Suggestion of Bankruptcy did not prevent foreclosure in North Carolina

Sale not stopped with Suggestion of Bankruptcy in North Carolina

IN RE: Wiley Brown & Associates, LLC, Debtor.

Case Law
Case No. 06-50886
UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF
NORTH CAROLINA, WINSTON-SALEM DIVISION
2006 Bankr. LEXIS 2851

October 11, 2006, Decided

Facts: On November 19, 2003, Debtor A executed a promissory note in favor of A&F in the original principal amount of $ 630,000.00 which was secured by a deed of trust (the "Deed of Trust") on commercial real property located on Trade Street in downtown Winston-Salem (the "Real Property"). The City is also a secured creditor of the Debtor, holding a second deed of trust against the Real Property. The outstanding amount of the indebtedness owed by the Debtor to the City is approximately $ 98,000.00.

Prior to the bankruptcy filing, debtor A defaulted under the terms of the Deed of Trust and A&F commenced foreclosure proceedings. On May 16, 2006, a foreclosure sale was conducted. A&F was the high bidder at the foreclosure sale, submitting a bid in the amount of $ 601,725.38. The City concedes that it received notice of the sale but did not bid on the Real Property. On May 26, 2006, Cecil Brown, who holds a 1/2 ownership interest in debtor A, filed a petition under Chapter 13 of the Bankruptcy Code. A Suggestion of Bankruptcy was filed with the Forsyth County Clerk's Office at 4:14 pm that day. No bids were received during the 10-day upset bid period.

On July 11, 2006 (the "Petition Date"), debtor A filed a petition under Chapter 11 of the Bankruptcy Code. The Debtor listed the Real Property on Schedule A, with a value of $ 1,550,000.00. A&F seeks an order which lifts the stay to allow it to finalize the foreclosure sale, as well as an order compelling a transfer of all rents received from the property. The City of Winston Salem filed an objection to A&F's motion and contends that the foreclosure sale was not commercially reasonable and should be set aside. The Debtor fully supports the City's position and has commenced an adversary proceeding against A&F asserting a claim under 11 U.S.C. § 548.

Issue: Whether the foreclosure sale should be set aside.

Ruling: The debtor and city contended that the bank's notice of foreclosure sale was insufficient, the sale was tainted by the filing of the suggestion of bankruptcy, and the sale was a fraudulent transfer. The notice complied with the requirements of N.C. Gen. Stat. § 45-21.16A as the metes and bounds description was identical to that contained in the deed of trust, that description plainly indicated that the property was on three different streets, and there was a reference to a county condo book that showed the exact location and dimension of the property. There was no authority for finding that a shareholder's filing of a suggestion of bankruptcy just prior to the expiration of an upset bid period for a foreclosure sale on property owned by a corporation could be the basis for invalidating that sale. Finally, the debtor's pending adversary proceeding seeking to avoid the sale as a fraudulent transfer was not grounds to deny the bank relief from the automatic stay where the bank had complied with North Carolina law in the foreclosure process and as a result, the price received for the property at the foreclosure sale was a reasonably equivalent value for purposes of 11 U.S.C.S. § 548.

Lesson Learned:For a person to invalidate a sale, it is important that he comes up with compelling evidence that indeed no notice was given and that the sale was one of a fraudulent transfer. Absent a very tangible proof, the court will sustain the regularity of the proceeding of the foreclosure sale.

Written by Kevin Levonas and Jerry L.