May a Bankruptcy Court Annul the Automatic Stay after Acevedo?

In Acevedo, the Supreme Court ruled in February that a nunc pro tunc order can only memorialize an action that the court actually took at a previous time but was not officially recorded. In other words, nunc pro tunc cannot create the fiction of an action that the court did not actually take.

Acevedo raises this question: Are bankruptcy courts now prohibited from annulling the automatic stay?

In an opinion on April 30, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., appeared to hold that annulling the automatic stay, or modifying the stay nunc pro tunc, cannot allow a state court order to stand if it was entered in violation of the automatic stay.

Good Grounds for Annulment

The facts before Judge Grossman were similar to those where courts have annulled the automatic stay: Engaged in shenanigans, the debtor filed his second chapter 13 petition two days before a scheduled foreclosure sale. Unaware of the bankruptcy filing, the lender proceeded with the sale and took title to the property.

Learning later about the bankruptcy filing, the lender filed a motion to modify the automatic stay nunc pro tunc to the day before the foreclosure sale.

Under law before Acevedo, the lender was on solid ground for obtaining an annulment of the automatic stay and giving a retroactive blessing to the foreclosure sale that was otherwise void. Judge Grossman cited authorities in his district laying out a seven-part test that would seemingly allow him to annul the stay and thereby validate the foreclosure sale.

Nonetheless, Judge Grossman denied the motion, relying on Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696, 206, L. Ed. 2d (Feb. 24, 2020). To read ABI’s report on Acevedo, click here.

The Lack of Jurisdiction in Acevedo

The facts in Acevedo will be critical in deciding how far the decision goes.

The defendant had removed a lawsuit from a Puerto Rico commonwealth court to federal district court based on the pendency of a bankruptcy case. Later, the bankruptcy case was dismissed, but the district court at the time did not remand the suit to the commonwealth court.

Later still, the commonwealth court assumed that its jurisdiction had been restored and entered a money judgment against the defendant. After that, the plaintiff prevailed on the district court to enter an order nunc pro tunc remanding the case to the commonwealth court as of the date of the dismissal of the bankruptcy.

The Supreme Court granted certiorari to address complex First Amendment issues. Without reaching the constitutional issues and without oral argument, the Supreme Court reversed and remanded, ruling that the Puerto Rico court was without jurisdiction to enter orders at the critical time because the suit had not been remanded when the judgment was entered.

The Supreme Court quoted one of its prior decisions to say that a nunc pro tunc order may “‘reflect[] the reality’” of what has occurred. A nunc pro tunc order, the Court said, “presupposes” that a court has made a decree that was not entered on account of “inadvertence.”

In other words, the high court will allow nunc pro tunc orders only if the court had made a ruling but failed to enter an order at the time.

In Acevedo, the commonwealth court was without jurisdiction when it entered a money judgment against the defendant. Because the district court had not acted, it was without power to enter an order nunc pro tunc remanding the case and restoring jurisdiction in the Puerto Rico court, the Supreme Court said.

Judge Grossman’s Analysis

With regard to annulling the automatic stay or modifying the stay nunc pro tunc, Judge Grossman said the “landscape of the law is different post-Acevedo.” The Supreme Court, he correctly said, “has clarified that nunc pro tunc relief cannot be used to confer jurisdiction where none existed.”

After bankruptcy, Judge Grossman said, the foreclosure court in the case before him was “divested of jurisdiction . . . [and] any action taken by the state court with respect to the debtor’s property is void.” In other words, the foreclosure sale “was void.”

Consequently, Judge Grossman concluded that “nunc pro tunc relief cannot be used to change the outcome of a void foreclosure sale.” He therefore ruled that because “nunc pro tunc relief cannot be granted to confer jurisdiction on a state court where none existed, the motion must be denied in its entirety.”

The April 30 opinion is Judge Grossman’s second decision dealing with Acevedo. In March, he held that nunc pro tunc retention was not required for him to grant compensation to counsel for a period of time before entry of the retention order. In re Benitez, 19-709230, 2020 WL 1272258, 2020 BL 95485 (Bankr. E.D.N.Y. March 13, 2020). To read ABI’s report, click here.

Observations

Does Acevedo mean that a bankruptcy court can never grant retroactive relief or relief effective as of a date before the underlying motion was entered? Can counsel be retained as of the filing date although the motion for retention was not filed until a day or two later? May the court reject an executory contract as of the filing date if the rejection motion was not filed until days or weeks later?

And does Acevedo only pertain to situations where the court lacked jurisdiction? Perhaps Acevedo generally proscribes nunc pro tunc orders but does not categorically preclude an order from being effective as of an earlier date, assuming the court has jurisdiction.

In the case before Judge Grossman, did bankruptcy divest the state court of jurisdiction, or did the automatic stay only preclude the state court from taking some types of actions?

Even assuming the foreclosure sale was void on account of the automatic stay, did the state court have jurisdiction, even though its actions may have been void? If the state court was not altogether divested of jurisdiction, did the state court have sufficient jurisdiction so that its actions could be validated at a later time?

As usual, decisions by the Supreme Court raise more questions than they answer.