A. OVERVIEW OF BANKRUPTCY PROCESS
The filing of a bankruptcy petition, whether by an individual or a business, is usually a major event to that person or business. Upon the filing of a bankruptcy petition, all non-exempt legal and equitable interests of the debtor, including property rights, become part of the so-called “bankruptcy estate” under 11 U.S.C. § 541. Property of the estate also includes other property interests that the debtor acquires post petition (see § 541 (a)(5) and (7)) as well as proceeds, profits and other similar property. However, as § 541 (a)(6) indicates, an individual debtor’s future earnings are not ordinarily property of the estate. Also, § 541 also provides that certain beneficial interests in trusts, like ERISA qualified pension plans and spendthrift trusts, are not part of the estate.
Unless a particular federal interest requires a different result, property interests are created and defined by state law. SeeButner v. United States, 440 U.S. 48, 55 (1979).
Upon the filing of a petition under any chapter of the Code, a stay arises automatically pursuant to 11 U.S.C. § 362(a). The stay is an injunction against the commencement or continuation of actions against the debtor and its property. Foreclosure, collections and certain set-off rights are enjoined and actions in violation of the automatic stay are generally void and of no effect. SeeIn re Soares, 107 F.3d 969 (1stCir. 1997). Seealso, In re A& J Auto Sales, Inc., 223 B.R. 839 (D.N.H. 1998)(post petition towing of cars seized by the IRS pre-petition violated stay). The basic idea of the stay is to give the debtor a temporary break from their creditors so that they can both formulate and propose a reorganization plan or time for the orderly administration and liquidation of assets.
There are over twenty-five exceptions to the stay. See11 U.S.C § 362(b). Among these exceptions are actions taken to perfect or maintain the continuance of perfections of liens. See11 U.S.C. § 546(b), actions by lessors against debtors of non-residential real property when the lease term expires pre-petition or during the case to obtain possession, the commencement of any action by the Secretary of Housing and Urban Development to foreclose a mortgage or deed of trust in any case in which the mortgage or deed of trust held by the Secretary is insured or was formerly insured under the National Housing Act and covers property, or combinations thereof, of five or more living units. 11 U.S.C. § 362(b)(22) excepts from the stay, the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involvingresidentialproperty in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained, before the filing of the bankruptcy petition, a judgment for possession against the debtor. However, a debtor-tenant may take steps to prevent the exception (thus preserving the automatic stay) by (1) filing and serving with the bankruptcy petition, a certification under the pains and penalties of perjury as to why, under non-bankruptcy law, the debtor is entitled to cure the monetary default AND the debtor files with the Bankruptcy Clerk, any rent that would become due within thirty (30) days after the petition date and (2) file within thirty (30) days of the petition, a certification to the Court that the debtor has in fact cured the monetary default. If the debtor meets these obligations, the lessor may file an objection and the Court will hold a hearing within ten (10) days.
11 U.S.C. § 362(b)(23) provides an exception for residential eviction actions based upon the endangerment of the property or when illegal, controlled substances are used on the property.
§ 365 provides specific time frames within which executory contracts and unexpired leases must either be assumed or rejected. It requires a debtor (or trustee) to perform under the contract or lease until it has been assumed or rejected and to cure past defaults prior to assumption.
§ 365 (d)(3) carves out an exception to the Automatic Stay discussed above. It states, in relevant part as follows: The trustee shall timely perform all the obligations of the debtor…arising from and after the order for relief under any unexpired lease ofnon-residentialreal property, until such lease is assumed or rejected… So, § 365 (d)(3) protects landlords by allowing them to enforce the lease post-petition without having to resort to the automatic stay process. However, the debtor is not without protection either. Under the 2005 Amendments to the Code (BAPCPA), a debtor-tenant is allowed to reject a lease and to limit the damages his landlord can claim and receive.
§ 365 (d)(3) requires that a debtor timely performs all of its obligations under a lease that occur from the time it files bankruptcy to the time it assumes or rejects. If real estate taxes are assessed during that period, then under the so-called “proration rule”, a debtor would only have to pay for amounts thataccruedpost-petition. SeeIn re Learningsmith, Inc., 253 B.R. 131 (Bankr. D. Mass. 2000).
Another school of thought, referred to as the “performance rule”, holds that § 365 (d)(3) requires a debtor to pay for all of its obligations that accrued up to the time it either assumes or rejects (including pre and post amounts). New Hampshire seems to follow the minority view’s performance rule, at least in one specific instance. SeeIn re Lakeshore Construction Co. of Wolfeboro, Inc., 390 B.R. 751 (Bkrtcy. D.N.H. 2008).
BAPCPA has left unaltered, the time a debtor has in which to assume or reject a residentialreal property lease or a lease of personal property-the trustee/debtor still has sixty (60) days from the petition date to assume or reject. Revised § 365 (d)(4) gives a maximum of two hundred and ten (210) days from the petition date, for the debtor to assume or reject a commercial (a/k/a nonresidential) lease. In order to extend that time, a debtor will need the consent of the landlord.
The legal standard a debtor must demonstrate in order to assume or reject a lease is the business judgment test. SeeGroup of Institutional Investors v. Chicago, Milwaukee, St. Paul, and Pacific R. Co.,318 U.S. 523 (1943); In re Trans World Airlines, Inc.,261 B.R. 103, 120-121 (Bankr.D.Del.2001); Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co. (In re Wheeling-Pittsburgh Steel Corp.),72 B.R.845-846 (Bankr.W.D.Pa.1987).
A court is required to examine whether a reasonable business person would make a similar decision under similar circumstances. SeeIn re Exide Technologies, 340 B.R. 222 (Bkrtcy. D. Del. 2006). This is not a difficult standard to satisfy and requires only a showing that rejection will benefit the estate. SeeIn re Patterson,119 B.R. 59, 60 (E.D.Pa.1990); In re Blackstone Potato Chip Co., Inc., 109 B.R. 557 (D. R.I. 1990).
