The United States Bankruptcy Court for the Central District of California recently held that the filing of a bankruptcy petition by a borrower can void a trustee sale even where the petition is filed after the trustee sale, so long as the borrower files the petition before the execution of the trustee's deed upon sale. In re: Gonzales 2011 WL3328508 (Bkrtcy. C.D.Cal. August 1, 2011). A real property secured lender is generally aware that the borrower always has the option of filing a bankruptcy to stay the trustee sale prior to the trustee's sale but once a trustee sale occurs, most lenders believe the bankruptcy filing by the borrower does not impact the sale.

However, In re: Gonzales the Bankruptcy Court by the Hon. Mark S. Wallace was faced with a situation where a borrower gave a deed of trust on a house in Riverside as collateral for a loan and then defaulted. The Lender conducted a trustee sale and a third party successfully bid at the sale, paying $167,000 for the property. On the same day as the sale but after the sale, the borrower filed a Chapter 7 bankruptcy petition. The Trustee then issued the Trustee's deed, memorializing the sale to the third-party purchaser, and the deed was not recorded until a number of days later. When the borrower was asked to vacate the residence, the borrower refused and the purchaser at the sale filed a motion for relief from the automatic stay in order to evict the borrower. The purchaser argued the deed issued by the foreclosure trustee was valid, notwithstanding the fact that it was not recorded until after the bankruptcy because it "related back" to the date and time of the foreclosure sale.

The Bankruptcy Court denied relief from the automatic stay and disagreed with a number of earlier Bankruptcy Court opinions, holding that the doctrine of relation back did not apply because California Civil Code section 1091 provides that title to real estate can pass only by deed or operation of law. Since no deed had been executed prior to the bankruptcy filing, the title remained in the hands of the debtor/borrower. For a decision that disagrees, see In re: Garner 208 BR 698 (BK ND Cal 1997). While you may disagree with the court, and the decision is not a binding precedent on any other court, it illustrates that once a trustee sale takes place, it is important to have the trustee's deed signed and recorded as soon as possible.