'll show you as we talk in a couple minutes about the cases where this caused a lot of issues because suddenly debtor started to file for bankruptcy after the foreclosure sale and argued that the deed doesn't relate back, and so the sale is void, and that threw a monthly wrench into this system that has been established for many years now that prevented a debtor from avoiding a sale by filing for bankruptcy after the foreclosure. So I will turn it over to Dave now to discuss some of the relevant bankruptcy sections.

David Goodrich:

Okay, thank you. We're going to go through some really boring stuff and I apologize for that, but it helps to provide a little bit of a backbone for why the intersection of this new statute under the civil code could wreak havoc for a lender or buyer going through the foreclosure process. Just like all of you who have been through the foreclosure process probably are aware under California Civil Code of Procedure and the civil code itself, there can be some real problems if you don't do things correctly. Same is true with bankruptcy court. The bankruptcy laws are draconian in certain sense, meaning that if you miss certain timing or deadline rights could be altered in a way that's the opposite of what should have happened, and if you've ever been caught in bankruptcy, you know that to be true. The conflicts of the automatic stay what becomes a state property and the rights of a bankruptcy trustee or a debtor in possession sometimes are superior to those of creditors, and there's a reason for it.

Generally speaking, it's to make sure there's an equal distribution to general unsecured creditors. So if we could go to the next slide, Steve. The first is a very simple concept. It's the automatic stay when the bankruptcy case is filed, the bankruptcy court issues an automatic stay. It is done on the minute the case is filed, meaning that anything that happens after that first minute of the bankruptcy filing is void in the event that there is not relief from the stay or an exception to this day, which we'll talk about in a minute. What happens where you have title to property, which is essentially in limbo under this new foreclosure law is what is at the heart of this presentation, does a deed that is recorded after the filing of a bankruptcy case where there's an automatic state issue become void under the ninth circuit case law that is in place that's prevailing.

Anything done in violation of the automatic state is void and the debtor or the trustee do not need to do anything to unwind whatever has happened because it simply is void. Steve, we go to the next slide. This next section again, this is really boring, I apologize, is section 5 41 A and what 5 41 A is? It's a description of what becomes a state property, so what is protected by the automatic stay, and generally it's everything anywhere and everywhere, which could also include paralegal title. The paralegal title concept is part of what we're going to discuss because while you're in this process of foreclosure, if the foreclosure cell has not become final and a bankruptcy case is filed, the debtor still holds something and it's bare legal title. So in other words, there's some interest that get swept back into the bankruptcy case. However, as we're to discuss there are exclusions to this so long as the foreclosure process is followed, even if you're completing that process, post-bankruptcy, in other words, during the automatic stay. Steve, you go to the next slide please.

The next concept is section 5 44, particularly it's BA bankruptcy trustee holds this superpower. It is the hypothetical junior lien creditor with the ultimate avoidance powers, which essentially gives a trustee the right to recover property notwithstanding other competing claims to the property. For example, if there's a wild deed out there to real estate, if that wild deed has not been recorded before the bankruptcy is filed, the bankruptcy trustee can recover the property and takes the ownership position at the top below that wild deed. The wild deed holder is essentially a stop from recording their deed because the bankruptcy, the state is protected by the bankruptcy state, the automatic state. And so the hypothetical judicial lien creditor position of a trustee is important to understand because in a situation where title is up in the air during a foreclosure process, it is potentially possible that a bankruptcy trustee could step in, sweep away rights and sell a property, notwithstanding an investor or maybe a tenant occupant purchasing a property of foreclosure sale.

Don't worry, it's very rare and you'll see why as we talk about these cases. 5 46 B is the exception to the automatic stay when it comes to perfecting an interest in property. And how that works is it's in tandem with non bankruptcy law, which the bankruptcy nerds like us, we call anything that's not bankruptcy, non bankruptcy law. For purposes of this discussion, it is the California Civic Code sections that we're going to talk about. If there is a statute or more under non bankruptcy law that allows an act to continue in order to obtain perfection and that act is done in compliance with state law, then the automatic state does not apply. There's an exception to the automatic state that allows a perfection of an interest post-bankruptcy without the worry of violating the automatic state and having the whatever is recorded. In this situation we're going to discuss it's a trustee's deed upon sale.

That deed can still be recorded post bankruptcy and the sale can become final without any worry about a trustee recovering the property or trying to avoid a transfer or stay violation being alleged. Alright, Steven, the next slide, five 50 is the next section, which is what happens in the event that there is a dispute over title and the trustee acting as the hypothetical lien creditor attempts to recover the property. Well, if the trustee can recover the property, the property comes into the bankruptcy estate and if the property cannot be had, the trustee is entitled to a judgment for the value of the property that might come into play in situations where there's a problem with the foreclosure sale as we'll discuss in a minute. And then there's one more concept C. Thank you. Finally, it's 5 51, but what happens to property once a bankruptcy trustee recovers it?

5 51 essentially says that that property is returned for the benefit of the creditors of the estate and it's preserved for the benefit of creditors of the estate. And in certain situations, the nature of what is recovered is different than the nature of the property that was transferred out. A property that is transferred away from the estate may have new claims, perhaps it has been there's a new lien on it. When the property is recovered, that lien may be unperfected. It may not apply to the property because the property was transferred under circumstances warranting the return of the property. So it's an interesting concept to think about as we're going through this foreclosure discussion because what happens if the foreclosure sale becomes, well, you try to make it final post bankruptcy, but you don't follow the correct steps and the cells invalidate it. What happens to the property in that situation? So those are the key concepts that we're going to discuss after we discuss four different cases about the statute itself and how they intersect with bankruptcy law. Alright, Marina.

