The chapter 7 debtor lived in a home belonging to a limited liability corporation that she owned. Before bankruptcy, the lender filed a foreclosure suit against both the debtor and the LLC. Notified of the filing, the lender nonetheless conducted a foreclosure sale after bankruptcy.
Even though the home was not the debtor’s property, the Second Circuit found willful violations of the automatic stay in Sections 362(a)(1) and (a)(2).
The Facts
The debtor was the 99% owner of an LLC that owned the home that was her principal residence. The debtor had no personal liability on the mortgage.
The debtor stopped paying the mortgage in 2010. The lender initiated a foreclosure proceeding in 2011, eventually naming both the debtor and the LLC as defendants.
The lender won a judgment of foreclosure and sale in 2018. After entry of the judgment and a few days before the sale, the debtor filed a chapter 7 petition. Counsel for the debtor notified the lender about the bankruptcy and asserted that a sale would violate the automatic stay. The lender responded by claiming there was no stay because the home was not the debtor’s property.
The lender proceeded with the foreclosure sale after filing. The property was purchased by a third party.
Before the referee delivered the deed to the purchaser, the debtor sued the lender in bankruptcy court, alleging a willful violation of the automatic stay. At some later time during the bankruptcy case, the referee delivered the deed. The purchaser obtained a termination of the automatic stay and evicted the debtor from the home.
Finding no violation of the automatic stay, the bankruptcy court reasoned that the foreclosure action was purely in rem. The bankruptcy court dismissed the debtor’s suit.
The district court reversed, finding violations of Sections 362(a)(1) and (a)(2) and ruling that the stay violations were willful. The district court held that the debtor was entitled to actual damages. It remanded to the bankruptcy court to determine the amount of actual damages and to decide whether punitive damage should be imposed.
The lender appealed to the Second Circuit.
Finality
Neither party questioned the finality of the district court’s judgment, but the appeals court on its own examined its appellate jurisdiction in a lengthy footnote.
Unquestionably, the bankruptcy court’s order was final, but the district court remanded for further proceedings. Typically, a remand does not render an order nonfinal unless the remand is for significant further proceedings.
In her July 6 opinion handed down more than 12 months after argument, Circuit Judge Susan L. Carney said that the Second Circuit has not ruled in a precedential opinion whether a remand to fix damages amounts to “significant further proceedings.” She said her circuit has “repeatedly explained” in different contexts that the appeals court has discretion to decline to rule on difficult jurisdictional questions “so long as we are satisfied that we have Article III jurisdiction.”
Finding “hypothetical” appellate jurisdiction, Judge Carney held:
Here, where there is no doubt that we have Article III jurisdiction, where the statutory jurisdictional issue is novel and not addressed
by the parties, and where the merits turn on a straightforward textual analysis, we will exercise our discretion to assume hypothetical
jurisdiction and proceed to resolve the appeal on the merits.
In this writer’s view, the Second Circuit was reaching out to decide the merits of an important automatic stay question even though there may have been no appellate jurisdiction had the appeals court explored the issue.
The Stay Violation
In the circuit, the lender admitted that the debtor’s possessory interest in the property was part of her estate protected by the automatic stay. Judge Carney found stay violations under the “plain text” of Sections 362(a)(1) and (a)(2).
Subsection (a)(1) bars continuation of a judicial proceeding against a debtor. Given that the debtor was a named defendant in the foreclosure proceedings, Judge Carney said, “we can only conclude that the Foreclosure Action was ‘against the debtor’ and therefore covered by Section 362(a)(1).”
More particularly, she said that the sale conducted after filing was a “continuation” of an action against the debtor.
Subsection 362(a)(2) precludes “enforcement” against the debtor of a judgment obtained before bankruptcy.
The judgment of foreclosure and sale was entered before bankruptcy. The sale, conducted after bankruptcy, enforced a judgment against the debtor, Judge Carney said. She held, “The Sale therefore violated the plain terms of the stay imposed by Section 362(a)(2).”
The lender advanced numerous defenses not grounded on statutory language. Judge Carney dismissed the purported defenses, saying,
Here, that language [in Sections 362(a)(1) and (a)(2)] demands a bright-line rule that, so long as the debtor is a named party in a
proceeding or action, the automatic stay applies to the continuation of that proceeding, and to the enforcement of, a judgment
rendered in that proceeding.
Reliance on the canon against surplusage was one of the lender’s defenses, based on the idea that one action cannot violate two subdivisions in Section 362(a). Judge Carney found no indication that “Congress intended the automatic stay provisions to be mutually exclusive.” She expanded on the idea, saying,
Indeed, a congressional desire for comprehensiveness may lead the drafters of legislation to craft provisions that intentionally overlap
to some extent in an attempt to avoid any inadvertent gaps. That some overlap occurs on occasion does not require either striking or
ignoring the scheme.
Judge Carney also rejected the idea that the foreclosure was only in rem because the debtor had no personal liability on the mortgage. The argument, she said, was “fundamentally flawed,” because “Section 362(a) draws no textual distinction between in rem and in personam proceedings in which the debtor is a named party.”
The lender argued that foreclosure did not violate the stay because there was no effect on the estate.
Again declining not to venture beyond the language of the statute, Judge Carney said,
Here, we need not resolve whether the Sale would have a “likely” or a “certain” effect on [the debtor’s] estate. The inescapable fact is
that [the debtor] was a named party in the Foreclosure Action. And that fact subjected the Foreclosure Action to the automatic stay
regardless of its precise effects, equitable or legal, on her estate.
Rejecting numerous nonstatutory defenses, Judge Carney held:
[O]ur holding effects a bright-line rule: if the debtor is a named party in a proceeding or action, then the automatic stay imposed by
those subsections applies to the continuation of such a proceeding or action, under Section 362(a)(1), and to the enforcement of an
earlier judgment in that proceeding or action, under Section 362(a)(2). [The debtor’s] bankruptcy filing triggered the automatic stay
established by Section 362, and [the lender] violated that stay when it proceeded with the Sale.
Judge Carney affirmed the district court and remanded for further proceedings.
Observations
We recommend reading the opinion in full text to appreciate the range of defenses that Judge Carney rejected, because we mentioned only a few.
Judge Carney’s opinion is important in the wake of Taggart v. Lorenzen, 139 S. Ct. 1795, 1809 (2019), where the Supreme Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” The Second Circuit held in PHH Mortgage Corp. v. Sensenich (In re Gravel), 6 F.4th 503 (2d Cir. Aug. 2, 2021), that Taggart applies to all contempt citations in bankruptcy court. To read ABI’s report on Gravel, click here.
In sum, Judge Carney found no objectively reasonable basis for the lender to believe the stay was inapplicable.
This writer interprets the opinion in that manner because Carney upheld the district’s finding of a willful violation and remanded to consider punitive damages. Consideration of damages would have been inappropriate had the appeals court found an objectively reasonable basis for the lender’s defenses.
However, we note that the lender did not cite Taggart to the circuit. Should the lender raise Taggart on remand, the debtor can argue that the circuit’s mandate does not allow raising a defense that had been waived on appeal.
The chapter 7 debtor lived in a home belonging to a limited liability corporation that she owned. Before bankruptcy, the lender filed a foreclosure suit against both the debtor and the LLC. Notified of the filing, the lender nonetheless conducted a foreclosure sale after bankruptcy.
Even though the home was not the debtor’s property, the Second Circuit found willful violations of the automatic stay in Sections 362(a)(1) and (a)(2).