11 U.S.C. Section 363

The Automatic Stay

The automatic stay in bankruptcy is a very large, invisible stop sign with very sharp teeth. You will find it at Section 362 of the Bankruptcy Code. It is ten pages, small type, single spaced. So in this article, and on this web site, we will give the stay somewhat superficial treatment, with more detailed analysis to follow in blog posts.

How Is It Triggered?

The term “automatic stay” means just what it says. It springs into existence immediately upon the filing of a bankruptcy case.

I. The “Automatic Stay” Defined

“Except as provided in subsection (b) of this section, a petition filed under . . . operates as a stay, applicable to all entities, of …” 11 U.S.C. § 362(a). . .

A. The automatic stay is a broadly construed injunction that becomes operative immediately upon the filing of a bankruptcy case and prohibit actions affecting debtor or any property of the bankruptcy estate

B. “Automatic” means automatic

1. Whether you are “listed,” or scheduled, or, received notice of the bankruptcy is immaterial; hence the word “automatic;” if it seems unfair, you’re right-it is, but without it the system doesn’t function

2. Spend a few cents and do a PACER search; judges expect it

3. Lack of notice may be material in an action for a stay violation (you can’t act intentionally if you don’t know about the bankruptcy) but it has no effect on applicability of the automatic stay

II. Duration of the automatic stay -11 U. S. C. § 362(c)

A. As against property of the estate

1. When the property is no longer property of the estate; usually when the trustee files a notice of abandonment, or a report of no distribution, which has the same effect

2. When terminated or modified by order of the court

B. With respect to any other action

1. The date the case is closed

2. The date the case is dismissed

§ Practice note: a debtor cannot unilaterally dismiss a Chapter 7 case; they file motions to dismiss all the time, but the court won’t grant them without the trustee’s agreement

3. The date the discharge is granted or denied

§ Practice note: the automatic stay remains in effect beyond discharge if the trustee has not abandoned or closed the case. I have cases that are open for years, and the stay remains effective against property of the estate trustee has not abandoned

4. When terminated or modified by the court

5. Debtor fails to file a Statement of Intent within 30 days of the petition filing 11 U.S.C. §362(h)(1)

§ Practice note: this provision is inapplicable to Chapter 13 cases
In re Schlitzer, 323 B.R. 856 (Bankr. W.D.N.Y. 2005)

C. The 30-day lifting provision of 11 U. S. C. § 362 (c)(3)(A):

1. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), enacted in 2005, contains a provision designed to protect creditors from bad faith filings (eve of foreclosure filings, for example)

2. If the debtor was dismissed from a previous bankruptcy case within the preceding year, the stay lifts by operation of law after 30 days with respect to secured or leased property, unless, on motion of a party in interest and after notice and hearing, the court extends it. At the very least, debtor’s counsel should file an affidavit supporting the motion, or, be prepared to proffer evidence establishing that the filing of the latter case “is in good faith.”

3. CAUTION: several courts have severely limited the effect of the 30 day termination. One court admonished creditors to not rely on this provision, and file motions for stay relief; several courts have held that the restriction on the duration of the stay is only as to “debts” or “property of the debtor,” and the stay continues in effect for “property of the estate.” In re Johnson, 335 B.R. 805 (Bankr. W.D. Tenn. 2006). In the Middle District of Alabama, however, I’ve noticed no reticence on the part of the court to extend the stay. But, be prepared with evidence of good faith.

§ Practice note: Quite a few attorneys choose not to rely on this automatic termination provision. They will seek stay relief, or, confirmation of the termination of the stay. Once bitten, twice shy!

