In Re Ebadi
2011 WL 1257211, 448 B.R. 308, 2011 Bankr. LEXIS 1048 (2011)
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Rule of Law:
A post-petition foreclosure sale of property not owned by a debtor violates the automatic stay under 11 U.S.C. § 362(a) if the debtor is a guarantor of the underlying debt and a named defendant in the foreclosure judgment authorizing the sale. The sale constitutes an impermissible continuation of a judicial proceeding against the debtor and an act to collect a claim against the debtor.
Facts:
- CBC Media Realty ('CBC'), a company owned by Madjid Ebadi, executed a note for a $644,500 loan from Fleet National Bank, secured by a mortgage on commercial property owned by CBC.
- Ebadi personally executed a Guaranty for the full repayment of the note.
- CBC subsequently defaulted on the note and mortgage.
- Lings Property, LLC ('LP'), as successor to the original lender, obtained a state court Judgment of Foreclosure and Sale against both CBC and Ebadi.
- The Foreclosure Judgment specified that LP could recover a deficiency judgment from Ebadi if the sale proceeds were insufficient to cover the debt.
- A foreclosure sale of the property was scheduled for 11:00 a.m. on May 14, 2010.
- On May 14, 2010, just hours before the scheduled sale, Ebadi filed a Chapter 13 bankruptcy petition.
- Prior to the sale, Ebadi's counsel notified LP's attorneys and the appointed foreclosure referee via facsimile of the bankruptcy filing.
- Despite receiving notice of the bankruptcy, LP proceeded with the foreclosure sale as scheduled on May 14, 2010.
Procedural Posture:
- Bank of America, N.A. filed a foreclosure action in the Supreme Court of the State of New York, Suffolk County (a state trial court) against CBC Media Realty, LLC and Madjid Ebadi.
- The state trial court entered a Judgment of Foreclosure and Sale in favor of Lings Property, LLC (LP), the successor in interest.
- Ebadi filed a voluntary petition for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of New York.
- After the foreclosure sale occurred, Ebadi's bankruptcy case was automatically dismissed due to his failure to file required documents.
- The bankruptcy case was subsequently closed.
- LP's attorneys served CBC with a ten-day Notice to Quit the Premises.
- Ebadi filed a motion in the closed bankruptcy case to reopen it, vacate the foreclosure sale as a violation of the automatic stay, and for an award of damages.
- The Bankruptcy Court held a hearing and entered an order reopening the case for the limited purpose of determining whether the automatic stay was violated and what relief should be granted.
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Issue:
Does a post-petition foreclosure sale of property not owned by a debtor violate the automatic stay under 11 U.S.C. § 362(a) when the debtor is a guarantor of the underlying debt and a named defendant in the foreclosure judgment that authorized the sale?
Opinions:
Majority - Trust, J.
Yes, a post-petition foreclosure sale under these circumstances violates the automatic stay. The court held that even though the debtor, Ebadi, did not have an ownership interest in the foreclosed property, the sale violated two provisions of the automatic stay. First, it violated § 362(a)(1) as a 'continuation... of a judicial... action or proceeding against the debtor,' because Ebadi was a named defendant in the foreclosure action and judgment being enforced. Second, it violated § 362(a)(6) as an 'act to collect, assess, or recover a claim against the debtor,' because the sale was a significant step in a process that could lead to a deficiency judgment against Ebadi personally. The court reasoned that the foreclosure action was not merely an in rem action against the property but was also an in personam action against Ebadi. Therefore, the sale, conducted with knowledge of the bankruptcy, was a willful violation of the stay and is void ab initio. The court awarded actual damages but denied punitive damages, noting the novel legal issue and the debtor's own bad faith in filing the bankruptcy petition solely to stop the sale.
Analysis:
This case establishes a significant precedent in the Second Circuit by clarifying that the automatic stay's protection extends beyond the debtor's property interests. It holds that a creditor's action against a third party's property can violate the stay if that action is a continuation of a legal proceeding in which the debtor is a named defendant and is a step toward collecting a debt for which the debtor is personally liable as a guarantor. This decision serves as a critical reminder to creditors that they must cease all collection-related legal actions involving a debtor, even indirect ones, upon notice of a bankruptcy filing. It broadens the perceived scope of the stay's protection for guarantors and requires creditors to seek stay relief even when the primary collateral is not owned by the debtor.
