Foreclosing banks and attorneys beware!

This warning has been given countless times and this certainly won't be the final time. However, all real estate lending institutions in the state of Iowa should take particular note of the recent Court of Appeals case of First Iowa State Bank vs. Ronnie L. Hammond. First Iowa State Bank obtained a foreclosure decree in September of 2008 for the residential homestead of Kim and Ronnie Hammond and the foreclosure sale was set for August 2010. The sale notice informed the public that the Hammonds had a one year right of redemption. On the day before the August 2010 sheriff's sale, Kim Hammond filed for Chapter 7 bankruptcy. At sale, Jason Weems was the highest bidder and presumably had the right to take title to the property following the expiration of the redemption period. At the time of the sale, none of the interested parties were aware of or in receipt of notice of the bankruptcy filing. A week after the sheriff's sale, First Iowa State Bank received notice of the bankruptcy, but took no corrective action regarding the sale. Ultimately, Mr. Weems attempted to remove the Hammonds from the property following the expiration of the redemption period, but Kim Hammonds filed a motion to set aside the sheriff's sale due to the bankruptcy automatic stay. The Court of Appeals affirmed the district court's conclusion that this sheriff's sale was VOID and without effect due to the automatic stay becoming effective upon the filing of the bankruptcy petition. Thus, despite the fact that actual notice is not formally given (or received ) prior to a sheriff's sale, the automatic stay is still effective as of the date of the filing and thus any sheriff's sale following the date the petition is filed may be deemed void. The bank was ultimately required to reimburse the sheriff sale's highest bidder the amount paid to the bank along with the additional tax and insurance costs expended. The bank then attempted to salvage the judgment by executing on the property again and setting a second sheriff's sale for April 2012. The fate of this second sheriff's sale carried the same as the first. The court determined that the 2 year statute of limitations set forth in Iowa Code section 615.1 was unambiguous and thus clearly barred execution on the judgment after 2 years. Thus, the Court of Appeals determined that both sheriff sales were null and void and returned legal title to the Hammonds and further declared the 2008 foreclosure judgment null and void. Ouch. This case should certainly be a warning to all foreclosing lenders and their attorneys that a search should be done (if not already done) of the bankruptcy filings immediately prior to the sheriff's sale. Further, lenders and their attorneys should not ignore any notices they receive from the Bankruptcy Court, no matter how late in the game they are received. First Iowa State Bank can request further review by the Iowa Supreme Court, so this may not be the end of this case. Stay tuned for updates.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Ben Bruner