Category Archives: Automatic Stay and Bankruptcy

You Do Not Have To Immediately Dismiss A State Court Lawsuit If The Defendant Files Bankruptcy

By Ryan C. Wood

This issue comes up all the time.  What I always hope is the creditor or plaintiff just dismisses the state court lawsuit without prejudice upon the filing of the bankruptcy petition.  The automatic stay goes into effect stopping any and all collection activity including lawsuits.  It just saves time and money for all parties.  Of course it is not that simple and I will discuss this issue in more detail below.  The important part is continuing status conferences or just maintaining the status quo and not dismissing the state court lawsuit once the defendant files for bankruptcy protection is not a willful violation of the bankruptcy automatic stay.  A recent Ninth Circuit Bankruptcy Appellate Panel decision addressed this issue.  See Jerome E. Perryman v. Karen Dal Pogetto, BAP No. NC-21-1036-BFS, Bk. No. 19-10253 (9th Cir. BAP 2021)

“Continuances like these keep the matter against the debtor ‘on hold’ consistent with the stay; they do not advance the matter in the creditor’s favor.”

See In re Welsch, 602 B.R. 682, 686 (Bankr. N.D. Ill. 2019) (holding that continuances in a prepetition domestic relations proceeding did not violate the automatic stay)

See In re Cobb, 88 B.R119, 120 (Bankr. W.D. Tex. 1988) (holding that a status hearing does not violate the automatic stay because it does not move the case forward to a judicial determination).

Just Maintaining The Status Quo In The State Court Lawsuit Not Willful Violation of The Automatic Stay

I really do not see the utility in continuing to have status conferences in a state court case that is dead or soon to be dead.  Each status conference requires a pre-conference statement be filed and then only thing to be communicated is the state court lawsuit is stayed until further notice.  It would make sense to then order the plaintiff to only schedule a status conference in the event there is no longer a stay in the bankruptcy case.  For some reason this does not always happen.  The only reason I can come up with is the plaintiff’s attorney wants to incur the time and bill their client.  The thing is more often not an attorney for the plaintiff has no interest in saving time and money.  The state court attorney that filed the lawsuit just got the rug pulled out from under them.  They may very well want to continue to appear for status conferences and have to file preconference statements before every conference.  They want to bill their client for that so …….

It Does Unnecessarily Increase Expenses

It is difficult enough for most bankruptcy attorneys to get paid for their time without complications.  So anything that increases the time I have to spend to get the job done is not good.  This is one of those issues.  I quote a client a fee for their case with the hope certain things play out as I plan and the amount I quoted is an amount I can make money on.  That is the deal.  When a creditor and/or their attorney choose to not dismiss the pre-bankruptcy state court lawsuit I have to spend additional time dealing with and explaining to my client what is going on and why, why a status conference statement continues to be filed in the state court case or why there continue to be status conferences.  It is just so much simpler and cheaper for the plaintiff to dismiss the state court lawsuit without prejudice.  If the defendant bankruptcy filer does not receive a discharge in their bankruptcy case the plaintiff/creditor can file the lawsuit again.  Or even better file a notice of stay of proceedings.  In California this is judicial council form CM-180.  If a defendant/debtor has made an appearance in the state court litigation under California law the defendant/debtor has the duty to file the notice of stay of proceeding.  Plaintiffs rarely if ever file a notice of stay of proceedings in the state court case. 

So in the Chapter 7 case upon entry of the order of discharge the state court lawsuit must be timely dismissed given the underlying claim is in fact legally discharged.

In a Chapter 13 case things get more complicated given a discharge is not received until after completion of the Chapter 13 Plan.  That could be as long as five years after the case is filed.  So in theory for five years a plaintiff could request the state court keep scheduling status conferences until the Chapter 13 Plan is complete and a discharged entered.  This is a common practice for foreclosure sale dates.  Upon the filing of a bankruptcy case a pending foreclosure sale of real property is stayed or stopped. 

