In re

DOMINGO G. MACAVILCA,

Debtor(s)

Case No. A04-00020-DMD ¹

In Chapter 13

MEMORANDUM DECISION REGARDING RELIEF FROM STAY MOTION [Edward Osowski]

1. INTRODUCTION- Edwin Osowski bid-in Alaskan real property owned by debtor at a nonjudicial foreclosure sale. The deed of trust trustee conducting the sale prepared a deed transferring the property to Osowski that same day. On the next day, the debtor filed this chapter 13 bankruptcy. Nonetheless, the trustee of the deed of trust recorded the deed, even after both it and Osowski knew about the bankruptcy.

Osowski moved for relief from stay, seeking to annul the automatic stay with respect to the postpetition recordation of the trustee’s deed and to allow him to seek removal of the debtor from the property.

Since the deed of trust foreclosure sale transferred title to Osowski when the deed was executed and delivered by the sale trustee before bankruptcy was filed, the property did not become part of the bankruptcy estate, and the automatic stay did not bar recording the trustee’s deed. Also, Osowski is entitled to relief from stay to take action to evict debtor from the property, since debtor has no right to remain in possession.

2. FACTUAL AND PROCEDURAL BACKGROUND- Domingo Macavilca, the debtor, owned a duplex in Anchorage which was being foreclosed by a lender, Alaska USA Federal Credit Union, which had a deed of trust on the real property as security for its loan to Macavilca. The foreclosure sale was set for January 8, 2004, in Anchorage. It was being conducted as a nonjudicial deed of trust foreclosure sale ²

by the trustee named in the deed of trust, Land Title Company of Alaska, Inc.

At the sale auction on January 8^th, the beneficiary of the deed of trust, Alaska USA Federal Credit Union, opened the bidding for the amount that Macavilca was in default. Edwin Osowski won with a bid of $96,676.38, one-dollar more than Alaska USA’s bid. Osowski paid the amount of his bid in certified funds to Land Title’s officer conducting the sale, Leslie Plikat. Land Title had a trustee’s deed prepared and signed that day,

7 ABR 502 January 8, 2004, with Osowski as the grantee. Alaska USA has been paid off, using Osowski’s funds. ³

The trustee’s deed was ready to record.

In the normal course of events in handling nonjudicial foreclosures, Land Title records its trustee’s foreclosure sale deeds promptly. The Osowski trustee’s deed would have been recorded on the morning of January 9, 2004, if Land Title had met an internal deadline for making a recording at that time – Land Title generally only recorded the first thing in the morning. Normally, the trustee’s deed in not delivered directly by Land Title to the successful bidder. Rather, the original deed is sent to the recorder’s office with a notation to return it to the grantee (the successful bidder). Plikat said this might take 4 to 6 weeks from the date of recording. ⁴

Macavilca filed this chapter 13 bankruptcy case on January 9, 2004, at 3:11 p.m. AST, ⁵

on the day after the foreclosure sale. When Land Title learned of the bankruptcy, it checked with its legal counsel to see if recording the Trustee’s Deed would violate the automatic stay. It got the green light to record and the trustee’s deed was recorded on January 13, 2004. ⁶

Osowski moved for relief from stay, asking that the stay be annulled so that the recording would not be deemed to have violated the automatic stay. ⁷

The motion stated that the real estate did not become property of the estate, and that Osowski held the equitable interest in the property on January 9, 2004, when the bankruptcy was filed. ⁸

Macavilca argues that the sale was not complete because the trustee’s deed had not been recorded by the time bankruptcy was filed, so that the foreclosure was stayed. Macavilca claims that he still has an equitable interest in the property and any default cured in his chapter 13 plan. ⁹

At the preliminary hearing, I indicated that if the foreclosure sale had been completed prepetition, the recording was probably not an act which affected property of the estate. I directed the parties to reach a stipulated agreement regarding the facts, ¹⁰

which they did, ¹¹

but the stipulated facts did not discuss the issue of “delivery” of the deed.

