Articles Posted in Automatic Stay

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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. By Kurtis Garbutt (http://www.flickr.com/photos/kjgarbutt/15420116119) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsFederal 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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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.

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By Oparvez (http://www.flickr.com/photos/oparvez/390728321/) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA 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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Rental Realities [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrThe 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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By Alex Const (originally posted to Flickr as 50 cent) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons50 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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By Randy from Newbury Park, California, USA (Hidden Valley  Uploaded by PDTillman) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsA 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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OpenClipartVectors [Public domain (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe 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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By Christopher Hurdzan (www.flickr.com) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA California bankruptcy court recently ruled on a motion to lift the automatic stay in a Chapter 13 case by a company that purchased real property at a foreclosure auction. In re Richter, No. 6:14-bk-10231, mem. dec. (Bankr. C.D. Cal., Jan. 20, 2015). The purchaser sought to initiate an unlawful detainer proceeding, commonly known as an eviction, in order to take possession of the property. The debtor argued that he had a right of redemption under California law, which allowed him to recover the property by paying the amount owed to the lienholder. The court expressed sympathy for the debtor but ruled that his right of redemption had expired under both California law and the Bankruptcy Code.

The debtor owned a condominium in Palm Desert, California. Since it was part of a common interest development, the property was subject to covenants, conditions, and restrictions (CC&Rs) enforced by a homeowner’s association (HOA). When the debtor fell behind on assessments, the HOA commenced nonjudicial foreclosure. Under state law, a property owner has a 90-day right of redemption after the sale of a property in a nonjudicial foreclosure by an HOA. Cal. Civ. Code § 5715(b), Cal. Civ. Proc. Code § 729.035.

A trustee appointed by the HOA conducted a foreclosure auction in October 2013. The purchaser bought the property for $36,000, which more than covered the debtor’s $18,836 assessment arrearage. The foreclosure trustee notified the debtor of his 90-day right of redemption. On the last day of the redemption period, in January 2014, the debtor filed for Chapter 13 bankruptcy. According to the court, he intended to use the Chapter 13 bankruptcy plan to exercise his right of redemption. The HOA refused to accept his payments, however, arguing that the sale of the property was complete. The foreclosure trustee recorded the trustee’s deed in August 2014, perfecting the purchaser’s title. In October, the purchaser moved to lift the automatic stay.

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HelenCobain [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrWhen a debtor files for bankruptcy under Chapter 7 or Chapter 13, an automatic stay takes effect that bars most legal actions against the debtor or the debtor’s property. Violations of the automatic stay can result in substantial liability for the debtor. The Ninth Circuit Court of Appeals affirmed a judgment awarding more than $27,000 in damages to a debtor for an automatic stay violation by a payday lender. In re Snowden, 769 F.3d 651 (9th Cir. 2014). The court also held that a conditional offer of settlement by the lender, which the debtor rejected, did not preclude an award of damages as authorized by the Bankruptcy Code, 11 U.S.C. § 362(k).

The debtor took out a $575 payday loan “to make ends meet for herself and her daughter.” Snowden, 769 F.3d at 654. This is a short-term loan secured by a post-dated check. She put a stop payment on the check before its due date and informed the lender that she was considering bankruptcy. The lender’s employees began calling the debtor multiple times at the hospital where she worked as a nurse. The calls reportedly continued even after she referred the lender to her attorney, and they began to affect her work performance. When she filed for Chapter 7 bankruptcy, she did not directly inform the lender but listed it as an unsecured creditor with a claim for $575.

About a month after filing for bankruptcy, the debtor noticed that her bank account was overdrawn by more than $800. She learned that the lender had cashed the check securing the payday loan, resulting in overdraft fees. This had a substantial emotional impact on the debtor, since “her finances had careened out of control at the moment when she thought she was finally getting them together.” Id. at 655.

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By damianosullivan (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA bankruptcy court allowed Chapter 13 debtors to pursue an adversary claim against their loan servicer for unapproved fees. The debtors claimed that the loan servicer intentionally misapplied a lump sum payment intended to go towards their mortgage principal after the discharge. The court granted the debtors’ request for a preliminary injunction. In re Moffitt (“Moffitt I”), 390 B.R. 368 (Bankr. E.D. Ark. 2008) (PDF file). It dismissed the debtors’ non-Bankruptcy Code claims in two subsequent opinions, 406 B.R. 825 (Bankr. E.D. Ark. 2009) (“Moffitt II”) (PDF file) and 408 B.R. 249 (Bankr. E.D. Ark. 2009) (“Moffitt III”) (PDF file), but it allowed the remaining claims to proceed. The parties settled the dispute several months later.

The debtors filed a Chapter 13 petition in October 2004. They listed a first-lien deed of trust of $35,000 to their mortgage servicer, EverHome, which filed a proof of claim alleging a debt of over $36,000. It filed amended proofs of claim that progressively increased that number throughout 2005, claiming expenses like attorney’s fees and inspections. The debtors objected to the additional fees, but they also moved to settle and administer the case in order to use a personal injury settlement to pay off the Chapter 13 plan. Although the debtors wanted to continue to pursue the objection, the court ruled that it was moot and granted a discharge.

EverHome transferred the debt to America’s Servicing Company (ASC), which the debtors claim is an alter ego of Wells Fargo Bank, in late 2005. ASC submitted a payoff amount to the trustee of just under $10,000. In April 2006, the trustee paid that amount to ASC, and the debtors sent a personal check to ASC in the amount of $10,000, directing ASC to apply the funds to the mortgage principal. Instead, ASC applied the debtors’ payment to other fees, causing their mortgage “to go into complete disarray.” Moffitt I at 389. Continue reading