Chapter 7 Case Versus Chapter 13 Case

As I began to discuss above there are differences whether the bankruptcy case filed is Chapter 7 or Chapter 13.  In Chapter 7 bankruptcy the debtor will most likely receive their discharge in 3 to 4 months after the petition is filed.  So the state court case can only be an issue for this short period of time even if not dismissed.  So one status conference is held or continued while the Chapter 7 case is still pending.  No big deal and this does not substantially increase bankruptcy attorneys time and expenses.  If the state court law is not dismissed upon entry of the debtor/defendant’s discharge then at some point it has to be a willful violation of the automatic stay.  In a Chapter 13 bankruptcy filing the Chapter 13 Plan is usually either 36 months or the maximum 60 months.  There can be five years for status conferences and status conference statements to deal with?  Potentially yes when the state court lawsuit is not dismissed.  Even of the notice of stay of proceeding is filed the state court could still choose to have periodic status conferences.  The entire point is to be ready to go in state court if for some reason the Chapter 13 case is dismissed.   Some Chapter 13 cases are filed to stop foreclosures or state court lawsuits temporarily with no intent to actually confirm a Chapter 13 Plan of Reorganization.  These case usually use the minimum documents, or a skeletal petition, to get the case started.  If a skeletal petition is filed then it is unclear whether the case will continue and the petition completed.  In this case it is perfectly reasonable to not dismiss the state court lawsuit unless the petition is completed and then a Chapter 13 Plan is confirmed or approved by the Court.  In a Chapter 13 case the end of the rode for creditors should be when a Chapter 13 Plan is confirmed or approved.  After that the debtor/defendant need only complete the plan to receive their discharge so why not dismiss the state court lawsuit at this point?  Well, the debtor/defendant has not completed the Chapter 13 Plan and received their discharge.  This is the, “So you say’ in I got a chance” syndrome.   At the off chance that the Chapter 13 case is dismissed the state court lawsuit is still there to be continued.

Chapter 13 Bankruptcy and Escrow Payments and Projected Escrow Shortages

By

Let the insanity begin. What I will be discussing today are mortgage payments that include property taxes and insurance. The property tax and insurance have been “impounded” as part of the normal monthly mortgage payment and is traditionally called an escrow account. So this type of mortgage payment includes principal, interest, property tax and insurance. Before discussing how this has become extremely frustrating when filing a Chapter 13 bankruptcy case in the Northern District of California let us look at why this situation exists to begin with.

Why Are Property Taxes and Insurance Not Paid Directly By The Borrower

Lenders need to protect their investment. Fine, so as part of that lenders need to ensure property taxes are paid timely and the home is insured. No problem. Here in California lenders cannot force an impound escrow account unless the borrower’s loan to value ratio exceeds 80 percent. I believe this is the most common reason why impound accounts exist. A house is purchased via some favorable program that allows less than a 20% down payment at the time of purchase resulting in a ratio 80% or more. So if you put 20% or more as a down payment then the mortgage company cannot force you into an escrow or impound account. A lender or loan officer could also suggest the borrower have an impound escrow account and the borrower then would voluntarily agree to it.

Also here in California servicers and lenders are required to pay 2% interest to borrowers on funds held in escrow accounts. See Cal. Civ. Code Section 2954.80.

Pursuant to the Real Estate Settlement Procedures Act (RESPA) the servicer or mortgage company must review the property taxes and insurance each year to make sure they are not holding a surplus. At the same time RESPA allows the servicer or lender to collect up to two additional months of escrow payments as a cushion or reserve to protect the servicer or lender in the event a borrower misses monthly mortgage payments. See 12 U.S.C §2609(a)(1).

This is where the problem is created.

How Can A Borrower Have A Projected Escrow Shortage If They Paid All Mortgage Payments When Filing a Chapter 13 Bankruptcy Case?

