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New Jersey homeowners facing foreclosure will have to move faster to cure a mortgage default, under a federal appeals court decision. The Third U.S. Circuit Court of Appeals held that the right to cure ends when the property is sold at auction, rejecting the owner’s argument that it continues until the deed is delivered to the purchaser. The ruling in the closely watched case, which drew amici on both sides, resolves a more than decade-old split among federal bankruptcy and district judges in New Jersey. “Having finally been given the opportunity to break what is a virtual tie between the New Jersey federal courts,” the court held in its Aug. 3 decision that 11 U.S.C. � 1322(c)(1) does not afford the debtor a post-auction right to cure. The relevant provision, � 1322(c)(1), enacted as part of the Bankruptcy Reform Act of 1994, allows a Chapter 13 debtor to cure a home mortgage default “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” Some judges have interpreted that language to cut off the right to cure – to pay the arrears and bring the mortgage payments up to date – when the auctioneer’s gavel falls, the so-called gavel rule. Others have found a right to cure up until the sheriff hands over the deed to the winning bidder, which usually occurs later, once the auction price is paid in full, the “delivery-of-deed” rule. Lawyers involved in the case say judges in the Newark vicinage were more likely to follow the gavel rule than those in Trenton and Camden. The debtor, Vincent Connors of Matawan, defaulted on a home mortgage loan held by Deutsche Bank National Trust Co. The bank foreclosed on March 4, 2004, and the property was sold to 41 Lakeridge LLC at a foreclosure sale on Nov. 10, 2004. Lakeridge paid 20 percent of the $330,000 auction price at that time. On Nov. 14, Connors filed a Chapter 13 petition, which triggered the automatic bankruptcy stay and halted the finalization of the foreclosure sale. His Chapter 13 plan, filed on Nov. 30, 2004, proposed to cure his prepetition arrears on the mortgage. Connors did not, however, exercise his right to object to the foreclosure sale, or to redeem the property from the purchaser within 60 days of the filing of the petition by repaying the auction price plus interest and costs. The 60 days expired on Jan. 19, 2005. On March 9, 2005, Bankruptcy Judge Novalyn Winfield granted Lakeridge’s motion to lift the stay, over Connors’ opposition, explaining that Connors no longer had the right to cure the default and his right to redeem had also expired. But Winfield stayed the ruling until Connors could appeal. U.S. District Judge Dennis Cavanaugh affirmed on June 20, 2006. Noting the “schism” among courts in New Jersey on the issue, he applied the gavel rule and found Connors also waited too long to redeem under state law. Cavanaugh granted the motion lifting the automatic stay and Connors appealed. In affirming, the Third Circuit found “unambiguous” support for the gavel rule in the language of � 1322(c)(1). It agreed with Lakeridge’s and Deutsche Bank’s argument that the term “foreclosure sale” is synonymous with the foreclosure auction. Connors argued it encompassed the entire process and ended only with transfer of the deed. Though the auction cut off the right to cure, Connors still had post-sale remedies under state law, wrote Judge Maryanne Trump Barry, joined by Julio Fuentes and Kent Jordan. He had 10 days to object under New Jersey Court Rule 4:65-5, and his filing of the Chapter 13 petition then extended his time to object or redeem to 60 days under �108(b) of the Bankruptcy Code, said Barry. But he let the opportunity go by. The legislative history and public policy considerations also supported the gavel rule, Barry added. The 1994 change to the bankruptcy law was meant to overrule an “aberrant” 1987 Third Circuit decision, In re Roach, 824 F.2d 1370, that cut off the right to cure at the time of the foreclosure judgment, Barry pointed out. On the public policy side, the gavel rule is preferable because homeowners receive prior notice of the auction but not of the deed delivery, said Barry. States are free to provide more post-sale remedies but in the meantime, “the gavel rule protects purchasers by avoiding an interpretation that turns �1322(c)(1) into a federal vehicle for divesting them of property rights acquired at foreclosure sales.” Richard Haber, counsel for the New Jersey League of Community Bankers, an amicus, says the ruling creates “a level playing field,” in which everyone knows exactly when the right to cure is lost. “The substantive rights of interested parties will no longer be determined by which judge the clerk’s office assigns a particular bankruptcy case to,” adds Haber, of Zucker Goldberg & Ackerman in Mountainside. Warren Wolf of Mount Laurel’s Cureton Caplan, the lawyer for Deutsche Bank, welcomes the bright-line rule and says the decision could influence courts in states with similar foreclosure laws. It is also consistent with decisions by appeals courts in other circuits, he says, naming, for example, Cain v. Wells Fargo Bank, 423 F. 3d 617 (6th Cir. 2005). On the other side of the issue, Neil Fogarty, who argued on behalf of the National Association of Consumer Bankruptcy Attorneys, says the issue in the case was “who gets the home, the homeowner trying to pay it off or the spectator buying the house at a discount and taking the equity the homeowner has built up over the years.” A property is not really sold until the deed is delivered he says, observing that before that point, “speculators can get cold feet, can’t raise the rest of the money, or might realize they bought a toxic waste dump and they bail out.” Debtors should see a bankruptcy attorney at the earliest opportunity so they do not miss the deadlines, and they need to file the bankruptcy before the auction, advises Fogarty, who is with Northeast New Jersey Legal Services in Jersey City. Lakeridge’s lawyer, Matthew Fredericks, says his client is not a speculator but an investor, “a necessary participant in the foreclosure process.” The ruling is not unfair to homeowners but “simply clarifies the debate,” says Fredericks, who is with a Clifton firm headed by David Kessler. Fredericks has moved in the bankruptcy court for an order lifting the automatic stay, which will allow Lakeridge to pay the rest of the money to the sheriff and complete the sale. Connors’ lawyer, Scott Sherman of West Caldwell’s Minion & Sherman, calls the ruling “bad news” for homeowners. He says he is still digesting the opinion but it is “probably the end of the line as far as the courts,” leaving a settlement with Lakeridge the only hope for Connors to keep his home. Co-counsel Herbert Raymond, of Raymond & Raymond in East Orange, did not return a call for comment. The case is In re Connors,No. 06-3321.

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