Tag Archives: automatic stay

October 20, 2015

Ninth Circuit Holds That Debtor May Recover Attorneys’ Fees Incurred Prosecuting Action for Damages Relating to Violation of Automatic Stay

    The Ninth Circuit has overruled its own relatively recent decision and has held that a debtor who sues for damages to redress a violation of the automatic stay may recover the reasonable fees it incurs prosecuting the action, even after the stay violation is cured.

    The Bankruptcy Code’s automatic stay provision, section 362, includes this fee recovery clause: “[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees . . . .”  11 U.S.C. § 362(k).  The Ninth Circuit, in contrast to every other court to consider the issue, held in 2010 that section 362(k) allows a debtor to recover only those fees incurred to end the stay violation itself, not the fees incurred to prosecute an action for damages.  See Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010).  In a decision issued last week, the Ninth Circuit overruled its own Sternberg decision and held that a debtor may recover the reasonable fees it incurs prosecuting a damages action relating to a stay violation.  See In re Schwartz-Tallard, Case No. 12-60052 (9th Cir. Oct. 14, 2015).  (See opinion here.)

    In Schwartz-Tallard, a loan servicer foreclosed on the home of a chapter 13 debtor during the debtor’s bankruptcy, while the debtor was making its monthly payments.  The bankruptcy court found that the creditor had violated the automatic stay and ordered the creditor to reconvey the home to the debtor.  The creditor promptly complied.  The debtor also sought a damages award, and prevailed.  The creditor appealed the damages award, and the debtor prevailed on appeal.  The debtor then sought to require creditor to reimburse the attorney fees the debtor incurred defending its damages award on appeal.  The bankruptcy court denied the motion because under Sternberg, debtors could be reimbursed only for the fees they incurred to end the stay violation.  Here, the creditor had remedied the stay violation before the successful appeal, and thus no fees could be awarded in connection with the appeal. 

    The Bankruptcy Appellate Panel reversed on grounds not relevant here and held that the debtor could recover her fees relating to the appeal.  The Ninth Circuit, first as a three-judge panel and then sitting en banc, affirmed the BAP’s decision, but not on the same grounds.  The Ninth Circuit held that Stenberg was decided incorrectly and that the plain text of section 362(k) allows a debtor to collect attorney fees regardless of whether the fees were incurred to remedy the stay violation or to seek damages resulting from a stay violation.  Though it found the text of section 362(k) unambiguous, the Ninth Circuit went on to state that the policies presumably underlying section 362(k) would be advanced only if debtors had adequate “means or financial incentive (or both)” to “vindicate their statutory right to the automatic stay’s protection.”

    The most obvious practical impact of Schwartz-Tallard is identified in the decision itself: debtors who previously lacked the financial incentive to pursue damages for stay violations may now be more willing to bring those actions.  For creditors and their attorneys, Schwartz-Tallard is simply another reminder to scrupulously respect the automatic stay.

January 6, 2015

Does the Reopening of a Bankruptcy Case Re-Impose the Automatic Stay? The U.S. Bankruptcy Court for the District of Colorado Answers This Question in the Negative

In a case of apparent first impression in the Tenth Circuit, the U.S. Bankruptcy Court for the District of Colorado recently held that the reopening of a closed case under § 350 does not result in the re-imposition of the automatic stay in the reopened proceedings.  In re Brumfiel, 514 B.R. 637 (Bankr. Colo. 2014). 

The facts in Brumfiel present a classic case of a debtor failing to disclose in her bankruptcy schedules a claim against a third party, then attempting to pursue that claim after receiving a discharge.  In the Brumfiel case, the claim consisted of a claim against the debtor’s mortgage lender, who was conducting foreclosure proceedings against the debtor’s home.  The lender had initially commenced non-judicial foreclosure under a “Rule 120 proceeding” but had subsequently opted to proceed with a Rule 105 judicial foreclosure proceeding.  The debtor filed bankruptcy, staying the foreclosure proceeding.  The debtor did not schedule any claims against the lender in her bankruptcy schedules.  Following her discharge, the lender again pursued its foreclosure action, and the debtor filed an action against the lender asserting claims for wrongful foreclosure, fraud, common law conspiracy and intentional and negligent infliction of emotional distress.  After the court dismissed her action for lack of standing based on her failure to disclose the claims in her bankruptcy schedules, the debtor filed a motion pursuant to § 350 to reopen her bankruptcy case, with the stated goal of obtaining the trustee’s abandonment of the claims against the lender so the debtor could pursue them.  The debtor did not, however, ask the court to re-impose the automatic stay.

The lender filed a motion for relief from stay.  The debtor opposed the motion for relief, contending the loan documents were forgeries or counterfeit documents, despite the fact that the state court in both the Rule 120 and Rule 105 actions had found the lender was the holder of the original note and deed of trust.  The bankruptcy court faced the following two questions:  (1) did the automatic stay apply in the reopened case, thereby requiring the lender to seek relief from stay in the first instance and (2) if the automatic stay had been re-imposed, did the lender establish a basis for relief from stay.