The key words here are “projected escrow shortage” at the time the chapter 13 bankruptcy case is filed by the bankruptcy attorney of the borrow. So yeah, property taxes change and so do insurance premiums, but not that much. When a borrower files for relief under chapter 13 and is current with all mortgage payments at the time of filing the petition the bankruptcy filer normally just keeps paying the servicer or mortgage company directly just like prior to the filing of the chapter 13 since there are no missed mortgage payments. If no missed payments then no problem; life goes on regarding the loan even though the chapter 13 petition is filed. The chapter 13 should have no effect on the servicer or mortgage lender or the borrower as the bankruptcy filer. The servicer or mortgage lender is a secured creditor and normally files a proof of claim in the chapter 13 bankruptcy case providing the amount of the total secured debt owed and that there are no mortgage arrears or missed payments prior to the case being filed.

Here is when there are more and more problems because of escrow or impound accounts and alleged shortages. Proof of claims are being filed for escrow shortages or projected escrow shortages even though the bankruptcy filer has paid the servicer or mortgage lender all mortgage payments as required.

If the shortage is projected the shortage does not yet exist until some future date? If it does not exist how can this projected shortage be part of a proof of claim? Or if there is future projected escrow shortfall the only way for the servicer or mortgage company to obtain the shortfall is supposed to be by increasing the future escrow payments after the bankruptcy case is filed just like if no chapter 13 had been filed in the first place.

But wait just a second. So now this touches on what is a “claim” in bankruptcy? The Supreme Court of the United States provides “right to payment” in the definition of “claim” meant “nothing more nor less than an enforceable obligation[.]” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). “Congress intended by this language to adopt the broadest available definition of `claim.'” Id; see also FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003). So applying these definitions to a projected escrow shortage we can all agree the shortage is a “right to payment” pursuant to RESPA and the cushion of two escrow payments and can be part of a proof of claim.

Why is this happening though? The servicer of mortgage company is not properly calculating their RESPA cushion prior to the chapter 13 being filed. After the servicer or mortgage company pays a borrower’s property tax there should be a balance in the escrow account representing two escrow payments, the RESPA cushion. This is not happening and when the chapter 13 case is filed it triggers a review of the escrow account and behold there is a projected shortage.

I am not sure why this has become an issue when this dynamic of escrow accounts and RESPA cushion have existed for a very long time, but it is a problem now. Creditors referring to other Circuit opinions that provide that the collecting of pre-petition projected escrow shortages through post-petition mortgage payments is a violation of the automatic stay and arguably opens the creditor to possible sanctions for the violation of the automatic stay. There are a number of potential solutions to the problem, but the one that makes the most sense is that servicers and mortgage companies just properly calculate the RESPA cushion upon review of escrow accounts like they are supposed and this should never be a problem upon the filing of a bankruptcy case. After all, the borrower has made all payments as required by the servicer or mortgage loan company. What more can the borrower to make sure this is not a problem but make the payment requested each month on time?

Another solution is the include language in the chapter 13 plan that provides the service or mortgage lender may collect a pre-petition escrow shortfall from post-petition payments and not be in violation of the automatic stay. This will most likely trigger the necessity of having a confirmation hearing regarding the chapter 13 plan when a hearing would not normally be necessary. This is a waste of judicial resources, the chapter 13 trustee’s time and the attorney for the debtor’s time given the servicer or mortgage loan company did not properly calculate the escrow payment prior to the chapter 13 being filed.

Another solution is to stipulate that the creditor may collect pre-petition projected escrow shortages from post-petition mortgage payments. There is no guarantee that the trustee’s office will sign-off on this stipulation and again could end up with a hearing regarding confirmation of the chapter 13 plan that normally would not have to take place.

To be fair I could also provide any number of scenarios that a debtor or their bankruptcy attorney creates in the course of seeking confirmation of a chapter 13 plan that creditors, the Court and trustee’s office believe to waste their time over and over again so ………… I am just writing about this issue from a bankruptcy filer’s perspective and their attorney.

Why Is It Difficult to Project Escrow Account Funds?

Here in California we have Proposition 13 that limits how much property taxes can increase each year. You would think this would allow servicers and mortgage companies to easily estimate future property taxes and property insurance payments year after year so that there are no issues. Again, I get how sometimes getting numbers right is difficult even when a good faith effort is made to get the numbers right.