Marina Fineman:

Okay, so I'll talk a little bit about how these concepts that Dave discussed are actually applied by courts in the context of these issues. And what happened was, first of all, this was a new law, so there wasn't a lot on it, but also there was some misinterpretation of the statute as it was first enacted even by the bankruptcy court. So the first, and there are only as I think right now for bankruptcy court decisions total on this. So this is not broadly discussed in the courts, but the first such decision came out in 2022 is called Inre Ford, and that was down here in the central district of California bankruptcy court. And in that case, the debtor's house was sold a foreclosure and then there were two notices of intent to bid submitted by eligible bidders who were not tenants of the property at the time.

The debtor after the sale about a month later filed for chapter 13, and then the buyer recorded the trustee's deed within 49 days after the sales. So even though it was post-petition, it was still within the 60 days of relation back period under the 29 24 hc. So the buyer then went into court and filed a motion for relief from stay or asked the court to determine that no stay applied because of the relation back provision and the court in both, there's a ninth circuit case called Inre Bai Wong, where the ninth circuit back in 2000 basically blessed this relation back period and affirmed the fact that a deed recorded post-petition is not a violation of the stay as long as it complies with the relation back provision. And so she relied on that case and she then applied 29 24 HC and said that because this deed was recorded within 60 days, it was deemed to have been perfected pre-petition on the actual date of the sale. The problem here is that as the statute was drafted where the typo was still there at the time, this relation back only applied to notices of intent to bid submitted by prospective tenant buyers. But Judge brand ignored that issue in that case. So that is how she ruled.

Now in Ray Hagar-

David Goodrich:

Before you get to that Marina, there's an important piece to this that I want to make sure we don't skip over, which is section 5 46 B, which is one of the sections that I talked about earlier, is something that judge brand relied upon. That section really talks about liens and security interest, but she has expanded it based upon that BAP decision that Ben c Wong, I can't say the case to include the recording of a trustee's deed upon cell as that type of interest which can be recorded and perfected post-bankruptcy so long as you're within the lookback window that is more what I call a safe harbor. In other words, you're within the safe harbor and 5 46 B allows you to record so long as you're in compliance with state law as far as the auction process goes. Sorry to interrupt.

Marina Fineman:

No, very helpful. Yes. So then in Inre Hagar from the Eastern District of the California court in 2023, the court took a different take and this was still when the typo was in effect. So there the house was foreclosed on in November, November 7th, 2022 and there were notices of intent to bid, but no bids were received. Now the foreclosure trustee in that case did not wait for the 45 day period to expire before it sent the trustee's deed over to the buyer at the auction and the buyer recorded the deed. But unbeknownst to the buyer, the day before the buyer recorded the deed, and this was before that 45 day period expired the debtor on December 1st, the debtor filed a bankruptcy case. The debtor claimed that she had no knowledge of the foreclosure sales, so she did not provide notice of her filing on December 1st to the buyer. The buyer recorded the trustee's deed on December 2nd. So coincidentally, perhaps this is what happened, and it wasn't until March of 23 that the buyer learned that the bankruptcy had been filed. The buyer went to court, sought relief from state, which the court granted, but the buyer didn't seek retroactive relief from state to basically bless the fact that he recorded the deed post post-petition arguably in violation of the automatic stay because it was after the debtor had filed her case.

David Goodrich:

There's a couple interesting nuggets out of this case. One is Judge Reto in the Eastern District of California, he noted that the California's non-judicial foreclosure system is designed to provide lender beneficiary relief, which is inexpensive and efficient. But then he said with this new revision to 29 24, oh my how things have changed and the court is correct because what is happened as far as the intersection of the statute with bankruptcy law is it's giving multiple opportunities for a foreclosure trustee to mess up when there is an error as there was in this case. The trustees' deed upon se can be invalidated. It's a violation of the automatic state, and that's what the judge means by that is that a simple mistake in timing where a trustee's deed is recorded too early or too late, goes from being recorded and perfected relating back to the auction date at 8:00 AM and not subject to the automatic state and not subject to the property of the estate inclusion or 5 41 a to if you mess up and miss the deadline or you do early or late, there's a 15 day window, then the opposite happens. The property gets swept into the bankruptcy case, the foreclosure sale is essentially put back to square one. The any transfer deed recorded is void. Now you might be swept into a bankruptcy case, and that's what he means by my how things have changed. And even it said something that this new statute provides lots of different ways for a debtor owner or borrower to take advantage of a poorly run foreclosure sale,

Marina Fineman:

Right? Although that's not what happened in this case because of the typo, that's all true and important for now. But what happened in this case was that because of that error the legislature had made, this buyer basically had no way out and was not ever going, even if it complied and waited the 60 days was never going to be able to perfect this without violating the state. And the reason is that he was not an eligible buyer to begin with. So when he won the auction on the day of the sale, this investor had to open the bids up for the 15 day period and there were notices of intent submitted. Therefore, the 45 day period opened. So in this case, even if the trustee had waited, which is what the court had said, the 45 day period still ended up expiring and the investor was deemed the final winning bidder 45 days after the sale, which was already during the bankruptcy case.

