Foreclosure on Debtor’s Residence does not Violate Automatic Stay when the Debtor has no Property Interest in his Marital Property and no Dispossessory Proceeding is Alleged

Jack Reilly 

St. John’s University School of Law 

American Bankruptcy Institute Law Review Staff

In Jennings v. Nationstar Mortgage LLC, the bankruptcy court held that a debtor’s marital interest in his family residence would become a “property interest” warranting an invocation of the automatic stay against a foreclosure proceeding if he obtained a divorce.[1] The United States Bankruptcy Court for the Northern District of Georgia held that the foreclosure proceeding by the creditor was not in violation of the automatic stay, because (a) the debtor’s property interest in his marital property titled in his non-debtor spouse’s name did not arise until the need for equitable division (a divorce) occurred, and (b) the debtor’s possessory interest in the property did not render the property “property of the estate” where the foreclosure proceeding did not impact his possessory interest in his residence.[2]

In April 2022, the creditor began the foreclosure process on its security deed against the debtor’s residence and set the foreclosure sale for June 7, 2022.[3] On June 6, 2022, the debtor filed for bankruptcy under Chapter 13 of title 11 of the United States Code (the “Bankruptcy Code”) and gave the creditor’s foreclosure counsel notice of the bankruptcy filing.[4] The creditor’s counsel responded to the dispute, asking whether the debtor’s bankruptcy filing prohibited the continued prosecution of the foreclosure proceeding against the home.[5] The debtor’s counsel asserted that the debtor had an interest in the property as his residence and marital property and, therefore, the house was property of the estate protected by the automatic stay.[6] The creditor’s counsel executed the non-judicial foreclosure proceeding on June 7, 2022, notwithstanding the bankruptcy filing, and moved for eviction on August 4, 2022, against Selena Jennings (the non-debtor spouse) and the occupants of the property.[7] The debtor filed a complaint commencing an adversary proceeding seeking entry of an order that the home was property of the estate and a revocation of the foreclosure. The creditor responded that because the property at issue was not the property of the debtor’s bankruptcy estate, the debtor had failed to state a claim for relief in his complaint.[8]

The bankruptcy court relied upon the decision from the U.S. Court of Appeals for the Eleventh Circuit in Two Trees v. Builders Transp., Inc., for the proposition that "[w]hile the question of whether a debtor's interest constitutes property of the estate is a federal question . . . the nature and existence of the [debtor's] right to property is determined by looking at state law."[9] Therefore, the bankruptcy court looked to Georgia property law to determine the extent of the debtor’s interest in his residence. Although the debtor had a marital interest in his home, under Georgia property law, without his name on the deed, only a divorce would grant him a property interest in the residence.[10]  Thus, the bankruptcy court found that under Georgia law, the debtor has no property rights in his residence "titled in his non-debtor spouse's name 'until the need for equitable division arises (i.e. in divorce).'"[11] The bankruptcy court held that the debtor could not show that his residence should be considered property of the estate and, therefore, he failed to state a claim that the creditor violated the automatic stay by prosecuting the foreclosure proceeding on his residence.[12]

The bankruptcy court also considered whether the creditor's foreclosure sale violated the debtor's possessory interest in his residence, as "[i]t is well established that a 'mere possessory interest in real property without any accompanying legal interest is sufficient to trigger protection of the automatic stay[.]'"[13] Unfortunately for this debtor, his complaint only alleged that the foreclosure proceeding violated the automatic stay—not the dispossessory proceeding—and "[f]oreclosure does not affect a debtor's possessory interest in real property."[14] Therefore, the bankruptcy court concluded that the debtor failed to state a claim as the foreclosure proceeding did not impact his possessory interest in his residence.[15]

The decision in Jennings demonstrates that a debtor’s possessory interest in property is only protected by the automatic stay if it is protected under state law, and divorce can create a property interest for a debtor in his or her marital residence titled in the non-filing spouse’s name.[16] The decision in Jennings also confirms the general principle that a foreclosure proceeding does not affect a debtor's possessory interest in real property, and the failure to assert in a complaint that the creditor filed an eviction action is lethal to efforts to enforce the automatic stay.[17]