Lomagno v. Salomon Bros. Realty Corp. (In Re Lomagno)

United States Court of Appeals
For the First Circuit
____________________

No. 05-9003
IN RE: VITO LOMAGNO and MARIE MIDOLO,
Debtors.

____________________

VITO LOMAGNO; MARIE MIDOLO,
Debtors, Appellants,

v.

SALOMON BROTHERS REALTY CORP.,
Appellee.
_______________________

APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT

____________________________

Before

Lipez and Howard, Circuit Judges,
and Restani*, Judge.
____________________________

David G. Baker, for appellants.
John C. Barker, with whom Michienzie & Sawin LLC was on
brief, for appellee.

November 14, 2005

*
Chief Judge of the United States Court of International
Trade, sitting by designation.
 RESTANI, Judge. Vito Lomagno and Marie Midolo (the

“Debtors”) appeal from the bankruptcy court’s August 3, 2004 order

denying their motion for judgment on the pleadings and granting the

defendant’s cross-motion for judgment on the pleadings with respect

to their adversary complaint seeking declaratory and injunctive

relief. The bankruptcy court determined that Salomon Brothers

Realty Corp. (“Salomon”) did not violate an automatic stay by

foreclosing on the Debtors’ house while the Debtors’ Chapter 13

petition dismissal was on appeal. The bankruptcy court’s order was

sustained by the Bankruptcy Appellate Panel (“BAP”) for the First

Circuit on February 9, 2005. For the reasons set forth below, we

affirm.

BACKGROUND

The Debtors owned property on Tower Hill Street in

Lawrence, Massachusetts, with their note and mortgage on the

property assigned to Salomon. Following tenant complaints of

housing violations, the City of Lawrence began proceedings against

the Debtors, and appointed Raymond Fitzgerald as receiver (the

“Receiver”). Subsequently, the Debtors failed to make payments on

their mortgage and Salomon began foreclosure proceedings.

On January 16, 2003, the Debtors filed a petition for

relief under Chapter 13 of the Bankruptcy Code. The petition

triggered the automatic stay provision, 11 U.S.C. § 362(a) (2000),

which stayed all proceedings by creditors to levy on the Debtors’

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property. The Receiver filed a motion to dismiss the petition, and

following a January 29, 2003 hearing, the bankruptcy court denied

the motion. Next, the Receiver filed an objection to the Debtors’

plan and to the Debtors’ claim to a homestead exemption. The

bankruptcy court issued a notice of hearing to be held on March 5,

2003, to consider the objections.

Following the hearing, on March 10, 2003, the bankruptcy

court dismissed the Debtors’ Chapter 13 case based on issues raised

sua sponte. The Debtors appealed to the BAP, and simultaneously

filed motions to stay the order of dismissal with the bankruptcy

court and the BAP pursuant to Federal Rule of Bankruptcy Procedure

8005. These motions were denied, and the Debtors did not appeal

the denial of stay to this court. Salomon scheduled the

foreclosure sale for May 29, 2003.

While the bankruptcy court dismissal was on appeal to the

BAP, the Receiver brought a suit against the Debtors and Salomon in

Essex Superior Court to enforce its lien. The Debtors filed a

motion for injunctive relief with the Essex Superior Court to stop

the foreclosure sale, which the court denied. At the foreclosure

auction on May 29, 2003, Salomon was the highest bidder and

purchased the property. The Debtors filed a motion for injunctive

relief with the Essex Superior Court to prevent further conveyance

of the property, which the court denied.

On March 11, 2004, the BAP issued its decision reversing

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the bankruptcy court’s dismissal of the case. The BAP concluded

that the bankruptcy court erred in raising issues sua sponte and by

dismissing the case without providing appropriate notice and

opportunity for a hearing. On March 18, 2004, the Debtors filed an

adversary complaint in the bankruptcy court seeking declaratory and

injunctive relief to void the foreclosure sale and prevent further

conveyance of the property by Salomon. The Debtors argued that the

BAP’s reversal of the dismissal order reinstated the automatic stay

retroactively. The bankruptcy court denied the Debtors’ motion for

judgment on the pleadings and granted Salomon’s cross-motion for

judgment on the pleadings, concluding that when the bankruptcy

court dismissed the case, the automatic stay was immediately

terminated, and the reversal of the bankruptcy court dismissal did

not retroactively reinstate the automatic stay. The BAP affirmed.

