August 23, 2018
Author: ANNA S. McCORMACK
Organization: WarrenAllenLLP ATTORNEYS AT LAW
I. THE TWO MAIN TYPES OF BANKRUPTCIES YOU’LL ENCOUNTER
A. CHAPTER 7: LIQUIDATION
A Chapter 7 is what most people are thinking of when they think of bankruptcy. The vast majority of bankruptcies are Chapter 7 filings. A Chapter 7 is intended to provide the debtor with a financial “fresh start.” In a Chapter 7, a debtor’s debts are discharged, i.e. basically “wiped out” forever (except for a few non-dischargeable debts or debts that the debtor reaffirms). In a Chapter 7, the trustee (who is basically the manager of the bankruptcy estate) takes all of the debtor’s nonexempt assets and liquidates them, using the proceeds to pay unsecured creditors on a pro rata basis. In reality, almost all Chapter 7 cases are “no asset” cases, meaning that there are no assets to liquidate. In no asset cases, the debtor’s unsecured, dischargeable debts are wiped out, and the unsecured creditors do not get paid.
The Bankruptcy Abuse Prevention and Consumer Act of 2005 made it somewhat more difficult to qualify for a Chapter 7 filing. Among other things, a debtor must pass the “means test” in order to qualify. Generally speaking, the debtor’s income must be less than the median income for the relevant household size in their state to qualify. If the debtor’s income is too high, the debtor may not be eligible for a Chapter 7 bankruptcy.
B. CHAPTER 13: REORGANIZATION
In a Chapter 13 bankruptcy, the debtor commits a portion of his/her future income to be paid to creditors over a 3-5 year period in exchange for being allowed to retain all assets. Among other things, a debtor must have sufficient regular income in order to qualify for a Chapter 13. The Debtor submits a Plan regarding repayment of some debts; once confirmed, the Plan governs repayment of the covered debts. The debtor will receive a discharge at the end of the Plan period as long as the debtor has made the payments called for under the Plan.
With few exceptions, a Chapter 13 debtor must either surrender or reaffirm all secured debt. The debtor’s Plan must provide for repayment of any secured debt arrearage existing at the time of filing, and the debtor must also remain current throughout the life of the Plan. The debtor is allowed to modify certain debts by reducing the amount owed and/or reducing or eliminating interest rates and penalties. A Chapter 13 debtor may or may not have to repay some portion of unsecured debt. The debtor’s obligations regarding unsecured debt depend on a variety of factors, including the amount of nonexempt equity in the debtor’s property and the amount of the debtor’s disposable income. In some cases, a Chapter 13 debtor will not have to pay back any unsecured debt (such as credit card debt) at all.
II. THE AUTOMATIC STAY: 11 USC § 362
A. DEFINITION AND PURPOSE
The automatic stay is probably the most fundamental debtor protection provided by bankruptcy. The automatic stay is basically a statutory injunction that automatically goes into effect at the moment a debtor files a bankruptcy petition (with very limited exceptions). The automatic stay operates as a blanket prohibition on any and all activity outside the bankruptcy court to collect pre-petition debts, or to assert or enforce claims that may affect property of the debtor, property of the bankruptcy estate, and property in possession of the debtor or bankruptcy estate. NOTE: The stay is effective immediately upon filing a bankruptcy petition, and no court order or notice to creditors is required to put the stay in place. All actions taken in violation of the stay are void, and, if the creditor had reason to know of the bankruptcy, the creditor may be assessed monetary penalties for violating the stay.
B. WHAT ACTIONS ARE PROHIBITED BY THE STAY?
1. Summary
Subject to exceptions discussed below, generally, the following actions are prohibited:
a. Commencement or continuation of a judicial, administrative, or other action against the debtor;
b. The enforcement of a judgment obtained before the bankruptcy petition was filed;
c. Any action to obtain possession or control of property of the bankruptcy estate or in possession of the estate;
d. Any act to create, perfect, or enforce any lien against estate property
e. Any act to collect, assess, or recover a claim against the debtor that arose before the bankruptcy case;
NOTE: The “bankruptcy estate” is comprised of all legal or equitable interests of the debtor in property as of the moment the bankruptcy petition is filed.
2. Specific Landlord/Tenant Examples
a. Pre-Petition Debts (unpaid rent, late fees, etc.)