An assumed lease becomes a binding, post-petition obligation on the bankruptcy estate. Accordingly, debtors/trustees and creditors’ committees are usually hesitant to assume a lease too soon, without knowing the likely benefits and burdens to the bankruptcy estate. As discussed above, a debtor has a maximum of two hundred and ten (210) days to assume or reject under § 365(d)(4). If the debtor wants to seek an extension of time of the initial one hundred and twenty (120) day deadline imposed by the statute, it must do so within the one hundred and twenty (120) days. SeeIn re Tubular Technologies, LLC,362 B.R. 243 (Bankr. D. S.C. 2006).
If a lease is in default at the time of the petition, the debtor must cure all monetary defaults or provide adequate assurance that the monetary defaults will be promptly cured. 11 U.S.C. § 365(b)(1). However, non-monetary defaults (e.g. “going dark clauses or other non-monetary disputes or defaults) do not necessarily need to be cured prior to assumption. The First Circuit so held in In re BankVest Capital Corp., 360 F.3d 291 (1stCir. 2004). Congress redrafted § 365(b)(2)(D) and (b)(1)(A) to codify the essential holding of BankVestso that the debtor/trustee need not cure defaults that relate to a breach of a nonmonetary obligation on nonresidential leases if it is impossible to do so. Nonmonetary breaches of executory contracts and personal property leases still have to be cured before assumption.
If a debtor assumes the lease but then defaults, the landlord’s claim is treated as an administrative claim against the estate. See11 U.S.C. 503(b)(7). The administrative claim is limited (so as not to afford the landlord a super-priority to the detriment of other unsecureds). The statute caps a landlords’ claim at sums that would be due over a two (2) year period (instead of the entire remaining lease term).
Permitting debtors to shed disadvantageous contracts while keeping beneficial ones is one of the core purposes of the Code-to give worthy debtors a fresh start. In re Carp, 340 F.3d 15 (1stCir. 2003).
A landlord’s claim is potentially comprised of two parts, (1) a claim for pre-petition rent and a claim for damages for rejecting/breaching the lease. § 502(b)(6) provides a mechanism for a party to object to a landlord’s rejection claim. More specifically, § 502(b)(6)(A), limits a landlord’s rejection for future rent to the lesser of one years’ worth of rent or 15% of the rent over a three (3) year period.
§ 356 (h) addresses the situation where the lessor is the debtor. A tenant faced with this situation has two choices: (1) treat the lease as terminated and make a claim for damages or (2) continue in possession and pay rent in accordance with the lease. § 356 (h)(1)(B) allows the tenant to offset damages arising from its landlord’s rejection against future rent due under the lease. If the tenant chooses to treat the lease as terminated, it is released from its obligations, in addition to being able to make a claim for damages. SeeIn re Nickles Midway Pier, LLC, 372 B.R. 218 (D. N.J. 2007).
Whether you are a residential or commercial landlord, communication with your tenant and diligence about the marketplace is probably the best strategy to guard against a loss due to the rejection of a lease. It might be advisable in some circumstances to negotiate only triple net leases (where the tenant pays directly for all maintenance costs, utilities, taxes and insurance). Also, the Golden Rule seems to apply, treat your debtor as you would want to be treated. In other words, if the going lease rates in your market are much lower than what you are charging, don’t be surprised if the lease is rejected. Put yourself in the debtor’s shoes and try to negotiate in a way that meets either the monetary or nonmonetary needs of your tenant. Maybe a longer or shorter term or renegotiation of other terms would be attractive to the debtor and better for you than rejection. Also, with respect to security deposits, they become part of the bankruptcy estate upon filing. The best approach is not to apply security deposits to post-petition, pre assumption amounts that may come due; instead, hold the deposit so it can be applied to any potential rejection damages.
If you have decided that assuming the lease, even on different terms, is not feasible for you or the debtor then be diligent about how your rights may be affected by the bankruptcy case. There are a myriad of events in a case which can affect a debtor’s ability to reorganize and how assets and claims will be handled. Whether you are a tenant or a landlord, I strongly recommend that you seek legal advice at the earliest signs of financial distress.
Judgment, in this section, means a final, non appealable judgment. In,In re Alberts, the exception did not apply when the eviction judgment had been timely appealed for de novotrial on the merits. SeeHousing Authority of Beaver County v. Alberts, 381 B.R. 171 (Bankr. W.D. Pa. 2008).
William J. Amann, Esq.
BRAUCHER & AMANN, PLLC
Three men had a vision to develop a sports complex in Middleton, Delaware. They formed a limited liability company called, fittingly, Delaware Sports Complex, LLC (hereinafter “DSC”).
DSC was eager to develop the 170 acre sports complex, perhaps too eager, because it entered into a Lease one (1) year before the LLC had been legally created. However, the Lease contained a term wherein DSC represented and warranted that it was a duly formed and created Delaware LLC.
The Lease provided an Early Termination clause, which the Town asserted in its notice of default. But the Debtor, even if there was a default, had an opportunity to cure the default. Pursuant to the Lease, the default must remain for thirty (30) days afterthe Debtor receives the default notice and after the expiration of those thirty (30) days, if the default is of “a nature that it cannot be cured within such thirty (30) day period,” then as long as the Debtor is “proceeding to cure [the default] in good faith,” the default is deemed notto continue. (emphasis mine).
The Town of Middleton cried foul and issued a notice of default of terms of the Lease to DSC and then commenced a summary possession action against DSC. The Town’s notice of default was premised upon: (1) DSC not being listed with the State of Delaware’s Secretary of State’s Office; (2) DSC’s failure to provide certain bonding and; (3) DSC’s failure to execute a Recoupment Agreement with the Town and State’s Department of Transportation. The Debtor had until March 8, 2017 to cure the alleged defaults.
