Postponement of Sheriff's Sale In Compliance with State Law Does Not Violate Automatic Stay

In Taylor v. Slick, the United States Court of Appeals for the Third Circuit held that the postponement (or "continuation") of a sheriff's sale in accordance with state law procedure does not violate the automatic stay imposed under section 362(a) of the Bankruptcy Code, but preserves the stayed proceedings by maintaining the status quo between the creditor and the debtor.

Automatic Stays

Section 362(a) of the Bankruptcy Code imposes an automatic stay that arises upon the filing of a debtor's bankruptcy case and generally prohibits creditors from obtaining possession or control over property of the debtor, absent permission of the bankruptcy court. Section 362(a) stays "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case."

In Taylor v. Slick, after a default judgment was entered on a mortgage note and a sheriff's sale was scheduled for the property securing the mortgage note, the debtor/mortgagor commenced a case under chapter 11. The filing of the chapter 11 case automatically stayed the sheriff's sale. The executor of the mortgagee's estate sought relief from the automatic stay in the bankruptcy court in order to continue with the sheriff's sale of the property. The debtor did not respond or attend the hearing before the bankruptcy court, and the court granted the executor of the mortgagee's estate relief from the stay. The sale took place as scheduled, the executor was the high bidder for the property, and the sheriff's deed of the property was executed and recorded. The debtor's bankruptcy petition was subsequently dismissed on unrelated grounds.

The debtor later filed an adversary complaint in the bankruptcy court and contended, among other things, that the continuance of the sheriff's sale after the debtor had filed a bankruptcy petition violated section 362(a) of the Bankruptcy Code and therefore voided the sale of the property. The bankruptcy court granted the executor's motion to dismiss the adversary complaint on the ground that there had been no violation of the automatic stay. The district court dismissed the debtor's appeal, and the debtor appealed to the Third Circuit.

The Third Circuit concentrated on the purpose of the automatic stay provision and noted that the question before the court was "whether a continuation of a sheriff's sale serves to maintain the status quo between the debtor and his creditors or whether it constitutes 'a judicial, administrative, or other action or proceeding' prohibited by section 362(a)(1)." The Third Circuit concluded that the "continuation" of a sheriff's sale connotes the postponement of a proceeding and effectuates the purposes of section 362(a)(1) by preserving the status quo until the bankruptcy process is completed or until the creditor obtains relief from the automatic stay.

Postponement Notices

The court observed that the postponement notice specifying a new sale date does not, by itself, permit the rescheduled sale to occur. Nor does it permit any act that prejudices the debtor's position with respect to the property. Rather, it merely preserves the status quo between the creditor and the debtor. In this case, the creditor properly applied for and obtained relief from the automatic stay before it proceeded with the sale of the property. Upon receiving relief from the stay, the creditor was permitted to proceed with the sheriff's sale so long as appropriate notice requirements had been met.

The decision in Taylor v. Slick should give certainty to purchasers of property sold in the context of a bankruptcy case where proper authority is obtained from the bankruptcy court to lift the automatic stay and continue with a sheriff's sale and the debtor is given adequate notice. The purchaser's rights to the property should not be called into question where the proper procedure for such a sale is followed.

Taylor v. Slick, 178 F.3d 698 (3d Cir. 1999).

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