Articles Posted in Automatic Stay

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When a debtor files a bankruptcy petition, the automatic stay prevents any pending litigation involving the debtor from moving forward. 11 U.S.C. § 362. Once a bankruptcy case is closed, or once a bankruptcy judge lifts the automatic stay, pending lawsuits and other proceedings may continue. A creditor in a California bankruptcy case recently raised a concern about the effect of an order from the bankruptcy court on a state court lawsuit that was still subject to the automatic stay. The legal doctrine of res judicata holds that once a court has made a final ruling on the merits of a specific claim or issue, that issue cannot be relitigated. The district court, hearing the creditor’s concern on appeal, held that the question of whether res judicata applies must be left to the state court. Restoration Homes, LLC v. Taniguchi, No. 3:15-cv-00032, order (N.D. Cal., Aug. 7, 2015).

The debtor and his wife purchased real estate in 2004. He obtained a mortgage loan modification in 2009, which lowered the total balance and the monthly payments, deferred part of the balance, and adjusted the annual interest rate. In June 2013, the creditor bought the debtor’s loan. It initiated foreclosure proceedings that October, claiming that the debtor had not made payments since July. The debtor disputed this and filed suit to enjoin the foreclosure in California state court. The court granted the debtor’s injunction, on the condition that he post a $40,000 bond. The debtor filed for bankruptcy, since he could not afford the bond.

The creditor’s proof of claim included over $53,000 in prior defaults, $47,000 in payment shortfalls, and other costs and charges. The debtor objected, claiming that the proof of claim was based on the original loan, not the 2009 loan modification. The bankruptcy court partly sustained the objection, ruling that the debtor could cure the default based on the loan modification provisions. The court’s order included a paragraph stating that the order was “without prejudice” to any “claims or defenses” in the state court case, specifically including the amounts owed to the creditor. Taniguchi, order at 3.

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A California federal district court recently affirmed a bankruptcy court’s order lifting the automatic stay in a Chapter 13 proceeding, finding that the matter in question was not subject to the automatic stay under one or more exceptions found in the Bankruptcy Code at 11 U.S.C. § 362(b). The district court’s most recent ruling on the issue referenced two earlier orders:  In re Silva, No. 2:15-cv-02061, order denying appellant’s motion for stay pending appeal (“Silva I”) (C.D. Cal., Apr. 24, 2015); order denying appellant’s ex parte motion for reconsideration (“Silva II”) (May 1, 2015). The court incorporated those orders’ reasoning in the most recent order (“Silva III”), issued on June 22, 2015. The various orders draw on dense statutory language in the Bankruptcy Code, which frequently defines exceptions to the automatic stay entirely by reference to other code sections.

The debtor/appellant has, according to the court, lived in her home since 1988. She and her husband/co-debtor borrowed $125,000, secured by a first-mortgage lien on the property, in 2004. They took out a second mortgage the following year for $30,000. At some point, they began to discuss modifying the first mortgage loan, but they then defaulted on the second mortgage in 2008. The second-mortgage lender sold the property to a family trust (the “Buyer”) in a foreclosure sale in August 2009. Several weeks later, an employee of a property management company owned by the Buyer (the “Company”) went to the residence to inform the debtor of the sale, but the debtor reportedly did not believe him because of the ongoing loan modification negotiations with the first-mortgage lender.

Although the Buyer had an executed trustee’s deed, it did not record the deed right away, opting “to allow [the debtor] and her husband to remain in the property rent-free until the property increased in value.” Silva I at 3. In April 2010, the first-mortgage lender recorded a foreclosure notice. The debtors filed for Chapter 13 bankruptcy in August 2010, but no one recorded a notice of the bankruptcy proceeding in the property’s chain of title. In October 2014, the Buyer recorded the trustee’s deed and then executed and recorded a quitclaim deed transferring title to the Company. Neither party was aware of the pending bankruptcy proceeding at the time.