First, the Debtor cured the formation issue by filing its Certificate of Formation on February 28, 2017.
Second, as to the second, alleged default, the bonding requirement, the Court found that the Debtor cured the default through his letters of credit commitment which equaled the Town’s bonding request and that the Debtor acted in good faith and received no help from the Town. Therefore, the Debtor did was found not to have defaulted on the bonding requirement.
Third, the so-called Recoupment issue, basically required the Debtor to “promptly observe and comply with all present and future laws, ordinances, requirements, order, directive, rules and regulations of the Federal, State and local governments and all other governmental authorities affecting the Property or appurtenances thereto or any part thereof. . . .”. In other words, Delaware was requiring that the Debtor either complete and submit a sull traffic impact study or participate in a Recoupment Agreement. Both choices would cost the Debtor in excess of $2,000,000.
But DSC called a figurative time-out by filing Chapter 11 in May 2017.
ISSUE ONE: Whether the Lease was terminated before Debtor’s bankruptcy filing. In other words, whether the Lease was void ab initiobecause Debtor did not exist when it executed the Lease.
ISSUE TWO: Whether the Town’s interest as landlord may be subordinated to the lien of the post-petition lender if required under the Debtor’s financing agreement.
HOLDING ON ISSUE ONE: No. DSC’s certificate of formation was not filed until afterthe Town sent its notice of Lease default. However, the Court found that DSC could enter into the Lease even though it was not legally created at that time. The Court ruled that when an agent contracts for a non-existent principal which is subsequently formed, the principal may assume the contract. Boulden v. Albiorix, Inc., 2013 WL 396254 (Del. Sup. 2013). The Debtor’s original members were, in effect, promoters of the preformation entity. SeealsoLorillard Tobacco Co. v. Am. Legacy Found., 903 A. 2d 728, 744 (Del. 2006).
The Court also found that the Town was estopped from denying the existence of the Debtor, first, because it accepted Debtor as a limited liability company throughout; and second, because the Town conceded that Debtor’s formation was sufficient to cure the default.
HOLDING ON ISSUE TWO: No. Debtor seeks to subordinate the Town’s fee simple interest in the property to the Debtor’s credit agreement (the “DIP”). The Lease provides that:
[Debtor] shall have the right to grant a leasehold mortgage or otherwise encumber this Lease or any sublease of all or any part of the Property and [Debtor] may assign its rights hereunder. Such leasehold mortgage shall encumber the leasehold interest created by this Lease; [the Town] agrees to execute a commercially reasonable Subordination and Non-Disturbance Agreement or similar agreement with [Debtor’s] lender.
Lease, § 7.2. The Court’s decision that the Lease was terminated makes it unnecessary to address the subordination issue.
It is the Debtors’ failure to enter into a recoupment agreement that creates an uncured default. Debtor indicated at the Hearing that it may want to develop only six or so fields and because of the lighter traffic the recoupment agreement would not be needed. The Lease, however, makes the parties’ expectations clear. The Debtor was in good faith to develop the leasehold as numerous fields and facilities. Although the Lease does not contain timelines for the development of the fields and buildings, the “time is of the essence” provision in the Lease establishes the Debtor’s and the Town’s expectation that the entire project would be accomplished and promptly. It is perfectly clear to the Court that had the parties to the Lease focused on their understanding and agreement that Debtor would fully develop the property promptly, they would have included time limits. The Debtor’s failure to promptly enter into the recoupment agreement based on its intention to develop only a portion of the property and to fulfill only a portion of its plan is a default which Debtor failed to cure in a timely fashion. The default renders the Lease terminated.
The Debtor defaulted on the Lease and the Town’s termination was proper.
April 4, 2016, 11:00 A.M. EST to 12:30 P.M. EST
Via Teleconference Seminar (NBI Program # 72073)
William J. Amann, Esq.
11 U.S.C. § 362, known as the automatic stay, is one of the most powerful, if not the most powerful, provisions of the Bankruptcy Code. The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor's assets prevents that.
In addition to protecting relative positions of creditors, automatic stay is designed to shield Chapter 7 debtor from financial pressure during pendency of bankruptcy proceeding. In re Stringer (1988, CA9 Cal) 847 F2d 549, 17 BCD 1169, 19 CBC2d 233, CCH Bankr L Rptr P 72297.
Automatic stay is crucial provision of bankruptcy law and prevents disparate actions against debtors and protects creditors in manner consistent with bankruptcy goal of equal treatment of creditors by ensuring that no creditor receives more than equitable share of debtor's estate. Lincoln Sav. Bank, FSB v Suffolk County Treasurer (In re Parr Meadows Racing Ass'n) (1989, CA2 NY) 880 F2d 1540, 19 BCD 1125, CCH Bankr L Rptr P 73010, cert den (1990) 493 US 1058, 110 S Ct 869, 107 L Ed 2d 953 and (superseded by statute on other grounds as stated in In re Fischer(1995, BC MD Tenn) 184 BR 41, 27 BCD 569, 34 CBC2d 99) and (superseded by statute on other grounds as stated in Marc Stuart Goldberg, P.C. v City of New York(In re Navis Realty) (1996, BC ED NY) 193 BR 998) and (criticized in Marine Midland Bank v Bennett Funding Group, Inc.(In re Bennett Funding Group, Inc.) (1997, BC ND NY) 1997 Bankr LEXIS 2197) and (criticized in In re Bennett Funding Group, Inc.(1997, BC ND NY) 1997 Bankr LEXIS 2359) and (criticized in In re Marfin Ready Mix Corp.(1998, BC ED NY) 220 BR 148, 40 CBC2d 199) and (criticized in In re P.G. Realty Co. (1998, BC ED NY) 220 BR 773, 32 BCD 718) and (criticized in City of White Plains v A&S Galleria Real Estate, Inc.(In re Federated Dep't Stores, Inc.) (2000, BC SD Ohio) 243 BR 341, 43 CBC2d 906) and (superseded by statute on other grounds as stated in 229 Main St. Ltd. Pshp. V Department of Environmental Protection(In re 229 Main St. Ltd. Pshp.) (2000, DC Mass) 251 BR 186, 51 Envt Rep Cas 1188).
