Benchnotes September 2025

By Christina Sanfelippo, Aaron M. Kaufman and Bradley D. Pack1

Eleventh Circuit Holds that Acevedo Does Not Preclude Annulling the Automatic Stay

As a matter of apparent first impression, the Eleventh Circuit recently held that the U.S. Supreme Court’s decision in Acevedo2 does not prevent a bankruptcy court from retroactively annulling the automatic stay. In In re Rajesh C. Patel, the debtor willingly participated in a post-petition arbitration proceeding and lost.3 After a state court affirmed the arbitration award, the debtor moved the bankruptcy court to stay enforcement of the arbitration award against the members of his family because he argued that their assets were essentially his assets. Sensing gamesmanship by the debtor, the bankruptcy court instead exercised its authority to annul the stay “for cause.” The debtor challenged the annulment as contrary to Acevedo.

On appeal, the Eleventh Circuit rejected the debtor’s position. According to the Eleventh Circuit, the appeal concerned § 362(d), which grants bankruptcy courts the power to modify or annul a stay and permit another court or entity to exercise control over an asset or claim. Under § 362(d)(1), bankruptcy courts can grant relief from the stay “by terminating, annulling, modifying, or conditioning [the] stay — for cause.” As the court explained, annulments grant retroactive relief from the automatic stay, so as to validate action taken during the pendency of the stay.

Contrastingly, Acevedo turned on the meaning of 28 U.S.C. § 1446(d), which regulates the jurisdiction of a district court. Under 28 U.S.C. § 1446(d), after a defendant files a notice of removal, the state court “loses all jurisdiction over the case, and being without jurisdiction, its subsequent proceedings and judgment are ... absolutely void.”

In Acevedo, the Supreme Court held that a district court could not enter a nunc pro tunc judgment to validate the March 2018 orders that a Puerto Rico trial court had entered after the case was removed to federal court. The district court, in a procedural sleight of hand, attempted retroactively to validate the March 2018 orders when it later remanded the suit in August 2018, but the Supreme Court rebuffed the jurisdictional workaround.

The Eleventh Circuit rejected the debtor’s assertion that the annulment of the stay amounted to an impermissible nunc pro tunc order that retroactively granted jurisdiction to a state court’s judgment previously rendered void by the automatic stay. First, the court explained that the jurisdictional concerns that underscored Acevedo played no role in the case at hand. Under 28 U.S.C. § 1334(b), state and federal courts have concurrent jurisdiction over civil proceedings “related to” cases brought under chapter 11. While the state court order was void to the extent that it purported to hold the debtor accountable for the arbitration award, it was not void for want of jurisdiction over the suit like the Puerto Rico court orders in Acevedo.

Second, the court further explained that nunc pro tunc orders and annulments are different judicial tools. Nunc pro tunc orders stem from the inherent judicial power to correct mistakes or omissions in the record so that the record properly reflects the events that actually took place, and they have retroactive legal effect to the extent that they reflect the reality of what has already occurred. In contrast, annulment is a statutory power granted to bankruptcy courts by Congress, which allows them to grant retroactive relief from the automatic stay and validate actions taken while the stay was in effect. Thus, while the bankruptcy court issued an order providing retroactive relief, that order was not a nunc pro tunc order. The annulment simply eliminated an impediment to the enforcement of the arbitration award against assets in the bankruptcy estate and under the bankruptcy court’s control.

The Eleventh Circuit concluded by stating that the debtor’s arguments, taken to their logical end, would effectively nullify § 362(d) because every request for relief under § 362(d) is an attempt to control an asset within the bankruptcy court’s exclusive jurisdiction. If that exclusive jurisdiction bars annulment of a stay, the court reasoned that it also would bar termination or modification of the stay, thereby stripping bankruptcy courts of key powers granted to them by Congress. Ultimately, the Eleventh Circuit declined to read between Acevedo’s lines to require such a far-reaching result.

Miscellaneous

• Soussis v. Macco (In re Soussis), 136 F.4th 415 (2d Cir. 2025) (“[W]e join the Seventh, Ninth and Tenth Circuits in holding that a standing trustee cannot keep any percentage fee he collects from the debtor’s pre-confirmation payments if no plan is confirmed.”);

• Uriostegui v. Dowling (In re Uriostegui), --- B.R. ---, 2025 WL 1367215 (B.A.P. 9th Cir. May 12, 2025) (case law construing term “fiduciary” as used in 11 U.S.C. § 523(a)(4) as applying only where debtor was trustee of “an express or technical trust imposed prior to the wrongdoing that created the debt” also applies to 11 U.S.C. § 522(q)(1)(B)(ii), which limits amount of homestead exemption that debtor may claim if debtor owes debt for “fraud, deceit or manipulation in a fiduciary capacity”; state court judgment that debtor fraudulently induced elderly decedent to amend his trust to name debtor as sole trustee and beneficiary did not trigger 11 U.S.C. § 522(q) because fraud occurred before debtor became trustee);

