Limitations on Borrower Cure Rights in Foreclosure Situations
A recent decision from the United States District Court for the District of Maryland reinforces well-established Maryland law regarding limitations on a borrower’s right to cure defaults and reinstate a deed of trust with respect to residential property. In this case, the borrower tried to manipulate certain plan provisions under Chapter 13 of the Bankruptcy Code to extend the deadline for the borrower to redeem the borrower’s residence from foreclosure proceedings. After the borrower defaulted on a loan secured by a deed of trust on the borrower’s residence, substitute trustees commenced a foreclosure action in Baltimore City. Approximately 30 minutes after the foreclosure auction occurred, the borrower filed a Chapter 7 bankruptcy petition. Later, the borrower converted the case from Chapter 7 to Chapter 13. Thereafter, the Bankruptcy Court granted the lender’s motion for relief from the automatic stay to continue with the foreclosure proceedings, including seeking ratification of the sale. The borrower appealed, arguing that, under Section 1322 of the Bankruptcy Code, the borrower still had a right of redemption with respect to the borrower’s residence. Under Section 1322, a Chapter 13 plan may propose to cure defaults and reinstate a loan with respect to a lien on the debtor’s principal residence until the residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law. The borrower argued that since the foreclosure sale had not yet been ratified, the borrower was entitled to redeem the residence under Section 1322. The District Court rejected this argument, noting that under applicable non-bankruptcy law, a borrower has until one business day before the foreclosure sale occurs to cure all deficiencies and reinstate the loan. The Court further reasoned that under Maryland law, all rights of redemption are divested upon the occurrence of the foreclosure sale. The Court also distinguished this case from its decision in Ocwen Loan Servicing, LLC v. Kameni, where the court determined that the bankruptcy court could enter an order invalidating a foreclosure sale that occurred after the debtor filed a bankruptcy petition and an emergency motion for automatic stay but before the court could hold a hearing on the debtor’s motion. The Court emphasized that unlike in Kameni, the borrower filed his bankruptcy petition after the sale occurred and, thus, he had lost any right of redemption. Please contact Bryan Mull with any questions concerning this topic.