Annulment of the Automatic Stay
| Publication year | 1991 |
| Pages | 1811 |
| Citation | Vol. 20 No. 9 Pg. 1811 |
1991, September, Pg. 1811. Annulment of the Automatic Stay
When a debtor files a petition in bankruptcy or an involuntary petition is filed against an alleged debtor, creditors of the debtor automatically are stayed from commencing or continuing actions to collect their debts, either from the debtor or from property of the debtor's estate.(fn1)A creditor may request that the court grant it relief from the stay to proceed with its action.(fn2)The Bankruptcy Code grants the bankruptcy court broad discretion in the formulation of appropriate relief by providing that the court may terminate, annul, modify or condition the stay on an appropriate evidentiary showing.(fn3)
This article discusses how various courts, including the Tenth Circuit Court of Appeals, have treated the issues arising from a request for annulment of the automatic stay. It also provides guidelines for both seeking and challenging such an annulment.
Courts traditionally have held that an action taken in violation of the automatic stay is void and of no effect.(fn4) Creditors that inadvertently have violated the automatic stay nevertheless have looked to the broad language of the relief from stay provisions and, particularly, to the annulment language, in an attempt to establish the validity of their post-petition actions.
The leading decision on annulment of the automatic stay is In re Albany Partners, Ltd.(fn5)In that case, the creditor was in the process of foreclosing on property when it discovered that title to the property had been transferred to an entity which subsequently had filed bankruptcy. Believing the transfer to be unperfected, the creditor proceeded with the foreclosure and then sought retroactive relief from the automatic stay to validate its actions. In response, the debtor brought a contempt action against the creditor for violating the automatic stay.
The court found that the bankruptcy case had been filed in bad faith simply in an effort to avoid the foreclosure proceeding. In addition, the court found that grounds for relief from stay had been established by the creditor. While the court observed that acts taken in violation of the automatic stay generally are void, the court noted that the courts are authorized to annul the stay. Because annulment contemplates retroactive relief, it has the effect of validating acts that otherwise would be void. Thus, the court determined that when the debtor has acted in bad faith in filing the bankruptcy case, the court is justified in annulling the stay to prevent the creditor from incurring further harm and expense in protecting its rights.(fn6)
Numerous other courts have expanded the bases for granting annulment of the automatic stay. Generally,
The creditor's lack of knowledge of the bankruptcy case, or reasonable belief that the bankruptcy case does not affect the creditor's proceeding, is typically a prerequisite to annulment.(fn8) Where the creditor acts innocently, some act of bad faith of the debtor, such as a bad faith bankruptcy filing(fn9) or successive, abusive bankruptcy cases,(fn10) will justify annulment of the stay[t]he availability of annulment protects creditors and third parties who have, innocently and without knowledge of the [bankruptcy] case, taken actions or detrimentally changed their positions in pursuit of their state or federal remedies. Annulment has also proven an effective weapon against debtor fraud, because the bankruptcy court can break a cycle of abusive, multiple bankruptcy petitions filed to hinder and delay creditors----(fn7)
The Tenth Circuit has ruled that a debtor could not challenge a judgment entered against him in malpractice litigation brought in violation of the automatic stay, where the debtor actively participated in the litigation and failed to...
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