Chapter 7 The Automatic Stay

• Jurisdiction: United States

Chapter 7 The Automatic Stay

§ 7.1 ~ a Fundamental protection

The automatic stay, set forth in § 362 of the Bankruptcy Code, prohibits most actions against a debtor and its property during the bankruptcy case. It is (next to the discharge) probably the single most important protection available to a debtor in bankruptcy, and is one of the principal sources of bankruptcy litigation.

We begin with a form of motion for relief from the stay. Then, we go on to explain why the stay is in the Code, and how it works.

§ 7.2 ~ Form of motion for relief from the stay

IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF UTOPIA

In Re: INSOLVENT SUPPLY CORPORATION, Debtor-in-Possession

In Re: INSOLVENT DISTRIBUTION CORPORATION Debtor-in-Possession

Case No. 14-1415-BBL

(Chapter 11)

Case No. 14-1416-BBL

(Chapter 11)

MOTION FOR RELIEF FROM AUTOMATIC STAY

Bancorporation ("Lender") hereby moves for relief from the automatic stay, pursuant to 11 U.S.C. § 362(d) (1) and (d)(2) and Federal Rule of Bankruptcy Procedure 4001(a), to foreclose on its collateral and to exercise its other rights and remedies as a secured creditor. In support of its motion, Lender represents as follows:

I. FACTUAL BACKGROUND

1. This case was filed as a voluntary chapter 11 case on February 23, 2014.
2. The Debtor owns certain real property improved by a 12-story office building located in Rockville, Utopia, which is described in more detail as Lot 12, Square 473, Erewhon Estates (the "Property").
3. In 2005, Lender made a loan to the Debtor in the original principal amount of $7.3 million to purchase the Property (the "Loan"). The Loan was evidenced by a Promissory Note and was secured by a duly recorded first-priority mortgage on the Property, an assignment of rents and leases, and certain other instruments and documents, all of which are listed on Attachment A hereto and are referred to collectively hereinafter as the "Loan Documents."
4. The outstanding principal balance of the Loan, as of the petition date, was $6.9 million. With accrued and unpaid pre-petition interest, fees, costs, and expenses allowed under the Loan Documents, the amount of the Debtor's obligation to Lender, in connection with the Loan, as of the petition date, was at least $7.9 million.
5. The Property has a value of $6.1 million. This value is confirmed by an appraisal performed by Robin Allen, MAI, dated as of March 29, 2014.

II. JURISDICTION AND VENUE

6. This Court has jurisdiction over this motion pursuant to 28 U.S.C. § 1334. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(G).
7. Venue is proper in this Court in accordance with 28 U.S.C. § 1409.

III. RELIEF UNDER SECTION 362(d)(2)

8. The Debtor has no equity in the Property.
9. The Property is not necessary to an effective reorganization.
10. No reorganization of the Debtor is in prospect.
11. The Debtor has not proposed a plan of reorganization and is unable to propose a confirmable plan.

IV. RELIEF UNDER SECTION 362(d)(1)

12. Lender's interest in the Property is not adequately protected.
13. Lender's interest in the rents generated by the Property, which are an additional item of Lender's collateral, is not adequately protected.
14. The Debtor is not able to provide to Lender adequate protection for its interest in the Property or the rents.
15. The Debtor is committing and suffering waste and deterioration in the Property. The value of the Property has diminished since the petition date and continues to diminish.
16. The Debtor has not paid real property taxes due and owing on the Property for the post-petition period and Lender has been forced to pay those real property taxes, in the amount of $75,000, in order to avoid the taxes becoming a lien on the Property.
17. For all of these reasons, "cause" exists to grant Lender relief from the automatic stay, as that term is used in § 362(d)(1) of the Bankruptcy Code.

V. MEMORANDUM OF LAW

18. A memorandum of law is being filed along with this motion and is incorporated herein by reference.

WHEREFORE, Lender requests that the Court grant it relief from the automatic stay, pursuant to Sections 362(d)(2) and 362(d)(1) of the Bankruptcy Code, to foreclose on the Property and to exercise each of its other rights and remedies under the Loan Documents and applicable law, and that the Court afford such other and further relief as it deems appropriate.

