Bankruptcy and foreclosure often keep the same company, as a mortgagor whose property is under foreclosure will frequently resort to bankruptcy at some point in the foreclosure process to attempt to save it. At what point bankruptcy relief must be sought for that purpose can depend upon applicable state law, and the analysis can be tricky. What follows is a navigation of this somewhat technical issue for a Connecticut mortgage foreclosure, with some historical perspective.

In Connecticut, there are two methods of foreclosing a mortgage on real property: strict foreclosure and foreclosure by sale. Ocwen Federal Bank, FSB v. Charles, 95 Conn. App. 315, 323 (2006). See generally C.G.S. §49-24. Foreclosure simply means to "cut off the equity of redemption, the equitable owner's right to redeem the property," id., which can be done either "by sale or strict foreclosure." Mortgage Electronic Registration Systems, Inc. v. White, 278 Conn. 219, 229 (2006).

In a strict foreclosure, the court "finds the amount due under the mortgage, orders its payment within a designated time and provides that should such payment not be made, the debtor's right and equity of redemption will be forever barred and foreclosed." National City Mortgage Co. v. Stoecker, 92 Conn. App. 787, 793 (2006). The date on which the mortgagor is ordered to make payment of the mortgage or lose his equity of redemption is known as mortgagor or owner's "law day." JP Morgan Chase Bank v. Gianopolos, 131 Conn. App. 15, 21 (2011). The owner of the equity of redemption is assigned the first law day, with subsequent encumbrancers to be assigned succeeding law days in the inverse order of their priorities. Id.

In a foreclosure by sale, "a mortgagor may exercise his rights of redemption 'until such time as the judicial authority approves the foreclosure sale'." Wells Fargo Bank of Minnesota, N.A. v. Morgan, 98 Conn. App. 72, 79 (2006) (quoting Washington Trust Co. v. Smith, 241 Conn. 734, 742 (1997)). See also Matter of Loubier, 6 B.R. 298, 302 (Bankr. D. Conn. 1980) ("Connecticut decisional law indicates that a judicial sale … becomes complete and creates legal rights and obligations among the parties when it is confirmed and ratified by the court"). "[A] foreclosure by sale is like the running of law days in a strict foreclosure matter in that it serves as the operative act which extinguishes the mortgagor's right of redemption …." Morgan, 98 Conn. App. at 81.

For many years, it had been established law in Connecticut that if a mortgagor filed a bankruptcy petition prior to either the running of his law day or the approval of a foreclosure sale by the state court, either the automatic stay provisions of 11 U.S.C. §362(a) or the rights given by the Bankruptcy Code to cure a default would preserve the property for disposition by a chapter 7 trustee or for reorganization by the debtor under chapter 11 or 13. See Valente v. Savings Bank of Rockville, 34 B.R. 362, 366-67 (D. Conn. 1983) (debtor who filed chapter 11 before foreclosure by sale was confirmed by the state court would be given the opportunity to reorganize with the property by virtue of the rights to cure afforded by 11 U.S.C. §1123(a)(5)(G)); Matter of St. Amant, 41 B.R. 156, 163 (Bankr. D. Conn. 1984) (holding automatic stay applicable to prevent "involuntary transfer of ownership … by the terms of the strict foreclosure judgment," and observing more broadly that "[i]n Connecticut, when a bankruptcy petition is filed during the redemption period, it is the ownership of the property which passes into the estate and not merely a statutory post-sale redemption right subject to extinction by the passage of the statutory period").

That legal landscape changed with the Second Circuit's decision in In re Canney, 284 F.3d 362 (2d Cir. 2002). In Canney, the Second Circuit held that the sixty-day extension afforded by 11 U.S.C. §108(b) to "cure a default" or "perform any other similar act" applied to the passing of a law day in a Vermont strict foreclosure, rather than the indefinite stay imposed by 11 U.S.C. §362(a) when a debtor files a chapter 7 bankruptcy petition. Id. at 370-73. In relevant part, §108(b) provides that:

if applicable nonbankruptcy law [or] an order entered in a non-bankruptcy proceeding … fixes a period within which the debtor may … cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only … cure, or perform, as the case may be before the later of – (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 60 days after the order for relief.

More particularly, Canney held that a Vermont foreclosure judgment fixing a law day in a strict foreclosure is an order entered in a nonbankruptcy proceeding that fixes a period within which the debtor has to cure, i.e., pay off the entire mortgage balance in exercise of the debtor's equity of redemption, Canney, 284 F.3d at 371 – and that a bankruptcy filing only affords an additional 60 days to exercise that right. Id. at 372-73. Inasmuch as Connecticut's strict foreclosure procedures are very similar to Vermont's, Canney has been held to apply to a Connecticut strict foreclosure where the debtor filed a chapter 7 bankruptcy petition several days before her law day passed. Provident Bank v. Lewitt, 84 Conn. App. 204 (2004).

But the effect of Canney on Connecticut strict foreclosures and bankruptcy was short-lived. In 2003, the Connecticut legislature passed into law subsection (b) of C.G.S. §49-15, effective October 1, 2003, which provided that:

Upon the filing of a bankruptcy petition by a mortgagor under Chapter 13 of Title 11 of the United States Code, any judgment against the mortgagor foreclosing the title to real estate by strict foreclosure shall be opened automatically without action by any party or the court, provided, the provisions of such judgment, other than the establishment of law days, shall not be set aside under this subsection, provided no such judgment shall be opened after the title has become absolute in any encumbrancer or the mortgagee, or any person claiming under such encumbrancer or mortgagee.