The issue there was because he was not a tenant, there was no tenant bidder that submitted the NOI and he himself was not a tenant bidder. Any recording of the deed of trust would've violated the state because the relation back period under 29 24 HC did not apply. It could never have applied to this case. And that was the problem that the relation back at that point was eligible only for bids or notices of intent to bid from people who were tenants of the property or at the property at the time of the sale. And so this holding left a lot of people very confused. And after Hagar and before the typo was fixed, the idea of filing a foreclosure sale or I'm sorry for filing for bankruptcy after a foreclosure sale pick off gangbusters, everyone started to do it. And I know that there are a number of cases, and I'll talk about the next one, where I was involved in suddenly the debtor's lawyers were recommending that the debtor, oh, the foreclosure happened, it's fine.

As long as the deed isn't recorded, you can go ahead and file for bankruptcy if it wasn't submitted by a tenant and you'll be fine. So that is where we were in 2024 when I had a client call me who had, this is the in Ray Stevens case, and the client called and she was the winning bidder at an auction and she submitted the NOI. She was not a tenant bidder. She submitted her NOI and then submitted a bid with about $600,000 to purchase the property. She overbid the bid at the auction and she submitted it within 42, I think days or so before the 45 day period expired. The debtor in that case waited until after she submitted her bid. So maybe on the 43rd day after the sale, the debtor suddenly woke up and filed this chapter 13 case. And I think what happened was he was trying to get other people to bid.

One of the things about 29 24 M is that the person who is the owner who's being foreclosed out is not an eligible bidder. So if you're the one who's being foreclosed, even though you live in the property, you may not bid. So you can try to get, I don't know, a relative friend to bid. He tried to do it, it didn't work. He filed for bankruptcy and then my client received the trustee's deed and had to record it within the 60 day. There's just that 15 day window. If you miss it, you're in trouble. So after the deed was issued to recorded it, and then we filed a motion to have the court say that the state does not apply or grant retroactive relief. And a week before the hearing, which was in the summer, it was in August of 2024, the legislature finally woke up and amended 29, 24 hc, which fixed the type.

So, at this point now the relation back period, if you record your deed within 60 days of the sale, if the 45 day window for bidding had opened, then it doesn't matter what kind of ineligible bidder you are or what kind of ineligible bidder submitted the notice of intent, the relation back period applies. But Judge Basin in this case, even though he was aware by the time the hearing that this has happened, still felt strongly that there are other principles of bankruptcy law, finality and foreclosure sales that needed to be addressed. And so he wrote this decision and he pointed out three important things. One is that under 360 2 a three, which is the section that imposes the stake and prohibits any affirmative act by a creditor to collect on its debt or exercise property over the debtor, he said that on the petition day, because the sale had happened before, the debtor only had an interest that was temporary and it only depended on the finality of the sale from whoever the bidder was.

But the debtor no longer had anything but paralegal title. It did not have equitable interest on the day of the petition because once the foreclosure sale happened, property was sold. What was undetermined is who the winning bidder would be. And so there was no act that needed to happen. And then once the sale became final after the 45 days, the trustee did take an affirmative act, which was to issue the deed, and then the winning bidder, Ms. Cristobal recorded it, but by then the sale had become final on the 45th day. So Judge Mason said that the debtor's temporary legal title had already expired by then. So the estate had no property interest, and so the prohibition on exercising control over the property of the estate no longer applied. And so because the property was no longer part of the estate, then the automatic stay did not prevent the deed from being recorded and because of the relation back provision, it related back to the sale. So that's what happened in those cases. And David, I'll turn it to you for the cautionary tale of the latest in the couple cases.

David Goodrich:

A couple takeaways from Stevens is the Judge Basin case. One is that the court discusses the city of Chicago case, which is a US Supreme Court case that came out a handful years ago. And that case is the police department in the city of Chicago had tow away vehicles and was holding them in impound yards generally for parking tickets. I think they were all parking tickets and debtors in that district filed bankruptcy and they demanded their cars be returned and the city of Chicago said no. And so a few of the debtors filed complaints for turnover in violation of the stay, and one of those, the bankruptcy court, I believe, agreed with the debtor and required the city of Chicago to turn over the vehicle to that debtor. It went all up to the Supreme Court. The Supreme Court said, no, the automatic stay under 360 2 A three, it prevents a creditor from taking an affirmative step, in other words, going out and repossessing post-bankruptcy.

The city had not done that. It had already repossessed before the filing, so there's no affirmative act, so there's no stay violation, and it excused the city's retention post-petition of the vehicle, even though as Steve and I both know from way back when, that used to be a stay violation. In fact, I think a judge ordered Steve to wash a car one time, if I'm not mistaken, before he returned it. But setting aside that little story, that's what the court is seizing on here in Steven. It's like, look, in this situation, you've got an exception to the stay. The recording of the deed isn't an affirmative act, although I disagree with that, but it essentially used the city of Chicago as its stepping stone to get to the conclusion that you've got a lot of different things here. Compliance with a statute that's provides for foreclosure with the relation back protection or safe harbor and 5 46 B and the City of Chicago case all telling me that this is perfectly fine.