Dated: April 4, 2014

Respectfully submitted,

TIMBERS, TOIBB & STRUMF

By: /s/_________
Simon Dogcat
72 Fifteenth Street
Paradise City, Utopia 94943

ATTORNEYS FOR BANCORPORATION

§ 7.3 ~ An Example

Here is a classic automatic stay case. The debtor files a petition for relief under chapter 11 (or 13). He may owe unsecured claims, but in any event, he owes a large undersecured claim, perhaps a mortgage on Blackacre. The petition stays all creditor action against the debtor and against his property.

The mortgagee could seek dismissal or conversion of the case, but this motion is unlikely to succeed. It might also entangle the mortgagee in a conflict with the unsecured creditors, for whom bankruptcy may be their best chance to achieve a recovery.¹

The mortgagee decides to ask the court for relief from the stay so it can go ahead with foreclosure, unencumbered by the bankruptcy case. It files a motion for relief. The debtor/DIP answers. The motion provides a forum for the debtor and secured lender to thrash out issues of valuation, possibly a schedule of interim payments, and some sort of understanding as to how long the case will last. In many cases, they reach an agreement and submit a stipulation (under Bankruptcy Rule 4001(d)) for a court order without ever actually presenting their cases.

There is more to the stay than this. But the example suggests the scope and significance of the stay.

§ 7.4 ~ Two Reasons for the Stay

To understand the stay, it helps to recognize that the stay protects two different interests. One is the interest of the debtor in getting a fresh start. Upon filing for bankruptcy, the debtor gets a breathing spell from creditor collection efforts. Many subsections of § 362(a) bar action against the debtor.² But the other is the interest of creditors (and perhaps also the debtor) in preserving the estate. The stay is necessary to preserve the status quo so that meaningful relief can be afforded to all interested parties in the bankruptcy case.

So the stay plays a role in a case where there are no assets, but the debtor will get a discharge. It also plays a role in a case where there will be no discharge, but there are assets to collect and distribute. And, of course, it plays a role in a case where the debtor will get a discharge and there are assets to collect.

The dramatic fact about the stay is that it is a kind of "statutory injunction," if there can be such a thing, that operates upon the filing of a petition without court initiative and without bond. Imagine a debtor under threat of foreclosure. He believes that with a bit more time he could come up with the cash to reinstate the obligation. Outside of bankruptcy, is there anything he can do to delay the sale?

The answer is, "possibly." Perhaps he can persuade a court to issue a temporary restraining order against the foreclosure sale, but there are obstacles. The debtor must take the initiative and draft the pleading, find a court, schedule a hearing, put on a case and make an extraordinary showing. And even if he is successful, there is a great likelihood that the judge will not issue the injunction unless the debtor posts a bond, which means yet more money — which is, after all, exactly what the debtor does not have enough of. Against this, compare the sequence in bankruptcy: The debtor files the petition, and the stay is in place. As the name suggests, imposition of the injunction is "automatic."

It's probable that courts have always entertained pleas for restraining orders to delay mortgage foreclosures. The automatic stay worked its way into bankruptcy law in stages. It made its first important appearance in old chapter X, the procedure for the reorganization of large public corporations. That was surely consistent with the premise of old chapter X: If the debtor was truly a "public" problem, then surely it made sense to mandate a single forum for the disposition of all claims against which it might be liable. The stay made its way by degrees into old chapter XI, and even into the liquidation provisions of old chapter VII. It was extended to all cases by the 1978 Act.

One unintended consequence of the stay was an explosion of cases in which the debtor finds a lawyer who will file a petition without schedules, without prospects, indeed, with no sense of what will happen next, but simply seeking the stay to give the debtor more time. In its extreme form, this is surely improper, and probably grounds for dismissal and (some might contend) lawyer discipline. The trouble is, no one quite knows what the "extreme form" might be, and so many such cases have perhaps gone unsanctioned or even undismissed.

§ 7.5 ~ How to read § 362

The statutory framework of the stay is fairly easy to grasp. Most of what counts is in § 362(a), which provides that the filing of the petition "operates as a stay" of a great variety of actions against the debtor and against property of the estate. If something is not listed in subsection (a), it isn't stayed. If the act in question is listed in subsection (a), then one must consult § 362(b), which itemizes a number of exceptions to the automatic stay. Section 362(c) provides the extent and duration of the stay. Section 362(d) sets forth the substantive grounds for relief. Sections 362(e) through (g) govern procedure for getting (or resisting) relief.

Sections 362(h) and (i) deal with issues arising in individual bankruptcy cases. Subsection (j) provides that if the stay has terminated under subsection (c) and someone requests a court order confirming that fact, the court will issue such an order. Section 362(k)...