Andrew Vavricka
St. John's University School of Law
American Bankruptcy Institute Law Review Staff
Section 362 of title 11 of the United States Code (the “Bankruptcy Code”) provides that the filing of a bankruptcy petition results in an automatic stay generally enjoining all actions, including a foreclosure sale, against a debtor or its property.[1] In Bayview Loan Servicing LLC v. Fogarty, the United States Court of Appeals for the Second Circuit held that the automatic stay is violated by a creditor when it tries to proceed with a foreclosure in which the debtor is named, even if that debtor only had a possessory interest in the property.[2] In 2010, Debtor Eileen Fogarty lived in a house (the “Property”) in Shirley, New York and held a 99% interest in 72 Grandview LLC (the “LLC”), the entity that owned the Property.[3] When the LLC stopped making mortgage payments on the Property, the owner of the mortgage, Bayview Loan Servicing LLC (“Bayview”), began proceedings to foreclose on the Property.[4] In January 2018, Bayview obtained a judgment in the state foreclosure action and the LLC and Fogarty were each named as defendants.[5] The judgment authorized a sale of the Property on April 17, 2018.[6] Four days before the scheduled sale, Fogarty filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code with the Bankruptcy Court for the Eastern District of New York.[7] Fogarty informed Bayview of the bankruptcy filing and the resulting automatic stay on the eve of the foreclosure sale.[8] Notwithstanding the bankruptcy filing, Bayview proceeded with the sale of the Property and it was sold to a third party.[9] Fogarty sued Bayview in bankruptcy court for willful violation of the automatic stay.[10]According to Bayview, the LLC itself needed to file for bankruptcy for the stay to go into effect. In a brief order, the bankruptcy court sided with Bayview and concluded that the foreclosure was solely an in rem action that does not create a stay because the LLC did not file for bankruptcy.[11] Fogarty appealed the bankruptcy court’s decision to the United States District Court for the Eastern District of New York.[12] The district court held that the foreclosure sale violated the automatic stay because it was an action against the debtor and its assets. In particular, Fogarty was (i) named as a defendant in the foreclosure action and (ii) Fogarty’s possessory interest in the Property as tenant was part of her bankruptcy estate.[13] On a subsequent appeal by Bayview, the United States Court of Appeals for the Second Circuit affirmed the district court.[14]
The Second Circuit reasoned that the “plain text” of 11 U.S.C. § 362 supports the conclusion that the automatic stay blocks the foreclosure sale by Bayview.[15] Citing Section 362(a)(1), the court stated that “the Sale represented a ‘continuation . . . of a judicial, administrative, or other action or proceeding against the debtor.”[16] The foreclosure sale “continuation” because Fogarty was named a defendant in the foreclosure action against her and the foreclosure sale was part of this same proceeding.[17] The court also explained that Section 362(a)(2) applies because the foreclosure judgment against Fogarty entered in February 2018 was “obtained before the commencement of’ Fogarty’s bankruptcy proceeding on April 13.”[18] Finally, the court rejected Bayview’s arguments that the stay did not apply to Fogarty because the foreclosure action was an in rem proceeding and that the sale will not affect Fogarty’s bankruptcy estate.[19]There is no distinction in Section 362(a) between in rem and in personam proceedings where the debtor is a named defendant and the statute does not consider the reason why the debtor was named as a defendant.[20]
Because Bayview was aware of the bankruptcy filing, the Second Circuit concluded that Bayview willfully violated the automatic stay by completing the foreclosure sale after a named defendant in the action filed for bankruptcy.[21] The court noted that its conclusion was consistent with the plain meaning of section 362.[22] Moreover, the court noted that Bayview could not identify any court that held “that the automatic stay does not apply to a proceeding in which the debtor is a named defendant.”[23] Finally, the Second Circuit emphasized that automatic stay provision is to be broadly construed and is “one of the fundamental debtor protections” in the Bankruptcy Code.[24]
[1] 11 U.S.C. § 362(a); 11 U.S.C. § 301.
[2] See Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62, 71 (2d Cir. 2022).
[3] Id. at 67.
[4] Id. at 68.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 69.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 69–70.
[13] Id. at 70.
[14] Id. at 81.
[15] Id. at 71–72.
[16] Id. at 72; 11 U.S.C. § 362(a)(1).
[17] In re Fogarty, 39 F.4th at 72.
[18] Id.; 11 U.S.C. § 362(a)(2).
[19] In re Fogarty, 39 F.4th at 74.
[20] Id.; 11 U.S.C. § 362(a).
[21] In re Fogarty, 39 F.4th at 77.
[22] Id. at 74.
[23] Id. at 73.
[24] Id. (quoting Eastern Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998)).