We're not going to set aside the trustee's deed upon cell under these circumstances. However, another case, very recent case called NRA spikes. NRA spikes is a little bit different, but it's a similar problem. Prior to the bankruptcy filing an investor bid on the debtor's property at a foreclosure sale, that investor was not an owner occupant or tenant. So it triggers the 40, well, the triggers the window for bidding. The trustee's deed was ultimately recorded post-petition reliance on the 21 day relation back date, and then the bankruptcy case was filed before their deed was recorded. The investor sought relief from stay in the bankruptcy court and the bankruptcy court denied the motion. The debtor started out as a pro se, in other words representing himself, but then finally hires a lawyer and the lawyer comes into the case after motion was heard, the debtor demands that the deed, the trustee's deed upon sale be rescinded.

 

And of course the investor disagreed and said no, and the debtor sued the investor for violation of the automatic stay. And the court in the decision says something interesting. It said, the California civil code 29 24 is no model of draftsmanship unintended consequences lurk in the corners. And it goes back to something that Judge Reto said in the, I think it was the Stevens decision, the Hagar decision, and it found the course of the Look 29 24 reach back applies in most circumstances. However, in this case, there were problems. One is that the foreclosure trustee on the internet posted information about the foreclosure and the bidding process. And in that posting, there was no statement evidencing a telephone number that could be called to obtain information about the foreclosure cell and bidding. And it didn't say that the telephone line was available or you could call it 24 hours a day, seven days a week.

I guess that's important. I don't know. It also says that it should have said there was no cost to anybody to call that line. The court also found a second problem with the notice that was posted, that there was no language regarding what the final and last bid was at auction. It didn't have anything about what the auction price was, which to me that's pretty unusual. That should have been kind of a no-brainer. That should have been in the notice. And then finally, there's no statement on the posting by the foreclosure trustee indicating what address information could be sent to the foreclosure trustee by US mail and by overnight mail. And so what the court in Spike says is we have so many problems with this posting that the foreclosure sale itself is invalid, and the trustee's declaration in support of recording the trustee's deed is also invalid.

And the court actually said specifically, a false trustee declaration invalidates the ensuing trustee's deed. And because the trustee's deed was invalid, the sale itself can never become final. And so without a final sell, the title probably bare legal title as Marina correctly pointed out earlier, still remains with the debtor or the borrower on the date of filing. And because the recording is now, it's going to be void because the deed itself is invalid. That title returns essentially to pre-foreclosure where the debtor is on title. You have a foreclosure sale that will have to be reset. You'll have to go back in, get relief from stay, and essentially start at the step you were at before the auction occurred, which I don't know foreclosure law very well, but I believe you have to re-notice your cell and things like that. And so in that situation, the lender who filed a motion to dismiss the lawsuit lost and the bankruptcy court said, no, this is a stay violation.

And now the property is property of the estate. So be very careful if you are working with a trustee that's doing a foreclosure sale or you're buying from a foreclosure trustee, that the notice itself, once the auction has concluded, if there is a situation where the auction needs to go up for the bidding under 29 24, that notice needs to be precise. It needs to hit everything that's in the statute because if there's a bankruptcy that follows and that posting is not accurate and it's not complete, it doesn't have a fulsome indication of what needs to be done and how to do it, you could end up in the situation that is spikes, which is now you've back to the cell essentially being unwound and you have to start over and potentially a debtor trying to reorganize the debt that's underlying the property. So that's in Ray Spikes I,

Marina Fineman:

Yeah, and this issue, I know for a number of wonders has become a problem of who actually owns the property. It says in the statute that title remains with the debtor under 29, 24 M until the sale becomes final. But who there's paralegal title and then there's equitable title. So I've had questions like, okay, so the 15 day period has opened when there's been an REO, the lender's taken the property back and the lenders wanted to protect the property, concerned that someone might, that the prior owner might vandalize it or something else might happen, but you don't have the right to take possession of the property. And so there's this limbo period, the statute addresses insurance, but it's still a little unclear, which is why Judge Basin wanted to clarify in Ray Stevens that the debtor and the estate do not have title to the property in the sense that they could have sold it on the petition date or done anything.

It's just kind of nominal, but it becomes a practical issue when the lender wants to go and fence off the property to protect it because you're not allowed to do that. So I think just the takeaways here are what we've been talking about and what David just mentioned, which is there are now even more pitfalls that could cause you to cause a sale to be voided. And then suddenly you find yourself in a chapter 13 or chapter 11 proceeding that you as the lender never wanted to be in and avoided by doing the foreclosure sale before bankruptcy was filed. So under 29, 24 H to relate back, you always had since 2000 or whenever it was, you had the relation back. If you filed within 21 days. Now you have to be very careful. Make sure the trustee A, makes sure that there are or not notices of intent to bid.

Because if none are received after the 15 days, then you have only seven days to record the deed in order for it to relate back to the sale date. Otherwise you're in trouble and it's not going to relate back. And if the period opens up to the 45 days, then you only have 15 days from the time the 45 day period ends and the winning bidder is now selected and the sale is final until you have to record the deed to relate back to the original date of the sale. And the trustees don't always issue them timely or they might issue 'em too early, which is the issue that Dave raised, what had happened in Hagar that they issued it before the sale is even final. So if you record that, then that deed is void. See, there are various things to watch out for where you don't comply strictly. You may find yourself subject to bankruptcy proceeding or having to start the foreclosure sale again, even if you get relief from stay. So I,

David Goodrich:

Right. And so then what happens in some of these situations, and this is where it gets fund as a bankruptcy trustee, we are charged with trying to liquidate property to pay distribution to unsecured creditors. And oftentimes title that's in transit that gets captured by a bankruptcy case can be subject to the clawback powers that I discussed earlier. And Marina and I had a spirited debate about what really happens, let's say under the Hagar or the spikes decisions where you have a foreclosure cell that the deed has been recorded and now is a stay violation. As I mentioned before, it's under ninth circuit law void abio, which means that it is as if it didn't take place, what happens? So title in that situation, it returns to something else. So the investor or the tenant occupant buyer no longer are the owners of the property. The property goes back to something that predates that.