2003 Conn. Legis. Serv. P.A. 03-202 (S.S.B. 900) (emphasis added). The legislative history to this enactment squarely explains that its purpose was to reverse the effect of Canney as it relates to Chapter 13 bankruptcies See CT H.R. Tran., 5/3/2002 (Statement of Rep. Hamzy that purpose of amendment is to put Connecticut's "relationship between foreclosures and Chapter 13 bankruptcies in the same position that we were in before a U.S. Court of Appeal decision was handed down early in March…, [which was] that if a debtor filed a Chapter 13 bankruptcy before the law day, they had a right to reinstate the mortgage"). Subsection (b) was further amended in 2004, effective October 1, 2004, to apply to any bankruptcy petition filed under Title 11 of the United States Code. 2004 Conn. Legis. Serv. P.A. 04-127 (S.H.B. 5594).

Thus, in Connecticut, if a mortgagor files a bankruptcy petition under any chapter of the Bankruptcy Code before the expiration of the law day for the mortgagor, the foreclosure judgment is automatically opened and in particular, all law days are set aside. In a bankruptcy case, while the question of whether an interest in property should be classified as property of the estate is one of federal law, state law determines the nature and extent of the debtor's interest. Butner v. U.S., 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Canney itself acknowledges this well settled rule. Canney, 284 F.3d at 370 (quoting Butner). Therefore, by virtue of C.G.S. §49-15(b), if a bankruptcy petition is filed by a mortgagor before his, her or its law day has passed, the mortgagor's entire property interest—and not just the equity of redemption fixed by the law day—should pass into the bankruptcy estate.

As an important caveat, however, C.G.S. §49-15(b) does not purport to disturb the well-established law that the entry of a judgment of foreclosure prior to bankruptcy precludes the assertion of any setoffs, defenses or counterclaims to the mortgagee's debt in the bankruptcy proceeding. Connecticut bankruptcy decisions have been consistent in ruling that such challenges are barred by the doctrine of res judicata or by the Rooker-Feldman doctrine, which holds that federal courts lack jurisdiction to review state court decisions. See Cameron v. PHH Mortgage Corp (In re Cameron), 2019 WL 1383069, at *5-7 (D. Conn. Mar. 27, 2019); JP Morgan Chase Bank, N.A. v. Caires (In re Caires), 611 B.R. 1, 9-10 (Bankr. D. Conn. Jan. 29, 2020); Matter of Johnson, 149 B.R. 284, 287 (Bankr. D. Conn. 1993).

Interestingly, the Connecticut legislature did not address the situation where a mortgagor files a bankruptcy petition before a foreclosure sale is confirmed by the state court. Thus, whether the holding in Canney would apply when a bankruptcy petition is filed after a foreclosure by sale is ordered, but before it is confirmed or ratified by the state court, is an open question.

Although a foreclosure by sale has been likened by Connecticut courts to the running of a law day in a strict foreclosure, Connecticut case authorities are also clear that a debtor has up until the date the foreclosure sale is confirmed to redeem. See Mortgage Electronic Registration Systems, Inc. v. White, 278 Conn. 219, 230 (2006). Thus, it could be questioned whether §108(b) of the Bankruptcy Code, which is the statutory basis of the decision in Canney, would even apply to the situation where a bankruptcy petition is filed before a foreclosure sale is confirmed by the state court, because, prior to that time, there would be no "applicable nonbankruptcy law" or "order entered in a non-bankruptcy proceeding" that fixes an actual date for the debtor to redeem. That date would only be fixed when the state court confirms the foreclosure sale, and it cannot simply be presumed that the sale would be confirmed on the date set for a hearing on its confirmation. Cf. Town of Beacon Falls v. Christiano (In re Christiano), 605 B.R. 1, 6-8 (Bankr. D. Conn. 2019) (applying Canney and §108(b) in holding that the filing of a Chapter 13 petition by a delinquent taxpayer just ten days before the expiration of her six-month right to redeem property sold at a tax sale, as afforded by C.G.S §12-157, provided only an additional 60 days to redeem the property, on the basis that applicable nonbankruptcy law established a six-month period for redemption of property sold at a tax sale).

Still further, Canney did not address whether the curative provisions of chapter 11 or 13 would have any effect on the strict application of §108(b). Since the law in effect prior to Canney held that these curative provisions provided a basis for reorganizing with property if a bankruptcy filing is initiated before a foreclosure sale is confirmed, Valente v. Savings Bank of Rockville, 34 B.R. 362, 366-67 (D. Conn. 1983), it can be persuasively argued that such a result remains available even after Canney.

It should be mentioned that there is a specific statute in Chapter 13 which provides that "a default with respect to … a lien on the debtor's principal residence may be cured … until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law." 11 U.S.C. §1325(c)(1). Whether "sold a foreclosure sale" means the actual sale or its confirmation by the court is an open question, but it would seem to be an anomalous result if other types of real property could be preserved for reorganization if a bankruptcy filing is made before the foreclosure sale is confirmed, but not a debtor's principal residence.

Irve J. Goldman is a member of the Bankruptcy and Creditors Rights Practice at Pullman & Comley, LLC, and has been certified as a business bankruptcy specialist by the American Board of Certification since 1993. He can be reached at [email protected].