I entered another order directing the parties to discuss the facts and law regarding delivery of a deed in the context of the deed of trust foreclosure, ¹²

which they did in the form of an affidavit of Leslie Plikat explaining the sale and Land Titles procedures, and competing briefs on the issue of delivery of deeds. ¹³

At the preliminary hearing on the motion for relief from stay, I suggested to the parties that if the facts and law showed that the real property was property of the estate when the case was filed, I probably would not grant an annulment of the stay to cure the problem, since both Osowski and Land Title knew of the bankruptcy when the deed was recorded (although, Osowski said he asked Land Title not to record before seeking an order by the bankruptcy court authorizing it). ¹⁴

4. ANALYSIS- There are a number of cases in the Ninth Circuit involving foreclosure sales which were held shortly before a bankruptcy case was filed, in which certain of the foreclosure procedures (generally recording of the sale deed) occurred after the case was filed. The resolution of each case varies a little based on the wording of the state’s foreclosure statute. ¹⁵

Resolution of our case depends on the wording of the Alaska Statutes governing nonjudicial foreclosures, AS 34.20.070-.130. Nonjudicial foreclosures involve sales by a trustee named in a deed of trust which explicitly gives the trustee a power to sell the real estate at a public auction for a breach of a condition (such as failure to pay a promissory note secured by the deed of trust according to the payment terms set out in the note), without the intervention of a court. The sale must be properly noticed, served on the trustor, and published in a newspaper for four consecutive weeks. ¹⁶

The benefit of a nonjudicial foreclosure sale is that it avoids the cost and delay of having to go through a court connected foreclosure, and the one-year redemption period attendant to judicial foreclosures of real property. ¹⁷

The redemption period generally detracts from the ability to freely use the property during the redemption period, due to

7 ABR 506 the uncertainty of whether the defendant will redeem – this tends to decrease the foreclosure sale price.

The trade off for avoiding the one-year redemption period by using the nonjudicial foreclosure route is the statutory limitation requiring the beneficiary of the deed of trustee to give up the right to a deficiency judgment. ¹⁸

If the collateral is worth more than, or close to, the amount it secures, there may be little or no economic loss to the beneficiary in using the nonjudicial foreclosure route.

The issue in our case is whether the nonjudicial foreclosure sale had already conveyed away Macavilca’s interest in the property before the bankruptcy was filed, so that it was not “property of the estate”. ¹⁹

If it was not property of the estate on the petition date, the automatic stay does not protect any significant interest in the property beneficial to the bankruptcy estate or the debtor. ²⁰

The relevant Alaska Statutes surrounding the issues raised in this case are (with emphasis added by bolding and italicizing the most pertinent words):

(b) The attorney for the trustee may conduct the sale and act in the sale as the auctioneer for the trustee. Sale shall be made to the highest and best bidder. The beneficiary under the trust deed

7 ABR 507 may bid at the trustee's sale. The trustee shall execute and deliver to the purchaser a deed to the property sold.

(a) The sale and conveyance transfers all title and interest that the party executing the deed of trust had in the property sold at the time of its execution, together with all title and interest that party may have acquired before the sale, and the party executing the deed of trust or the heirs or assigns of that party have no right or privilege to redeem the property, unless the deed of trust so declares.

(b) The purchaser at a sale and the heirs and assigns of the purchaser are, after the execution of a deed to the purchaser by the trustee, entitled to the possession of the premises described in the deed as against the party executing the deed of trust or any other person claiming by, through or under that party, after recording the deed of trust in the recording district where the property is located.

Land Title, the sale trustee, declared Osowski to be the high bidder, collected the sale proceeds in certified funds, and executed a trustee’s deed to him, all before this bankruptcy case was filed. The only question is whether the trustee’s deed had been delivered, or whether there had been a conveyance of the deed, before the bankruptcy was filed. If there was delivery, than the real property, other than Macavilca’s bare holdover possession, was not property of the estate.

In a Montana bankruptcy court case which is very similar on the facts, In re McLouth, this was the ultimate conclusion. ²¹

In McLouth, however, the court merely

7 ABR 508 said that delivery had occurred prepetition, without discussing the facts surrounding the delivery. “Delivery” is the very issue which troubles the court in the present case.