In terms of collectability, a bankruptcy is probably going to discharge the debt itself, unless the debtor needs to cure to remain in the property under applicable bankruptcy law. Accordingly, a landlord would, for example, have to cease collection efforts against a former tenant who still owes money.
b. Pending FEDs (prior to Judgment of Restitution)
Unless an actual Judgment of Restitution has already been entered prior to filing of the bankruptcy petition, the FED cannot be continued without obtaining relief from stay from the bankruptcy court. When a landlord (or landlord’s attorney) finds out that the tenant has filed a bankruptcy, the landlord should immediately notify the court in which the FED has been filed. Pursuant to UTCR 7.050, the court is required to stay the action until proof of relief from stay is provided. The landlord must not continue the FED—even if the FED judge is of the opinion that the FED is not affected by the bankruptcy. Commencing or continuing an FED after a tenant has filed a bankruptcy violates the automatic stay, and not only would any eviction judgment be void, the landlord could be ordered to pay the tenant damages as a penalty for violating the stay.
c. Notices of Termination
This is probably the most misunderstood area in terms of the relationship between bankruptcies and landlord/tenant matters. The confusion is created by the fact that bankruptcies only apply, in terms of discharge, to pre-bankruptcy debt. Debts incurred after a bankruptcy petition has been filed generally have nothing to do with the bankruptcy, will not be discharged, and therefore, almost all creditors can try to collect the post-petition debt. Accordingly, many landlords (and even non-bankruptcy attorneys and judges) understandably reason that they do not need to obtain relief from stay in order to serve a termination notice based upon a post-petition default. If a debtor files bankruptcy in June and then fails to pay July rent, at first glance, it seems reasonable to think that the landlord can simply go ahead and serve a 72 Hour Notice for nonpayment of rent.
However, this is just not so. If a bankruptcy case is still pending, the landlord must obtain relief from stay in order to serve a termination notice—even if the default occurred after the tenant filed for bankruptcy. This is because a termination notice constitutes an attempt not just to collect a post-petition debt, but to terminate a tenancy and dispossess the debtor/tenant of real property currently in his possession. Remember, the automatic stay prohibits anyone from trying to obtain possession or control of property that is either property of the bankruptcy estate or in possession of the debtor/estate. The tenancy is generally considered to be an asset that is included in the bankruptcy estate, so trying to terminate the tenancy is trying to “take” an estate asset. Framed another way, the debtor/tenant’s possessory interest in the rented property is property of the estate.
The landlord must obtain relief from stay in order to take any action against property included in or possessed by the bankruptcy estate. This is true even for terminations based upon nonmonetary defaults. BOTTOM LINE: A landlord must obtain relief from stay in order to take any action to regain possession of the rented premises while the bankruptcy case is still pending (unless one of the exceptions below applies—and even then, obtaining relief from stay may be advisable as a practical matter).
C. EXCEPTIONS TO THE AUTOMATIC STAY
1. Expired Commercial Leases
The automatic stay does not apply to any act by a landlord to obtain possession of NONRESIDENTIAL real property under a lease that has terminated by the expiration of the stated term of the lease prior to the time the bankruptcy petition was filed. 11 USC § 362(b)(10).
This exception is as narrow as it sounds. It only covers commercial tenancies that have already terminated at the time the bankruptcy petition is filed. It would not cover any residential tenancy or any commercial tenancy which has terminated for any reason other than the natural expiration of the lease term (although there is a New York state court case which holds otherwise).
2. Pre-Petition Judgments of Restitution (Residential Tenancies)
a. Landlord Already Has Judgment of Restitution
The automatic stay does not apply to the continuation of any residential eviction/unlawful detainer proceeding by a landlord against a residential tenant where a judgment for possession was already granted to the landlord prior to the filing of the bankruptcy petition. 11 USC §362(b)(22).
Thus, if the tenant files for bankruptcy moments before the FED trial, the automatic stay does go into effect and the FED must be stayed until relief from stay is obtained from the bankruptcy court. But if the tenant waits until after the Judgment of Restitution has already been issued by the court, the stay is not in effect and the landlord can continue the eviction proceeding, i.e. obtain the Notice of Restitution and/or the Writ of Execution—subject to the exception discussed next (yes, there is an exception to the exception).