It just appears the escrow analysis that is required by law is not happening until the chapter 13 case is filed and the projected escrow shortage is created. If the chapter 13 case was never filed the servicer or mortgage lender would just continue to send statements with a monthly dollar amount owed and the borrower would just keep making the payment each month and there would be no issues. The part of the monthly escrow payment would increase or decrease depending upon the whim of the servicer or mortgage company ……….

Be Very Careful If You Argue Your Deed Of Trust Or Loan Are Invalid So You Do Not Owe Anything On Your Home

By

Over and over again during the mortgage meltdown and now even years after the mortgage meltdown I have potential clients still wanting to argue that they owe nothing on their primary residence because of some issue with the loan, recording or assignment of the loan. Do not get me wrong. There is an exception to every statement anyone makes like this, but it is rare. What I can prove to you is state court lawsuit after state court lawsuit getting dismissed after you the homeowner were lied to about your chances of actually being successful at arguing you owe nothing even though you did not pay the loan off in full. I can also prove to you relief from stay after relief from stay granted by bankruptcy courts when someone files for bankruptcy protection and is behind on their mortgage payments then tries to argue I owe nothing. Since there still seems to be some confusion let me be clear.

If you do not pay your mortgage payment each month at some point your mortgage company will seek foreclosure and if you have filed for bankruptcy protection and do not pay your mortgage on time your mortgage or loan company will get relief from stay to start the foreclosure process in the real world. Hopefully the following provides some more detailed information about why to not argue you do not owe any money on your house. I do not think bankruptcy attorneys mislead potential bankruptcy clients about this topic but state court litigation attorneys still do.

A recent Ninth Circuit Bankruptcy Appellate Panel case from the Central District really highlights the issues with this argument and applicable law in the bankruptcy world. See BAP CC-18-1015-FLS.

Mortgage Company Can Assign or Transfer the Right of Collection of the Note Secured by the Recorded Deed of Trust

In this particular case here is the list of secured creditors for the bankruptcy filer regarding his deed of trust for his house in chronological order.
1. November 2014: GMAC Mortgage Corporation DBA ditech.com is the original loan company with recorded deed of trust for $315,000 and provides Mortgage Electronic Registration Systems, Inc. (“MERS”), as “nominee” for GMAC and its successors and assigns, was the beneficiary under the Deed of Trust;
2. June 2010: Through nominee MERS GMAC assigns deed of trust to GMAC Mortgage, LLC;
3. January 2011: The borrower and bankruptcy filer entered into a loan modification with MERS, nominee for the then-current holder of the Note, GMAC Mortgage, LLC;
4. May 2013: GMAC Mortgage, LLC assigned the Deed of Trust to Green Tree Servicing, LLC;
5. February 2016: Green Tree Servicing, LLC (which was then known as Ditech Financial LL) recorded the notice of default when mortgage payments were not made;
6. December 2017: Ditech Financial assigned the deed of trust to U.S. Bank Trust, N.A., as Trustee for LSF9 Master Participation Trust 13801; Servicer Caliber Home Loans, Inc. as its attorney in fact.
The assignments continued even after the borrower defaulted on payments and filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Ditech Financial filed the proof of claim in the bankruptcy case but U.S. Bank and Caliber as the servicer filed the motion for relief from the bankruptcy automatic stay for permission to continue to enforce their state court rights outside of bankruptcy. The bankruptcy filer and/or borrower unfortunately argued U.S. Bank/Caliber had no standing or no right to request relief from stay and that he was current with all post-bankruptcy filing mortgage payments.

The Motion For Relief From Stay

U.S. Bank/Caliber sought relief from the automatic stay under Section 362(d)(1) for cause alleging the borrower and bankruptcy filer failed to make over $19,000 in mortgage payments after the chapter 13 bankruptcy case was filed. First the borrower/bankruptcy filer argued that U.S. Bank/Caliber was not the “real party in interest.” Second that the Deed of Trust was defective at its inception given the original lender was listed as “GMAC Mortgage Corporation dba ditech.com,” but only “GMAC Mortgage Corporation” is registered in the state of Pennsylvania, while the fictional name “ditech.com” is not. Third, the borrower/bankruptcy filer claimed that the January 2011 modification agreement was invalid.