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The Ninth Circuit Court of Appeals recently issued a series of rulings addressing the rights of Chapter 7 debtors to the funds in their bank accounts. In re Mwangi (“Mwangi I”), 764 F.3d 1168 (9th Cir. 2014); In re Mwangi (“Mwangi II”), No. 14-15265, slip op. (9th Cir., Oct. 21, 2014). The debtors, a married couple, claimed exemptions on several bank accounts and sought sanctions against the bank when it refused to lift an administrative freeze. The appellate court held that the accounts remained part of the bankruptcy estate until the deadline for creditors to object to the debtors’ claimed exemptions had passed, and then the accounts re-vested in the debtors. Since the alleged automatic stay violation occurred before re-vesting, the court held that the debtors lacked standing. Only the trustee has standing to bring claims to protect assets in the bankruptcy estate.

The debtors filed for Chapter 7 bankruptcy in August 2009. They held four accounts at Wells Fargo Bank at the time with a total balance of about $17,000, which they did not claim as exempt in their original Schedule C. Wells Fargo runs an automated computer program that compares the names of new Chapter 7 cases to those of account holders. It put an administrative freeze on all four accounts shortly after the debtors filed their petition and notified them by mail. It also notified the trustee, who instructed it to hold the funds until further instructions, or until 31 days after the creditors’ meeting.

About a week after the filing date, the debtors filed an amended Schedule C that claimed exemptions in 75 percent of the value of the four accounts, citing a state law that exempts that amount of disposable earnings. Nev. Rev. Stat. § 21.090(1)(g). They asked Wells Fargo to lift the freeze on the accounts, which it refused to do without the trustee’s agreement. Continue reading

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The automatic stay in a bankruptcy proceeding is intended to freeze the bankruptcy estate at the moment the debtor files a petition in order to allow the bankruptcy trustee to deal with the estate’s property as efficiently as possible. Federal law excludes some proceedings and obligations from the automatic stay, however, for a variety of reasons. If a debtor is obligated to pay spousal maintenance or child support, or is involved in a legal proceeding in which those are at issue when a bankruptcy petition is filed, the automatic stay could negatively affect people who rely on the debtor for support. The automatic stay therefore does not apply to spousal maintenance and child support obligations. A divorce case usually involves more than just maintenance and support, however, so it can be difficult for bankruptcy courts to determine which parts of an order are subject to the automatic stay. A California district court recently addressed this issue in a dispute between a debtor and his soon-to-be ex-wife. In re Cohen, No. 2:14-cv-08939, civ. minutes (C.D. Cal., Oct. 5, 2015).

The Bankruptcy Code allows an exception to the automatic stay with regard to state court proceedings “for the establishment or modification of an order for domestic support obligations.” 11 U.S.C. § 362(b)(2)(A)(ii). Congress added this provision specifically to protect spouses, ex-spouses, and children of debtors from losing needed support during a bankruptcy proceeding. Bankruptcy courts also have rather wide discretion to determine whether or not a particular obligation in a divorce proceeding is a “domestic support obligation.” Federal bankruptcy law, rather than state family law, guides the court’s determination. Cohen at 8. As a result, a bankruptcy court may conclude that an agreement or order is not covered by the automatic stay under § 362(b)(2)(A)(ii), even if it does not specifically provide for spousal maintenance or child support, if the court concludes that a recipient needs support. Id.

The debtor’s wife (the “Wife”) filed a petition for divorce in Los Angeles County Superior Court in October 2008. The court signed and entered an agreed order (the “Order”) in March 2012, ordering the debtor (the “Husband”) to make monthly spousal and child support payments. The Husband filed for bankruptcy in June 2013, and the automatic stay halted many aspects of the divorce proceeding, including the division of property and the divorce itself. The parties agreed that most marital assets became the property of the bankruptcy estate.

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The 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.