b. Exception to Exception: 11 USC § 362(l)
Even if the landlord obtains a Judgment of Restitution before the tenant files his bankruptcy petition, the tenant can still avoid or significantly delay execution (i.e., actual lockout) as follows:
1) The debtor/tenant must disclose in the bankruptcy petition that the debtor’s landlord obtained a judgment for possession of the premises prior to the debtor’s bankruptcy filing, and must list the landlord’s name and address in the bankruptcy petition;
2) The debtor/tenant must include a certification in the bankruptcy petition that state law allows tenants to avoid eviction by paying unpaid rent even after the landlord has won a judgment for possession. NOTE: Oregon law does not provide such a right to tenants—but the debtor could still certify otherwise;
3) The debtor/tenant must serve the landlord with a copy of the certification;
4) At the time of filing the bankruptcy petition, the debtor/tenant must deposit with the bankruptcy court any rent that would become due within the 30 days following the bankruptcy filing;
5) Within 30 days after filing the bankruptcy petition, the debtor/tenant must pay the back rent and file and serve another certification that the entire prepetition monetary default giving rise to the pre-petition Judgment of Restitution has been cured.
During the 30 day time period described above, the landlord can file an objection to the debtor/tenant’s certification(s) with the bankruptcy court. Once the landlord’s objection is filed, the bankruptcy court will set a hearing within 10 days. The bankruptcy judge will determine whether the debtor/tenant’s certifications are accurate. If the bankruptcy judge finds that the certifications are false, the judge will uphold the landlord’s objection and officially confirm that the stay is not in place with regard to execution of the Judgment of Restitution.
3. Drugs or Damage (Residential Tenancies)
a. Pending FED Based upon Illegal Drug Use/ Endangerment (11 USC § 362(b)(23))
If a landlord files a certification, the automatic stay will not apply to the continuation of an FED that a residential landlord has already filed based upon the tenant’s illegal drug use on the property or the debtor/tenant’s endangerment of the property. The landlord must file with the bankruptcy court a certification under penalty of perjury that the landlord has filed an FED based upon illegal drug use and/or endangerment of the property, and must serve a copy of the certification upon the tenant. However, there is essentially a waiting period, as described below, and until that period runs, the stay is in effect.
b. Landlord Wants to File FED Based upon Recent Illegal Drug Use or Endangerment. 11 USC § 362(b)(23)
The stay will likewise not apply if a residential landlord files a certification that the debtor/tenant, within the 30-day period preceding the filing of the certification, has either endangered the property and/or used illegal drugs or allowed illegal drug use on the property. The certification must be served upon the tenant. Again, the stay is in effect until the time period described in section c below runs.
c. Objections to Landlord’s Certification. 11 USC § 362(m)
Once the landlord files a certification as described above, the debtor/tenant has 15 days to file an objection thereto. If the debtor/tenant does not file an objection, then the stay is not in effect and the landlord can proceed with eviction actions. However, if the tenant does file an objection, the court will hold a hearing within 10 days. The debtor/tenant will have the burden of convincing the bankruptcy judge that either the facts alleged by the landlord did not exist, or that the debtor/tenant has remedied the problem. If the debtor/tenant succeeds, the stay remains in effect. If the debtor/tenant fails, the stay is declared not in effect and the landlord may proceed to take eviction action.
NOTE: There are many other exceptions to the automatic stay which have not been included here because they are not applicable to landlord/tenant situations.
D. OBTAINING RELIEF FROM STAY
1. Motion for Relief from Stay
a. Filing Information
11 USC § 362(d) provides that, upon request and after notice and hearing, the bankruptcy court shall grant relief from the automatic stay by terminating, modifying, or conditioning the stay if certain statutory requirements are met. A landlord seeking relief from stay must file and serve a Motion for Relief from Stay as well as a Notice of Motion for Relief. Note that in Oregon, attorneys can only file electronically using the bankruptcy court’s electronic filing system (ecf), and must first become ecf certified by taking a class and passing an ecf exam. Moreover, attorneys and pro se creditors must use the appropriate Local Bankruptcy Forms (LBF). The United States Bankruptcy Court District of Oregon website, located at www.orb.uscourts.gov , contains links for information about electronic filing, local rules and forms, and general information for debtors and creditors. LBF 720.50, “General Relief from Stay Procedures,” provides instructions for creditors seeking relief from stay.
b. Timelines
Once the landlord files the Notice of Motion and Motion for Relief from Stay, and serves it upon the debtor/tenant, the debtor/tenant has 14 days to file a Response (on the appropriate LBF) resisting the motion. If the debtor/tenant does not file a Response, the automatic stay terminates 30 days after the Motion for Relief was filed. While technically the stay is terminated in this scenario by operation of law, as a practical matter the landlord will want to submit an order granting relief from stay at the end of this time period. Without an order granting relief from stay, the landlord will likely have difficulty convincing the state court that the stay is no longer in effect.