Does it go back to the debtor? Does it go into the estate at all? Does it go back to the foreclosure trustee, the beneficiary? How does it work? And my understanding of the law, the way this would work is that it's essentially as if the foreclosure sale had not occurred, that the debtor goes back onto title, that the lender returns to the lien hole position that they were in, and that you're back to whatever point you are in the foreclosure process. I thought long and hard about various ways to intercede and intervene in this process where the trustee recovers the property and says, well, you lender are out of luck because your foreclosure cell was completed and your lien has been released. But unless there is a deed, a reconveyance of a deed of trust, I can't envision how a foreclosure sale that's invalid doesn't invalidate everything.

In other words, how it wouldn't spring the deed of trust back into title. Because if the foreclosure sale is void, then everything that relates to the foreclosure sale is void, including anything that happened with the lender unless the lender was paid off, which is another odd thing that could happen, but I don't think so. Is there a situation where a payment is made to the lender and now the lender's lien has been satisfied, however, the foreclosure sale has been wiped out because it was in violation of the stay. So those are the things that we've been looking at and considering. And finally, what happens if the property has to be clawed back under 5 44 B? Especially if the property is in the name of the investor, let's say, and a trustee sues to recover title in certain other situations, for example, under 7 24 where there's a tax penalty that's avoided, the avoided penalty portion of the tax lien becomes a state property and gets paid ahead of junior lien holders.

So taking that example and moving it towards a property that has been sold to an investor, if you've title as a trustee or debtor possession from the investor, does the value of the property get paid to the estate ahead of all of the other liens, including the senior lien holder? Maybe there aren't any cases on it yet because this is kind of a new statute, but it's a possibility. I think it's relatively remote, but something that could be argued by a bankruptcy trustee. But I think just going through these cases and knowing the statutes that are in play, it's very unlikely that a foreclosure cell, even where there is a recorded deed of trust that's now invalid, would result in anything other than the parties going back to their pre-foreclosure positions. And then now you're just as if you're the foreclosure trustee or you're the lender that's foreclosing, you just need to get relief from stay and start your foreclosure again, unless, of course, if the debtor somehow comes up with a plan to repay the loan, whether it's to cure it and pay future payments through a chapter 13 plan, or if it's to put it in a chapter 11 plan, probably a cure and pay situation.

Also, rarely on residential properties do you see a cram down in chapter 11, but maybe chapter 12, you could do a cram down in chapter 12. So those are all things to think about that if you have this cell that is invalidated because it violates the state, everything gets swept back into the bankruptcy case and now you, you're potentially involving the property and the loan are all mixed into bankruptcy simply because you just missed a step or did something incorrect under the statute.

Marina Fineman:

Okay, I think that's a place to start to end and open it up. We have just a few minutes for questions. Steve,

David Goodrich:

You're muted, Steve.

Steven Ernest:

So yeah, I've done something I wasn't supposed to do here. I think I've messed up the screen, but we're going to live with that because it's live, so it happens. So after all of that, if any of you find yourself bum fled, then I'm sure you're going to put your questions in the q and a, which you've done and I am looking at now. So thank you all for that. Question number one from an anonymous attendee, what about commercial properties? So again, this 29, 24 only applies to residential property, which has one to four units. So five units residential or bigger doesn't apply. Commercial property doesn't apply. You don't have to worry about it at all. Question number two, Jim Polina, if I buy at a foreclosure auction and the house has a tenant with a long-term lease, is that protected by AB 1482 statewide rent control?

So eviction question, not really what today's topic was about, but generally speaking, foreclosure sales void, all liens. We can help you out of the weeds in your eviction cases too, but today's about bankruptcy, not this. So part two, three part question from Jim. Can I, as the new owner who wants to move in and live there, give the tenants 90 days notice to move out? Yes, we certainly can. Part three of the three part question from Jim, does this 90 day notice to move apply to section eight tenants? These are all eviction questions, so probably I'd have to look that one up. I think section eight is going to protect them, but I'm not abundantly sure. And today I was open for some foreclosure stuff, so sorry Jim, but you got two out of three what? Michael Zuck Lelo, that's a name. What does an investor do when the trustee tenders the trustee's deed after the statutory time period? What do you do? Oh, your question just went away. How did that happen? Your question changed. Sorry,

Marina Fineman:

I responded and I think it disappeared, but the question there was what happens when the trustee, there are a couple questions about negligence on the part of the trustees when either they don't comply with the requirements that Dave discussed in the spikes case. And Dave and I actually had this discussion yesterday about when the trustees are sued in some of these SB 10 79 cases, Steve can speak to the fact that they're non-monetary parties, so often they're sort of not involved to get out of the case, but when it's actually the negligence of the trustee either not to comply or the question that was in the chat was that the trustee issued the deed after the 21 day period after the sale, so the buyer could not take advantage of the 21 day relation back period and the property got vandalized, and at that point, who owned the property and who was responsible. So

David Goodrich:

Seems

Marina Fineman:

Like, yeah-

David Goodrich:

That situation sweeps into bankruptcy. Maybe that's the question. And then let's say the automatic stay applies and the property, property estate, I would think, I would hope that the foreclosing, the investor and the foreclosure trustee would go back and get relief from stay and do it again. And then to me, that would probably mitigate most of the damages that would've been suffered by the investor because of the negligence. But the negligence claim itself could be probably raised against the foreclosure trustees to the extent there are legal fees and things like that. Maybe loss of use, enjoyment of the property, things like there's probably some kind of claim that could be had, but I would imagine unless something happens in the bankruptcy case, there would be a claim that could be made. And that's just a little nugget for you, a carrot, if you will.