III. What actions are prohibited?

A. Simply stated, any action to collect a debt or enforce a lien or obligation against the debtor or property of the bankruptcy estate. The purpose of the automatic stay is to give the debtor breathing room, and, allow the trustee the opportunity to review the case, administer assets, review avoidance claims and otherwise take actions intended to treat creditors and debtors alike fairly

B. The “bankruptcy estate,” is broadly defined in 11 U. S. C. § 541 to include almost any imaginable legal or equitable interest; note the following often overlooked interests:

1. Inheritances

2. Post-petition rents

3. Notes, receivables, payments thereon

4. Life estates

5. Rights of redemption

6. Non-exempt annuity payments

7. Property settlements or alimony owed by former spouse

8. Insurance payments

9. Tax refunds

10. Any legal claim, lawsuit, or right to sue

11. Possessory interests (more on this below)

12. Losses carried over for tax purposes

13. Rights of loan reinstatement

C. Some common actions that are immediately enjoined:

1. Foreclosure

2. Repossession

3. Prosecution of lawsuits

4. Garnishments

5. Levy or execution

6. Collection calls or letters

7. Any communication or action reflecting an effort to collect a debt

8. Termination of utility service

9. SSI/Food Stamps/Benefit Overpayment recovery

10. Evictions, unless a judgment for possession was issued prior to bankruptcy

11. Retaining property repossessed pre-petition, in which creditor has not yet perfected legal title (more on this below)

IV. Some actions not prohibited?

A. Criminal proceedings

§ Practice note: there are Alabama decisions holding that criminal process may not be used solely to collect a civil indebtedness. Be careful and don’t get your client sued.

B. Actions to establish paternity

C. Actions to establish, modify or enforce a domestic support obligation, or to redress domestic violence

D. Eviction, if a judgment of possession was issued prior to bankruptcy and debtor does not comply with several exceptions. 11 U. S. C. § 361(b)(22)

§ Practice note: there are some complicated exceptions; review 361(b)(22) carefully

V. Liability for stay violations

A. Section 362(h): “An individual injured by any willful violation of the automatic stay provided in this section shall recover actual damages, including costs and attorneys fees, and in appropriate cases, punitive damages”

1. This claims are always fact specific

2. Willful does not require specific intent to violate the stay

3. Willfulness will be found where creditor knew of the stay, and its actions were intentional

§ Practice note: if you know of the bankruptcy, then you are presumed to know of the stay; I might also suggest that if your client has been careless in the practices and procedures it has devised to prevent stay violations, you may have a problem

4. “Good Faith” is often, but not always, a defense

5. Clerical errors are usually overlooked, provided not a chronic excuse, and provided the court is satisfied you have been reasonably diligent in reviewing your practices and procedures to see that it doesn’t happen again.

6. Did the creditor act in bad faith? Was the creditor a serial violator? Did the creditor have reasonable procedures for dealing with bankruptcy cases?

7. Even if you acted in “good faith,” you may still have to pay debtor’s costs and attorneys fees incurred in the stay enforcement

B. “Actual damages”

1. Debtor generally must prove (1) willful violation of the stay; and, (2) actual injury to the individual seeking damages. In re Matthews, 209 B.R. 218 (6th Cir. BAP 1997)

2. Attorneys fees and litigation costs are “actual damages”

VI. Legal effect of action taken in violation of the automatic stay

A. Actions taken in violation of the stay are void or voidable

B. Example: foreclosure conducted shortly after bankruptcy filing is void

C. Example: deed is delivered pre-petition, but recorded post-petition; the recordation is voidable by the trustee

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Chapter 7 Practice Scenarios

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Our client has a properly perfected security interest in a motor vehicle. Debtor has filed Chapter 7 case. What is the client’s recourse?