If the debtor/tenant does file a response within 14 days, she will serve it upon the landlord, along with a Notice of Hearing on Motion for Relief. The Notice will set forth a date and time for a preliminary telephone hearing, called a “Meet Me” style hearing in Oregon. The “Meet Me” hearing will be about 1-2 weeks after the debtor/tenant’s Response. At that hearing, the bankruptcy judge basically determines whether there are sufficient legal and factual issues to warrant an evidentiary hearing. In the landlord/tenant context, the telephone hearing often resolves the issue and the judge grants relief from stay. However, the landlord will generally have to submit an order, and generally the order will not go into effect for another 10 days after it is signed by the bankruptcy judge. If an evidentiary hearing is required, it will be scheduled within 30 days of the preliminary hearing unless the parties agree to a longer time period.
2. Legal Grounds for Relief from Stay: 11 USC § 362(d)
Relief from stay is appropriate when the creditor can establish:
a. Cause
“Cause” includes lack of “adequate protection,” as well as other unspecified good cause. The Bankruptcy Code does not define “adequate protection,” and it is a flexible concept which is decided on a case-by-case basis.
The general idea is that secured creditors are entitled to some type of assurance or performance that protects their interest over a relevant time period. Adequate protection is most often provided in the form of cash payments over time. For purposes of relief from stay, “cause” may include other reasons beyond lack of adequate protection. In the landlord/tenant context, a tenant who has already defaulted in rent at the time the bankruptcy is filed, or who defaults thereafter, generally has a difficult time persuading the bankruptcy court that the landlord is “adequately protected” if the stay remains in effect. Moreover, where the tenant’s default is not monetary, but conduct-based, generally, cause to lift the stay so that the landlord can pursue state court remedies exists.
b. No Equity and Property Not Necessary for Reorganization
A creditor is also entitled to relief from stay if she can establish that the debtor has no equity in the property and that the property is not necessary to an effective reorganization. In the landlord/tenant context, this standard is almost always met, insofar as tenants do not have an ownership interest in the property (and therefore no equity). Moreover, if the case is a Chapter 7, there is no reorganization contemplated, so the rented property is ipso facto not necessary to an effective reorganization.
E. CONSEQUENCES OF VIOLATING THE AUTOMATIC STAY
1. Acts in Violation of Stay Void
Actions performed in violation of the automatic stay are void. For example, a Judgment of Restitution obtained in violation of the automatic stay is void as a matter of law, and the bankruptcy judge would have the power to declare it void. It is unclear whether the bankruptcy judge would have the power to actually order injunctive relief—i.e. order the landlord to let the tenant back into the premises— but ORS 90.375 would provide the tenant with a state court cause of action that could result in an order granting the tenant recovery of possession based upon a void Judgment of Restitution.
2. Sanctions for Willful Violation
a. Willful
Pursuant to 11 USC § 362(k), any individual or corporation who willfully violates the automatic stay may be subject to sanctions. An act is “willful” if the individual had knowledge of the bankruptcy filing and intentionally (with volition) performed the act constituting the violation. It is important to understand that for stay purposes, there is no requirement that the debtor/tenant actually serve the landlord with a copy of the Petition, provide the case number, etc. If the landlord has reason to know that the tenant may have filed a bankruptcy—such as the tenant’s oral assertion that the tenant has filed a bankruptcy—the onus is on the landlord to investigate further to determine whether a bankruptcy was in fact filed.
b. Applicability to Creditors’ Attorneys
A lawyer may be found to have violated the automatic stay if the lawyer, after notice of the bankruptcy filing, takes or continues some prohibited activity without obtaining relief from stay. Only inquiry notice is required.
c. Sanctions
Anyone who has willfully violated the automatic stay can be sanctioned. The debtor/tenant may recover actual damages, which include damages for emotional distress. The debtor may likewise recover costs and attorney fees, and in egregious cases, punitive damages.
III. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
IN BANKRUPTCY CASES
A. INTRODUCTION
11 USC § 365 governs the disposition of executory contracts and unexpired leases in bankruptcy cases. You will recall that leases are considered part of the bankruptcy estate. Generally speaking, the Bankruptcy Code gives the bankruptcy trustee power to assume, reject, or even assign executory contracts and unexpired leases. A bankruptcy trustee’s assumption or rejection of an unexpired lease affects landlords in a variety of ways. This section is designed to give a basic overview of the principles governing this particular intersection of bankruptcy law and landlord/tenant relations.
B. DEFINITIONS
1. Executory Contracts
The Bankruptcy Code does not define the term “executory contract,” and there is a great body of case law involving the interpretation and applicability of the term in various contexts. Most decisions adopt Professor Vern Countryman’s definition, which is a contract “under which the obligations of both the bankrupt and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy, Part I, 57 Minn. L. Rev. 439, 460 (1973). If performance remains due to some extent on both sides, the contract is executory.
2. Unexpired Leases
a. Lease
There is likewise no definition of the term “unexpired lease.” Much of the case law interpreting this term deals with whether a particular agreement constitutes a “true lease,” or whether it is in fact some other type of agreement, such as a financing agreement, mortgage, or similar type of security agreement. This is rarely going to be an issue in the landlord/tenant context; most rental agreements and leases are unambiguously what they purport to be.
b. Unexpired
There is likewise a complicated body of law dealing with when a lease is “expired” within the meaning of § 365. It is not a simple question, and the issue must be analyzed on a case-by-case basis. The fact that a notice of termination has been served, and that the tenancy has terminated according to that notice, does not mean that the lease is “expired” for bankruptcy purposes. The main issue in each instance will be whether there is some mechanism or provision of state law that would allow the lease to continue. If so, the lease will not be considered “expired.”
Generally speaking, it is very likely that a real property lease will not be deemed to have expired. For example, let’s say a landlord serves a 72 Hour Notice for nonpayment of rent and, before the 72 hour period runs, the tenant files for bankruptcy. The lease has clearly not expired. Let’s say that the 72 hour period runs, the tenant does not pay rent, and the landlord files an FED. The lease has still not expired because really, all that exists is an allegation that the tenancy has terminated. The tenant could successfully defend the FED. Therefore, the lease has not “expired” for bankruptcy purposes. It is important to note that for the most part, executory contracts and unexpired leases are treated the same under §365.
C. ASSUMPTION & REJECTION OF LEASES IN CHAPTER 7 CASES
Subject to court approval, the bankruptcy trustee has the power to assume or reject an unexpired lease, subject to certain deadlines and performance requirements.
1. Residential Leases
a. Timing
The trustee must decide whether to assume or reject an executory contract or unexpired residential lease within 60 days of the date that the order for relief is entered (in voluntary bankruptcies, this is the date the petition is filed). If the trustee fails to assume the lease by this deadline, the lease is deemed rejected. The Ninth Circuit has held that the 60 day deadline is absolute and applies even if the debtor did not list the lease on her schedules. In Re Lovitt, 757 F.2d 1035 (9th Cir. 1985). However, the trustee can request an extension of time “for cause,” but the motion for the extension must be filed before the 60 day period runs. Furthermore, a landlord may be subject to a waiver argument if the landlord continues to accept rent after the lease has been deemed rejected.
b. Effect of Rejection
If an executory contract or lease is rejected, it is deemed breached by the debtor/tenant retroactive to the filing date. Rejection of the lease may provide the landlord with a basis for obtaining relief from stay if the debtor is actually in default.
c. Requirements for and Effect of Assumption
If the debtor/tenant is in monetary default in the lease, in order to assume the lease, the trustee must “promptly” cure the prepetition default (or provide “adequate assurance” that the default will be cured), pay all sums due since the bankruptcy was filed, and must provide “adequate assurance” of future performance under the lease. What is “prompt” depends on the facts and circumstances of a particular case.
In most chapter 7 cases, if the debtor/tenant was in default prior to filing the bankruptcy, he has no ability to pay the back rent, and therefore the trustee will not assume the lease. If the debtor/tenant can pay the back rent and stay current, the trustee may assume the lease, and the lease will continue unless and until there is some default that would allow the landlord to obtain relief from stay.
2. Commercial Leases
a. Timing
The trustee must assume a commercial lease within 120 days of the bankruptcy filing date. If the trustee does not assume the lease, it is deemed rejected. The court may extend the deadline once for cause, but only for 90 days, and the motion for the extension must be filed prior to the expiration of the 120 day period. Additional extensions will only be granted with the consent of the landlord.
b. Effect of Rejection
If the trustee rejects a commercial lease, the trustee must immediately surrender the commercial premises to the landlord.
c. Requirements for and Effect of Assumption
The trustee has the same obligations to cure in order to assume a commercial lease. See Section C(1)(c) above.