Primary purpose of stay is to afford debtors in Chapter 11 reorganizations opportunity to continue their businesses with their available assets. Small Business Admin. v Rinehart(1989, CA8 SD) 887 F2d 165, 19 BCD 1508, 21 CBC2d 917, CCH Bankr L Rptr P 73125 (criticized in In re Tillery(1995, BC WD Ark) 179 BR 576, 33 CBC2d 521).
Purpose of stay provisions of 11 USCS § 362, as regards Chapter 13 proceedings, is to allow trustee to have opportunity to inventory debtor's position before proceeding with administration of case and drafters intended § 362(a)(7) as mere stay of creditor's enforcement of setoff rights and not as evisceration of substantive rights to sell. In re Hammett(1983, ED Pa) 28 BR 1012, 9 CBC2d 98, CCH Bankr L Rptr P 69211, 83-1 USTC P 9336, 52 AFTR 2d 5394.
11 USCS § 362 requires that set of facts occurring prepetition and creating legal relationship be claim that must be stayed unless it is excepted in 11 USCS § 362(b); purpose of statute is to cover both those claims based upon fully accrued prepetition causes of action and those claims based on prepetition facts or relationships which may still be contingent or un-matured. Baldwin-United Corp. v Paine Webber(1985, SD Ohio) 57 BR 759, 14 BCD 374, 15 CBC2d 921.
Policy underlying 11 USCS § 362 as whole is to afford immediate relief to debtor from understandably importunate creditors, and also to prevent dissipation of debtor's remaining assets before orderly, equitable distribution to creditors may be effected. In re Compton Corp. (1988, ND Tex) 90 BR 798, app dismd (1989, Em Ct App) 889 F2d 1104 and (criticized in Minn. Corp. v First Alliance Mortg. Corp. (In re First Alliance Mortg. Corp.) (2001, CD Cal) 264 BR 634).
Automatic stay of 11 USCS § 362 is merely recognition of necessity for protection of estate from pending and additional actions by creditors to recover collateral or collect debts; orderly liquidation or rehabilitation is objective of such section, not dismemberment of assets of debtor. In re Feimster(1979, BC ND Ga) 3 BR 11, 6 BCD 131, 1 CBC2d 956.
In Chapter 11 context, purpose of automatic stay is not as end in itself but rather to facilitate reorganization; its function so far as secured creditors are concerned is to preserve their position, within equitable limits, during period between filing of case and confirmation of plan of reorganization. In re Mr. D Realty Co.(1983, BC SD Ohio) 27 BR 359.
One primary goal of automatic stay is to sort out creditors into order of priority untainted by post-petition jockeying for position; intended effect of stay, is to fix rights and priorities as of time of petition filing and to prohibit any further acts to advance those rights and priorities. In re Paul(1986, BC DC Mass) 67 BR 342.
Purpose of automatic stay is to preserve what remains of debtor's insolvent estate and to provide systematic equitable liquidation procedure for all creditors, thereby preventing chaotic and uncontrolled scramble for debtor's assets in variety of uncoordinated proceedings in different courts. In re Sparks(1995, BC ND Ill) 181 BR 341.
Manifest purpose of automatic stay provision is to act of debtor's shield from proceedings which may adversely affect its interest; this purpose will hardly be served by requiring indefinite suspension of debtor's attempt to be relieved of judgments with obvious effect of acting as debtor's sword against creditor's claims upon it. Shop in the Grove, Ltd. v Union Federal Sav. & Loan Asso.(1982, Fla App D3) 425 So 2d 1138.
Purpose of automatic stay provision is to prevent interference with debtor's property during involuntary bankruptcy proceeding. Bishop v Geno Designs, Inc.(1982, Tex App Tyler) 631 SW2d 581.
Subsection (a) defines the scope of the automatic stay, by listing the acts that are stayed by the commencement of the case. The commencement or continuation, including the issuance of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the bankruptcy case is stayed under paragraph (1). The scope of this paragraph is broad. All proceedings are stayed, including arbitration, license revocation, administrative, and judicial proceedings. Proceedings in this sense encompasses civil actions as well, and all proceedings even if they are not before governmental tribunals.
The provision in this first paragraph prohibiting the issuance of process is designed to prevent the issuance of a writ of execution by a judgment creditor of the debtor to obtain property that was property of the debtor before the case, but that was transferred, subject to the judgment lien, before the case. Because the other paragraphs of this subsection refer only to property of the estate or property of the debtor, neither of which apply to this kind of transferred property, they would not prohibit pursuit of the transferred property by issuance of process. Thus, the prohibition in this paragraph is included and the judgment creditor is allowed to proceed by way of foreclosure against the property, but not by a general writ of execution (in the State court, or wherever the creditor obtained the judgment) against the debtor and all of the debtor's property.
The stay is not permanent. There is adequate provision for relief from the stay elsewhere in the section. However, it is important that the trustee have an opportunity to inventory the debtor's position before proceeding with the administration of the case. Undoubtedly the court will lift the stay for proceedings before specialized or nongovernmental tribunals to allow those proceedings to come to a conclusion. Any party desiring to enforce an order in such a proceeding would thereafter have to come before the bankruptcy court to collect assets. Nevertheless, it will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from many duties that may be handled elsewhere.
Paragraph (2) stays the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the bankruptcy case. Thus, execution and levy against the debtors' prepetition property are stayed, and attempts to collect a judgment from the debtor personally are stayed.