Short Answer: Surrender—Reaffirmation—Redemption—Repossession

A. Surrender

§ Debtor is required to file a Statement of Intention as part of the bankruptcy in which Debtor must indicate whether he intends to surrender or reaffirm the debt secured by the collateral. You may review the schedules yourself, or, inquire of the debtor provided you do not make any effort to compel payment or surrender. You will find the current Statement of Intention at ----------------

§ Debtor may voluntarily surrender the vehicle to you. It is not a stay violation for debtor to do so voluntarily

§ If there is equity in the vehicle, you should also discuss it with the trustee to be sure he or she does not intend to administer the asset

§ Remember that any deficiency is subject to discharge

B. Reaffirmation

§ Debtor has the option of negotiating an agreement to reaffirm the debt. This is very common with vehicles and homes. It must be signed, filed with the court, and in certain instances, approved by the court

§ In the old days, debtor’s counsel would typically prepare the reaffirmation agreement; I’ve noticed a definite trend towards creditor preparation. It’s not really important, as long as all parties read and understand it fully.

§ A form reaffirmation agreement is available on the website for the Bankruptcy Court, Middle District of Alabama, at www.almb.uscourts.gov

C. Redemption

§ Debtor may redeem the vehicle by paying you its value as of the petition date

§ It is rare, but it happens

§ If the parties cannot agree, debtor may file a motion and the court will determine the redemption value

D. Repossession check PACER for bankruptcy filings if you have that option; if you don’t, get an attorney to check; if you can’t do that, be very careful and also be conscious of the fact that debtor may give you proof of filing; or a case number; or an attorney’s contact information. It is best to look under every rock and be as certain as you can that there is no intervening bankruptcy filing.

They are driving our client’s car, have no insurance, and neither debtor nor his attorney will return our calls.

Short Answer: force place coverage, call your attorney, and file a stay motion.

A. The Motion for Relief from Automatic Stay

§ Filing fee is currently $---

§ Attach to your motion a copy of your note, security agreement, and title documents, UCC filing or recorded mortgage establishing you perfection; the trustee will object otherwise

§ Move quickly-these things take a little time; there are some pro-active creditors who get stay motions filed before the filing stamp on debtor’s petition has dried (I know, it’s all digital so there is no drying of ink; but you get the point)

§ The motion need not be a treatise, but should fully and succinctly describe the transaction and any security interest, lien, mortgage or other encumbrance which you seek to enforce. It is also useful to include, if possible, valuation information so that the trustee and the court can determine whether there is any equity in the asset.

B. The mechanics

§ Stay motions are subject to LBR 4001-1

§ In Chapter 7, the motion will contain “negative notice” language such as this, prominently featured on the first page of the motion, LBR 4001-1(b):

PURSUANT TO LRB 4001-1, THE MOVING PARTY SEEKS RELIEF FROM THE AUTOMATIC STAY. UNLESS A RESPONSE IS FILED AND SERVED UPON THE MOVING PARTY WITHIN 20 DAYS FROM THE DATE OF SERVICE OF THIS MOTION, THE MOTION MAY BE GRANTED BY THE COURT WITHOUT FURTHER NOTICE OR HEARING.

§ If an objection is filed, the court will set it for telephonic hearing

§ If it cannot be resolved at that point, it will be set for evidentiary hearing, usually in Dothan, after which the judge will rule

§ These things can easily run from weeks into months, which is why you need to move quickly.

We have a lawsuit pending for a plaintiff against the individual who has filed bankruptcy?

A. If the debtor is insured for the claim, file a stay motion to lift the stay to the extent of insurance coverage only, LBR 4001-1(d)

B.The court typically grants these motions, as long as no effort at recovery is directed towards the debtor. Be sure to make this limitation clear in your stay motion

C. Remember, the state court action is dead in its tracks until the stay is lifted; most likely, debtor’s counsel will file a suggestion of bankruptcy in the pending litigation

I have rental property; debtor has abandoned, but left property behind and I can’t rent it in that condition.

A. The property left behind is property of the bankruptcy estate until abandoned by the trustee

B. Before disposing of it, you will need:

§ The trustee’s agreement that he abandons the property, or,

§ Stay relief, which entitles you to exercise state law remedies

I have a co-maker on the car loan who has not filed bankruptcy.