Macavilca has cited the 1982 Alaska bankruptcy and district court decisions in In re Alsop ²²

for the proposition that the sale was only completed on recording the trustee’s deed, and that was stayed in this case by the bankruptcy filing. An action taken in violation of the automatic stay is generally void. ²³

But the issue in Alsop was whether the foreclosure sale, even after recording, was the “transfer” or did the transfer really occur at a prior date when the deed of trust was recorded. The date of the transfer was important at the time of the Alsop case (1981) to a determination of whether a fraudulent transfer claim (limited to one year after the transfer) was available under 11 USC § 548(d)(1).

That question was later resolved by a 1984 amendment to the definition of “transfer” in the Bankruptcy Code ²⁴

to make it clear that a foreclosure was a transfer ²⁵

and by the Supreme Court in the BFP v Resolution Trust Corp. case. ²⁶

Alsop does not stand

7 ABR 509 for the proposition that a deed of trust trustor retains a substantial interest in foreclosed property until the trustee’s deed has been recorded.

So, the question boils down to whether there was a “delivery” of the trustee’s deed on January 8, 2004, or at least sometime before this case was filed, sufficient to have conveyed the equitable, if not legal, title to Osowski.

There are no cases regarding delivery of trustee’s foreclosure sale deeds in Alaska on point, and little Alaska law involving the issue of deed “delivery” in a fact situation like ours. In Wickwire v City & Borough of Juneau, ²⁷

the court held that date a sewer easement became effective on the date it was executed, with delivery being presumed to be the date of delivery. ²⁸

Recently, the Supreme Court of Alaska, in the case of Rausch v Devine, ²⁹

said “ • • • Alaska case law has implied that delivery is a part of valid execution, relying on Powell on Real Property.” ³⁰

Rausch also approved the following Iowa law and implied it was applicable to Alaska real property situations:

• • • "Every conveyance of real estate passes all the interest of the grantor therein, unless a contrary intent can be reasonably inferred from the terms used." The proper transfer of title under a deed must include an actual or symbolic delivery of the deed accompanied by the intention of the grantor to transfer title without any reservation of control. "The intent of the grantor is controlling in the matter of delivery and is to be determined by the grantor's acts or words or both." • • • [citations omitted; emphasis added] ³¹

The important issue regarding delivery is whether the grantor intended a complete transfer, meant to be presently operative as a conveyance of its title to land. Effecting a valid deliver does not require that a deed be actually handed over to a grantee. Under the right set of facts, delivery may occur, even though the instrument remains in the hands of the grantor. ³²

In the present case, the bankruptcy case was filed while the deed was in the process of going to the recorder’s office. The grantor, Land Title, had a limited interest in the property and had satisfied its principal function of acting as the sale agent in the foreclosure – all that remained were the ministerial tasks of completing a nonjudicial foreclosure as prescribed by statute. By happenstance, the trustee’s deed did not go to the recorder’s office on the morning on January 9^th, but it was headed there in the ordinary routine of Land Title (subject to a brief delay to make sure recording did not violate the automatic stay; and, January 10^th and 11^th fell on a weekend).

When Land Title acts as trustee with a power of sale, it normally executes a trustee’s deed on the date of the sale, after it has received certified funds from successful bidders (other than the deed of trust beneficiaries, presumably, which is usually by offset bid). Land Title normally does not physically deliver a trustee’s deed to the successful bidder, but sends it to the recorder’s office for recordation with a notation to return the recorded document to the grantee (the successful bidder). Land Title’s office procedure called for recording in the morning, so, if the title company can arrange it, recording would be the day after the sale, but if not, relatively soon thereafter. The return of the original document from the recorder’s office often takes 4 to 6 weeks, so the grantee may not get possession of the actual deed for quite a while. Under this scenario, delivery will be presumed when the deed is executed with the intent to send it in for recording. That is what happened in this case. The conveyance from Land Title to Osowski was completed on January 8^th.

Since the duplex was effectively conveyed by execution and delivery of the trustee’s deed on January 8^th, the duplex was not property of the estate on January 9^th when the chapter 13 case was filed. Recording on January 13^th did not effect any property of the estate or the rights of the debtor.