Steven Ernest:

Twice now you're just showing off. Mike, along another question. This is admittedly off topic. Well, we've had a lot of this today, and I think these off topic questions are a compliment to both Marina and Dave for how replete your presentation was. It was so clear that people don't have questions about it. So well done. This is admittedly off topic, but I'd appreciate your explaining how a lender is likely to be treated by the courts in the event of a borrower declaring bankruptcy on a, oh, it's a three part question. One owner occupied loan, two business purpose owner occupied loan. So I think both one and two are going to be the same and three non-owner occupied loan. In short, what is the risk level associated with each type of loan? Well, if it's residential owner occupied loan or a business purpose owner occupied loan, is number two a business purpose property or is it a business purpose loan on residential? I'm not sure. So owner occupied loan in a residence, that's part one. It's going to be treated the way Dave and Marina described today. That's a hundred percent what these are about. If it's a business purpose property, commercial property 29 24 doesn't apply, so proceed as you otherwise would since the dawn of time and the advent of the bankruptcy code three non under occupied loan. So that's a commercial purpose loan I think. Am I reading that right, Dave Marina?

David Goodrich:

Right. Wouldn't that be a loan where you have a tenant in place if it's not on or occupied?

Steven Ernest:

I guess it could be a residential condo say so. Yeah, if it's the important part is this a residence with one to four units, that's the part that's important. So if it's a non-owner occupied, it doesn't matter. The thing that matters, is it residential with one to four units? That's the thing to focus on. And if it is residential one to four units, 29, 24 applies. If it's not five units or more, or if it's an office or if it's a hallmark shop, whatever it is, then 29, 24 does not apply. So there you go, Mike T and mom, hope that helps. Does a chapter, sorry, anonymous attendee. Does a chapter 13 have the option to file a plan to redeem or reinstate after foreclosure? Oh God. Something I used to know. I'm not so sure I do anymore. Marina Dave,

Marina Fineman:

I think this goes back to if the person is living in their home and all of the rules under 29 24 M are complied with, and the deed of the winning bidder is timely recorded either within 21 days or within the 60 day period, then no, because the sale would relate back to the pre-petition foreclosure sale, which I think is the question here.

David Goodrich:

Well, okay, so let's say in this hypothetical that there was a problem in the foreclosure process and the trustee's deed is invalidated, then in that situation, the debtor could reinstate the loan and propose, usually in chapter 13, they'll take whatever the arrears are and pay them over a period of time and then have to pay current on their regular obligations. So I do think you could reinstate redemption would be tough, is I believe what you're referring to is redemption where you would pay the entire loan off. I dunno how that would be done in a 13. It's probably impossible because it requires the entire amount to be paid. Maybe you could do it over five years, but that unless it's a small loan, that's very unlikely for most consumer debtors.

Marina Fineman:

But that's after a foreclosure is the question. And you don't get to do that after a foreclosure unless there's an error, right?

David Goodrich:

Well, yeah, that's what I meant is that if you're invalidating the foreclosure sale for the reasons we talked about earlier, you have these opportunities because the debtor is now the owner still the Well it's returned back to the owner of the property. It's as if the foreclosure sale didn't happen.

Marina Fineman:

Right, exactly.

Steven Ernest:

All right, next one, anonymous attendee. Once again. Going back to the foreclosure process, we have had a foreclosure on our first trustee deed stayed by a junior lien holder with an unrecorded deed junior lien holder with an unrecorded deed who filed bankruptcy the minute prior to the foreclosure auction. This continues to happen with new junior lien holders supposedly filing bankruptcy, delaying the foreclosure auction time and time again. Is there anything that can be done? So this is your serial filer. I don't know that the condition of them being a junior lien holder helps, although it probably increases the likelihood of fraud is what it sounds like there, but Dave Marina, what do you do? Serial filers, bad actors in bankruptcy, bankruptcy fraud even?

Marina Fineman:

Yeah, I think this is something that I experience a lot in representing our lenders, which is from what I understand there is that the debtor, once it's out of chances to file its own petition, will then assign a 5% interest to some other person, have them record that 5% interest deed and have that entity file for bankruptcy. And while technically, legally, you may be correct that this is a violation of whatever loan documents and that's not a proper transfer, the safer route that all my clients take and I think is recommended is to get relief from stay from the court and to postpone that sale because the cost of litigating a violation of stay and all the other stuff that you can open up is not worth it. But what can be done is once this happens, usually it happens after the debtor itself has filed for bankruptcy once or twice, then they start employing this transfer because the automatic state doesn't apply again with serial filings in the same way as it does with the first one in S seven or 13.

