Section 108(c) Tolls the Expiration of a Lien, Ninth Circuit Holds over a Dissent

Drawing on two of its own precedents, a divided panel of the Ninth Circuit held that the tolling provisions in Section 108(c) prevent a lien on personal property from expiring during the pendency of a bankruptcy case under a unique California law.

Section 108(c) extended the duration of the lien, even though the creditor evidently could have extended the lien by filing a notice under Section 546(b)(2).

A creditor held an unsatisfied money judgment. Under California law, the creditor obtained an Order for Appearance and Examination, or ORAP, requiring the judgment debtor to appear for an examination. By serving the order on the debtor, the California statute gave the creditor a one-year lien on the debtor’s personal property.

The lien was a secret lien in the sense that another creditor would only be aware of the lien by searching for lawsuits against the debtor and reading the individual dockets.

Before the one-year lien expired, the debtor filed a chapter 7 petition. The creditor filed a timely proof of claim.

The creditor did not take any action to extend the ORAP lien within the one-year period. About two years after the lien would have expired under state law, the creditor initiated an adversary proceeding in bankruptcy court seeking a declaration that her lien had priority over the trustee’s hypothetical judicial lien.

On summary judgment, the bankruptcy court ruled that the ORAP lien had expired and was not tolled by Section 108(c). On appeal, the Bankruptcy Appellate Panel reversed, holding that the expiration of the lien was tolled by Section 108(c). The trustee appealed to the Ninth Circuit.

In a 2/1 decision on October 22, the Ninth Circuit upheld the BAP in a majority opinion written by Circuit Judge Jay S. Bybee.

To Judge Bybee’s way of thinking, the outcome was governed by two Ninth Circuit precedents. In Spirtos v. Moreno (In re Spirtos), 221 F.3d 1079 (9th Cir. 2000), the appeals court held that Section 108(c) tolls the period for renewing a judgment. Spirtos in part relied on Miner Corp. v. Hunters Run LP (In re Hunters Run LP), 875 F.2d 1425 (9th Cir. 1989), where the Ninth Circuit held that Section 108(c) tolled the period for enforcing a mechanics’ lien.

Judge Bybee nonetheless analyzed the statute’s two pertinent provisions, Sections 362(a) and 108(c). In separate subsections of Section 362(a), the automatic stay enjoins the “commencement or continuation” of legal proceedings and the “enforcement . . . of a judgment.”

In contrast, Section 108(c) does not differentiate between the continuation of legal proceedings and the enforcement of judgments. Instead, Section 108(c) only extends the time under nonbankruptcy law “for commencing or continuing a civil action in a court other than a bankruptcy court . . . .”

Judge Bybee therefore analyzed whether an ORAP lien “constitutes ‘commencing or continuing a civil action.’” He also explored whether the omission of a reference to enforcement of judgments in Section 108(c) means that the ORAP lien expired, because an ORAP lien is one of California’s means for enforcing a judgment.

Citing the Collier treatise, Judge Bybee said that Section 362(a) contains overlapping provisions to ensure that the automatic stay is expansive. Therefore, he said, the references in Section 362(a) to the commencement of legal proceedings and enforcement of judgments are not mutually exclusive.

Guided — if not compelled — by Spirtos and Hunters Run, Judge Bybee held that the expiration of the ORAP lien was tolled by Section 108(c) because enforcing a judgment falls within the rubric of “commencing or continuing a legal action.”

Judge Bybee found support in Morton v. National Bank of N.Y.C. (In re Morton), 866 F.2d 561 (2d Cir. 1989), where the Second Circuit held that the expiation of a 10-year judgment lien was tolled by Section 108(c).

Judge Bybee ended his opinion by expressly holding “that the period in which a creditor may enforce a judgment by executing on a lien constitutes the continuation of the original action that resulted in the judgment.”

Arguably, Section 108(c) should not have applied because the creditor likely could have served a notice under Section 546(b)(2) to extend the perfection of the lien. However, Judge Bybee said that the Ninth Circuit had already ruled in Spirtos that Section 108(c) applies whenever the automatic stay bars enforcement of a judgment.

Circuit Judge Kim McLane Wardlaw dissented. Focusing on the plain language of the statute, she found significance in the omission of “enforcement” from Section 108(c). She said that enforcing a lien “is simply a different animal” from “commencing or continuing a civil action.”

Judge Wardlaw said that Section 108(c) “expressly does not address” enforcement of a judgment. She saw the omission of enforcement in Section 108(c) to be “particularly persuasive” because the automatic stay applies “not only to ‘commence and continuation’ but also ‘enforcement . . . of a judgment . . . .’”