3.1 Introduction

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

3.1 INTRODUCTION

The automatic stay of section 362(a) is one of the most powerful provisions of the Bankruptcy Code. The stay operates as an injunction, "applicable to all entities," ¹ to prevent most actions that might be taken against (i) the debtor, (ii) any property of the debtor, and (iii) any property of the bankruptcy estate. ² The automatic stay is

one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. ³

The automatic stay operates nationwide and without notice once the debtor files its petition for relief ⁴ to preserve the status quo pending the determination by the bankruptcy court of the respective rights of the parties to share in the debtor's assets. For this reason, it is also described as a "debtor protection." ⁵

Relief from the automatic stay removes the injunction and places the parties in the position they were in before the commencement of the bankruptcy case. Relief from the stay is discussed below in paragraph 3.2.

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3.101 The Statute. The automatic stay is codified in section 362(a). That section states, in part:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . , or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 . . . , operates as a stay, applicable to all entities, of

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; ⁶

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) 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;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

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(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; ⁷ and

(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.

An important change effected by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) concerns the curtailment of the automatic stay if the debtor had one or more bankruptcy cases pending that were dismissed within one year of a second filing, so-called "serial filings," which are now rebuttably presumed to be in bad faith. ⁸ The statute creates an exception to the presumption of bad faith when the prior case was dismissed because the debtor created a "debt repayment plan." In that circumstance, the presumption does not apply in any subsequent case. ⁹

Where the debtor had one prior bankruptcy case that was dismissed within one year of the second filing, the stay is only effective until the thirtieth day after the date the new petition is filed. ¹⁰ During that first 30 days, a "party in interest," presumably the debtor or the trustee, can file a request that the stay be extended, and the hearing on this request must be held during that 30-day period. ¹¹

To justify an extension of the stay, the moving party must show by clear and convincing evidence that the filing of the second case was in good faith. Indicia of bad faith in the first filing include the debtor's failure to (i) file documents, (ii) provide adequate protection, (iii) adhere to the terms of a confirmed plan, or (iv) demonstrate that there has been a change in the

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debtor's circumstances substantial enough to justify the new filing. ¹² The court has the power to extend the stay as to all creditors or limit its extension to certain creditors. ¹³

When a debtor has had two or more cases pending within the previous year, no automatic stay goes into effect in the third or any subsequent case unless the case is refiled pursuant to section 707(b). ¹⁴ The court may enter an order confirming that no stay is in effect at the request of any party in interest. ¹⁵ As with the cases in which there has been only one previous petition filed and dismissed within the year, the moving party has the burden of proving good faith and also must prove that a substantial change in circumstances requires the stay to be imposed. ¹⁶ In a case under Chapter 11 or 13, the debtor must show that the plan can be fully performed. ¹⁷ The trustee also may seek the imposition of the stay to protect the bankruptcy estate when assets of "of consequential value" to the bankruptcy estate would otherwise be subject to relief. ¹⁸

The automatic stay in the subsequent case expires at the end of 30 days as to a purchase money secured claim on personal property or a lease on personal property, and that property is no longer the property of the estate unless the debtor files a statement of intent to retain or surrender or takes the action promised by such a statement within the time prescribed. ¹⁹ In cases where the debtor fails to file a statement of intent, if the loss of the property will affect the rights of other creditors the trustee also can make a motion to prevent the termination of the automatic stay within 30 days after the filing. ²⁰ If a statement of intent has been filed, the debtor generally has 30 days after the creditors meeting to perform in conformance with the terms of the statement, but the trustee can independently file a motion to extend

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the stay within 45 days of that meeting even if the debtor has not performed. ²¹

3.102 Purpose and Effect of the Automatic Stay. Except as described above, the automatic stay takes effect immediately upon the filing of a voluntary or involuntary bankruptcy petition under Chapter 7, 11, 12, or 13 of the Bankruptcy Code. It prohibits a broad range of actions and is unique in that it operates nationwide and is effective without requiring actual notice to creditors. ²²

The purposes of the automatic stay are to (i) afford the debtor relief from creditor action; (ii) achieve equality of distribution of property of the estate; and (iii) promote an orderly administration of the estate. ²³ The stay, by preventing any action by one creditor to the detriment of other creditors, prevents a "race of diligence." ²⁴ It is designed to prevent a "chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts." ²⁵ It similarly protects the creditors by "ensuring that the estate will be preserved against attempts by other creditors to gain an unfair advantage with respect to the payment of claims." ²⁶ The automatic stay provides the debtor the opportunity to formulate a plan for repayment and reorganization or rehabilitation. ²⁷

Other than the exceptions described in section 362(b), the automatic stay applies to most types of formal or informal action against the debtor, the

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debtor's property, or the property of the estate. ²⁸ Because it is applicable "against all entities," it affects most government agencies, including a federal district court in which a suit is pending. ²⁹

3.103 Voidness or Voidability of Actions in Violation of the Automatic Stay. It is an open question whether actions taken in violation of the automatic stay are void or voidable. The circuit courts are split on this point. ³⁰ The United States District Court for the Eastern District of Virginia has held that actions taken in violation of the stay are voidable, not void. ³¹ The Western District, on the other hand, has held that "[a]ctions taken in violation of the stay are void ab initio and without effect, regardless of lack of knowledge of filing of the petition." ³² The Third, Fifth, Sixth, and Eleventh Circuits have decided that actions taken in violation of an automatic stay are voidable rather than void. ³³ The Second, Ninth, and Tenth Circuits have held that such actions are void. ³⁴ The Fourth Circuit declined to decide the issue in the only case it has taken up that touched on the question. ³⁵

3.104 Pre-Petition Claims. Sections 362(a)(1) and (2), respectively, prohibit the commencement or continuation of any act that was, or could

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have been, commenced against the debtor or the debtor's property to (i) recover prepetition claims or (ii) enforce pre-petition judgments. ³⁶ Therefore, neither a promissory note made by the debtor pre-petition nor a pre-petition judgment may be enforced after the commencement of a bankruptcy case without obtaining relief from the automatic stay. The automatic stay also prevents the creditor from enforcing judgment on a postpetition claim against the debtor's property or the assets of the estate but does not protect the debtor itself from a postpetition claim. ³⁷ This does not apply to the perfection of certain liens. Section 362(b)(2)

provides an exception for those with an interest in property that predates the bankruptcy...