As to the first question, the court decided that the automatic stay was not re-imposed on the reopening of the bankruptcy case.  The court reasoned that only the filing of a petition imposes the automatic stay, and there is no language in § 350 providing for the re-imposition of the automatic stay on the reopening of a case.  Further, the court noted that the reopening of a bankruptcy case may be accomplished on limited notice, and that reopening is a ministerial act having no substantive effect in and of itself.  The court distinguished the decision of In re Diviney, 211 B.R. 951 (Bankr. N.D. Okla. 1997), aff’d, 225 B.R.  762 (B.A.P. 10th Cir. 1998), abrogated on other grounds by In re Johnson, 501 F.3d 1163 (10th Cir. 2007), because in Diviney, the order reopening the case also provided for the vacating of the prior order of dismissal and restoration of the case to its pre-dismissal position.  In Brumfiel, the debtor did not request that the order reopening her case vacate the order closing it, nor did the debtor request the order re-impose the automatic stay.  Consequently, the court held that the automatic stay was not re-imposed on the reopening of the case.

As to the second question, the court noted the Tenth Circuit’s opinion in In re Miller, 666 F.3d 1255 (10th Cir. 2012), where the Tenth Circuit held that a standing determination in a Rule 120 proceeding has no preclusive effect, and a creditor seeking relief from stay in order to proceed with a foreclosure must produce evidence of a right to payment.  However, the court noted that a motion for relief from stay is a summary proceeding, to be determined on an expedited basis, and the creditor does not have to prove standing by a preponderance of the evidence.  Instead, the creditor must show a colorable claim to an interest in the property.  Disputes over the creditor’s rights in the property will be ultimately determined by the court adjudicating the foreclosure.  In this case, the original note and deed of trust had been deposited with the state court, and the bankruptcy court had before it only copies of the relevant documents.  The bankruptcy court found that the lender had established a colorable claim to the property, and the debtor’s failure to make payments on the loan, to insure the property or pay the property taxes for several years established cause for relief from stay.  Further, the case was a chapter 7 proceeding, and so the property was not necessary to any effective reorganization.

September 3, 2014

Ninth Circuit — Bank Did Not Violate Automatic Stay by Placing Administrative Hold on Chapter 7 Debtors’ Bank Accounts

On August 26, 2014, the Ninth Circuit Court of Appeals held that Wells Fargo (the “Bank”) did not violate the automatic stay by placing a temporary administrative hold on a chapter 7 debtor’s bank accounts.  See In re Mwangi, 2014 WL 4194057 (9th Cir. 2014).  Holland & Hart represented the Bank in this significant victory.

The United States Supreme Court long ago held that a bank may impose an administrative hold on a debtor’s bank account to preserve the bank’s setoff rights.  See Citizen’s Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  The Ninth Circuit’s Mwangi decision builds on the Strumpf holding and establishes that an administrative hold may be proper even if its purpose is not to preserve setoff rights.

Facts

The Mwangis, chapter 7 debtors, held four accounts at the Bank with an aggregate balance of $52,000.  When the Bank became aware of the Mwangis’ bankruptcy filing, it placed an administrative hold on all four accounts, and sent two letters: one to the chapter 7 trustee requesting instructions as to how to dispose of the account funds, and one to the Mwangis’ counsel informing him of the administrative hold that would last until the Bank received instructions from the Trustee or until 31 days after the meeting of creditors.

The Mwangis requested that the Bank lift the administrative hold.  The Bank refused to do so without the chapter 7 trustee’s consent.  The Mwangis then moved for sanctions, alleging that the Bank willfully violated the automatic stay, which motion the bankruptcy court denied.  The Mwangis then filed a class action adversary proceeding on the same basis.  The bankruptcy court dismissed the adversary action with prejudice, and the district court affirmed. 

Statutory Background

The filing of a bankruptcy petition gives rise to an automatic stay that prohibits, among other things, “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  See Bankruptcy Code § 362(a)(3).  It also automatically creates an estate that includes all legal or equitable interests of the debtor.  See Bankruptcy Code § 541(a).  On the petition date, a chapter 7 debtor is required to turn over to the chapter 7 trustee all of the debtor’s property.  See Bankruptcy Code § 521(a)(4).  Pursuant to Bankruptcy Code § 522, the Debtor may claim certain property as exempt from the estate, and if no party objects to the exemption, the property becomes exempt, in most cases, 30 days after the meeting of creditors.  See Fed. R. Bankr. P. 4003(b)(1).  A Nevada statute exempts from a debtor’s estate 75% of the debtor’s weekly disposable earnings.  See Nevada Revised Statutes § 21.090(1)(g). 