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A U.S. district judge affirmed a bankruptcy court’s dismissal of a Chapter 13 case, finding that the debtor did not respond to two separate motions to dismiss filed by the trustee and a creditor. In re Quezada, No. 1:13-cv-00638, mem. op. (D.D.C., Dec. 20, 2013). While this failure to respond would allow the court to treat any issues presented by the motions to dismiss as conceded by the debtor, the court went further and addressed several other reasons for dismissing the petition. The court’s opinion provides a useful guide to various Chapter 13 filing deadlines and the consequences of missing them.

The debtor was the owner of a multi-unit apartment building in Washington, D.C. The beneficiary of the deed of trust, the Dyer Trust 2012-1 (“Dyer”) foreclosed on the property when the debtor fell behind on mortgage payments. It scheduled a foreclosure sale on January 10, 2013, but the debtor filed a Chapter 13 petition two days earlier. The automatic stay therefore prevented the sale.

The Chapter 13 petition did not include all of the documents required by federal law. The bankruptcy court instructed the debtor to file the remaining required financial documents and a Chapter 13 plan of reorganization within two weeks, and later extended that deadline by another two weeks. The trustee had to cancel a creditor meeting scheduled on February 11, 2013 because the debtor still had not filed the required documents. On February 12, the trustee filed a motion to dismiss the petition, in part for the lack of financial documents and a reorganization plan. Dyer filed a separate motion on February 21, citing additional grounds for dismissal. The debtor did not respond to either motion. Continue reading

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The bankruptcy process helps people who cannot make all of their required debt payments with their available income. It allows them, in Chapter 13 cases, to create a manageable payment schedule, or to pay down their debts by liquidating assets in Chapter 7. At the end of the case, the court may grant a discharge of some or all remaining debts. Of course, payments on debts, such as mortgages, credit cards, and student loans, are not the only regular financial obligations people must maintain. Most people also have monthly bills for utilities, cellular phones and internet, and other services. People who do not own their homes must also pay rent, which can be a tricky aspect of personal bankruptcy.

A recent article in the Los Angeles Times described ways that tenants can “game” the eviction system. In addition to various courtroom tactics, the article mentioned bankruptcy as a means of delaying eviction. This only tells one small part of the story. If stalling an eviction is an individual’s primary goal, a bankruptcy filing is perhaps the least efficient way of doing it. The automatic stay in a bankruptcy case, 11 U.S.C. § 362, has the effect of staying any pending court case, including most evictions, but the relationship between bankruptcy and eviction under California law is much more complicated than that.

The legal term for eviction in California is an action for “unlawful detainer.” Cal. Civ. Pro. Code § 1161. A tenant commits unlawful detainer if they continue to occupy leased premises after the expiration of the lease, or if they default on their rent obligation and fail to vacate the premises three days after the landlord gives written notice with instructions on how to cure the default. The landlord must file a verified complaint alleging unlawful detainer and, if the eviction is based on a default, stating the amount of rent owed. Id. at § 1166. Eviction cases occur on a faster timeline than other lawsuits. The tenant must file an answer within five days of receipt of the complaint, or risk a default judgment. Id. at §§ 1167, 1169.

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50 Cent, the well-known rapper, producer, actor, and entrepreneur, filed a bankruptcy petition in July 2015, claiming nearly $25 million in assets and about $32 million in debt. At that time, he was involved in a civil lawsuit in New York that was about to go to trial. Within days of the bankruptcy filing, however, the plaintiff in the New York case had obtained an order from the bankruptcy court lifting the automatic stay and allowing the trial to proceed. The case is notable to us for at least two reasons. First, it demonstrates that a person does not need to be “broke,” or completely out of money, to need bankruptcy protection. It also illustrates how the automatic stay, which comes with any new bankruptcy petition, does not guarantee a lengthy respite from pending legal matters.

“Bankrupt” Does Not Equal “Broke”

Filing for bankruptcy does not necessarily mean that a debtor has no money, although this unfortunately remains a common misconception. In the present case, the debtor’s lavish lifestyle led to numerous public comments and jokes at his expense, but it is entirely possible to have millions of dollars in assets and still go bankrupt. It merely requires a large amount of debt and income that, however high it might seem to most people, is insufficient to pay that debt.

