In February, U.S. Bankruptcy Judge Robert Grossman, of the Eastern District of New York decided a case which impacts both bankruptcy cases and foreclosure cases. At its core, the ruling by Judge Grossman impacts the ability of a bank or servicer of a mortgage to set aside the automatic stay for purposes of pursuing a foreclosure outside of a bankruptcy.
Let me back up a moment and explain some of that last sentence.
The automatic stay is provided for by the Bankruptcy Code, section 362 to prevent creditors from making collection attempts immediately following the filing of a debtor's petition. Basically, it is why creditors have to stop calling and why lawsuits filed against a debtor must not be pursued further after the filing of the petition.
As it applies to a foreclosure case, the automatic stay prevents a foreclosure from going forward. However, a mortgage holder or servicer may move the bankruptcy court to set aside the automatic stay, as it applies to that mortgage holder or servicer, and pursue the foreclosure of a property.
Judge Grossman created a tougher barrier, at least for alleged mortgage holders and servicers, to setting aside the automatic stay. The reasoning has to do with the way mortgage companies have done business for the last several years. Most mortgage companies have utilized the Mortgage Electronic Registration System, or MERS, to track the transfer of "ownership" in mortgages and mortgage notes. The problem with these transactions taking place through MERS, according to Judge Grossman, is that the purported authority MERS has to transfer ownership is speculative. The exact reasoning by Judge Grossman need not be repeated here, because whether there will be applicability to Florida law has yet to be seen. However, what can be said is that the authority of a mortgage company to set aside the automatic stay should --and likely will-- be challenged on the same grounds that foreclosures are challenged in general in state courts.
The interplay between foreclosure and bankruptcy is sure to result in rulings in many U.S.Bankruptcy courts, and more than likely eventually in Florida.