• In re Credito Real, S.A.B. de C.V., SOFOM, E.N.R., ___ B.R. ___, 2025 WL 977967 (Bankr. D. Del. April 1, 2025) (in this chapter 15 case, bankruptcy court considered Purdue in context of Mexican-court-approved “concurso” plan, which included nonconsensual third-party releases; chapter 15 debtor filed prepack proceeding pursuant to pre-petition restructuring-support agreement in Mexico, then sought recognition of that prepack proceeding under chapter 15 in U.S. bankruptcy court; prepack plan contained nonconsensual third-party releases that were permitted under Mexican law; U.S. International Development Finance Corp. objected to enforcement of such releases in chapter 15 proceeding, arguing that recognition of concurso plan and enforcement of such releases would be contrary to U.S. public policy; bankruptcy court disagreed and overruled objections; explaining that court “has broad discretion to order enforcement of orders entered in a foreign main proceeding, consistent with the guiding principles of comity,” bankruptcy court held that Purdue did not change the interpretation of § 1521(a) or 1507; specifically, §§ 1521(a) and 1507 are not as restrictive as language in § 1123(b) and have different limitations, purposes of which are to promote comity and international cooperation; in doing so, bankruptcy court concluded that enforcing third-party releases in foreign prepack plan would not be manifestly contrary to public policy of U.S. under § 1506 and thus recognized chapter 15 case as foreign main proceeding and granted comity and full force and effect of prepack plan, including releases);

• In re Adair, ___ F.4th ___, 2025 WL 1439450 (5th Cir. May 20, 2025) (this appeal concerned a judgment of nondischargeability after debtor wrongfully withheld $70,000 of insurance money owed to contractor who completed work on debtor’s house; contractor obtained default judgment in state court; in bankruptcy, contractor filed a § 523(a)(6) action, which debtor defended on basis that contractor had “unclean hands” because contractor was not licensed to perform work worth more than $75,000 (job totaled more than $150,000); bankruptcy court entered judgment in favor of contractor, concluding that debtor was precluded from raising “unclean hands” equitable defense in bankruptcy, following state court’s entry of default judgment; on appeal, Fifth Circuit (in 2-1 split decision) vacated judgment and remanded, concluding that default judgment from state court was insufficient to demonstrate that “unclean hands” defense had actually been litigated in state court; thus, split panel of Fifth Circuit Court of Appeals held that debtor was not precluded from raising “unclean hands” defense in response to dischargeability complaint, and that bankruptcy court should reconsider its ruling in light of this available defense);

• In re Estiatorio Ent. Ltd., ___ B.R. ___, 2025 WL 1466571 (Bankr. S.D.N.Y. May 22, 2025) (landlord to pre-petition ground lease moved to reopen chapter 7 case, seeking to remove state court action filed by debtor to quiet title to property abandoned by chapter 7 trustee; however, landlord never filed actual notice of removal, instead relying on its motion to reopen as such notice; abandoned building to which debtor sought to quiet title is located on property subject to ground lease and was expressly abandoned by chapter 7 trustee; landlord also asserted that trustee’s abandonment was not effective and argued that ground lease had been rejected; noting split of authority on effect of motion to reopen bankruptcy case, bankruptcy court declined to treat landlord’s motion to reopen chapter 7 case as notice of removal, holding that landlord failed to properly or timely remove state court action; court explained that landlord’s motion to reopen was too vague and inconsistent to be treated as notice of removal, and regardless, notice of removal would have been untimely; bankruptcy court next held that the ground lease and building thereon were properly abandoned; trustee had filed notice of abandonment as to ground lease, and no parties (not even landlord) objected; because building was listed on debtor’s schedules and was not “otherwise administered” in chapter 7 case, it was deemed abandoned under § 554(c) once case was closed first time);

• In re 2 Monkey Trading LLC, --- F.4th ----, 2025 WL 1892380 (11th Cir. July 9, 2025) (addressing matter of apparent first impression, Eleventh Circuit held that in subchapter V proceedings, when nonconsensual plan is confirmed, both corporate and individual debtors are subject to general exceptions to discharge set forth in § 523(a); in so holding, Eleventh Circuit agreed with Fourth and Fifth Circuits (see In re GFS Indus. LLC, 99 F.4th 223 (5th Cir. 2024); In re Cleary Packaging LLC, 36 F.4th 509 (4th Cir. 2022)), and abrogated In re Hall, 651 B.R. 62 (Bankr. M.D. Fla. 2023)); turning first to plain language of statute, court reasoned that § 1192’s plain text is unambiguous, as it applies to both individual and corporate debtors and grants a debtor a discharge of its debts except for the 21 kinds of debt found in § 523(a); Eleventh Circuit rejected debtors’ argument that § 1192(2)’s reference to § 523(a) includes § 523(a)’s preamble, which limits any nondischargeable debts found to “individual debtor,” explaining that § 1192(2)’s cross-reference to § 523(a) does not refer to any kinds of debtor addressed by § 523(a) but rather to kinds of debt listed in § 523(a); court further noted that § 523(a)’s preamble states nothing about what corporate debtor can or cannot discharge; thus, § 1192(2)’s cross-reference to “the kind of debt” listed in § 523(a) is simply convenient way to list kinds of debt that are nondischargeable under § 1192(2) without restating them; court found support for its interpretation in § 1141, noting that express language in certain subsections of § 1141 specifies which kinds of debtors cannot discharge debts under § 523(a), so those sections’ references to § 523(a) can serve only to point to location of listed debts; court also rejected debtors’ arguments on canon against surplusage and general/specific canon, explaining that canons do not allow court to undermine unambiguous text of § 1192);