Paragraph (3) stays any act to obtain possession of property of the estate (that is, property of the debtor as of the date of the filing of the petition) or property from the estate (property over which the estate has control or possession). The purpose of this provision is to prevent dismemberment of the estate. Liquidation must proceed in an orderly fashion. Any distribution of property must be by the trustee after he has had an opportunity to familiarize himself with the various rights and interests involved and with the property available for distribution.
Paragraph (4) stays lien creation against property of the estate. Thus, taking possession to perfect a lien or obtaining court process is prohibited. To permit lien creation after bankruptcy would give certain creditors preferential treatment by making them secured instead of unsecured.
Paragraph (5) stays any act to create or enforce a lien against property of the debtor, that is, most property that is acquired after the date of the filing of the petition, property that is exempted, or property that does not pass to the estate, to the extent that the lien secures a prepetition claim. Again, to permit post-bankruptcy lien creation or enforcement would permit certain creditors to receive preferential treatment. It may also circumvent the debtors' discharge.
Paragraph (6) prevents creditors from attempting in any way to collect a prepetition debt. Creditors in consumer cases occasionally telephone debtors to encourage repayment in spite of bankruptcy. Inexperienced, frightened, or ill-counseled debtors may succumb to suggestions to repay notwithstanding their bankruptcy. This provision prevents evasion of the purpose of the bankruptcy laws by sophisticated creditors.
Paragraph (7) stays setoffs of mutual debts and credits between the debtor and creditors. As with all other paragraphs of subsection (a), this paragraph does not affect the right of creditors. It simply stays its enforcement pending an orderly examination of the debtor's and creditors' rights.
Subsection (b) lists five exceptions to the automatic stay. The effect of an exception is not to make the action immune from injunction. The court has ample other powers to stay actions not covered by the automatic stay. Section 105, of proposed title 11, derived from Bankruptcy Act § 2a(15), grants the power to issue orders necessary or appropriate to carry out the provisions of title 11. The bankruptcy courts are brought within the scope of the All Writs Statute, 28 U.S.C. 1651 (1970), and are given the powers of a court of law, equity, and admiralty (H.R. 8200, § 243(a), proposed 28 U.S.C. 1481).Stays or injunctions issued under these other sections will not be automatic upon the commencement of the case, but will be granted or issued under the usual rules for the issuance of injunctions. By excepting an act or action from the automatic stay, the bill simply requires that the trustee move the court into action, rather than requiring the stayed party to request relief from the stay. There are some actions, enumerated in the exceptions, that generally should not be stayed automatically upon the commencement of the case, for reasons of either policy or practicality. Thus, the court will have to determine on a case-by-case basis whether a particular action which may be harming the estate should be stayed.
With respect to stays issued under other powers, or the application of the automatic stay, to governmental actions, this section and the other sections mentioned are intended to be an express waiver of sovereign immunity of the Federal government, and an assertion of the bankruptcy power over State governments under the Supremacy Clause notwithstanding a State's sovereign immunity.
The first exception is of criminal proceedings against the debtor. The bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension. Thus, criminal actions and proceedings may proceed in spite of bankruptcy.
Paragraph (2) excepts from the stay the collection of alimony, maintenance or support from property that is not property of the estate. This will include property acquired after the commencement of the case, exempted property, and property that does not pass to the estate. The automatic stay is one means of protecting the debtor's discharge. Alimony, maintenance and support obligations are excepted from discharge. Staying collection of them, when not to the detriment of other creditors (because the collection effort is against property that is not property of the estate), does not further that goal. Moreover, it could lead to hardship on the part of the protected spouse or children.
Paragraph (3) excepts any act to perfect an interest in property to the extent that the trustee's rights and powers are limited under section 546(a) of the bankruptcy code. That section permits post-petition perfection of certain liens to be effective against the trustee. If the act of perfection, such as filing, were stayed, the section would be nullified.
Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay. Paragraph (5) makes clear that the exception extends to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment. Since the assets of the debtor are in the possession and control of the bankruptcy court, and since they constitute a fund out of which all creditors are entitled to share, enforcement by a governmental unit of a money judgment would give it preferential treatment to the detriment of all other creditors.
Subsection (c) of section 362 specifies the duration of the automatic stay. Paragraph (1) terminates a stay of an act against property of the estate when the property ceases to be property of the estate, such as by sale, abandonment, or exemption. It does not terminate the stay against property of the debtor if the property leaves the estate and goes to the debtor. Paragraph (2) terminates the stay of any other act on the earliest of the time the case is closed, the time the case is dismissed, or the time a discharge is granted or denied (unless the debtor is a corporation or partnership in a chapter 7 case).
Subsection (c) governs automatic termination of the stay. Subsections (d) through (g) govern termination of the stay by the court on the request of a party in interest. Subsection (d) requires the court, on request of a party in interest, to grant relief from the stay, such as by terminating, annulling, modifying, or conditioning the stay, for cause. The lack of adequate protection of an interest in property of the party requesting relief from the stay is one cause for relief, but is not the only cause. As noted above, a desire to permit an action to proceed to completion in another tribunal may provide another cause. Other causes might include the lack of any connection with or interference with the pending bankruptcy case. For example, a divorce or child custody proceeding involving the debtor may bear no relation to the bankruptcy case. In that case, it should not be stayed. A probate proceeding in which the debtor is the executor or administrator of another's estate usually will not be related to the bankruptcy case, and should not be stayed. Generally, proceedings in which the debtor is a fiduciary, or involving post-petition activities of the debtor, need not be stayed because they bear no relationship to the purpose of the automatic stay, which is debtor protection from his creditors. The facts of each request will determine whether relief is appropriate under the circumstances.
