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Going, Going, Gone

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  • Posted on: Mar 14 2018

“Timing is everything”, it is often said.  A fine illustration of this often-uttered phrase can be found in Reverend C.T. Walker Housing Dev. Fund Corp. v. City of New York (E.D.N.Y. March 5, 2018), an appeal from the United States Bankruptcy Court for the Eastern District of New York.

The Reverend C.T. Walker Housing Dev. Fund Corp. (“Walker”) owned property on 135th Street in New York City (the “Property”).  The New York City Department of Housing Preservation and Development (“HPD”) agreed to fund the development of the Property, but the funding was conditioned on certain restrictive covenants that required Walker to use the Property for low-income, rent-stabilized housing for twenty years.  The financial success of the development would have been greatly enhanced by certain property tax exemptions offered by the City.  Unfortunately, the exemption expired before Walker filed its petition to receive same.  Accordingly, Walker fell behind in its property tax payments and the resulting tax lien certificates were sold to Bank of New York Mellon (“BONY”).  BONY assigned its rights to two trusts.

The trusts initiated state court foreclosure proceedings in which a judgment of foreclosure and sale was issued and a foreclosure sale was held.  The Property was knocked down to the highest bidder at the sale and a $1.15 million deposit was delivered to the foreclosure sale referee.  The winning bid was assigned to 181 West 135th LLC (“West”).  The closing of the sale was adjourned twice at West’s request because it was having difficulty obtaining title insurance, but a third request for an adjournment was denied.

West filed for bankruptcy protection one day prior to the scheduled closing and the closing was postponed due to the automatic stay.  The trusts, Walker and the City moved to lift the automatic stay imposed by West’s bankruptcy filing.

Thereafter, Walker filed its own bankruptcy petition in which it moved the bankruptcy court for an order permitting a sale of the Property to West for $9 million.

The bankruptcy court denied Walker’s motion to sell the Property, holding that, under New York law, the Property was not part of the estate because the foreclosure sale extinguished Walker’s equity of redemption prior to the filing of Walker’s bankruptcy petition.  The bankruptcy court did, however grant relief from the automatic stay in the West bankruptcy because, inter alia, West had no equity in the $1.15 million bid deposit because it failed to close on the Property.  Walker appealed to the United States District Court for the Eastern District of New York.

The District Court affirmed the bankruptcy court’s order.  In addressing that portion of the appeal relating to the sale of the Property, the Court found that the Property was not property of the estate under 11 U.S.C. §541 and, therefore, a sale could not be ordered under §363 in Walker’s bankruptcy proceeding.  The Court relying on In re Rodgers, 333 F.3d 64 (2003), in which the Second Circuit, applying New York law, found that the subject “property did not become part of the debtor’s bankruptcy estate when it was subject to a tax lien foreclosure auction before the bankruptcy petition was filed.”

For a variety of reasons, the Walker court found that, at the time it filed its petition, Walker “had no cognizable legal or equitable interests in the Property” and, therefore, the Property was not part of Walker’s bankruptcy estate.  (Internal quotation marks omitted.)  First, the judgment of foreclosure and sale (the “JF&S”) extinguished any interest Walker had in the Property.  Second, assuming that the JF&S left Walker with an equity of redemption, same was cut-off by the foreclosure sale.  Section 1194 of the Real Property Tax Law permits the owner of a tax lien to “foreclose the lien as in an action to foreclose a mortgage”.  “In such an action, the equity of redemption allows property owners to redeem their property by tendering the full sum at any point before the property is actually sold at a foreclosure sale.”  (Citation and internal quotation marks omitted; emphasis supplied by the Walker court.)  The court further recognized that, under New York law, it is the foreclosure sale, and not the delivery of the deed to the sale purchaser, that operates to extinguish the equity of redemption.

The Court also found that the stay was properly lifted in the West bankruptcy.  Pursuant to 11 U.S.C. §362(d)(2), after notice and a hearing, the stay can be lifted if the debtor has no equity in the property and the property is not necessary for an effective reorganization.  The Court found that West “abandoned all equity in the [P]roperty by failing to close the sale. And because…West is left with only the bid deposit as an asset, there is no reorganization necessary.”

TAKEAWAY

Frequently bankruptcy actions are filed immediately before a foreclosure sale so that the sale will be stayed.  Once the referee at the sale says “going, going, gone” and knocks down the property to the highest bidder, the foreclosed prior owner no longer has rights to the property itself and cannot generally unwind the foreclosure sale by filing a bankruptcy petition.

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