Effect on Foreclosure
A pending bankruptcy at the time of the foreclosure of a mortgage will render the foreclosure void. This is because of the automatic stay that arises upon the filing of the bankruptcy petition. But inMassachusetts Automatic Transmissions, Inc. 35 B.R. 328 (Bkrtcy 1983), which cited as authorityOutpost Cafe, Inc. v. Fairhaven Savings Bank, 3 Mass.App.Ct. 1, 322 N.E.2d 183 (1975), it was held that the bankruptcy estate had no interest in property, legal or equitable, which had been sold by foreclosure sale six days prior to the debtor filing for bankruptcy. This is because the debtor had no equity of redemption for the bankruptcy estate to succeed to. In other words, the filing for bankruptcy after the foreclosure, even though the foreclosure deed has not yet been recorded, will not affect the title. In Massachusetts Automatic Transmissions, Inc. the bankruptcy court said:
As a threshold matter, legal and equitable interests in property generally are determined by reference to state law. * * * Accordingly, this court must look to Massachusetts law to evaluate the debtor's interest in the property.
Under Massachusetts law, the debtor would have no interest in the property after a proper foreclosure. Outpost Cafe, Inc. v. Fairhaven Savings Bank . . . . The [ Massachusetts] court . . . held that the plaintiff's equity of redemption was barred . . . at least as early as the point in time when the memorandum of sale was executed with the purchaser at the foreclosure sale.
[In] Schanberg v. Automobile Insurance Ins. Co. of Hartford, 285 Mass 316, 318, 189 N.E. 105 (1934) [it was held that] "the equity of redemption . . . [is] barred as soon as the property . . . [is] knocked down at the foreclosure sale."
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Accordingly, there is no need to grant relief from stay to [the bank] in order for it to complete the transfer of the property to [the purchaser].
The important thing to remember, is that for the foreclosure to be complete a memorandum of sale with the purchaser must have been duly executed.