The Automatic Stay

The New York lawsuit, originally filed in 2010, included claims for intentional infliction of emotional distress, defamation, and violations of the New York statute prohibiting the use of a person’s name or likeness. This is commonly known as the “right of publicity.” See Cal. Civ. Code § 3344. The plaintiff alleged that the debtor had posted a “sex tape” of her, to which he had added his own narration, on the internet without her permission. She withdrew her defamation claim in late 2013, but the court denied a motion to dismiss the remaining claims.

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A U.S. district court in Los Angeles affirmed a bankruptcy court’s order finding that a judgment creditor willfully violated the automatic stay in a Chapter 13 case. In re Bayley, No. 2:14-cv-07799, order (C.D. Cal., Jan. 14, 2015). The automatic stay takes effect the moment a bankruptcy petition is filed. 11 U.S.C. § 362(a). Violations of the automatic stay may be subject to penalties by the court, with greater penalties for violations found to be “willful.” The present case demonstrates how a court could find that a party’s violation was willful despite a claimed mistake of law.

The creditor at issue in this decision obtained a judgment against the debtor in a Ventura County court in August 2011, in an amount approaching $13,000. A lien on real property owned by the debtor in Thousand Oaks secured the judgment. The court in Ventura County issued a writ of execution about two years later, and in January 2014, the Los Angeles County Sheriff’s Department (LASD) served the debtor’s bank with a writ of garnishment. The LASD levied $4,000 from the account that February.

About two weeks after the levy, the debtor filed a Chapter 13 bankruptcy petition. The LASD was still in possession of the $4,000 at the time. The debtor included the $4,000 in her Schedule B list of personal property, and she claimed it as exempt in Schedule C under California’s “wild card” exemption, Cal. Code Civ. P. § 703.140. She then filed a motion to avoid the real property lien. The creditor did not object to the debtor’s claimed exemption or her motion.

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The City of San Bernardino joined a number of cities around the country by filing for bankruptcy in 2012. See In re City of San Bernardino, 499 B.R. 776 ((Bankr. C.D. Cal 2013). While a municipal bankruptcy differs from a personal or business bankruptcy in numerous important ways, the legal conflicts that have arisen from the case can be similar to disputes that individuals and families may face with their creditors. A U.S. district judge in Los Angeles recently ruled on what he called “a trilogy of meritless appeals” by the San Bernardino City Professional Firefighters Local 891 (SBCPF). In re City of San Bernardino (“SB I”), No. 5:14-cv-02073, opinion (C.D. Cal, May 7, 2015); In re City of San Bernardino (“SB II”), No. 5:14-cv-02505, opinion (C.D. Cal, May 7, 2015); In re City of San Bernardino (“SB III”), No. 5:15-cv-00042, opinion (C.D. Cal, May 7, 2015). The decisions address efforts to negotiate with the city, relief from the automatic stay, and other issues.

Individuals and families may file for bankruptcy under Chapter 7, Chapter 13, or occasionally Chapter 11 of the federal Bankruptcy Code. Municipal bankruptcies are governed by Chapter 9, which takes unique features of city governments into account, such as the ability to renegotiate collective bargaining agreements (CBAs) with unions to address pensions and other expenses. Unions are essentially creditors in this situation, since the city has a financial obligation to union members.

The specific details of the disputes between the City of San Bernardino and the SBCPF are not as important for our purposes as the legal principles involved in the SBCPF’s three appeals. In SB I, the SBCPF appealed an order from the bankruptcy court that partly granted the City’s motion to reject a memorandum of understanding (MOU), which had served as a CBA between the two parties. After a lengthy period of time involving attempts at negotiation between the City and the SBCPF, the court held a hearing and partially granted the motion in late 2014.

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