The Ninth Circuit’s Holding

The Mwangis argued that they were injured by the administrative hold during two periods: (1) after the Debtor claimed the property as exempt, but before the exemption became effective; and (2) after the exemption became effective. 

The Ninth Circuit held that the Mwangis could not allege a plausible injury relating to either period.  After a debtor claims property as exempt, but before the objection period expires, the allegedly exempt property remains property of the estate.  Mwangi at *7.  Thus, during that period, the Mwangis had no right to possess or control the accounts funds, and could allege no plausible injury.

When the objection period expires (typically 30 days after the meeting of creditors), exempt property revests in the debtor and ceases to be property of the estate.  The Mwangis alleged a violation of § 362(a)(4), which notably refers only to property of “the estate,” not property of the debtor.  Thus, once the exempt account funds revested in the Mwangis, the Bank’s administrative hold could not violate § 362(a)(4) because it did not affect estate property.  Id.

Conclusion

The Mwangi decision, like the Supreme Court’s 1995 Strumpf decision, should comfort banks that seek to impose administrative holds on debtors’ bank accounts.  This is particularly true where, as in Mwangi, the bank’s motivation for the administrative hold is to comply with the Bankruptcy Code and Rules.

October 31, 2013

Ninth Circuit BAP Holds that Foreclosure Occurring After Abandonment May Violate the Automatic Stay

Under Section 554 of the Bankruptcy Code, the trustee may
abandon any property of the estate that is burdensome to the estate or that is
of inconsequential value and benefit to the estate.  Once the trustee abandons an asset that
serves as a secured lender’s collateral, the lender may assume that it may
proceed with foreclosure or repossession of the property since the asset has reverted
back to the debtor.  However, based on a
recent decision from the Bankruptcy Appellate Panel for the Ninth Circuit this
assumption is not only incorrect but may also give rise to a finding that the
lender violated the automatic stay.

In Gasprom, Inc. v.
Fateh
, BAP No. CC-12-1567-KuKiTa (B.A.P. 9th Cir. filed October 28, 2013), the
chapter 7 debtor had one asset of significance—a non-operational gas station
(the “Station”).  The chapter 7 trustee
decided to abandon the Station because she lacked the funds necessary to render
it operational and because the Station was fully encumbered.  The debtor objected to the abandonment claiming
that there was equity in the Station.  The
bankruptcy court overruled the debtor’s objection and authorized the
abandonment.  That same day, the secured
lender (whose interest encumbered the Station) proceeded with foreclosure.  Thereafter, the bankruptcy case was
closed.  Approximately one month after
the bankruptcy case’s closure, the debtor moved to reopen the case so that it
could seek to set aside the foreclosure sale and hold the secured lender in
contempt for violation of the automatic stay. 
The bankruptcy court agreed to reopen the bankruptcy case but held that
the foreclosure did not violate the automatic stay because upon entry of the
abandonment order, the automatic stay no longer enjoined the foreclosure sale
of the Station.  Therefore, the
bankruptcy court refused to set aside the foreclosure or hold the secured
lender in contempt for violating the automatic stay.

The debtor appealed the bankruptcy court’s order to the BAP
for the Ninth Circuit and the BAP held that the bankruptcy court erred when it
held that the foreclosure sale did not violate the automatic stay.  The BAP reached its holding by analyzing the
effect of abandonment on the debtor’s property and the various automatic stay
provisions under Section 362. 

Specifically, the court explained that upon abandonment, the
Station was no longer property of the estate and title to the Station reverted
back to the Debtor.  As a result, the
automatic stay provision that protects property of the estate no longer
applied.  See 11 U.S.C. § 362(c)(1).  However,
the abandonment did not terminate the aspect of the stay arising from Section
362(a)(5), which protects “property of the debtor.”  As a result, abandoned property continues to
be protected by the automatic stay to the extent it has reverted back to the
debtor, unless and until the case is closed or dismissed, or a discharge is
granted or denied. 

Based on the foregoing reasoning, the BAP held that the
bankruptcy court erred as a matter of law when it concluded that, immediately
upon abandonment, the automatic stay no longer enjoined the foreclosure.  Therefore, the BAP vacated the bankruptcy
court’s order and remanded for further proceedings consistent with its
decision.  

April 27, 2012

Tenth Circuit Prohibits Relief from Stay Where Bank Was Unable to Establish its Status as a “Party in Interest”

In In re Miller v. Deutsche Bank Nat’l Trust Co., 666 F.3d 1255 (10th Cir. 2012), the Tenth Circuit was faced with the determination of whether Deutsche Bank (the “Bank”) established that it was a “party in interest” and therefore, entitled to seek and obtain relief from the automatic stay.

