Almost two years after the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), it would appear that some of its provisions are meeting their objectives better than others. In the case of residential tenancy issues, the number of new disclosure requirements, coupled with submissions required to overcome the exceptions to the automatic stay, have had their intended effect. In reviewing this particular area of BAPCPA, the number of reported cases is scant, reflecting the limited issues subject to challenge.
With regard to the treatment accorded residential tenancy issues, where a judgment for possession has not been entered pre-petition, the state of the law remains unchanged. With regard to cases where the judgment for possession in the debtor’s residence has been entered pre-petition, the amendments and modifications brought about by BAPCPA have had a marked impact on the number of cases filed with the principal goal of retaining an interest in a residential lease.[1]
Residential Tenancy—Interplay between BAPCPA and State Law
It is generally accepted that the automatic stay applies to a debtor’s possessory interest in a tenancy. State law determines whether or not a debtor has an interest in real property. Courts have examined the outer bounds of such interest and have held that mere physical possession without more is insufficient to trigger the automatic stay. See Culver v. Boozer, 285 B.R. 163, 167 (D. Md. 2002). Likewise, “mere possessory interest (for instance, a ‘squatter’ or tenant at sufferance) in an expired lease at the time of filing has been held insufficient to sustain the protections of the automatic stay.” In re Turner, 326 B.R. 563, 573 (Bankr. W.D. Pa. 2005). Further, under many states’ laws, the tenant whose lease has expired retains no property interest in the tenancy that could ever become property of the estate. It follows that if the tenancy is not property of the estate, the automatic stay does not apply. However, it seems clear that in all jurisdictions a debtor/lessee’s belongings are “property of the estate.” See Ahart, Alan M., “The Inefficiency of the New Eviction Exceptions to the Automatic Stay,” 80 Am. Bankr. L.J. 125, 140 (2006). See also United States v. Whiting Pools Inc., 103 S. Ct. 2309, 2313 (1983); In re Atlantic Business Community Corp., 901 F. 2d. 325, 328 (3d. Cir. 1990).
Residential Leases: The State of the Law—No Judgment in Place
The automatic stay will protect debtors from a lessor’s quest for possession, eviction or unlawful detainer once a case has been filed if no judgment for possession has been entered. Moreover, attempts to collect rent, notice a default or nonrenewal of a lease could be construed as violations of the stay. See In re Lansaw, 358 B. R. 666 (Bankr. W.D. Pa. 2006) (as to a nonresidential lease). Relief from the stay is required to evict a debtor based on a post-petition default. In light of the existing provisions of the law, debtors may still propose to cure residential pre-petition rent arrears and assume residential leases in a chapter 13 plan.
Residential Leases: The New Exceptions to the Stay
Substantive changes arose in the area of residential tenancy issues with the enactment of BAPCPA. Provisions in 11 U.S.C. §362(b)(22) and 11 U.S.C. §362(b)(23) have created two notable exceptions to the automatic stay. Other provisions under 11 U.S.C. §362 (l)(5)(A) require that the debtor disclose the judgment of possession in the petition together with the landlord’s name and address (referred to as “lessor” in §362(d)(5)(A) and as “landlord” in the Official Voluntary Petition form). The debtor must also file a certification with the petition, in effect setting forth why the exception to the stay should not apply.
The exception set out in §362(b)(22) applies only where the lessor has obtained a judgment for possession pre-petition on a property in which debtor resides under a lease or rental agreement.[2] This exception to the stay takes effect 30 days after the commencement of a chapter 13 case, provided that the debtor meets the conditions set out in 11 U.S.C. §362(l). To salvage the tenancy for at least 30 days, the debtor must file a certification with the petition asserting that nonbankruptcy law permits a cure of the entire monetary default that gave rise to the judgment. Also, the debtor or his dependent deposits (pre-pays) one month’s rent with the clerk of the court. BAPCPA does not address the lessor’s right to object to the debtor’s initial certification, and presumably a lessor is not precluded from doing so (i.e., to challenge the truthfulness asserted in debtor’s certification). The debtor may extend the stay beyond 30 days under §362(l)(2) by filing an additional certification attesting that the pre-petition default that gave rise to the judgment has been cured in its entirety. If the lessor objects to this second certification, a hearing is required within 10 days to consider the merits. If the court rules in favor of the lessor, pursuant to §362(b)(22), the exception to the automatic stay applies.
Recent Reported Opinions
Few cases addressing residential tenancies have been published since the enactment of BAPCPA, the most colorful being In re Baird out of the Eastern District of Tennessee. This case, with some egregious facts and unsavory characters, serves as a good analysis of the applicability of §362(b)(22). In Baird, debtors filed for chapter 7 protection after the lessor obtained a judgment for possession. The debtors failed to comply with the provisions of §362(l). As a consequence, the court found that §362(b)(22) excepted the judgment from the automatic stay. However, the debtors sought the bankruptcy court’s assistance in retrieving their personal property from the residential property. The court held that the lessor had an affirmative duty to turn over the property pursuant to 11 U.S.C. §542(a). The court also found that the lessor had willfully violated the automatic stay in denying debtors access to their personal property and awarded damages to the debtors. In re Baird, 2006 WL 3922527 (Bankr. E.D. Tenn. 2006).
