In re Smith

In re: DARRELL L. SMITH, Debtor.

Case No.: 20-10507-JDW

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF MISSISSIPPI

August 12, 2020

The Order of the Court is set forth below. The case docket reflects the date entered.

Chapter 13

MEMORANDUM OPINION AND ORDER GRANTING MOTION FOR RELIEF FROM AUTOMATIC STAY AND FOR OTHER RELIEF (DKT. # 13)

This matter is before the Court on the Motion for Relief from Automatic Stay and for Other Relief (Dkt. # 13) filed by the creditor HSBC Bank USA, National Association, as Indenture Trustee for People's Choice Home Loan Securities Trust Series 2005-2 and the Response to Motion to Lift Automatic Stay (Dkt. # 18) filed by the debtor Darrell L. Smith. A hearing was held on June 16, 2020, where the parties argued to the Court and agreed to a briefing schedule.

The question is at what moment does a real property foreclosure sale become final under Mississippi law, or more specifically, at what point does the debtor lose both legal and equitable title to the property? The Court has reviewed the arguments and relevant law and finds and concludes that after legal title is divested upon default, a real property foreclosure sale is final as to the debtor's equitable right of redemption once the public auction sale concludes, not when a deed is delivered or recorded. Accordingly, the motion is due to be granted.

I. JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334, and the United States District Court for the Northern District of Mississippi's Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc dated August 6, 1984. This is a core proceeding as set forth in 28 U.S.C. § 157(b)(2)(A), (B), (G), and (O).

II. FACTS AND RELEVANT PROCEDURAL HISTORY¹

The debtor initiated this bankruptcy proceeding by filing a chapter 13 voluntary petition on February 4, 2020 at 11:28 a.m. (Dkt. # 1). He listed the creditor as a secured creditor in his bankruptcy schedules and listed the real property as collateral securing the claim. (Dkt. # 6). The creditor then filedthis motion to lift the automatic stay asserting that a foreclosure sale had concluded on February 4, 2020, prior to the debtor filing his bankruptcy petition, and that the debtor therefore had no interest in the property. (Dkt. # 13). The debtor argued that the bankruptcy petition was filed prior to the conclusion of the foreclosure sale and the automatic stay prohibited the transfer of title. (Dkt. # 18).

At the hearing on the motion, the foreclosure auctioneer, Pam Reel, testified that she commenced the sale on February 4 at 11:05 a.m., and that the sale took approximately two to three minutes to complete. She testified that the creditor was the highest bidder with a bid of $151,500.00 and that there were no other bidders at the sale.² She further testified that after the gavel fell she signed a memorandum of sale. The Court finds Ms. Reel's testimony credible as to these facts. The Court further finds that the gavel fell and the memorandum of sale was signed before the bankruptcy petition was filed at 11:28 a.m.

The substituted trustee's deed was delivered no earlier than the next day, February 5, when it was signed by the trustee. (Dkt. # 36, Ex. B). The deed was recorded in DeSoto County Court records on February 12. (Dkt. # 36, Ex. C).Timeline of Events:

 Date of Default3 Public AuctionForeclosure SaleBegins  BankruptcyPetitionFiled  Deed Recorded  Nov. 1, 2018  Feb. 4, 202011:05 AM  Feb. 4, 202011:08 AM  Feb. 4, 202011:28 AM  Feb. 5, 2020  Feb. 12, 2020   Public AuctionForeclosure Sale Concludes -Memorandum of Sale Signed  Deed Signed and Delivered   

III. CONCLUSIONS OF LAW

The commencement of a bankruptcy case creates an estate that is comprised of all legal or equitable interests of a debtor in property held as of the commencement of the case.⁴ "Although bankruptcy law creates the estate, non-bankruptcy law determines which assets of the debtor become part of the estate."⁵ "[W]hatever rights a debtor has in property at the commencement of the case continue in bankruptcy-no more, no less."⁶ "Property interests arecreated and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding."⁷ Accordingly, the Court looks to Mississippi state law to determine whether the debtor had a legal or equitable interest in the property at the time the bankruptcy case was commenced.⁸ If so, that interest is property of the bankruptcy estate and the foreclosure sale may be set aside. If not, neither the estate nor the debtor have any interest in the property.

