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Connecticut Case Addresses Bankruptcy Stay’s Impact on Judgments of Strict Foreclosure

Posted By USFN, Wednesday, December 18, 2019



by Joseph Dunaj, Esq
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)


In the case of Seminole Realty, LLC v. Sekretaev, 192 Conn. App. 405 (2019), the Connecticut Appellate Court has released an important opinion concerning the intersection of federal bankruptcy law and judgments of strict foreclosure; specifically, the effect of a bankruptcy court order imposing a stay on a pending law day.  In Seminole Realty, a judgment of strict foreclosure had initially entered in 2014, with a law day being set.  The defendant, however, engaged in a scheme to delay the foreclosure by filing multiple bankruptcy petitions to gain the benefit of the automatic bankruptcy stay under 11 U.S.C. § 362(a).  In 2018, the foreclosing plaintiff obtained an order of in rem relief under 11 U.S.C. § 362(d)(4), so that any further petition filed within two years would not impose a stay on the foreclosure.  The plaintiff then filed a Motion to Reset the law days. 

Prior to the scheduled hearing, the defendant filed another Chapter 13 Bankruptcy Petition, which did not impose a stay because of the in rem relief order.  At the hearing on the Motion to Reset, the court scheduled a law day of August 15, 2018.  On July 10, 2018, the bankruptcy court entered an order suspending the prior in rem relief order.  On September 18, 2018, the bankruptcy court then vacated its July order.  The foreclosing plaintiff then applied for an execution for ejectment, to gain possession of the premises, which was issued on November 29, 2018, from which the defendant appealed, claiming that the law days became ineffective upon the bankruptcy court’s July 10th order imposing a stay, and thus title never vested in the plaintiff.

Prior to 2002, the general presumption in Connecticut was that a law day in a judgment of strict foreclosure was indefinitely stayed by a bankruptcy petition 11 U.S.C. § 362(a).  Citicorp Mortgage v. Mehta, 39 Conn. App. 822, 824 (1995).  That changed with the Second Circuit decision of Canney v. Merchs. Bank (In re Canney), 284 F.3d 362 (2nd Cir. 2002).  In In re Canney, the Second Circuit held that because a strict foreclosure was merely a time limitation on a particular action (the time to redeem), and not a positive act to enforce a judgment, the limited stay of 11 U.S.C. § 108(b) applied instead.  In Provident Bank v. Lewitt, 84 Conn. App. 204 (2004), the Connecticut Appellate Court adopted the holding of In re Canney, and held that a judgment of strict foreclosure is subject to 11 U.S.C. § 108(b), and the filing of a bankruptcy petition serves to only extend a law day 60 days, rather than stay the law days indefinitely. 

The state legislature adopted Conn. Gen. Stat. § 49-15(b) in response to In re Canney and Lewitt.  Under that statute, when a mortgagor files a bankruptcy petition under any title of the Bankruptcy Code, the judgment of strict foreclosure is automatically opened by operation of law, but only as to the law days, with the other terms of the judgment remaining in place.  The effect of the statute is to prevent the passage of the law days upon the filing of a bankruptcy petition and avoid the result of In re Canney & Lewitt.  At that time (pre-BAPCPA), all bankruptcy petitions imposed a stay, and while efforts have been made to correct the now-outdated statute, the state legislature has been slow to act.

In Seminole Realty, the issue before the Appellate Court was the impact of the bankruptcy court’s July 10th order on the pending law day.  The Appellate Court held that Conn. Gen. Stat. § 49-15(b) only applies upon the filing of a bankruptcy petition, and only applies when a petition is filed after a court sets a law day pursuant to a judgment of strict foreclosure.  Further, the Appellate Court held that when the statute does not apply, the prior case law of In re Canney and Lewitt applies.  The Appellate Court found that when the bankruptcy court imposed a stay on July 10th, the law day was automatically extended 60 days under 11 U.S.C. § 108(b), and when the defendant failed to redeem by the expiration of his law day, title vested absolutely to the Plaintiff.

The Appellate Court’s holding in Seminole Realty has potentially broad implications.  As stated above, the court has re-affirmed the validity of the prior case law, when the strictures of Conn. Gen. Stat. § 49-15(b) do not expressly apply.  A foreclosing plaintiff would be mindful to review Seminole Realty and whether or not its holding would be beneficial to argue, especially in an aged foreclosure case with multiple bankruptcy filings.  Further, the Appellate Court in Seminole Realty, by highlighting some of the shortcomings of Conn. Gen. Stat. § 49-15(b), appears to either show its willingness to address the statute in future cases or seeks to invite the legislature to further amend the statute.  Surely, time will show how the statute will further evolve.

 

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Tags:  Bankruptcy  Connecticut  Connecticut Appellate Court  Foreclosure  Seminole Realty LLC v. Sekretaev 

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