§14.3 AUTOMATIC STAY
This section discusses the automatic stay that comes into effect when a bankruptcy petition is filed.
(1) General principles of the automatic stay
Upon the filing of a petition under the Bankruptcy Code, an injunction or "stay" of certain activities automatically becomes effective as to all entities. 11 U.S.C. §362. Formal or even actual notice is not required. In re Johnson, 501 F.3d 1163 (10th Cir. 2007); ACandS, Inc, v. Travelers Cas. & Sec. Co., 435 F.3d 252 (3d Cir.), cert. denied, 547 U.S. 1159 (2006); In re Eisenberg, 7 B.R. 683, 687 (Bankr. E.D.N.Y. 1980). Actions in violation of the automatic stay are prohibited and void and may, in some instances, result in payment of damages to the debtor. In re Peralta, 317 B.R. 381, 389 (B.A.P. 9th Cir. 2004)
(a) Actions prohibited
With respect to real property interests, the automatic stay operates as a broad prohibition of enforcement of (1) judgments obtained before commencement of the case, 11 U.S.C. §362(a)(2); (2) actions by creditors to obtain possession of property of the estate, 11 U.S.C. §362(a)(3); and (3) actions to create, perfect, or enforce liens against the property of the estate or the debtor, 11 U.S.C. §362(a)(4), (5). See, e.g., Wekell v. United States, 144 B.R. 503 (W.D. Wash. 1992) (automatic stay is an absolute bar to IRS collection proceedings), aff'd, 14 F.3d 32 (9th Cir. 1994).
(b) Litigation stayed
Nearly all civil actions against the debtor are stayed by the filing of a bankruptcy petition, including contingent or unliquidated claims. 11 U.S.C. §101(4). See In re Hunters Run Ltd. P'ship, 875 F.2d 1425 (9th Cir. 1989), and cases relying thereon, for a discussion of the wide variety of actions stayed by the filing of a petition. Hunters Run is discussed in Hazel v. Van Beek, 135 Wn.2d 45, 954 P.2d 1301 (1998). However, a line of demarcation is drawn according to the date the petition is filed. The automatic stay does not prohibit the commencement of actions based on claims that arise after the filing. See 11 U.S.C. §362(a)(1). An exception to the post-petition exception exists whereby the Bankruptcy Code treats a claim as if it had arisen prepetition, such as a claim arising from the rejection of an unassumed executory contract or lease. 11 U.S.C. §502(f)-(i).
It is important to recognize that the filing of a bankruptcy petition generally does not stay litigation against a guarantor of a debtor's debt, In re Lockard, 884 F.2d 1171, 1178-79 (9th Cir. 1989) (surety bond); against individual partners of a partnership debtor, Patton v. Bearden, 8 F.3d 343, 348-49 (6th Cir. 1993) (stay applied to debtor partnership but not individual partners); or against any nondebtor party, In re San Juan Dupont Plaza Hotel Fire Litig., 994 F.2d 956, 969 (1st Cir. 1993) (stay does not apply to affiliated entities distinct from the debtor), aff'd, 93 F.3d 1 (1996). See §14.3(3), below, for other exclusions.
| Practice Tip : | It may be possible to enjoin court actions against an unprotected party. An injunction may be sought under the bankruptcy court's authority to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. §105. Injunctive relief must be sought via an adversary proceeding and FED. R. CIV P. 65 applies. FED. R. BANKR. P. 7001(7), 7065. For example, enjoining an action against an officer, director, or employee crucial to early Chapter 11 reorganization efforts might be warranted to avoid harmful distraction. An injunction was entered to enjoin action against nondebtor employees in In re Phila. Newspapers LLC, 410 B.R. 404 (Bankr. E.D. Pa. 2009), aff'd, 423 B.R. 98 (E.D. Pa. 2010). See In re LaBrum & Doak, LLP, 237 B.R. 275 (Bankr. E.D. Pa. 1999) for citations of cases enjoining creditor actions against nondebtors. Also see the discussion in Gander Partners LLC, et al. v. Harris Bank, N.A., Adv. No. 10 A 00981, 2010 WL 2802668 (Bankr. N.D.Ill. July 16, 2010) (amended order granting motion for preliminary injunction).Such injunctions are granted only in exceptional circumstances. In re Johnson, 346 B.R. 190 (B.A.P. 2006). Although the Fifth Circuit court, in Browning v. Navarro, 887 F.2d 553 (5th Cir. 1989), reh'g denied, 894 F.2d 99 (5th Cir. 1990), held that only an Article III judge has jurisdiction to restrain another court, neither 11 U.S.C. §157 nor 11 U.S.C. §105(a) contains such a restriction. |
In Chapter 13 cases, a creditor is stayed from commencing or continuing any civil action to collect all or any part of a consumer debt of the debtor from any codebtor. However, the automatic stay may be terminated if a debtor or codebtor does not file and serve an objection within 20 days to a creditor's request to proceed against the codebtor. 11 U.S.C. §1301(d). Chapter 12 contains similar provisions regarding the applicability of the automatic stay to codebtors. See 11 U.S.C. §1201(d).
