Foreclosure proceeds: a review of the Bayview case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need. Bayview v Gold from the Eastern District of Virginia concerns foreclosure sale proceeds.

ALG was the first lienholder of the townhouse owned by the Debtor. ALG foreclosed and sold the property for $512,000.00. ALG paid their debt of $32,785.00. $456,802.72 remained.

Normally this would go to the second lienholder of the townhouse (Bayview), but the Debtor filed a Chapter 7 bankruptcy before ALG could pay Bayview. ALG instead gave the funds to the Chapter 7 Trustee. The Trustee disbursed the funds to the creditors (mostly to taxes owed by the Debtor), filed his/her proper paperwork showing the disbursement; the paperwork was approved by the court and the case was closed and a discharge granted.

Bayview was aware of the bankruptcy filing and even filed a Motion for Relief from Stay in the case. They did NOT file a claim to allow it to receive any Trustee funds.

Bayview sued to force the Trustee to pay back the funds Bayview believed were owed to it. It argued that “… the sales proceeds from the foreclosure sale were not property of the estate because the foreclosure sale was completed prior to the filing of the petition in bankruptcy and the debtor, therefore, had no interest in the … property.”

The last half of that is correct – once the foreclosure sale takes place, the debtor has no interest in the property. If a person wants to save their house from foreclosure they MUST file a Chapter 13 reorganization before the sale of the property. If they file after the foreclosure sale, they cannot use the bankruptcy to protect the property.

But the court ruled that a foreclosure sale does NOT prevent the Debtor from having an interest in the sales proceeds. “Until the proceeds of sale are paid to the secured lender — in this case the sales proceeds were held by a third party, the trustee under the prior deed of trust — the debtor has an interest in the proceeds of sale even though they are subject to the lien of a secured lender.”

Bayview dropped the ball. It did not file a claim in the case. Had it done so, and provided proof of its lien on the property, it would have been paid in full.

It missed the deadline to set aside the Order approving the Trustee’s disbursement. It missed the deadline to appeal the Order. It filed a Complaint against the Trustee, the IRS, ALG, etc. in a shotgun approach – with many theories in the hopes of finding the right argument to get funds due to them. Unfortunately for them, the Court denied all of Bayview’s arguments.

Is there any benefit to the Debtor? No. Not really. Filing bankruptcy only grounds to a halt the bank’s disbursement to other lienholders and, eventually, the Debtor.

But that can be advantageous to a Debtor – it guarantees the Debtor’s exemption will be (at least) addressed by the Trustee and the Court. A Debtor will not have to fight with the bank for his or her exemption (assuming he or she is entitled to an exemption) but instead will have a ready-made forum to argue the matter. If a Debtor is entitled to any of the proceeds, he or she will get it (once approved by the Court). This will save the Debtor time and legal expenses.

If a Debtor is worried the bank may stall, or even deny, his or her exemption in the real estate proceeds, filing a Chapter 7 before the disbursement of the funds, because of this case, may help.

About the author: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!