1. Real Party In Interest

In the bankruptcy world the key term regarding this issue “colorable claim” to enforce an alleged debt/claim. A claim is extremely broadly defined and I have written about this issue in a prior article. But a mere colorable claim is all that is required in the bankruptcy world.
See Arkinson v. Griffin (In re Griffin), 719 F.3d 1126, 1128 (9th Cir. 2013) (citing In re Veal, 450 B.R. at 915); see Edwards v. Wells Fargo Bank, N.A. (In re Edwards), 454 B.R. 100, 105 (9th Cir. BAP 2011)
“A party seeking stay relief need only establish that it has a colorable claim to the property at issue.” A party filing a motion for relief from stay or movant must have a colorable claim sufficient to bestow upon it standing to prosecute a motion under § 362 if the party/movant either: (a) owns or has another form of property interest in a note secured by the debtor’s (or the estate’s) property; or (b) is a ‘person entitled to enforce’ . . . such a note under applicable state law”). The borrower and bankruptcy filer argues that the stamp signature on one of the loan documents invalidates the documents. There does not need to be a lengthy discussion about this issue given an endorsement of a negotiable instrument does not require a “live” or “wet” signature. See U.C.C. § 3-204(a) and U.C.C. § 1-201 providing “signed” includes any symbol executed or adopted with present intention to adopt or accept a writing. Or more commonly known as “make your mark” for a valid signature or endorsement of a document. The alleged “stamp” signature argument fails.

2. Failure to Registered a Fictitious Business Name

This is an interesting argument. The borrower and bankruptcy filer also argues that GMAC Mortgage Corporation dba ditech.com did not register or fill out and file a fictitious business for ditech.com. The problem is that cannot invalidate a lender’s ability to make and enforce thousands upon thousands of dollars of loans…..
The borrower and bankruptcy filer then attempts to argue the various assignments between the parties listed above are invalid. This issue has been analyzed before, see: Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th Cir. BAP 2011). The Ninth Circuit provides a service has standing to seek relief from the automatic stay when the borrower files for bankruptcy protection.

3. I Did Pay All The Alleged Missed Mortgage Payments

Finally the borrower and bankruptcy filer argues he made all of the post-petition mortgage payments in a declaration but failed to provide any proof the mortgage payments were paid. As a bankruptcy attorney trying to help someone prevent relief from stay being granted this has to be the most frustrating thing to deal with. If mortgage payments are paid there has to be proof of the payment readily available. If you are behind on your mortgage payments most likely the only thing that can prevent relief from stay being granted is a plan the mortgage company will accept to pay back the missed mortgage payments and that means ALL of the missed mortgage payments up to when the motion for relief from stay is filed within a reasonable time. As a side note; most motions for relief from stay are filed for cause or missed mortgage payments regardless of the amount of equity a property has. Cause exists for relief from stay is you missed mortgage payments and cannot pay them back within a reasonable amount of time there is not much anyone can do for you.

How Much Time Do I Get If I Am Being Evicted Then File Bankruptcy?

By

What a question. It depends upon many things and if you want a guarantee of time before you must leave the home or apartment for nonpayment of rent when you are behind on the rent or lease payments someone would have to lie to you. Since that will not happen around here the answer to this question requires asking a few questions to know what is possible or not when a bankruptcy petition is filed and staying in a rental unit. There are just too many moving parts to make some sort of blanket statement about how much time you will get before you have to move out. So I will do my best to answer the question, “What happens if I am being evicted then file bankruptcy? How much time will I get in my place?”

So some guy calls me and says, “I got this form here from the internet that says I get thirty days.” Okay, what form? Response: I do not know. Does your landlord have an unlawful detainer judgment against you already? Response: I do not know. Okay, well, that is almost nothing to go on so here is what is possible if you file for bankruptcy protection and your landlord is trying to get you evicted.