Prepetition, the Debtors executed a promissory note (the “Note”) in favor of IndyMac Bank (“IndyMac”).  The Note was secured by a deed of trust (the “Deed of Trust”) on the Debtors’ real property.  The Debtors defaulted on the Note and the Bank, which claimed to be the current holder of the Note, filed a foreclosure action in Colorado state court (i.e. a Rule 120 Proceeding) seeking an Order Authorizing Sale (“OAS”).  The Debtors disputed the action by arguing that the state court lacked jurisdiction because the Bank lacked standing to seek an OAS because it was not an “interested person” for purposes of Colo. R. Civ. P. 120.  The state court disagreed and held that the Bank made a sufficient showing that it was an “interested person” because the Bank provided a copy of the Note, which had been indorsed in blank by IndyMac.  The Bank did not present the original Note to the state court.  The state court entered an OAS and found that the Bank had established jurisdiction.

Subsequently, the Debtors filed for bankruptcy protection and the Bank moved for relief from stay.  In its Motion, the Bank alleged that it was the current owner of the Note and Deed of Trust and it attached a copy of the Note to the Motion.  The Debtors objected to the Motion arguing that the Bank was not a proper “party in interest” and lacked standing to pursue the Motion because the Bank had failed to produce the original Note or establish that it was in possession of the Note.  At the preliminary hearing on the Motion, the Bank again produced a copy of the Note along with a copy of the Deed of Trust.  The bankruptcy judge queried into the location of the original Note and the Bank reassured the bankruptcy court that it would produce the Note at any evidentiary hearing the court may hold.  However, no further evidentiary hearing was held on the Motion.  Instead, the bankruptcy judge made findings from the bench and lifted the automatic stay.

The Debtors appealed the decision to the BAP.  The BAP affirmed the bankruptcy court’s ruling because it relied on the Rooker-Feldman doctrine which generally prohibits federal courts from entertaining suits by parties who have lost in state court and who seek review of the state court decision in federal court.  666 F.3d at 1260 (citing Rooker v. Fid. Trust Co., 263 U.S. 413 (1923)).  As a result, the BAP concluded that the bankruptcy court was prohibited from revisiting the state court’s decision that the Bank was an “interested person.”

The Tenth Circuit disagreed with both the bankruptcy court and the BAP.  The Tenth Circuit began its analysis by noting that while the Bankruptcy Code does not define the term “party in interest” for purposes of seeking relief from stay under Section 362(d), courts have concluded that to invoke Section 362(d), a party must either be a creditor or debtor of the bankruptcy estate.  Thus, the court’s primary focus was whether the Bank had established its status as a creditor of the Debtors’ bankruptcy estate.  The court determined the Bank had failed to do so for several reasons.

First, the court found that the Rooker-Feldman doctrine did not apply because while the Debtors “lost” on their standing argument in state court, they were not seeking review of that decision in the federal court; rather, it was the Bank that sought affirmative relief in federal court.  The Court noted that the appropriate doctrine to apply under the circumstances was not Rooker-Feldman, but rather, issue preclusion.  The Court, however, found that issue preclusion also did not apply because the Colorado Rules of Civil Procedure specifically state that the grant of a Rule 120 motion is without prejudice to the rights of any person aggrieved to seek injunctive relief and the Debtors obtained injunctive relief from the bankruptcy court in the form of the automatic stay.  Further, Colorado case law holds that Rule 120 Proceedings are non-final.  As a result, the rulings of a state court in such proceedings have no preclusive effect.  666 F.3d at 1262 (citing United Guar. Residential Ins. Co. v. Vanderlaan, 819 P.2d 1103, 1105 (Colo. App. 1991)).  Therefore, the Court found that neither the Rooker-Feldman doctrine nor issue preclusion applied to prevent the bankruptcy court from determining whether the Bank was a “party in interest.”

Second, the Court found that the Bank failed to independently establish its status as a “party in interest.”  Under the Bankruptcy Code, a “creditor” includes an “entity that has a claim against the debtor.”  666 F.3d at 1262 (citing 11 U.S.C. § 101(10)(A)).  A “claim” is a “right to payment.”  666 F.3d at 1262 (citing 11 U.S.C. § 101(5)(A)).  Accordingly, the Court needed to determine whether the Bank had a right to payment from the Debtors under Colorado law since property right determinations are a matter of state law.  Under Colorado law a promissory note that is indorsed in blank may become payable only to the bearer of the note.   666 F.3d at 1262 (citing C.R.S. § 4-3-109(c)).  The Note at issue was endorsed in blank and therefore, could become payable to any individual or entity bearing or possessing the Note.  The Bank, however, was not able to prove it was the “bearer” of the Note because it did not present any evidence before the state or bankruptcy courts that would establish that it had actual possession of the Note.  As a result, the Court found that the evidence was insufficient to establish that the Bank was a “party in interest” for purposes of Section 362(d) and reversed the BAP and bankruptcy court decisions.