A Creditor’s Perspective on Avoiding the Bankruptcy Code’s Automatic Stay

The first consideration for creditors during bankruptcy proceedings is the Automatic Stay provision of the Bankruptcy Code.  Section 362 of the United States Bankruptcy Code provides the provisions governing the Automatic Stay.  The Automatic Stay works as an immediate “injunction” that halts all actions by creditors and potential creditors to collect on pre-bankruptcy debts from a debtor who has declared bankruptcy.

The Automatic Stay applies in all bankruptcy proceedings, including Chapters 7, 11 and 13, and this provision is invoked automatically and immediately upon the debtor filing for bankruptcy.  The Automatic Stay is a benefit to debtors because once invoked it works to immediately stop all actions and proceedings to recover claims against the debtor.  Conversely, it is a detriment to creditors as they can no longer continue with either collection efforts or legal action for their claims against the debtor.

However, there are exceptions to the Automatic Stay which provide relief to creditors.  For creditors seeking to avoid the Automatic Stay, there are three subsections of Section 362, which can be invaluable if taken advantage of properly.  These include §§§ 362(b), (d) & (f), which can be considered the creditor’s best allies within the Bankruptcy Code.

First, Section 362(b) provides for built-in, statutory exceptions to the Automatic Stay for specific circumstances.  The following are examples of a few such circumstances in which the Automatic Stay is of no effect:

1)      criminal actions/proceedings against the debtor (§ 362(b)(1))

2)      obligations pursuant to ownership in financial securities, such as stocks, bonds and options (§ 362 (b)(6))

3)      a lessor’s actions to regain control over commercial property due to a lease expiration (§ 362(b)(10))

4)      an eviction action for residential property if the lessor received a judgment for possession of such property before debtor’s filing of bankruptcy and the eviction action is in regards to the endangerment of such property or the illegal use of controlled substances on such property  (§§ 362(b)(21) & (22))

The next section of the Bankruptcy Code that is friendly to the creditor is § 362(d), which allows for a creditor to petition the court for a “lifting of the Stay” or “relief from the Stay” in order to continue collecting a debt under certain circumstances.  The following are examples of a few situations in which a creditor may seek relief from the Stay:

1)      the creditor has a lack of adequate protection in the property in which the creditor has a secured interest (§ 362(d)(1))

2)      the debtor has no equity in the property that a secured creditor has an interest in, and such property is not necessary for reorganization under Chapter 11 (§ 362(d)(2))

3)      the creditor’s claim involves debtor’s real estate that the secured creditor has an interest in, unless, the real estate is a part of Chapter 11 reorganization or the debtor has voluntarily continued making payments (§ 362(d)(3))

4)      the creditor’s claim involves property in which the creditor has a secured interest, if the court finds debtor’s filing of bankruptcy was part of a scheme to delay, hinder or defraud creditors, which involved the transfer of ownership in that property              (§ 362(d)(4))

If a creditor has a claim where § 362(d) may allow for relief from the Automatic Stay, the creditor must follow certain legal procedures.  The creditor must first file a motion with the court.  The debtor is then entitled to a notice and a hearing regarding the creditor’s claims and reasons for petitioning the court for relief.  The creditor then has the burden to convince the court that it has a sufficient reason for obtaining relief from the Automatic Stay.

The third section of the Bankruptcy Code that is friendly to the creditor is § 362(f), which can be viewed as a catch-all for situations that arise that were unforeseeable to Congress when ratifying the Bankruptcy Code.  Section 362(f) states the following:

Upon request of a party in interest, the court, with or without a hearing, shall grant such relief from the stay . . . as is necessary to prevent irreparable damage to the interest of an entity in property, if such interest will suffer such damage before there is an opportunity for notice and a hearing under subsection (d) or (e) of this section.

In other words, when all else fails, a creditor should, at the very least, attempt an argument under § 362(f) that irreparable damage will occur to the property in question in order to protect its interest in the debtor’s property.

In the case of In re Pink Moon Enterprises, LLC., a landlord, after making a § 362(f) argument, was granted immediate relief from the Automatic Stay to continue his action to repossess property from the debtors.  444 B.R. 490 (Bankr. S.D.Fla. 490).  The court provided the landlord relief from the Stay because it found the leased premises posed a threat to public safety due to it having no power, inoperative emergency lighting, and no air conditioning, which created the threat of mold on the property.  Id.

In another case, In the Matter of Yasparro, the value of a debtor’s boat, based on an ordinary sale in an average market, was determined to be $140,000.  76 B.R. 207 (Bankr. M.D. Fla. 1987).  However, there were extremely soft market conditions at the time and it was doubtful the boat could be sold for that amount.  Id.  Moreover, the debtor had no income at the time of his bankruptcy filing and the amount owed to the creditor was $120,000.  Id.  The creditor argued that he should be granted relief from the stay, pursuant to § 362(d)(1), because his interest in the boat was not adequately protected.  Id.  The court agreed with the creditor and held that due to the debtor’s nominal equity in the boat, the soft market conditions, and the debtor’s lack of income in which to make adequate protection payments, the creditor was granted a modification of the Automatic Stay to pursue its interest in the boat.  Id.

Not all is lost for a creditor after one of its delinquent customers files for bankruptcy.  The creditor can take advantage of those sections of the Bankruptcy Code that are friendly to the creditor’s interests for the purposes of avoiding the Automatic Stay.  In fact, the following three step process is how a creditor should view approaching this endeavor:  (1) Is the creditor and/or the creditor’s claim statutorily exempt from the Automatic Stay under § 362(b)?  If not, then (2) does the creditor’s claim and/or circumstance allow for the creditor to request from the court relief from the Automatic Stay under § 362(d)?  If not, then (3) can the creditor make an argument, pursuant to § 362(f), that there will be irreparable damage to the debtor’s property, in which the creditor has a claim, if relief from the Stay is not granted.  While the Bankruptcy Code provides many benefits to debtors, there are provisions a creditor can use to protect its interest in the debtor’s property by avoiding the Automatic Stay.