A. In Chapter 7 cases, there is no co-debtor stay, so you are free to make demand on your non-filing co-maker. You can’t go get your collateral, but you can pursue state law remedies against the co-maker

B. In Chapter 13, there is a co-debtor stay for consumer loans only 11 U. S. C. § 1301(a)

An employer is withholding pursuant to a writ of garnishment.

A. The automatic stay prohibits further withholding

B. If the employer has withheld monies not yet paid into the court, those monies should be returned to the debtor, but only after you have cleared it with trustee. It is rare that I administer garnished funds simply because of the minimal amount, but it is always possible. A quick phone call or email can clear it up quickly.

Does the automatic stay prevent a bank or credit union from placing an “administrative freeze” on the account(s) of customers filing bankruptcy?

A. The problem is that a bank or credit union with loans to a customer has a state law right to set-off against other deposits, such as a checking or savings account. If the account is not frozen, it is likely to be “emptied” quickly. I haven’t looked at this issue in a long time because I no longer represent creditors. So check it with a creditors attorney with knowledge of banks and credit unions, simply because of the below case.

B. The 11th Circuit has held that freezing an account is an exercise of control prohibited by the automatic stay, Patterson v. B. F. Goodrich Employees Federal Credit Union, 967 F.2d 505 (11th Cir. 1992)

C. A number of courts in other circuits hold that freezing accounts is an administrative necessity to preserve the creditor’s state law right of set-off, and does not violate §362

D. If you are a bank or credit union, just be sure to check this with your counsel

Does the automatic stay enjoin the owner of rental property from evicting a non-paying tenant who has filed bankruptcy? The argument here is that I’m not trying to collect, or execute on estate property—I just want them out.

A. 11 U. S. C. § 362(b)(22) excepts from the automatic stay an eviction or similar proceeding against a debtor residing under a lease or rental agreement where the landlord obtained a judgment for possession prior to the bankruptcy filing. BUT, there are exceptions to the exceptions, that frankly make (b)(22) pretty unworkable

B. 11 U. S. C. § 362(b)(23) allows the landlord of residential property to evict upon certifying that the property endangered or illegal controlled substances are being used on the premises. There are likewise exceptions to this exception

C. Eviction is stayed if the debtor files a certification within 30 days that under state law, debtor is entitled to cure the default, and the debtor deposits with the Clerk of the Court when the bankruptcy is filed the amount due

D. There is a similar exception for the endangerment or illegal substance use exceptions. They are complex, so you will need to consult your attorney if confronted with this situation

My client’s collateral is perishable-we need emergency stay relief

A. LBR 4001-3 provides for emergency motions

B. Call the Judge’s chambers in the event of an emergency; the staffs of both judges are very responsive

Our client was tendered a check prepetition. Is the stay violated if the client cashes the check post-petition?

A. Cashing a check tendered pre-petition does not violate the stay if cashed post-petition. Thomas v. Money Mart Financial Services, Inc. No. 05-1176 (8th Cir. 2005)

Our client repossessed a vehicle prepetition, but has not completed the process of disposition so as to obtain legal title. Does the client incur liability by refusing to return the vehicle?

A. If under State law the legal title does not pass to the creditor until the disposition process is completed, then the “legal title” remains in the bankruptcy estate of the debtor, protected by the automatic stay. Motors Acceptance Corp. v. Rozier, 348 F.3d 1305, 1307 (11th Cir. 2003)

B. Some courts have held that by refusing to return the vehicle to a Chapter 13 debtor who proposes to pay for it through the plan, the creditor violates the automatic stay. In re Rutherford, 329 B.R. 886 (Bankr. N.D. Ga. 2005). I think that if the Chapter 13 debtor provides proof of insurance, the creditor would be wise to return the vehicle without the necessity for a turnover action.

C. In a Chapter 7 case the situation differs. I would retain possession of the vehicle, and contact the trustee to determine whether he or she has any interest in it. If not, I think you can proceed with your disposition under state law.