The lender started judicial foreclosure for a motel property in New Mexico. The borrower filed bankruptcy (Ch 11) to delay foreclosure. The lender and borrower reached an agreement and an Order to Sell property outside of normal course of business was issued by the Bankruptcy court to sell the property to the lender. The borrower gave a deed and possession of the property to the lender pursuant to the order. The agreement also called for an unsecured claim against the borrower for $700,000. The lender operated the motel for about 10 years. The borrower's bankruptcy was converted to Ch 7 and subsequently dismissed involuntarily about 4 years later in 2001. The lender did not have knowledge of this dismissal, although his attorney was sent a notice by the bankruptcy court. The borrower is now claiming that the deed and the agreement reached during his bankruptcy are now void, since his bankruptcy was dismissed. He is now claiming title to the property
Since the lender had the possession of the property, and he did not have any knowledge of the bankruptcy dismissal, he did not pursue the foreclosure case in the state court, assuming, that there was no need. No action was taken by either party from 10/1996 to 12/2008. Motion to dismiss was filed in 12/2008 on the grounds of no activity.
The lender, of course, is surprised.
The lender wants to know if the agreement reached in Bankruptcy court, either fully or partially performed, can be preserved.
Response: Generally, a dismissal of the bankruptcy case places the debtor and the creditor back in the situation they were in before the case commenced. Unless the Court orders otherwise, a dismissal of the bankruptcy case vacates most (but not all) bankruptcy orders and returns the parties as much as possible to the position that they were in before the filing of the bankruptcy petition. Where the deed has already been transferred to you four years before the involuntary dismissal of the case, the transfer cannot be undone. Just as if the trustee appointed in the case had sold the property and distributed the proceeds to the debtor's creditors, the debtor cannot ask the trustee to undo the sale. See 11 U.S.C. Section 349(b). Also see In re Witte, 279 B.R. 585 (Bankr. E.D. Cal. 2002), Court held that where a debtor's house had been sold pursuant to a Court Order before the dismissal, proceeds held by the bankruptcy trustee were not plan proceeds that had to be returned to the debtor but instead the proceeds had to be turned over to holders of liens on the house.
You should also review the docket of the old bankruptcy case to see what the Dismissal Order says.