Then what you do is you have to get relief. It's called in REM relief from the automatic stay, and that is issued by courts once. There are multiple filings for bad faith. And so that basically means that you get your stay relief order and now you record the order. So any transfer like this that is recorded afterwards is not binding and not effective, and the lender can go ahead and foreclose on the property. The senior lien holder can foreclose on the property without worrying about violating the automatic stay. But the issue is you do have to wait this out for two or three cases before the court will issue this so that you have all of the facts to support the elements of fraud and bad faith filing.

David Goodrich:

Right? The specific statute is 11 USC 360 3, 60 2D four, and it talks about multiple filings, bad faith, transfers of partial interest and recordation, and that's what you should be looking at if you have any questions about how you get relief. That's binding because it's binding on the property, not withstanding any future bankruptcy cases once it's recorded,

Steven Ernest:

Yeah, that prospective relief, even the debtor friendly judges are going to grant it after three or so of these, everybody can figure out what's going on. Now it's a little bit expensive and certainly frustrating that you have to wade through them because when it happens, once you know what's happening, and the judge probably does too, they're just a bit more conservative ordinarily. But then you take that order and I think what we did in the old days when we used to ride horses to court was we'd take that order and then record it, right? You record the bankruptcy judges in REM order and then it doesn't matter. They could transfer 5% interest to 20 different people. It makes no difference, right?

Yeah. That could be a bankruptcy lawyer again. All right, anonymous attendee. One more of these. Can the lender ensure the property during this process? Certainly you can. There's definitely insurance brokers who will take your money. And not only can you, I think you would be foolhardy not to. I definitely think during this 45 day period, it's frustrating because you can't get in there, you can't evict anyone, you can't change the locks, you can't do anything. It's your property kind of, but sometimes not. You'd be kind of crazy not to get an insurance policy that's going to protect you then because one person falling down the stairs in your new property, who's going to sue you when you don't have insurance? Going to be a super bad day for you, the lender. So part two,

Marina Fineman:

Well, I wanted to jump in on that. Yeah, do it say that under 29, 24 M, usually there is already insurance when you're going into foreclosure. So presumably whoever is residing there has insurance and the statute clarifies that the dependency of finality. So until there is actually a final winning bidder determined and the sales deemed final that any insurance that exists is not terminated by this. So it's going to be anything that's in effect at the time of the foreclosure sale is going to remain effective through the foreclosure sale until the date that the winning bidder is determined. So if there is insurance, you don't need to go out and get more insurance, you should be protected. The insurance company doesn't have a right to terminate

David Goodrich:

Practical tip is in the event that you are worried or concerned that the property ended up in bankruptcy and there's a bankruptcy trustee involved, contact the trustee. He or she will be happy to talk you about access, especially if you're going to ensure the property. The last thing I want to do is have to spend money sometimes out of my own pocket to insure a property. If the lender's going to do it and it can't be forced place insurance. That's minimum. You need full blown insurance liability, fire theft. We're going to let you go into the property. Even if it's not property estate, if we feel it is, you'll get access because you're taking care of the property and we don't have to pay for it.

Steven Ernest:

Yeah, the short answer is yes. Get insurance. Probably not as expensive as you think. And if you need contacts with outside brokers, I can provide those. Two. Two come to mind already, but this is a part question from anonymous attendee. So that was part one, part two. What about access to the property for maintenance? I think Dave just touched on that. If it's in bankruptcy and the trustee says you can go in there, then you can go in there. If it isn't, I wouldn't. If it's me, if I'm your lawyer and you're calling me saying, can I go in there because I want to fix the electrical, I'm going to caution you. No, but there's not a statutory hard and fast answer about that. Part three of this four part question. Who is responsible for water service for the tenants who continue to live on the property?

So in California, a landlord, residential landlord must provide water, power and heat, so the landlord is responsible for it. I think what this question might be driving at is I was the winning bidder at the auction. The or the foreclosure trustee banged his gavel. I won 15. Well, they haven't recorded my deed yet. 14 days later and eligible bidder filed a notice and now we're 38 days in. Who's responsible for the water service? I've never been on title. I think I might be someday on day 46. My trustee's deed is going to relate back to day one. What a mess the legislature has given us. So what's the answer? You can call your legislator. This is why we vote every two years. So think about that one. Who's responsible on day 46? If it turns out your deed relates back to day one and the water service terminated on day four, I think that your tenants have a winning case against you for not providing water.

Now, you've got a sympathetic song to sing when they sue you, but I think they have a winning case. Now, if this eligible bidder shows up and actually does tender the money and becomes the owner, it's not you. Somebody's responsible, but it's definitely not you because you were never on title. So there's kind of a lot of spinning plates in that one. But water, power, heat, you have to provide to residential tenants. So congratulations on your problem. Who is the responsible party for any claims like injuries that occurred during this time? That's the guy falling down the stairs on day four.

Buy insurance. I can't say this. Well, two choices. You buy insurance or you can spend 15 times the money that you would've spent on that insurance premium paying me to defend this tort claim that you have that was uninsured that you find out was your problem. And it's again, you were the winning bidder at the auction. On day 13, you got a notice of intent to bid. On day seven, a guy falls down the stairs on day 45, the eligible bidder didn't pay the money. So on day 46, they record your deed and it relates back to day one, which means you were the owner of the property this whole time, including day six when the guy fell down the stairs. I hope that that illustrates it well enough with all of those dancing around and jumping numbers. But buy insurance, if you understood those numbers, buy insurance.