Subsection (e) provides a protection for secured creditors that is not available under present law. The subsection sets a time certain within which the bankruptcy court must rule on the adequacy of protection provided of the secured creditor's interest. If the court does not rule within thirty (30) days from a request for relief from the stay, the stay is automatically terminated with respect to the property in question. In order to accommodate more complex cases, the subsection permits the court to make a preliminary ruling after a preliminary hearing. After a preliminary hearing, the court may continue the stay only if there is a reasonable likelihood that the party opposing relief from the stay will prevail at the final hearing. Because the stay is essentially an injunction, the three stages of the stay may be analogized to the three stages of an injunction. The filing of the petition which gives rise to the automatic stay is similar to a temporary restraining order. The preliminary hearing is similar to the hearing on a preliminary injunction, and the final hearing and order is similar to a permanent injunction. The main difference lies in which party must bring the issue before the court. While in the injunction setting, the party seeking the injunction must prosecute the action, in proceedings for relief from the automatic stay, the enjoined party must move. The difference does not, however, shift the burden of proof. Subsection (g) leaves that burden on the party opposing relief from the stay (that is, on the party seeking continuance of the injunction) on the issue of adequate protection.
At the expedited hearing under subsection (e), and at all hearings on relief from the stay, the only issue will be the claim of the creditor and the lack of adequate protection or existence of other cause for relief from the stay. This hearing will not be the appropriate time at which to bring in other issues, such as counterclaims against the creditor on largely unrelated matters. Those counterclaims are not to be handled in the summary fashion that the preliminary hearing under this provision will be. Rather, they will be the subject of more complete proceedings by the trustees to recover property of the estate or to object to the allowance of a claim.
Subsection (f) permits ex parte relief from the stay in situations in which irreparable damage might occur to the stayed party before there is opportunity for notice and a hearing under the usual procedure. The Rules of Bankruptcy Procedure will provide for a hearing soon after the issuance of any ex parte order under this subsection.
Reach of stay is intended to be quite broad, and therefore exceptions to stay should be read narrowly to secure broad grant of relief to debtor. In re Stringer(1988, CA9 Cal) 847 F2d 549, 17 BCD 1169, 19 CBC2d 233, CCH Bankr L Rptr P 72297.
The Automatic stay is fundamental to reorganization process and its scope is intended to be broad. Small Business Admin. v Rinehart (1989, CA8 SD) 887 F2d 165, 19 BCD 1508, 21 CBC2d 917, CCH Bankr L Rptr P 73125 (criticized inIn re Tillery(1995, BC WD Ark) 179 BR 576, 33 CBC2d 521).
11 USCS § 362 is extremely broad in scope and should apply to almost any type of formal or informal action against debtor or property of estate. Delpit v Commissioner(1994, CA9) 18 F3d 768, 94 CDOS 1745, 94 Daily Journal DAR 3125, 25 BCD 590, 30 CBC2d 1745, 94-1 USTC P 50127, 73 AFTR 2d 1409, 94 TNT 51-32 (criticized in Roberts v Commissioner(1999, CA11) 175 F3d 889, 99-1 USTC P 50511, 83 AFTR 2d 2282, 12 FLW Fed C 782) and (criticized in Spence v Brooks(2001, CA4 Va) 11 Fed Appx 175) and (criticized in Haag v United States(2007, CA1 Mass) 485 F3d 1, 2007-1 USTC P 50473, 99 AFTR 2d 1986).
The scope of automatic stay provisions is broad and applies to formal and informal proceedings against debtor; any action taken in violation of automatic stay is void. In re Smith(1988, WD Mich) 86 BR 92, affd in part and revd in part on other grounds (1989, CA6 Mich) 876 F2d 524, 19 BCD 1097, CCH Bankr L Rptr P 72936.
Legislative history reveals clear congressional intent that automatic stay be broadly enforced so as to preserve status quo as of petition date, insure orderly administration of bankruptcy estate, and prevent race among creditors. Pension Benefit Guar. Co. v LTV Corp.(In re Chateaugay Corp.) (1988, SD NY) 87 BR 779, 17 BCD 1089, 9 EBC 2209, affd (1989, CA2 NY) 875 F2d 1008, 19 BCD 913, 10 EBC 2425, 111 CCH LC P 11200, 16 FR Serv 3d 400, revd on other grounds, remanded (1990) 496 US 633, 110 S Ct 2668, 110 L Ed 2d 579, 20 BCD 1075, 22 CBC2d 1237, 12 EBC 1593, CCH Bankr L Rptr P 73423 and (Abrogated as stated in Cohen v JP Morgan Chase & Co.(2007, CA2 NY) 498 F3d 111).
Although scope of automatic stay is undeniably broad, it does not serve to stay all actions involving bankrupt party; rather, reach of automatic stay is limited by its purpose. Rett White Motor Sales Co. v Wells Fargo Bank (1989, ND Cal) 99 BR 12, CCH Bankr L Rptr P 72814.
Congress intended automatic protection afforded by automatic stay provisions of 11 USCS § 362 to be far reaching and to eliminate previously existing limited perimeters of Bankruptcy Code automatic stay; scope of protection under 11 USCS § 362 is broad and was designed to reach all proceedings, including license revocations, arbitrations, administrative and judicial proceedings, and its operation is no longer limited to civil action, but includes proceedings even if they are not before governmental tribunals. In re R. S. Pinellas Motel Partnership(1979, BC MD Fla) 2 BR 113, 5 BCD 1292, 1 CBC2d 349, CCH Bankr L Rptr P 67384, 53 ALR Fed 611.
Scope of automatic stay is broad and encompasses all proceedings, even those not before governmental tribunals. In re Elsinore Shore Associates (1986, BC DC NJ) 66 BR 723, 15 BCD 420, 15 CBC2d 1128, CCH Bankr L Rptr P 71553.
Automatic stay provision is very broad, and any exceptions to it must be strictly construed to further purposes of automatic stay. Gunther v Glabb(In re Glabb) (2001, BC WD Pa) 261 BR 170.