The debtor argues that the foreclosure sale was not complete until the property was conveyed to the creditor when the deed was signed and delivered, which occurred after the bankruptcy petition was filed. MISS. CODE ANN. § 89-1-3 provides that "lands shall not be conveyed from one to another unless the conveyance be declared by writing signed and delivered." "For a deed to be valid in Mississippi, the grantor must deliver it to the grantee."⁹ The debtor argues that the foreclosure sale was not complete until February 5 when the substituted trustee's deed was signed.

In a traditional sale of land where "A" conveys its interest in real property to "B," the sale transaction would not be complete (i.e., the transaction of conveying the property would not be complete) until the deed was signed and delivered. Foreclosure law is different and the debtor's focus on the deed is inapposite. The question is not when did the creditor (as the highest bidder) take title to the property, but rather when did the debtor lose his rights in the property.

The Court concludes that in Mississippi, a mortgagor loses his rights in real property in two steps. First, a mortgagor is divested of legal title when a default occurs. A mortgagor then loses the equitable right of redemption when a public auction foreclosure sale concludes.

A. Legal Title

States adopt one of three theories (title theory, lien theory, or intermediate theory) to determine the respective legal interests of parties to a mortgage or deed of trust.¹⁰ "Under the 'title' theory, the mortgagee or the trustee is considered to hold actual title to the real property until the underlying debt is paid."¹¹ "Under the 'lien' theory, the mortgagor or borrower retains title to the property subject to the lien of the mortgage or deed of trust,which must be executed upon or foreclosed after default."¹² The intermediate theory is a hybrid of title and lien theory, and "provides that a lien is created against the real property by the mortgage or deed of trust, and that title to the real property transfers to the mortgagee or trustee upon default."¹³ "In effect, a state adhering to the intermediate theory is a lien theory state up until the time of default and is a title theory state once default occurs."¹⁴

Mississippi is an intermediate theory state.¹⁵ "Section 89-1-43 provides that, prior to a sale under a deed of trust, the grantor 'shall be deemed the owner of the legal title' except as against the trustee after breach of the condition of the deed of trust."¹⁶ Upon maturity of a debt and a failure to pay, legal title shifts from the mortgagor.¹⁷ If the mortgagor breaches a condition of the mortgage or deed of trust, such as defaulting on the loan, legal title to the real property transfers to the mortgagee or trustee "for the protection of his debt, and to make the security available for its payment."¹⁸ "Since the mortgagee's rights arise with default, it has been held that even if a mortgageeis holding under an improper foreclosure, it is still entitled because of this statute to possession and the income until the debt is paid."¹⁹

Because Mississippi is an intermediate theory state, legal title shifts to the mortgagee or trustee once a borrower defaults on the loan. Here, the debtor admitted that he defaulted on the mortgage prior to the foreclosure sale and the filing of the bankruptcy petition.²⁰ Accordingly, the debtor was divested of legal title to the property several months prior to the commencement of the bankruptcy case.

B. Redemption Rights

1. Mississippi State Law Redemption

Even though legal title shifted upon default, that title was held subject to the debtor's right to redeem the property prior to a foreclosure sale.²¹

MISS. CODE ANN. § 89-1-59 provides that:

[w]here a series of notes or installment payments secured by a deed of trust, mortgage, or other lien, and a provision is inserted in such instrument to secure them to the effect that upon a failure to pay any one (1) note or installment, or the interest thereon, or any part thereof, or for failure to pay taxes or insurance premiums on the property described in such instrument and the subject of such lien, that all the debt secured thereby should become due and collectible, and for any such reason the entire indebtedness shall have been put in default or declared due, the debtor, or any interested party, may at any time before a sale be made under theterms and provisions of such instrument, or by virtue of such lien, stop a threatened sale under the powers contained in such instrument or stop any proceeding in any court to enforce such lien by paying the amount of the note or installment then due or past due by its terms, with all accrued costs, attorneys' fees and trustees' fees on the amount actually past due by the terms of such instrument or lien, rather than the amount accelerated, and such taxes or insurance premiums due and not paid, with proper interest thereon, if such should have been paid by any interested party to such instrument. Any such payment or payments shall reinstate, according to the terms of such instrument, the amount so accelerated, the same as if such amount not due by its terms had not been accelerated or put in default (emphasis added).

"In effect, a debtor...