Chapter 11, B. Actions Taken in Violation of the Automatic Stay

• Jurisdiction: United States

B. Actions Taken in Violation of the Automatic Stay

Some courts hold that acts made in violation of the automatic stay are void, while others hold that they are merely voidable and subject to cure.²⁹⁹ The majority of courts, however, adhere to the position that an action taken in violation of the stay is void.

While most courts have held that action taken in violation of the automatic stay is void, there may be exceptions to the general rule. In Raymark Industries Inc. v. George Q. Lai,³⁰⁰ the court held that actions taken in violation of the automatic stay are void ab initio. A subsequent Third Circuit decision held that the general principle is that any creditor action taken in violation of the automatic stay is void ab initio, but there is an exception to that rule.³⁰¹

The exception is based on § 362 of the Bankruptcy Code, which provides:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section such as by terminating, annulling, modifying or conditioning such stay —

(2) with respect to a stay of an act against property under subsection (a) of this section, if—

(A) the debtor does not have an equity in such property and,
(B) such property is not necessary to an effective reorganization.

The Raymark court held that the bankruptcy court had the authority to annul the automatic stay retroactively and validate proceedings that would otherwise be void ab initio. Section 362(d) permits bankruptcy courts, in limited circumstances, to grant retroactive relief from the automatic stay.³⁰²

An order terminating the automatic stay is effective only from the date of entry of the order.³⁰³ Lifting the automatic stay to allow prosecution of a claim is not sufficient to annul the stay retroactively and does not validate a complaint filed in violation of the stay.³⁰⁴ In order to validate any actions taken in violation of the automatic stay, the plaintiffs must request an order annulling the stay retroactively.³⁰⁵

If the limitations period for a claim expires during the pendency of the bankruptcy proceeding, a plaintiff has 30 days from notice that the automatic stay is lifted to re-file the action.³⁰⁶ By its terms, § 108(c) does not toll externally imposed time deadlines; it merely extends the applicable deadline for 30 days.³⁰⁷ A claimant may not file suit during the duration of the bankruptcy stay, therefore the 30-day period becomes the only functional period in...