Chapter 7 debtors were entitled to recovery of their attorney's fees incurred in bringing motion for stay violation under 11 USCS § 362 by creditor's law firm, which was obligated to turn over funds garnished under Colo. R. Civ. P. 103 § 6(a)(1)to chapter 7 trustee under 11 USCS § 542(a), although debtors were not entitled to funds as cash collateral under 11 USCS § 363(a). In re Trujillo (2012, BC DC Colo) 485 BR 238.
Automatic stay provision is purposely broad in its reach so as to prevent dismemberment of debtor's estate in chaotic and uncontrolled scramble for debtor's assets in variety of uncoordinated proceedings in different courts. Stone v George F. Richardson, Inc.(1983) 169 Ga App 232, 312 SE2d 339 (ovrld in part on other grounds by State v Glover(2007) 281 Ga 633, 641 SE2d 543, 2007 Fulton County D R 488).
Automatic stay is broad in scope and applies in almost any type of action against debtor or property of estate; it stays collection efforts, harassment, and interference with debtor's assets. General Motors Acceptance Corp. v Yates Motor Co. (1981) 159 Ga App 215, 283 SE2d 74.
Automatic stay is critical protection of bankruptcy law and quite broad in its scope. Ramirez v Fuselier(In re Ramirez) (1995, BAP9 Cal) 183 BR 583, 95 CDOS 5397, 95 Daily Journal DAR 8390, CCH Bankr L Rptr P 76595, app dismd (1999, CA9 Cal) 201 F3d 444, reported in full (1999, CA9) 1999 US App LEXIS 26239.
Whether you represent creditors or debtors, it is valuable to know some basic strategies. With that said, I’ll share with you what a more experienced debtor’s counsel told me at a deposition in a complex chapter 11 case more than a decade ago. I was representing a secured creditor who had filed a motion for relief in order to foreclose on various parcels of real estate. Debtor’s counsel told me (in his typical, threatening fashion) that I had “gone too far” in pressing my motion for relief. Well, I soon found out what he meant when the debtor filed a host of adversary proceedings against my client seeking to re-characterize the debt to equity and to otherwise subordinate our debt to other claimants. In the end, after years of protracted litigation, we obtained the property. But not without a fairly high cost in time and money.
So, the first thing to understand is what a moving creditor wants and whether there are other things which can be offered, in way of adequate protection or plan concessions (in a Chapter 11). Quite simply, if your case involves a personal debtor and you are dealing with consumer goods (be it a house, car, boat or other secured asset), the approach is simple. Is there something the debtor can offer to temporarily satisfy or placate the creditor? Is there equity in the asset? Can you offer a better alternative to foreclosure or repossession? Are there offensive maneuvers you can make if the creditor refuses to deal?
I am reminded of a small business case where I represented a small business owner (debtor) against a very aggressive creditor. The creditor took the position that the equipment contract (for the company’s large manufacturing equipment) was a lease and under the Code, the debtor had to assume or reject and more importantly, had to get current if it wanted to retain the equipment. We took the position that the equipment contract was not a truelease (under the U.C.C.) but rather was a loan; a loan which could be crammed-down since the value of the equipment was far less than the outstanding balance due. We offered adequate protection, we offered additional cash collateral and we asked to re-write or modify the equipment contract. None of these offers were appealing to the zealous creditor. So, we filed an adversary proceeding to determine whether the equipment contract was a lease or a loan. We survived the creditor’s motion to dismiss. Soon after that hearing, the creditor became remarkably receptive to a principal write down and adequate protection. Because of this, the company survived for several more years. The owner (who was an interesting character, had a Ph.D. And had a bush pilot’s license) ultimately decided to close up shop and move to South America. Yet, knowing the right strategy to counter the motion for relief enabled him and his family to keep the business going, earn much needed money and divest themselves (legally) of debt-laden assets. The case converted to a 7, he received a discharge and I’d like to think he’s happily flying a cargo plane over Brazilian skies.
Creditors typically take definite and predictable paths with motions for relief depending on the case chapter and how intricate the relationship between the debtor and creditor is.
In a consumer chapter 7 case with a bank mortgagee, there’s usually little negation or creativity. The bank will seek relief almost immediately and just seek the return of its collateral.
In a chapter 13, if the creditor is a mortgagee, it will typically seek relief for any post-petition default such as delinquent post payments, unpaid real estate taxes or lack of insurance.
In a business case, usually a chapter 11 if a motion for relief is involved, there are a myriad of creditor approaches. Chapter 11 is beyond the scope of this discussion. However, it is wise to determine how aggressive, if you are representing a creditor, you can and want to be. While being aggressive is usually a smart move, you want to be careful not to “go too far”. For example, in a chapter 11 case I am involved with now, I represent a creditor which holds a first mortgage on several rental properties. We are incredibly over-secured. Under § 506(b), the over-secured creditor is entitled to post-petition interest on their claim until payment of their claim or until the effective date of the plan. Rake v. Wade[508 U.S. 464], 113 S.Ct. 2187, 2190 [124 L.Ed.2d 424] (1993); In re Laguna, 944 F.2d 542, 544 (9th Cir.1991), cert. denied [503 U.S. 966], 112 S.Ct. 1577 [118 L.Ed.2d 219] (1992). The U.S. Supreme Court has held that the language of § 506(b) entitles holders of both consensual and nonconsensual over-secured claims to post-petition interest on their claim. U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 [109 S.Ct. 1026, 103 L.Ed.2d 290] (1989). So, being over-secured means, in essence, that the creditor will eventually be paid in full. While my aggressive creditor client wants to foreclose and have its outstanding loan paid in full as soon as possible, there aren’t any good grounds right now to file a motion for relief. Instead, we struck a very favorable post-petition interest rate for cash collateral payments and the debtor is either going to sell some or all of the properties or refinance. If that does not occur within the next six (6) months, we will likely move for relief then but until now we are being paid at 12% and will, in the context of either a Proof of Claim, §363 sale motion or an In re Tillmotion, seek repayment based upon the post-petition, default rate of 25%. And since we are over-secured, we are likely to win. And given that the debtor is currently paying us at 12% (with the other 13% accruing), it has a real incentive to sell or refinance quickly.