Even though the court in Engles, ³³

under California law, felt that a stay was in effect after a prepetition foreclosure, but before the deed was recorded, it found that there was no substantial rights protected by the stay, and ruled that the stay should be

7 ABR 512 lifted as a matter of course to allow recording. I go a bit further and hold, under Alaska law, that no stay is in effect when a prepetition foreclosure is completed by execution and deliver of the trustee’s deed (the conveyance of the property to the successful bidder), because property does not become “property of the estate.” Recording of the trustee’s deed, in that case, may take place without the need to seek relief from stay.

There are sometimes draconian results if a party falls on the wrong side of an rigid bankruptcy time line. A debtor who files for bankruptcy too late to receive the ample protections that the Bankruptcy Code affords to debtors, such as Mr. Macavilca did in this case, may suffer harsh consequences – in this case, loss of a house.

And, having no interest in the duplex on the date of filing except, essentially, the rights of a squatter (i.e., a person having no legal right to remain in possession), he must suffer the additional indignity of the court lifting the stay to allow Mr. Osowski to evict him. ³⁴

Hopefully, the parties can arrange to do this amicably.

5. CONCLUSION- I conclude that the foreclosure sale was completed by execution and delivery of the trustee’s deed on January 8, 2004, the day before the debtor filed this chapter 13 case. The real estate was not property of the estate at the time of the filing. The debtor had bare possession of the property, with no right to remain. The postpetition recording of the trustee’s deed postpetition was not an act violating any provision of 11 USC § 362(a), since it did not continue foreclosure or assert a lien against

7 ABR 513 the property of the estate, but merely allowed Osowski to give notice to third parties of his ownership.

Osowski is entitled to relief from stay to bring a state court action to evict debtor, since debtor’s possession is not based on any continuing rights to remain on the property.

1. Although this case is assigned to Judge Donald MacDonald IV, I happened to be filling-in for him when this motion was first heard, and have followed through with this decision.

3. Affidavit in Support of Motion for Relief From Stay, by Leslie Plikat, a Vice President of Land Title of Alaska, Inc., Docket Entry 35, filed March 27,2004.

9. Opposition to Motion for Relief from Stay, Docket Entry 20, filed February 2, 2004.

10. Proceeding Memorandum, Docket Entry 24, filed on February 9, 2004, and Order Regarding Relief from Stay Motion [Edward Osowski], Docket Entry 23, filed February 10, 2004.

12. Second Order Regarding Relief from Stay Motion [Edward Osowski], Docket Entry 31, filed March 15, 2004.

13. Affidavit in Support of Motion for Relief from Stay (by Leslie Plikat), Docket Entry 35, filed March 27, 2004; Memorandum Supporting Motion for Relief from Stay [Delivery of Deed Issue], Docket Entry 34, filed March 27, 2004; and, Supplemental Brief on Motion for Relief from Stay by Osowski (filed by debtor), Docket Entry 36, filed March 30, 2004.

15. See, In re McLouth, 257 BR 316, 321 (Bankr D Mont 2000), citing Butner v United States, 440 US 48, 54-55 (1979) for the proposition that state law controls the specifics of the foreclosure process. Other cases involving foreclosures which happened just before the filing of bankruptcy are: In re Engles, 193 BR 23 (Bankr SD Cal 1996); In re Garner, 208 BR 698 (Bankr ND Cal 1997); and, In re Bebensee-Wong, 248 BR 820 (9^th Cir BAP 2000).

16. AS 34.20.080(a)(2), requiring notice of the time and place in the same manner as sale of real estate on execution, AS 09.35.140(2).

18. AS 34.20.100; Hull v Alaska Federal Savings & Loan Ass’n 658 P2d 122, 124-25 (Alaska 1983)

22. In re Alsop, 14 BR 982 (Bankr D Alaska 1981), aff’‘d 22 BR 1017 (D Alaska 1982).

25. In re Verna, 58 BR 246, 249 (Bankr CD Cal 1986) (discussing the definition of “transfer” under the 1984 amendment, then numbered 11 USC § 101(48)).

26. BFP v Resolution Trust Corp., 511 US 531, 114 SCt 1757, 129 LEd2d 556 (1994).

27. Wickwire v City & Borough of Juneau, 557 P2d 783, 785 fn9 (Alaska 1976).