If a court other than the bankruptcy court rules on a pending matter by handing down a decision after the bankruptcy filing, is the resulting order null and void as a violation of the automatic stay?
“Maybe yes, maybe no.” That’s the answer from the Ninth Circuit Bankruptcy Appellate Panel in an opinion on April 5. A stay violation depends on whether the creditor was on the offensive or the defensive.
The owner of a condominium unit was behind in the payment of assessments by the homeowners’ association. The unit was subject to a mortgage. The purchaser of the unit at the HOA’s foreclosure sale was the entity to become the chapter 11 debtor later.
After foreclosure, the foreclosed homeowner sued the purchaser in federal district court, along with the HOA, the mortgagee and everyone else in sight. The homeowner sought a declaration that the foreclosure was invalid in view of alleged defects in the mortgage. The purchaser filed an answer, counterclaims and crossclaims, contending that the HOA’s foreclosure had extinguished the mortgage.
The mortgagee filed a motion for summary judgment, seeking a declaration that the purchaser bought the unit at foreclosure subject to the mortgage. The motion was sub judice in district court when the purchaser filed a chapter 11 petition.
After bankruptcy, the district court ruled on the summary judgment motion and held that the now-bankrupt purchaser bought the unit subject to the mortgage.
Back in bankruptcy court, the debtor-purchaser sued the mortgagee, contending that the mortgage was invalid because it did not contain a correct description of the property, among other defects.
The mortgagee filed a motion to dismiss. Bankruptcy Judge Michael K. Nakagawa granted the motion based on issue preclusion, previously known as collateral estoppel. The debtor appealed.
For the BAP, Bankruptcy Judge William J. Lafferty affirmed, first laying out the elements of claim preclusion.
Claim preclusion cuts off claims that were raised or could have been raised in the prior proceeding if (1) there is an identity of claims; (2) there was a final judgment on the merits; and (3) there was identity or privity between the parties.
On appeal in the BAP, the debtor only argued there was no final order on the merits because the order of the district court was in continuation of an action against the debtor and thus invalid as a violation of the automatic stay.
Judge Lafferty analyzed each of the subsections in Section 362(a), beginning with subsection (a)(1). He said that it “applies only to actions against the debtor.” [Emphasis in original.]
Judge Lafferty summarized the distinction between defensive and offensive claims by a creditor, saying,
The cases holding that a creditor’s defense of claims brought by a debtor do not violate the automatic stay typically involve facially defensive actions such as moving for summary judgment of dismissal of a complaint filed by a debtor. On the other hand, the commencement or continuation of a creditor’s counterclaim for affirmative relief will generally be construed as a stay violation. [Citation omitted.]
Judge Lafferty therefore analyzed whether the action was against the debtor at its inception. He said that the debtor began the fight by aiming to invalidate the mortgage. “Under any common sense interpretation,” the mortgagee’s counterclaims and summary judgment motion were defenses to the debtor’s claims, he said.
In other words, “all [the mortgagee] was doing was defending its lien against [the debtor’s] attack,” Judge Lafferty said. Therefore, the order by the district court did not violate Section 362(a)(1), even though it disposed of the mortgagee’s counterclaims against the debtor.
Next, Judge Lafferty looked at Section 362(a)(3), which precludes taking possession of property of the estate. In that respect, he cited the Supreme Court for the proposition that “[a]cts that simply maintain the status quo do not violate the automatic stay.” City of Chicago v. Fulton, 141 S. Ct. 585, 590 (2021). To read ABI’s report on Fulton, click here.
Judge Lafferty noted that the mortgage existed on the filing date and that the order of the district court “simply affirmed the validity of the existing lien. It did not affect [the debtor’s] possession or control of the Property.” Not changing the status quo, the order did not violate Section 362(a)(3).
With regard to Sections 362(a)(4) and (a)(5), Judge Lafferty alluded to the teaching of Fulton that “not every post-petition act or omission that could conceivably affect property of the debtor or the estate is a stay violation.”
Judge Lafferty found no violation of Sections 362(a)(4) and (a)(5) because the order did not create, perfect or enforce a lien. Indeed, he said that the mortgagee had filed a motion in the bankruptcy case for a modification of the stay to permit enforcement of the lien after the district court had upheld the validity of the mortgage.
The BAP upheld the bankruptcy court’s dismissal of the debtor’s complaint, because the district court’s order did not violate the automatic stay and supplied the elements of claim preclusion.
Observations
Judge Lafferty’s opinion should not be understood to mean that a plaintiff can sit tight if a matter is sub judice when the defendant files a bankruptcy petition.
A pair of recent decisions suggest that a creditor is obliged to inform the nonbankruptcy court about the defendant’s bankruptcy filing and attempt to stop the proceeding, if, for instance, the creditor’s pending motion seeks an attachment or transfer of property.
See Stuart v. City of Scottsdale (In re Stuart), 632 B.R. 531 (B.A.P. 9th Cir. Nov. 10, 2021); and Margavitch v. Southlake Holdings LLC (In re Margavitch), 20-00014, 2021 BL 383922, 2021 Bankr Lexis 2784, 2021 WL 4597760 (Bankr. M.D. Pa. Oct. 6, 2021). To read ABI’s reports, click here and here.
If a court other than the bankruptcy court rules on a pending matter by handing down a decision after the bankruptcy filing, is the resulting order null and void as a violation of the automatic stay?
“Maybe yes, maybe no.” That’s the answer from the Ninth Circuit Bankruptcy Appellate Panel in an opinion on April 5. A stay violation depends on whether the creditor was on the offensive or the defensive.
The owner of a condominium unit was behind in the payment of assessments by the homeowners’ association. The unit was subject to a mortgage. The purchaser of the unit at the HOA’s foreclosure sale was the entity to become the chapter 11 debtor later.
After foreclosure, the foreclosed homeowner sued the purchaser in federal district court, along with the HOA, the mortgagee and everyone else in sight. The homeowner sought a declaration that the foreclosure was invalid in view of alleged defects in the mortgage. The purchaser filed an answer, counterclaims and crossclaims, contending that the HOA’s foreclosure had extinguished the mortgage.