D. ASSUMPTION & REJECTION OF LEASES IN CHAPTER 13 CASES
1. Residential Leases
a. Timing
A Chapter 13 trustee may assume or reject an unexpired residential lease at any time prior to confirmation of the Chapter 13 Plan. However, the landlord may file a motion to require the trustee to elect by a particular deadline. This will be decided based on a “reasonableness” standard. The landlord may also object to assumption of the contract.
b. Effect of Rejection
If the lease is rejected, the landlord may treat the rejection as breach and require the debtor/tenant to surrender the premises. Failure to surrender the premises after a lease has been rejected will provide a basis for relief from stay. In terms of the tenant’s prepetition default, the landlord will have an unsecured claim, which may or not be paid pursuant to the Plan depending largely on the debtor/tenant’s income. The debt may simply be discharged. In terms of postpetition, pre-rejection unpaid rents, the landlord will have a priority administrative claim, i.e. a claim to be paid out of Plan funds.
c. Requirements for and Effect of Assumption
As in Chapter 7 cases, a chapter 13 trustee must “promptly” cure prepetition defaults (or provide adequate assurance), promptly pay post-petition sums, and provide adequate assurance of future performance. In a Chapter 13, the Plan will indicate whether the debtor/tenant wishes to assume the lease; will list the landlord’s name; will indicate the amount for any pre-petition default; and will provide for repayment of the default. Failure to list the lease under the executory contract section of the LBF generally means that it is rejected, although the debtor/tenant could file an Amended Plan adding the lease.
“Prompt” repayment in Chapter 13 cases may not be particularly prompt, but the debtor/tenant will also be required to stay current on rent throughout the remainder of the lease. The Plan will usually provide for the debtor/tenant to make all payments directly to the landlord, but may provide that the landlord shall be paid out of the Plan. A landlord can object to confirmation of the Plan, but will not be successful if the proposed repayment plan is found to be “prompt” under the circumstances, and if the debtor’s income shows that the proposed payments are feasible.
2. Commercial Leases
a. Timing
The trustee must assume a commercial lease within 120 days of the bankruptcy filing date, or prior to confirmation of the Plan, whichever occurs sooner. If the trustee does not assume the lease, it is deemed rejected. The court may extend the deadline once for cause, but only for 90 days, and the motion for the extension must be filed prior to the expiration of the 120 day period. Additional extensions will only be granted with the consent of the landlord.
b. Effect of Rejection
If the lease is rejected, the trustee must immediately surrender the premises to the landlord. In the event that the debtor/tenant does not vacate, the landlord should seek relief from stay. Failure to surrender the premises after a lease has been rejected will provide a basis for relief from stay. In terms of the tenant’s prepetition default, the landlord will have an unsecured claim, which may or may not be paid pursuant to the Plan depending largely on the debtor/tenant’s income. The debt may simply be discharged. In terms of post-petition prerejection unpaid rents, the landlord will have a priority administrative claim, i.e. a claim to be paid out of Plan funds.
c. Requirements for and Effect of Assumption
The trustee must satisfy the same requirements for assumption of a commercial lease as in a residential lease. See above.
IV. FORECLOSURE AND TENANTS
A. THE PROTECTING TENANTS AT FORECLOSURE ACT OF 2009
1. Overview
Part of the Helping Families Save Their Homes Act of 2009, this federal law is intended to provide certain protections to tenants on properties that are foreclosed. It is important to emphasize that the Act only applies to bona fide tenants of foreclosed properties, and not owner-occupants of a property that has been foreclosed. The Act took effect in May 2009 and was set to expire on December 31, 2012 , but the “Dodd-Frank” legislation extended it to December 31, 2014.
Because of the Supremacy Clause, this federal law trumps state foreclosure law to the extent that state law provides lesser protections. The Act will therefore trump certain provisions of Oregon foreclosure law. The Act can be found at Public Law 111-112, helping Families Save Their Homes Act of 2009, Title VII, Sections 701-704, Protecting Tenants at Foreclosure Act.
2. Application
a. Federally-Related Loans and Residential Real Property.