• In re Sterling, 140 F.4th 924 (7th Cir. 2025) (Seventh Circuit held that in civil contempt proceeding, bankruptcy court has broad discretion to award debtor reasonable attorneys’ fees incurred in bringing defendant’s violation of discharge order to court’s attention; Seventh Circuit first found that in applying doctrine of pure comparative fault to debtor’s request for compensatory damages for harm from defendant’s violation of discharge order, bankruptcy court properly assigned to judgment creditor burden of proving that debtor’s failure to notify state court of her bankruptcy contributed to her injury; however, bankruptcy court’s finding that debtor contributed by her fault did not require it to apportion liability for attorneys’ fees that debtor incurred in prosecuting contempt proceeding, thereby reducing its award of attorneys’ fees to debtor; unlike a compensatory damages award in civil contempt proceeding that is limited by tort principles, court has broad discretion when issuing fee-shifting decisions and is not required to apportion liability according to comparative degree of fault; since bankruptcy court applied doctrine of pure comparative fault to reduce its award of attorneys’ fees based on erroneous view that same principles apply to both compensatory damages and attorneys’ fee awards, decision was an abuse of discretion; Seventh Circuit thus vacated judgment of district court with respect to attorneys’ fees and remanded for bankruptcy court to determine, in light of its broad fee-shifting discretion, whether to reduce judgment creditor’s liability for attorneys’ fees);

• In re Parker, 141 F.4th 583 (4th Cir. 2025) (Fourth Circuit affirmed district court’s reversal of bankruptcy court’s entry of judgment for judgment creditor, holding that debtor did not have fraudulent intent within meaning of § 523(a)(4)’s discharge exception for embezzlement when she liquidated accounts; Fourth Circuit explained that embezzlement requires proof of debtor’s fraudulent intent at time of claimed misappropriation; in case at hand, the Fourth Circuit agreed with district court that debtor did not have requisite “fraudulent intent” when she liquidated bank accounts at issue, because evidence showed that bank had told her that her status as joint account-holder entitled her to liquidate disputed funds; as such, debtor established good-faith belief that funds in question were hers, precluding embezzlement finding); and

• In re Sanchez Energy Corp., 139 F.4th 411 (5th Cir. 2025) (upon direct appeal, Fifth Circuit held that bankruptcy court’s equity allocation in reorganized debtor contravened § 550(a) and (d), because it incorrectly approved more than “single satisfaction” as remedy for avoided secured creditors’ liens; under confirmed plan, bankruptcy court was to allocate equity shares in reorganized company among debtor-in-possession (DIP) lenders, secured creditors and unsecured creditors depending on outcome of certain lien-related litigation; plan also released DIP liens and secured creditors’ liens, although liens were perceived to have no value due to downturn in oil-and-gas industry; after concluding that DIP liens were valid and secured creditors’ pre-petition liens were avoidable as preferential transfers, bankruptcy court placed hypothetical value on meritorious avoidance claims and other claims, and awarded unsecured creditors dominant stake in reorganized company; on appeal, parties argued over whether preference recovery against secured creditors could include, in addition to liens released under plan, amount necessary to “recover” value of liens at date of bankruptcy; Fifth Circuit answered in negative, explaining that while § 102(5) states that “or” is “not exclusive,” Bankruptcy Code does not apply this rule when surrounding context makes “A and B” logically impossible or dictates otherwise; by limiting recovery to “single satisfaction,” § 550(d) provides context for interpreting “or” in § 550(a) and compels conclusion that it uses “or” in its disjunctive form, as it is logically impossible to “recover” both transferred property and “value” of that property as “single satisfaction”; thus, when secured creditors returned their liens to debtors’ estate pursuant to plan, they effectuated estate’s “recovery” of “single satisfaction” for preferential transfers; court further rejected contention that both return of liens plus “value” they held at petition date was required because release of “worthless” liens on depreciated assets as recovery did nothing to return estate to its pre-transfer position, explaining that “property” to be recovered under § 550 is preferential lien and estate retains depreciating asset no matter what; Fifth Circuit concluded that unsecured creditors’ erroneous interpretation of § 550 would require bankruptcy courts to calculate value award in every case that involves avoidable transfer of depreciating asset, even if that asset is returned, and “that has never been the law”).

Christina Sanfelippo is a member with Cozen O’Connor in Chicago. Aaron Kaufman is a partner with Gray Reed in Dallas. Bradley Pack is a shareholder with Engelman Berger, PC in Phoenix.