Are There Exceptions to the §362(b)(22) Exception to the Stay?
Judge Alan M. Ahart, a U.S. Bankruptcy Judge for the Central District of California, contends that if “¼ of a lessor has a pre-petition judgment against the debtor for possession, [he] would be barred from taking any further acts to obtain possession of the property (or from disposing of the debtor’s personal belongings) by both §362(a)(1) and §362(a)(2).” See Ahart, Alan M., “The Inefficacy of the New Eviction Exceptions to the Automatic Stay,” 80 Am. Bankr. L. J. 125, 142 (2006). Since the enactment of BAPCPA, bankruptcy courts have held that the §362(b)(22) exception may not apply in the case of a public housing tenant as the tenant is entitled to remain in the premises under 11 U.S.C. §525(a), even if the debtor discharges rather than cures the pre-petition rent default. In re Kelly, 356 B.R. 899 (Bankr. S.D. Fla. 2006). Additionally, a bankruptcy court in the District of Columbia held that §362(b)(22) did not apply where the foreclosure purchaser sought the eviction of a serial filer. There, the purchaser at foreclosure failed to assert that the debtor was a lessee or had a lease or rental agreement. Consequently, §362(b)(22) did not apply. In re McCray, 342 B.R.668 (Bankr. D.C. 2006). (The court vacated the stay on other grounds.)
As a practical matter, the 11 U.S.C. §362(b)(22) exception to the stay has plugged the dike in chapter 13 cases seeking to salvage a tenancy where the lessor obtained a judgment for possession pre-petition. Most debtors who would have the financial ability to cure pre-petition rent arrears within 30 days of filing would not be motivated to file for bankruptcy for the principal purpose of salvaging the tenancy.
BAPCPA does not direct that a lease or contract is rejected or ceases to be property of the estate if a judgment for possession has been entered pre-petition. Judge Lundin, in his treatise on chapter 13 practice, presumes that a bankruptcy court order allowing the assumption of a residential lease and specifying how a debtor will cure rental default would be a complete defense to the lessor’s action for possession. The provisions of §362(b)(22) will accelerate the assumption processes, but they do not denigrate a chapter 13 debtor’s rights under §§365 and 1322(b)(7). See Lundin, Keith, Chapter 13 Practice, 3d. Ed. Vol. 5 §382.1 (2006).
11 U.S.C. §362(b)(23): When Did Jack Clean Up His Act?
The second exception to the stay impacting residential tenancies is found in 11 U.S.C. §362(b)(23). This section provides that the automatic stay under §362(a)(3) (which applies exclusively to property of the estate), subject to the provisions of §362(m), will not apply to the eviction or similar proceeding involving residential property in which the debtor resides, under the circumstances described below. The exception acts to terminate the automatic stay upon the filing of a certification by lessor that during the 30 days preceding the filing of the certification the debtor endangered the property or used or allowed to be used a controlled substance on the property. Section 362(m)(1) provides for the application of the exception within 15 days of the filing of the certification. Unlike the provisions under §362(b)(22), this section does not prevent the automatic stay from taking effect upon filing. Additionally, §362(a)(1) would seem to enjoin a lessor from continuing any judicial action that was filed or served pre-petition against the debtor.
The debtor may file and serve an objection to lessor’s certification. If the debtor objects, the court must hold a hearing within 10 days to determine the merits of the objection. The objection keeps the automatic stay in place until the court enters its ruling. At the hearing, the debtor may argue that the lessor’s certification is inaccurate or demonstrate that the situation set forth in the certification has been remedied.
Section 362(m)(2)(C) does not specify a timeframe for the cure of the situation that gave rise to the certification. Thus, it is possible for the debtor to remedy the improper activity at any time before the hearing. If the court rules against the debtor or the debtor fails to object in a timely manner, the lessor may proceed with eviction. Since the exception is limited to §362(a)(3), the lessor may not proceed with enforcement against the debtor for pre-petition claims pertaining to such things as damages to the property without first moving for stay relief under §362(a)(1) and (a)(6).
Conclusion
Case law remains to be developed with respect to residential tenancy issues that will arise as a result of BAPCPA. At present the changes that have been enacted, coupled with the judicial opinions, suggest that the new residential tenancy provisions have been of greatest benefit to lessors. Until further decisions are published, it would be prudent for lessors to proceed with caution with regard to the limits of the automatic stay and for debtor/tenants to do likewise as it pertains to the cumbersome mandates required for compliance and ensuring protections.
[1] BAPCPA also amended a number of provisions pertaining to the assumption and rejection of nonresidential leases. However, these are not addressed here.
[2] The legislative history indicates that this exception extends to manufactured housing communities where the debtor pays rent for the lot.