If you didn't understand those numbers, buy insurance. Buy insurance, the easiest way to protect yourself, then there's almost no reason not to other than the 700 bucks, the policy is going to cost you. But believe me, if someone has a broken hip and needs a lifetime of care and you didn't have insurance, you'll rule the day that you didn't pay that premium. So buy it. Evan Smith, a named Inquisitor. Thank you, Evan. I think the business loan secured by owner occupied residential property is subject to the statute business loan secured by owner occupied. Yeah, I agree with you. I think it is too. As long as it's one to four units. If it's five units or more, it's not. But otherwise, I agree with you evidence. Thank you for that. Anonymous attendee is back. This is a two part question. What happens if the winning bidder intending to occupy the property is unable to do so due to an existing tenant with a valid lease or because the property is uninhabitable?

So you want to move in, but you've got a group of carnies and squatters living in there and you can't get 'em out? Well, you got to get 'em out before you can move in because I don't think you want to be roommates with those guys. And the second part of the first part of this question, so one B, what if it's because the property's uninhabitable? Well, if you've indicated that you're an eligible bidder because you intend to occupy the property, I would either occupy the property or I would build a really good story for why I didn't and take some time to make it inhabitable and then move in yourself. I wouldn't flip it if that's what you think you're going to get away with, unless I had a really good documented story for why I'm not doing that, and if that's what I was going to do is build that good story and try to get away with it, bully for you. If it works once, I wouldn't do it again. You make a practice of this, somebody's going to figure it out.

Marina Fineman:

Well also, I would say in the middle of litigation on a number of these issues in various ways, but your excuse for moving in within 60 days of recording the deed for these reasons. If you have to do an unlawful detainer action or if the property is not inhabitable. So you're excused from that, but you're not excused from living there for a year. So presumably you're going to get the people out, fix up the property and then live in it. That is what you're agreeing to. You can't just say it's uninhabitable because and then sell it to someone else. That is not going to work. So that's built in though into the statute for those kinds of situations.

Steven Ernest:

Yeah. Part two of anonymous attendees question, is the 12 month holding requirements still applicable? Yes it is. That's what Marina was just referring to. You got to live there for a year. All right. Anonymous attendee. Very popular today. What happens if a property in a foreclosure sale has a recorded Liz Pendants due to the owner suing the lender over lending practices? So the foreclosure is generally not going to expunge is the word. We use the Liz Pendants. In fact, generally I think we can remove that. It's never going to expunge the pendants. What a LI Pendants does, and for those of you who aren't versed in Latin Li pendants is a notice of pending action. It says, Hey, look over there. There's a lawsuit that's about this property and the disposition of that lawsuit is going to affect title to this property. Perhaps just means look over there.

And so you foreclose a property that has a LI Pendants, it's going to cause you some difficulties remarketing your REO, getting liens against it. If you live there, it's a cloud on your title. It's going to have to be dealt with. And that's going to be true whether there's a foreclosure or whether there's not. How does the lawsuit, that's what's underlying the LI pendants. How does the lawsuit affect the sale of the property at a foreclosure auction? It does not unless there's either a restraining order or an injunction. So the existence of a list penance is not going to prevent your foreclosure. Alright, Ken Thayer named Inquisitor. Can a junior lien holder file a BK and install a foreclosure sale? Answers yes. That's what Dave and Marina were talking about before. You get these partial interest transfers and they can slow you down. But that prospective relief, they were talking about 11 USC 360 2D. What was it? Dave?

David Goodrich:

Four D four.

Steven Ernest:

D four. I was almost there. That's what I was going to say. I swear that's the statute to look at to get your perspective in REM relief. The creditor friendly judges are going to give it to you after maybe even one if it looks shady enough. Two, you got a good chance. Three is almost guarantee the creditor friendly judges probably looking at somewhere between three and five of these before you get it. But it's worth the price of admission to try you get that bankruptcy order and record it. Never again will you have to worry about those partial interest transfer bankruptcy cases as it relates to that property. Alright, I think we have answered every question that was here. And any closing thoughts? Marina? You don't have to have any. We didn't rehearse.

Marina Fineman:

Yeah, just be careful and when in doubt, give your lawyers a call, whether it's state law or bankruptcy or the intersection. It's always cheaper to ask because it's very expensive not to, as I've seen over and over again, even when you're bidding whatever side of that transaction you're on, I've seen lots of pitfalls and mistakes that could have been avoided. So

Steven Ernest:

Yeah, sure enough. Alright, Dave Goodrich the chapter seven trustee. It was so lovely to see you. Do you have any closing thoughts or impart any wisdom on us?

David Goodrich:

I also want to echo what Marina said. You're better off getting legal counsel. I would always caution to take the safe approach if it's unclear if you've gotten through the process without touching the bankruptcy case. Because as soon as you're tangled in the bankruptcy case, continuing violations of the stay, not only do you have issues of void transactions, but you also have problems with state violation and that carries potential sanctions and attorney's fees. So if you're not sure, when in doubt reach out to a lawyer that's a bankruptcy lawyer that's competent, that can help you navigate the position of the property as it relates to the bankruptcy case. And I'd also like to, thank Steve and Marina. Thank you so much for having me on the seminar. Steve, you've said probably the most gracious and wonderful thing I've ever heard when I've ever been introduced. I wish I had recorded it. Oh, we did record it. I'll give that to everyone going forward as the intro for me.

Steven Ernest:

It's well deserved. It's good to see you both. Thank you for your time. Thank you to all the attendees. I hope you learned something today and maybe had a laugh or two.