The Act applies in the case of any foreclosure on “federally-related” loans and on any residential property. Most loans will qualify as “federally related,” and all residential tenancies are covered.
b. Bona Fide Leases and Tenancies
The Act only applies to tenants under a “bona fide” lease or tenancy. To qualify, the tenancy must meet all of the following requirements: 1) The tenant is not the mortgagor or the mortgagor’s spouse, child, or parent;
2) The tenancy was the result of an arm’s length transaction; and
3) The lease requires the payment of rent that is not substantially less than fair market rent (unless the rent is reduced pursuant to a federal, state, or local subsidy).
3. Requirements for Termination and/or Completion of Lease Term Any “immediate successor in interest” on a foreclosed property (i.e., the bank or the purchaser at the foreclosure sale) takes title to the property subject to the rights of any bona fide tenant and will have to comply with notice requirements before the tenant will be required to vacate.
a. 90 Days Notice
The immediate successor (new owner) must provide the bona fide tenant with 90 days written notice to vacate. This notice can only be given after the foreclosure sale. This notice appears to be required even if there is a month-to-month tenancy. If the tenant does not vacate by the deadline, the landlord is entitled to file a non-residential FED in state court.
b. Right to Complete Term Lease
Furthermore, a bona fide tenant with a term lease must be permitted to stay in the residence for the remainder of the lease term (even if longer than 90 days), subject to two exceptions:
1) If the purchaser is going to occupy the property as her primary residence, the purchaser can terminate upon 90 days notice; and
2) If there is no lease, or the lease is terminable at will under state law, the purchaser can terminate the lease upon 90 days notice.
The Protecting Tenants at Foreclosure Act is very brief and simply does not address many practical questions that will arise in terms of the relationship between the Act and state law. In keeping with general legal principles, all issues not addressed by the Act should be determined according to state law, applied so as to be consistent with federal law.
B. OREGON LAW RE: FORECLOSURE AND TENANTS
1. Relationship to Federal Law
Oregon also passed significant amendments to post-foreclosure eviction law in 2009. Based upon some of the timelines in the Oregon statute, it is not clear whether the Oregon Legislature was aware of potential federal law on the same topic. To the extent that Oregon law provides lesser protection to tenants, it is trumped by federal law, and the federal requirements will apply. To the extent that Oregon law is not incompatible with federal law, or provides greater protection, Oregon law will apply. Asterisks indicate provisions of Oregon law that are trumped by more stringent federal law requirements. If the Protecting Tenants at Foreclosure Act is not renewed after 2014, Oregon law will apply. It is important to highlight again that this section deals only with tenants of foreclosed properties, and not owner-occupants of foreclosed properties. Different timelines and requirements for evicting previous homeowners who remain in the home after foreclosure apply and are not discussed here.
2. Overview (ORS 86.755)
If a residential tenant holds possession of the foreclosed property pursuant to a valid, voluntary, good faith rental agreement created by the former homeowner, the purchaser (bank or purchaser at the foreclosure sale) can still utilize the FED process to obtain possession of the property. However, the purchaser must follow greatly expanded notice requirements in order to terminate the pre-existing tenancy.
a. Good Faith
The statutes are not designed to protect tenancies created in bad faith. The good/bad faith determination depends upon when the tenancy was created in relation to when the notice of sale was served. A month-to-month tenancy or a week-to-week tenancy that a grantor or a successor of the grantor first created after a notice of sale was served under ORS 86.750 is presumed not to be a tenancy created in good faith. A fixed term tenancy that a grantor or a successor of the grantor created after a notice of sale was served under ORS 86.750 is not a tenancy created in good faith.
3. Notice Required
Before the Purchaser can file an eviction action, and after the sale, the Purchaser must terminate the tenancy in a written notice given to the person:
a. 60 Day Notice for Termination of Fixed Term Tenancy
A 60 day notice of termination is required if the tenancy is a fixed term tenancy, as defined in ORS 90.100. However, the 60 day notice is only required if the tenant provided the foreclosure trustee with a copy of the written rental agreement establishing the fixed term. Otherwise a 30 day notice would be required. ORS 86.755(5)(c)(A). *
*NOTE: Because federal law requires 90 days notice, and may even allow the tenant to complete the entire lease term, the purchaser must follow federal law rather than state law (at least as long as the Protecting Tenants at Foreclosure Act is in effect).