So, from a strategy standpoint, knowing one’s relative position is critical. In this same case, the debtor is filing an adversary against the second position mortgagee claiming usury and taking aim at the perfection of the mortgage. By working with the debtor when advantageous and prudent, we avoid pushing the debtor into a corner, where they will most likely come out swinging.
In re: A & J Auto Sales, Inc., d/b/a Wise Auto Sales, Debtor; A & J Auto Sales, Inc., d/b/a Wise Auto Sales v. United States of America, Civil No. 97-294-SD, 223 B.R. 839. In this bankruptcy appeal, appellant A & J Auto Sales, Inc., d/b/a Wise Auto Sales (A & J), seeks review of the bankruptcy court's order finding that the Internal Revenue Service (IRS) willfully violated the automatic stay, but declining to award damages for civil contempt under 11 U.S.C. § 105. The IRS cross-appeals, arguing that the bankruptcy court erred by finding the IRS willfully violated the automatic stay. This appeal raises three issues of unsettled law; i.e., the proper standard for determining whether a violation of the automatic stay is willful, whether corporations can recover damages pursuant to 11 U.S.C. § 362(h), and whether the court can award damages for a violation of the automatic stay pursuant to 11 U.S.C. § 105.
The court must first determine whether the IRS violated the automatic stay at all. The Bankruptcy Code provides that filing [**5] a bankruptcy pe-tition "operates as a stay, applicable to all entities, of . . . any action to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). The bankruptcy court found that "the IRS's actions in removing the cars from the Debtor's premises and retaining them postpetition were actions to obtain possession of property of the estate or to exercise control over property of the estate.'" A & J Auto Sales, Inc., v. United States (In re A & J Auto Sales), 210 B.R. 667, 670 (Bankr. D.N.H. 1997). The IRS, however, argues that the seizure was completed prepetition when it served the debtor with notice of seizure and tagged the vehicles. And "the removal of vehicles from the lot after a valid prepetition seizure does not constitute a violation of the automatic stay." Appellee's Brief on Cross-Appeal and Reply [*842] to Appellant's Brief on Appeal (Appellee's Brief) at 15.
As an initial matter, the court notes that the vehicles remained property of the bankruptcy estate even after the IRS seized them. See Appellee's Brief at 17. Property of the estate is defined broadly to include any property to which the estate has some right. See 11 U.S.C. § 541; United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 76 L. Ed. 2d 515, 103 S. Ct. 2309 (1983) ("Congress intended a broad range of property to be included in the estate"). Thus the United States Supreme Court has held that a "reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization . . . ." Whiting Pools, supra, 462 U.S. at 209. "The creditor with a secured interest in property included in the estate must look to [the Bankruptcy Code] for protection, rather than to the nonbankruptcy remedy of possession." Id. at 204. "The Bankruptcy Code provides secured creditors various rights, including the rights to adequate protection, and these rights replace the protection afforded by possession." Id. at 207. Furthermore, "the [IRS]'s in-terest in seized property is its lien on that property." Id. at 210. Thus the debtor retains an interest in property that has been seized by the IRS, making it property of the estate.
Bankruptcy Code § 108(c), among other things, extends state statutes of limitation on
claims by creditors who are prevented by the automatic stay from taking timely action to assert
those claims. The statute reads, in pertinent part as follows: [I]f applicable nonbankruptcy law ... fixes a period for commencing or continuing a civil
action in a court other than a bankruptcy court on a claim against the debtor, ... and such
period has not expired before the date of the filing of the petition, then such period does not
expire until the later of--
(1) the end of such period, including any suspension of such period occurring on or after
the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362 ... of
this title ... with respect to such claim. Recognizing that a petition in bankruptcy could sometimes give a debtor unfair advantage
over a claimant by allowing the debtor to remain under the protection of the automatic stay
until the limitation period governing the claimant's action had expired, see Meyer v.
Cunningham, 196 Ark. 1097, 121 S.W.2d 90 (1938) (party’s claim barred by the statute of
limitations even though limitation period ran during time that automatic stay prohibited
PARTY FROM BRINGING THE ACTION); AMERICAN WOOLEN CO. V. SAMUELSON, 226 N.Y. 61, 123
N.E. 154 (1919) (SAME) CONGRESS ACTED TO SOLIDLY PRESERVE THE RIGHTS OF A PARTY “STAYED FROM
COMMENCING OR CONTINUING AN ACTION AGAINST THE DEBTOR BECAUSE OF THE BANKRUPTCY CASE”.
S.R.REP. NO. 95-989, 95TH CONG., 2D SESS. 30 (1978); H.R. NO. 95-595, 95TH CONG., 2D
SESS. 318 (1978), U.S.CODE CONG. & ADMIN. NEWS 1978, P. 5787. IT DID SO BY EXTENDING
THE PERIOD FOR “COMMENCING OR CONTINUING A CIVIL ACTION” AGAINST THE DEBTOR TO, AT A
MINIMUM, 30 DAYS AFTER TERMINATION OR EXPIRATION OF THE AUTOMATIC STAY. 11 U.S.C. § 108(C). MORTON V. BANK OF NEW YORK CITY (IN RE MORTON), 866 F.2D 561, 566 -67 (2D CIR. 1989) (EMPHASIS
ADDED). SEE ALSO SHAMUS HOLDINGS, 642 F.3D AT 266-67.
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UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT - BAP NOS. PR 12-066, PR 12-067 - Bankruptcy Case No. 11-07492-EAG
Vendors Beware: The Risk of Debtor's Unauthorized Post-petition Payments For Post-petition Goods or Services