Someone accused of indirectly violating the automatic stay has two lines of defense, thanks to a Jan. 25 opinion from the Second Circuit.
A creditor had a judgment against the soon-to-be debtor. When the 10-year lien of the judgment was about to expire, the creditor applied to state court before the debtor’s bankruptcy for an order extending the lien. Although the court granted the extension, the order extending the lien was not docketed.
The judgment creditor did not know that the county clerk had never filed the extension order until the trustee sued to void the lien under the strong-arm powers.
According to the unsigned, nonprecedential summary opinion, the Second Circuit said that the creditor’s counsel then contacted the county clerk “to inquire why the [creditor’s] timely filed but inexplicably undocketed extension order did not appear” on the docket. In response to the inquiry, the state court clerk then entered the lien-extension order after the filing of the bankruptcy petition.
The bankruptcy court found the creditor in contempt for violating the automatic stay under Section 362(a)(4) as “any act to create, perfect, or enforce any lien against property of the estate.”
The district court reversed in August 2016, setting aside the contempt finding and holding that the entry of the lien after filing was not “reasonably foreseeable.” The district court said that the creditor “must intend or at least reasonably anticipate bringing about the consequences of his act.” The district judge said that the “act must have as its purpose the creation of the lien, not just that the act gave rise to the lien as a collateral result of the act.”
The Second Circuit upheld the district court’s reversal of the contempt finding, saying, however, that the case did not turn on “reasonable foreseeability.”
The appeals court said the creditor’s counsel “merely asked the [state court clerk] what happened to his timely filed extension order.” There was “no indication,” the opinion says, that the creditor asked the clerk to correct the mistake, nor was there any evidence suggesting that the creditor “engaged in anything other than a simple factfinding inquiry.”
The Second Circuit said that the automatic stay “does not prohibit all acts which coincidentally set in motion the creation” of a lien. Rather, there must be an act “to create, to perfect, or to enforce a lien.”
“Because [the creditor] engaged only in factfinding and did not attempt to create, perfect, or enforce its lien, [the creditor] did not violate the stay.”
To read ABI’s discussion of the district court opinion, click here.