Over the summer, the Second Circuit Court of Appeals answered the open question of whether the Bankruptcy Code’s automatic stay provisions are violated by the foreclosure sale of a property when the debtor is a named defendant in the foreclosure proceeding, even if the debtor’s interest in the property is only possessory, in the affirmative.

In reaching it decision, the Second Circuit set forth a new bright-line rule making the automatic stay applicable to the continuation of an action and/or the enforcement of a judgment rendered in that action whenever the debtor is a named party in the action. Under the Second Circuit’s new rule, whenever a defendant in a foreclosure proceeding files a bankruptcy petition, the automatic stay is triggered, halting the action. If a lender proceeds without first obtaining relief from the bankruptcy court, it will be found to have violated the automatic stay. In light of the Second Circuit’s decision, lenders and their counsel should exercise caution whenever they receive notice of a bankruptcy filing. Failure to do so could result in sanctions.