(c) Landlord/tenant issues stayed
Generally, 11 U.S.C. §365 (discussed in §14.6, below) describes the procedure that must be followed in the bankruptcy court to obtain most forms of relief with respect to leasehold interests. 11 U.S.C. §362(a) prohibits the termination of a leasehold interest by a party without the party first obtaining relief from stay. For example, the attempted ouster of a lessee after commencement of the lessee's bankruptcy case is a violation of the automatic stay. In re Butler, 14 B.R. 532 (S.D.N.Y. 1981).
The BAPCPA, however, created a new exception to the automatic stay to permit a residential lessor to evict a tenant after the bankruptcy filing when the lessor obtained a judgment for possession of the property against the debtor before the filing. 11 U.S.C. §362(b)(22). Also, a lessor may proceed against a residential tenant when the property is endangered or when there has been illegal use of controlled substances on the property. If either of these circumstances is present, the lessor must file with the court and serve upon the debtor a certification that such an eviction action has been filed or that during the 30-day period preceding the filing of the certification such use has occurred. 11 U.S.C. §362(b)(23).
(2) Foreclosure
The bankruptcy of a mortgagor may affect the foreclosure process at three different stages: (1) prior to commencement of foreclosure; (2) after commencement of foreclosure, but prior to the foreclosure sale; or (3) after the foreclosure sale, but prior to the expiration of the redemption period. See generally BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994).
(a) When foreclosure has not been commenced
When a mortgagor files a bankruptcy petition prior to the commencement of foreclosure, the mortgagee cannot commence a foreclosure action. A split of authority exists as to whether the mortgagee can accelerate the debt without leave of court after the petition has been filed. In re LHD Realty Corp., 726 F.2d 327 (7th Cir. 1984); In re Payless Cashways, Inc., 287 B.R. 482 (Bankr. W.D. Mo. 2002).
When the debt has already been accelerated, the debtor in Chapter 11 or Chapter 13 cases may be permitted to "de-accelerate" the debt pursuant to a confirmed plan. See In re Snowden, 345 B.R. 607 (Bankr. N.D.Ill. 2006); In re Nelson, 59 B.R. 417 (B.A.P. 9th Cir. 1985); In re Metz, 820 F.2d 1495 (9th Cir. 1987); George Bourguignon, Arguing for a Bright-Line Approach to the Debtor's Statutory Right to Cure a Residential Mortgage Default, 7 U.C. DAVIS BUS. L.J. 461 (2007).
(b) When foreclosure has been commenced
When the mortgagor files a bankruptcy petition after the mortgagee has commenced a foreclosure suit, the bankruptcy automatically stays any further proceedings. The mortgagee may then petition the bankruptcy court for relief from the automatic stay to proceed with the foreclosure litigation in state court. Alternatively, either the mortgagor or the mortgagee may remove the foreclosure proceeding to the bankruptcy court, subject to the bankruptcy court's power to abstain or remand. See FED. R. BANKR. P. 9027. Again, the debtor in Chapter 11 or Chapter 13 cases may be permitted to "de-accelerate" the debt pursuant to a plan of reorganization. See In re Hurt, 158 B.R. 154 (B.A.P. 9th Cir. 1993) (Chapter 13 debtors allowed to cure after foreclosure judgment but before foreclosure sale); see also In re Frazer, 377 B.R. 621 (B.A.P. 9th Cir. 2007); In re Taddeo, 685 F.2d 24 (2d Cir. 1982).
(c) During the redemption period
A majority of courts have held that the automatic stay prohibits affirmative...
