For more than 10 years, the courts in New Jersey were split as to whether, under the Bankruptcy Code, a chapter 13 debtor’s right to cure a default on a mortgage loan secured by the debtor’s primary residence expired at the foreclosure sale, or at the time the deed to the foreclosed property was delivered to the purchaser. That split now has been resolved by the U.S. Court of Appeals for the Third Circuit in favor of the line of cases cutting off the right to cure at the time of the foreclosure sale. In re Connors, No. 06-3321 (3d Cir., Aug. 3, 2007).

The so-called “gavel rule” does not, however, cut off a borrower’s state court remedies, the court determined. In New Jersey, a borrower may redeem the property or object to the sale within 10 days of the sale, or within 60 days of the petition date, if the borrower filed a bankruptcy petition during the 10-day grace period.

The debtor, Connors, executed a note in the amount of $252,000 secured by a mortgage in favor of the predecessor of Deutsche Bank National Trust Co. Aug. 21, 2002. By Nov. 10, 2004, Connors was in default and Deutsche Bank had scheduled a sheriff’s sale of the secured real property. At the sale, the successful bidder was 41 Lakeridge LLC with a bid of $330,000.

Four days after the sale to Lakeridge, Connors filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. On Nov. 30, 2004, Connors filed a chapter 13 plan in which he proposed to cure the pre-petition mortgage arrearages.

Because Connors filed his petition less than 10 days after the foreclosure sale, his statutory right under New Jersey law to redeem the property or object to the sale was extended to 60 days from the filing of the petition for relief. Connors failed to take action during the 60-day period to preserve his rights, however, and because he failed to do so, after the expiration of the 60-day statutory period, Lakeridge filed a motion for relief from the automatic stay to permit it to tender the balance of the purchase price, and receive the deed.

The bankruptcy court granted the motion for relief over Connors’ opposition, holding that the right to cure the default under 11 U.S.C. § 1322 (c)(1) and the statutory redemption period had expired. The U.S. District Court for the District of New Jersey affirmed.

An appeal followed and groups interested in the outcome of the case—one from each side—filed amicus briefs: the National Association of Consumer Bankruptcy Attorneys and New Jersey League of Community Bankers.

The Bankruptcy Code provision in question, 11 U.S.C. § 1322, permits chapter 13 debtors to provide for the cure or waiver of defaults through their chapter 13 plans. With respect to a default of a loan secured by a debtor’s principal residence, however, such default may be cured only “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.”

Despite the seemingly clear language in the statute, New Jersey courts had disagreed over whether this provision gave debtors the right to cure a default on a home mortgage between the time of the foreclosure sale and the time of the delivery of the deed to the purchaser.

The line of cases determining that chapter 13 debtors can cure up to the delivery of the deed employed a rather strained reading of the bankruptcy code. Among other things, they determined that the phrases “sold at a foreclosure sale” and “conducted in accordance with nonbankruptcy law” are ambiguous and could mean either the event of the sale itself or the entire process, including the delivery of the deed.

The court in Connors, however, determined that the plain meaning of the statute was clear and unambiguous and, under such circumstances, the court did not need to look outside the language of the statute to be able to interpret its meaning. Plain and simply, under a strict construction of the statutory language, “foreclosure sale” means the foreclosure auction. The Third Circuit decision has delivered clarity and certainty to what had previously been a confusing and uncertain landscape for borrowers in bankruptcy whose primary residence was sold at a foreclosure sale