Filing Motion For Relief From Automatic Stay

Once a bankruptcy petition if filed the automatic stay takes effect, is self-executing, and stops/enjoins any and all collection activity against you including evictions. A creditor/landlord can ask the Bankruptcy Court for relief from the automatic stay to continue the eviction though. In the Northern District of California Bankruptcy Court the local rules provide a hearing can be scheduled by creditor/landlord for a motion for relief from the automatic stay on 14 day’s notice. A creditor/landlord could also file a motion for shortened notice and try and get a hearing scheduled on their motion for relief from the automatic stay on less than 14 day’s notice. The notice procedure for hearing is different in different jurisdictions though so this timing may or may not apply in your jurisdiction. Also, this is assuming the landlord/creditor filed the motion for relief from stay as soon as possible after the bankruptcy case is filed. Generally notice of any bankruptcy case takes 4 – 7 days given notice to creditors is mailed via United States First Class Mail by the Bankruptcy Noticing Center. So a landlord/creditor would not even find out about the bankruptcy case until days after your bankruptcy attorney files the bankruptcy petition unless notice was faxed to the landlord/creditor given you are worried about eviction …. FRBP 4001(a)(3) also stops the enforcement of an order grating relief from the automatic stay unless FRBP 4001(a)(3) is waived. So if this rule is not waived you get another 14 days to stay before the order granting relief from stay is signed/entered.

But again does the landlord/creditor already have a judgment in the unlawful detainer lawsuit or have they even filed an unlawful detainer lawsuit against you?

Your Landlord Already Obtained An Unlawful Detainer Judgment For Right of Possession

If your landlord has already obtained an unlawful detainer judgment for right of possession then there is no automatic stay pursuant to Bankruptcy Code Section 362(b)(22). Section 362(b)(22) provides the automatic stay pursuant to Bankruptcy Code Section 362(a)(3) does not apply if: subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.

I will get to subsection (l) in a moment. For now our facts are your landlord sued you in an unlawful detainer action and has a judgment for possession before you filed your bankruptcy case. If so there is no automatic stay and as an experienced bankruptcy attorney I do know of attorneys out there that have had sheriff departments evict people within days of the filing of a bankruptcy case. The attorney for the landlord was good and knew what there were doing. Along with the other documents it takes to have someone evicted the landlord attorney also sent Section 362(b)(22) of the Bankruptcy Code and the sheriff followed the law. You get evicted in a matter of days of the filing for bankruptcy protection.

What Is This 30-Days I Get After Filing Bankruptcy If I Am Facing Eviction?

So finally we get to what this caller was actually talking about, Subsection (l) of 362 of the Bankruptcy Code. Subsection (l) provides: (1) Except as otherwise provided in this subsection, subsection (b)(22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, IF the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that— (A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and (B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition. This is now Official Form 101A: “Initial Statement About an Eviction Judgment Against You.” You must also deposit with the Clerk of the Court the rent amount for that 30 day period. That 30 days you get is not free. For the automatic stay to continue after the 30 days you must also then pay the entire amount due in the unlawful detainer judgment against you and fill out and file Official Form 101B: Statement About Payment of an Eviction Judgment Against You.
Are there other circumstances that this article may not address the could change what I just wrote above? Yes. Generally speaking if facing eviction you either do not have an unlawful detainer judgment entered against you or you do.

If The Person or Company I Sued Filed Bankruptcy Can I Continue My State Court Lawsuit?

Leave a reply

By

The greatest grant of power to the bankruptcy court is the automatic stay stopping any and all collection activity including lawsuits. As soon as the petition for bankruptcy is filed the automatic stay takes effect. Section 362 of the Bankruptcy Code governs the automatic stay and relief from the automatic stay to continue collection activity with the bankruptcy court’s permission. So what circumstances need to exist to obtain relief from the automatic stay and continue prosecution of a state court lawsuit?

What Is The Automatic Stay?

