VALIDATION OF A FORECLOSURE SALE THROUGH RETROACTIVE ANNULMENT OF THE AUTOMATIC STAY

In Cruz v. Strauss (In re Cruz), 2014 Bankr. LEXIS 3687(B.A.P. 9th Cir. Aug. 29, 2014), the Bankruptcy Appellate Panel for the Ninth Circuit recently affirmed retroactive annulment of the automatic stay to validate a foreclosure sale. In Cruz, a five-percent interest in residential real property was transferred to the debtor post-petition. The deed transferring the five-percent interest to the debtor was recorded at 12:52 p.m. on July 15, 2013, and on the same day, at approximately 2:18 p.m., the property was sold at a trustee’s sale. At the time of the sale, the trustee was unaware of the debtor’s bankruptcy; however, after becoming aware of the debtor’s bankruptcy filing, the trustee moved the bankruptcy court to annul the automatic stay to validate the sale or, in the alternative, to confirm that no stay was in effect at the time of the sale. The Court held that a stay violation could be cured by retroactive annulment where cause exists to annul the stay pursuant to 11 U.S.C. § 362(d). The Court reasoned that although the property interest was transferred post-petition, the automatic stay was in effect at the time of the trustee’s sale pursuant to 11 U.S.C. § 362(a)(5); however, the Court further reasoned that an action taken in violation of the automatic stay that would otherwise be void may be declared valid if cause exists for retroactive annulment of the stay pursuant to 11 U.S.C. § 362(d). The Court concluded that a bankruptcy court could find that cause existed where a debtor, who had filed a skeletal chapter 7 case in bad faith, took a fractionalized interest in residential property on the day it was sold in foreclosure, the buyer had no knowledge of the stay at the time of sale, and the buyer acted promptly to obtain relief from stay once it learned of the debtor’s bankruptcy.