b. 30 Day Notice for Month-to-Month or Week-to-Week Tenancy
A 30 day notice of termination is required if the tenancy is a month-to-month tenancy or week-to-week tenancy, as those terms are defined in ORS 90.100, and if, at least 30 days before the date first set for the trustee’s sale, the tenant provided the trustee with a copy of the rental agreement that established the tenancy or with other written evidence of the existence of a rental agreement, if the person cannot provide the rental agreement. ORS 86.755(5)(c)(B)(i).*
*NOTE: Because federal law requires 90 days notice, the purchaser must follow federal law rather than state law (at least as long as the Protecting Tenants at Foreclosure Act is in effect).
c. 30 Day Notice for Fixed Term Tenancy Where Purchaser to Occupy
Even if a fixed term tenant has provided the trustee with a copy of the fixed term rental agreement, the purchaser can terminate the tenancy upon 30 days notice if the purchaser intends to occupy the property as his primary residence. ORS 86.755(5)(c)(B)(ii)*
*NOTE: Because federal law requires 90 days notice, the purchaser must follow federal law rather than state law (at least as long as the Protecting Tenants at Foreclosure Act is in effect).
d. Service of Notices
The purchaser must serve the foregoing notices by first class mail, and not by certified or registered mail or a form of mail that may delay or hinder actual delivery of mail to the addressee. The notice is effective three days after the notice is mailed.
4. Time Before Filing the Eviction Action (ORS 86.755(6)(d))
A purchaser may not commence an FED before the later of:
a. The 10th day after the trustee’s sale;
b. The date specified in a written notice of the requirement to surrender or deliver possession of the property per ORS 86.755;
c. The date specified in a written notice of the purchaser’s intent to terminate a tenancy per ORS 86.755; or
d. The date on which the term of a fixed term tenancy ends.
5. Post-Sale Creation of a Landlord/Tenant Relationship? (ORS 86.755(7)(a))
Notwithstanding the provisions of ORS 86.755(5)(c), and except as provided in ORS 86.755(7)(b), the purchaser is not a landlord subject to the provisions of ORS chapter 90 unless the purchaser:
a. Accepts rent from the pre-foreclosure tenant;
b. Enters into a new rental agreement with the pre-foreclosure tenant; or
c. Fails to serve the applicable notice of termination within 30 days after the date of the sale.
Conversely, if the purchaser accepts rent, enters into a rental agreement, or fails to timely terminate the tenancy, the purchaser is a landlord subject to all of the requirements of the Residential Landlord and Tenant Act.
Note also that, pursuant to ORS 86.755(7)(b), the purchaser can essentially act as a pseudo-landlord for purposes of terminating the tenancy under ORS 90.396, the 24 hour notice of termination statute.
6. Liability of Purchaser (ORS 86.755(8))
a. Non-Landlord Purchasers Not Liable
As long as the purchaser avoids becoming a landlord, the purchaser is not liable to the tenant for damage to the property, diminution in rental value, or for return of the security deposit.
b. Post-Sale Landlords Are Liable
A purchaser who becomes the landlord of a pre-foreclosure tenant (by accepting rent etc.) is liable to the tenant for damage to the property or diminution in rental value that occurs after the date of the trustee’s sale, and also liable to the tenant for the return of any security deposit paid after the date of the trustee’s sale.
7. Application of Security Deposit or Prepaid Rent (ORS 90.367)
A tenant who receives actual notice that the property that is the subject of the tenant’s rental agreement with a landlord is in foreclosure may apply the tenant’s security deposit or prepaid rent to the tenant’s obligation to the landlord. The tenant must notify the landlord in writing that the tenant intends to do so. The landlord may not terminate the tenancy because the tenant has exercised this right, and may not issue a nonpayment of rent notice for that month unless a balance is owing after applying all payments, deposits and prepaid rent. If the landlord provides written evidence that the property is no longer in foreclosure, the landlord can require the tenant to replenish the security deposit or prepaid rent, but must allow at least two months to do so.
8. Tenant’s Right to Terminate term Lease
The 2013 amendments added a provision allowing a tenant in a fixed term lease who has received actual notice that the property is in foreclosure to deliver a 60 day notice of termination to landlord specifying that a) the tenant had received notice that the property is in foreclosure; and b) that the tenancy will terminate on a specified date not less than 60 days after delivery, unless within 30 days the landlord either provides written evidence from a lender or trustee that the property is no longer in foreclosure, or written evidence that a receiver has been appointed.