The automatic stay among other things, prohibits creditors from continuing to prosecute prepetition litigation against the bankruptcy filer. § 362(a)(1); see also In re Conejo Enterprises, Inc., 96 F.3d at 351. This aspect of the automatic stay protects both the debtor and the debtor’s creditors. The entire point is to not allow one creditor to continue collection to the detriment of another creditor. The assets of the bankruptcy filer, once a case is filed, if any assets, are to be distributed equally to creditors at the time the case is filed.

Grounds For Relief From The Automatic Stay To Continue State Court Lawsuit

This issue arises quite a bit under many different circumstances. The most common lawsuit that exists at the time a bankruptcy case is filed is breach of contract lawsuits. Rarely will a breach of contract case satisfy the requirements for relief from stay to continue. Relief from the automatic stay can be obtained for “cause.” The Bankruptcy Code unfortunately does not define what “cause” is though. Courts have had to interpret circumstances and create factors to evaluate. The Ninth Circuit uses the Curtis factors. See In re Curtis, 40 B.R. 795, 799–800 (Bankr. D. Utah 1984).

The Curtis factors consist of the following twelve nonexclusive factors:

(1) Whether the relief will result in a partial or complete resolution of the issues;
(2) The lack of any connection with or interference with the bankruptcy case;
(3) Whether the foreign proceeding involves the debtor as a fiduciary;
(4) Whether a specialized tribunal has been established to hear the particular cause of action and whether that tribunal has the expertise to hear such cases;
(5) Whether the debtor’s insurance carrier has assumed full financial responsibility for defending the litigation;
(6) Whether the action essentially involves third parties, and the debtor functions only as a bailee or conduit for the goods or proceeds in question;
(7) Whether the litigation in another forum would prejudice the interests of other creditors, the creditors’ committee and other interested parties;
(8) Whether the judgment claim arising from the foreign action is subject to equitable subordination under Section 510(c);
(9) Whether movant’s success in the foreign proceeding would result in a judicial lien avoidable by the debtor under Section 522(f);
(10) The interests of judicial economy and the expeditious and economical determination of litigation for the parties;
(11) Whether the foreign proceedings have progressed to the point where the parties are prepared for trial, and
(12) The impact of the stay on the parties and the “balance of hurt.”

The burden of proof on a motion to modify or for relief from the automatic stay is a shifting one. To obtain relief from the automatic stay, the bankruptcy attorney and party seeking relief must first establish a prima facie case that “cause” exists for relief under § 362(d)(1). Once a prima facie case has been established, the burden shifts to the debtor to show that relief from the stay is unwarranted. If the\ movant fails to meet its initial burden to demonstrate cause, relief from the automatic stay should be denied.

Unfortunately there are not clear guidelines for what constitutes a prima facie case given the analysis is on a case by case basis. A party’s production of enough evidence to allow the fact-trier to infer the fact at issue and rule in the party’s favor. See Black’s Law Dictionary (10th ed. 2014); see also In re Planned Sys., Inc., 78 B.R. 852, 860 n.7 (Bankr. S.D. Ohio 1987).

Congress’ legislative comments provide their desire to permit an action to proceed to completion in another tribunal may provide . . . cause” for stay relief, and “it will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from many duties that may be handled elsewhere.” H.R. Rep. 95-595, 341, as reprinted in 1978 U.S.C.C.A.N. 5963, 6297

The bottom line is bankruptcy attorneys need to be aware that the bankruptcy court’s focus on whether the continuation of the state court lawsuit screws up the administration of the bankruptcy estate. In some circumstances insurance is liable for any damages if the lawsuit is successful. Therefore, none of the assets of the bankruptcy estate are at risk either way. So why not let the lawsuit continue?

Why Continue With State Court Lawsuit?

To get a judgment and hopefully paid on the judgment. The most common lawsuit that exists at the time a bankruptcy case is filed is breach of contract lawsuits. Rarely will a breach of contract case satisfy the requirements for relief from stay to continue. There are other types of issues though that can continue and not disrupt the administration of the bankruptcy estate.