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400 North Midler Avenue Corp. v. Depo

May 27, 1986

400 NORTH MIDLER AVENUE CORPORATION AND LAWRENCE SOVIK, PLAINTIFFS-APPELLANTS,
v.
FRANK J. DEPO AND JOSEPH ROBERT DEPO, BANKRUPTS, AND MICHAEL J. BALANOFF, TRUSTEE OF BANKRUPTS, DEFENDANTS-APPELLEES



Appeal from an order of the United States District Court for the Northern District of New York, Howard G. Munson, Chief Judge, affirming order of bankruptcy court vacating a judgment of foreclosure. Vacated and remanded.

Author: Kearse

Before: MANSFIELD, KEARSE, and CARDAMONE, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiffs 400 North Midler Avenue Corporation and Lawrence Sovik, its president and sole shareholder (collectively, the "Corporation"), appeal from an order of the United States District Court for the Northern District of New York, Howard G. Munson, Chief Judge, affirming an order of the bankruptcy court which vacated a judgment of foreclosure obtained by the Corporation in state court on property that the defendant debtors in bankruptcy, Frank and Joseph Depo (the "Depos"), claim to own. The basis of the bankruptcy court's ruling was that the foreclosure judgment had been obtained in violation of an automatic stay provision of the Bankruptcy Act of 1898 (the "Act"), 11 U.S.C. § 1 et seq. (1976) (repealed). The district court affirmed, rejecting the Corporation's contention that vacation of the foreclosure judgment was improper because of the prior expiration of the automatic stay provided by Chapter XII of the Act upon the conversion of the Depos' Chapter XII proceeding into a bankruptcy proceeding. On appeal, the Corporation principally renews this contention. We agree with the Corporation's contention and we vacate the order of the district court.

BACKGROUND

On October 5, 1978, the Depos filed a petition under Chapter XII of the Act. Since their petition was filed prior to the effective date of the current Bankruptcy Code, the ensuing proceedings were governed by the Act. See Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 403(a), 92 Stat. 2549, 2683.

The chronology of events pertinent to the applicability of the Act's stay provisions does not appear to be in dispute. The Depos filed their Chapter XII petition in October 1978. In December 1982, the Depos offered to purchase property at 400 North Midler Avenue in Syracuse, New York (the "Property"), from its then-owner, the Salvation Army; they took possession of the Property in February 1983, but never consummated the purchase.

In the summer of 1983, the Corporation purchased the Property from the Salvation Army. In August 1983, a company called Midler Court Merchandise Mart, Inc. ("Merchandise Mart"), was formed and purchased the Property from the Corporation, giving the Corporation a purchase money mortgage. Merchandise Mart's stock was owned principally by the Depos' sister; the Depos continued to occupy the Property.

In April 1984, alleging that Merchandise Mart had failed to make the required mortgage payments on the Property, the Corporation obtained a judgment of foreclosure in the state court. In February 1985, one day before the scheduled foreclosure sale of the Property, the Depos successfully moved in the bankruptcy court for a stay of the sale, stating that they owned an interest in the Property and had not received notice of the foreclosure action.

On June 17, 1985, the bankruptcy court adjudicated the Depos bankrupt and ordered that their "bankruptcy shall proceed as a general bankruptcy under the general provisions of the Bankruptcy Act of 1898." This order was subsequently affirmed by the district court. In re Depo, No. 85-CV-1059 (N.D.N.Y. Oct. 24, 1985) (McCurn, J.).

By order dated June 28, 1985 ("June 28 Order"), the bankruptcy court vacated the Corporation's judgment of foreclosure on the Property and stayed its enforcement on the ground that it had been "obtained in violation of the automatic stay as to the Depos," apparently referring to the stay against enforcement of liens provided by 11 U.S.C. § 828 (1976) (repealed), which stay had become effective upon the filing of their Chapter XII petition. Assuming that the § 828 stay is applicable to property acquired by the debtor after the filing of the chapter XII petition, a proposition for which we have found no authority, the 1984 foreclosure on the Property acquired by the Depos in 1983 would have violated the § 828 stay.*fn1 The June 28 Order provided that the Corporation could bring a new foreclosure action on notice to the Depos.

The Corporation appealed the June 28 Order to the district court, contending that it was improperly entered because the automatic stay provided by § 828 had expired upon the June 17 conversion of the Chapter XII proceeding to bankruptcy. In a Memorandum-Decision and Order dated December 20, 1985, the district court rejected this contention. The court noted that if the Depos had first filed their case as a bankruptcy case in 1978, there indeed would have been no ground for staying enforcement of the foreclosure judgment, since the Depos did not own their alleged interest in the property in 1978, see 11 U.S.C. § 110(a)(5) (1976) (repealed). But the court believed it

inconsistent with the protection of Chapter XII to impost upon the Depo brothers the narrower stay rule of Chapter VII retroactively from when the case was converted to Chapter VII. Instead, the Chapter VII rule should apply only to property that the Depo brothers acquired after the case was converted to Chapter VII. Therefore, although the bankruptcy court converted the case to Chapter VII on June 17, it was correct in ...


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