DISCUSSION

At issue in this case is whether a foreclosure sale is

valid when the foreclosure takes place after the dismissal of a

Chapter 13 bankruptcy petition, but before reversal of the

dismissal. Filing a petition under Chapter 13 of the Bankruptcy

Code triggers an automatic stay of creditor proceedings against a

debtor’s property. 11 U.S.C. § 362(a). While the stay is in

effect, the creditor cannot proceed with foreclosure. Section

362(c) provides that the stay of such proceedings “continues until

such property is no longer property of the estate.” 11 U.S.C. §

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362(c)(1). Thus, when the petition giving rise to the stay is

dismissed, the stay terminates immediately, and creditors may

proceed with foreclosure. In re de Jesus Saez, 721 F.2d 848, 851

(B.A.P 1st Cir. 1983). The Federal Rules of Bankruptcy Procedure

provide that a debtor may seek a stay pending appeal. See Fed. R.

Bankr. P. 8005.

In the instant case, the Debtors argue that the reversal

of the bankruptcy court’s dismissal retroactively restored the

automatic stay. Even though they acknowledge that the stay

terminated upon dismissal, the Debtors argue that because the

dismissal resulted from a violation of their due process rights,

equity requires that the violation be remedied by retroactive

application of the stay. See Great Pac. Money Mkts., Inc. v.

Krueger (In re Krueger), 88 B.R. 238 (B.A.P. 9th Cir. 1988). We

conclude that this remedy is not available here.

In Krueger, the Ninth Circuit BAP recognized a due

process exception to stay termination upon dismissal, and it voided

a foreclosure sale that occurred after a Chapter 13 bankruptcy

petition was dismissed, but before reversal of the dismissal. The

Ninth Circuit BAP stated that the failure to provide notice

violated due process, and that “[a]n order is void if it is issued

by a court in a manner inconsistent with the due process clause of

the Fifth Amendment.” Krueger, 88 B.R. at 241. Moreover, the

court concluded that “because the order dismissing the case was

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void, the stay was continuously in effect from the date the

petition was filed.” Id. Therefore, the court determined that the

foreclosure sale was held in violation of the stay, even though the

stay normally terminates with dismissal of the petition. Id.

We have not recognized the due process exception set

forth in Krueger, and we do not need to reach this issue here. In

Krueger, the trustee did not notify the debtors that it would

object to the debtors’ confirmation plan amendments and the debtors

were not present at the confirmation hearing. Id. at 240. The

court continued the hearing and instructed the creditor to notify

the debtors of the continuance. Id. The creditor failed to notify

the debtors and the case was dismissed for lack of prosecution.

Id. The debtors were not provided with notice of the dismissal or

notice of the scheduled foreclosure sale. Id. Under those facts,

the debtors’ failure to seek a stay pending appeal was explained by

their lack of notice of the dismissal and the creditor’s bad

faith.1

Here, in contrast, the Debtors were not provided with

advance notice that the court was considering dismissal, but were

1
In Krueger, the creditor caused the due process violation by
failing to provide the debtors with notice of the dismissal
hearing, notice of dismissal, or notice of the scheduled
foreclosure. The creditor was aware or should have been aware that
the foreclosure sale was scheduled to take place in violation of
the debtors’ due process rights. The instant case is distinct
because the creditor proceeded in good faith upon the termination
of automatic stay and the Debtors did not explain their failure to
fully pursue a stay pending appeal.

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present and thus immediately alerted to both the dismissal and the

scheduled foreclosure sale. The Debtors had the opportunity to

pursue a stay pending appeal, and did to a certain point. After

their motions before the bankruptcy court and the BAP were denied,

however, the Debtors could have sought a writ of mandamus or

appealed to this court, but chose not to do so. See Rochman v. Ne.

Utils. Serv. Group (In re Pub. Serv. Co. of N.E.), 963 F.2d 469,

472 (1st Cir. 1992). The Debtors provide no explanation for their

failure to diligently pursue a stay pending appeal.

In sum, even if the court were to recognize the Ninth

Circuit BAP’s exception for due process violations in cases such as

Krueger, facts such as these at hand, including the Debtors’

unexplained failure to diligently pursue a stay pending appeal, do

not warrant the drastic remedy of voidance of the stay termination.

CONCLUSION

For the foregoing reasons, the bankruptcy court did not

err by concluding that the automatic stay was not retroactively

reinstated by reversal of the dismissal. The bankruptcy court’s

determination is AFFIRMED.

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