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Automatic Stay Lifted for Pending State Court Litigation in Los Angeles Chapter 7 Bankruptcy Case

By Broderick, Thomas [CC0], via Wikimedia CommonsThe moment a debtor files a bankruptcy petition, the automatic stay takes effect. ‘Access’ or ‘use’ to the automatic stay is one of the primary benefits and reasons a person would consider filing a bankruptcy, whether via Chapter 7 or a Chapter 13. It basically provides an ‘umbrella of protection’ on all of a Debtor’s assets. This means that no party or creditor can repossess or foreclose on such assets once the bankruptcy has been filed. Bankruptcy courts can lift the automatic stay upon the motion of a creditor or other party-in-interest, if/where such creditor is able to convince the court to do so. A California district court recently ruled on a creditor’s motion to lift the stay with regard to ongoing litigation in state court. The court considered 12 factors established by case law to determine whether to lift the stay. In re Roger, No. 5:14-cv-02515, civ. minutes (C.D. Cal., Oct. 13, 2015).

A bankruptcy court, upon a motion by a party-in-interest, notice, and a hearing, can lift the automatic stay “for cause,” which gives the court very broad authority. 11 U.S.C. § 362(d)(1). Bankruptcy courts in the Los Angeles area have adopted a set of 12 factors to consider, known as the Curtis factors after In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984). See also In re Plumberex Specialty Products, Inc., 311 B.R. 551, 560 (Bankr. C.D. Cal. 2004). A bankruptcy court must evaluate the impact on the bankruptcy estate, and the bankruptcy proceeding itself, of whatever action the party requesting relief from the automatic stay wants to take.

The court’s decision in the Roger case involved a creditor’s appeal of the bankruptcy court’s denial of its motion to lift the automatic stay. The creditor had a pending lawsuit against the debtor and others in state court, involving two loans, their associated security agreements, and several claims that collateral attached to the loans belonged to various trusts.

In 2007, the debtor took out a loan and signed a promissory note and security agreement, and the debtor signed a guaranty agreement on another loan. The creditor sued the debtor in state court in late 2009, asserting causes of action for breach of the note, foreclosure of the security agreement, breach of the guaranty agreement, declaratory relief against certain trusts, and more. The state court granted summary judgment on several claims for the creditor in August and October 2013. Between the two judgments, the debtor filed for bankruptcy.

The creditor moved to lift the automatic stay in April 2014, arguing that “it should not be forced to litigate the State Court Action piece-meal.” Roger, civ. min. at 4. It asked for relief from the stay to allow the state court to address four specific matters:  entering orders from prior hearings, trying the last cause of action “to void a sham trust,” id., entering a final judgment, and entering orders for attorney’s fees and costs. Both the debtor and the trustee opposed lifting the stay.

The bankruptcy court denied the creditor’s motion, but the district court reversed and remanded with instructions to grant the motion. It found that the bankruptcy court erred in failing to give adequate weight to five Curtis factors—factors 2, 7, 10, 11, and 12—that weighed in favor of lifting the stay:

2. “Whether there is a lack of any connection with or interference with the bankruptcy case,” id. at 10;
7. “Whether the litigation in another forum would prejudice the interests of other creditors, the creditor’s committee and other interested parties,” id. at 14;
10. “The interests of judicial economy and the expeditious and economical determination of litigation for the parties,” id. at 15;
11. “Whether the foreign proceedings have progressed to the point where the parties are prepared for trial,” id. at 17; and
12. “The impact of the stay and the ‘balance of hurt,’” id.

For the past 18 years, bankruptcy attorney Devin Sawdayi has guided individuals and families in Los Angeles through Chapter 7 and Chapter 13 bankruptcy cases, helping them rebuild their finances with respect and dignity. To schedule a free and confidential consultation with a member of our team, contact us today online, at (310) 475-9399, or at (800) 474-6050.

More Blog Posts:

Rapper’s Bankruptcy Filing Does Not Stop Trial in Civil Lawsuit from Moving Forward, Los Angeles Bankruptcy Lawyer Blawg, November 18, 2015

Los Angeles Court Affirms Penalties for Willful Violation of Automatic Stay in Chapter 13 Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, September 18, 2015

Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blawg, May 11, 2015

Photo credit: By Broderick, Thomas [CC0], via Wikimedia Commons.