Chapter 8 - § 8.6 RELIEF FROM THE AUTOMATIC STAY — BANKRUPTCY CODE § 362(d)

• Jurisdiction: Colorado

§ 8.6 RELIEF FROM THE AUTOMATIC STAY — BANKRUPTCY CODE § 362(d)

In providing for relief from the automatic stay, Congress recognized it should be lifted, modified, or terminated in appropriate circumstances.

[I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere.¹⁷

Bankruptcy Code § 362(d) provides for lifting of the automatic stay:

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—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(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.

With respect to mechanics' liens, relief from stay is typically granted where the debtor has no hope in keeping its property, and therefore state foreclosure is appropriate, or it makes more sense for the state court to sort out priority, validity, and amount of competing liens on a property. In the latter circumstance, the bankruptcy court will grant relief to the extent necessary to determine those issues, but will not grant relief for a foreclosure until it becomes more certain whether the debtor will be able to reorganize or sell the property while still in bankruptcy.

Congress meant to give the debtor some breathing room from pending litigation and to free the debtor of the burden of defending numerous lawsuits in various different forums. However, where the pending state court litigation involves numerous other parties over which this Court's jurisdiction is questionable, where full relief may not be accorded without the presence of all the parties, and where the state court proceedings have progressed to the point where the parties are prepared for trial, cause for relief from the stay exists.¹⁸

§ 8.6.1—Procedure/Burden of Proof

The filing of a motion for relief from the automatic stay starts a contested matter with an expedited timeline. Normally, a contested matter follows Fed. R. Bankr. P. 9013 and L.B.R. 9013-1, but instead the 30-day timelines for preliminary and final hearings under § 362(e) apply, as do Fed. R. Bankr. P. 4001(a) and L.B.R. 4001-1 (Rule 4001-1 is included at Exhibit 8B).

The court must hold a preliminary hearing within 30 days after the motion is filed, and must hold a final hearing within 30 days after the preliminary hearing (unless stay relief is granted at the first hearing), unless the parties consent to a longer time period or the court finds compelling circumstances. Accordingly, a court must enter a final ruling on a motion for relief from stay no more than 60 days after the motion is filed.

The requirements for a motion for relief from stay are included in L.B.R. 4001-1. At times, creditors will not follow the local rules, and judges in the District of Colorado have been known to deny such motions without prejudice. Given the importance of the automatic stay, judges will not grant such relief if they think the creditor has been sloppy or otherwise has not followed the requisite procedures.

The party seeking stay relief has the burden of proof with respect to the debtor's equity in the property, while the debtor-in-possession or trustee has the burden of proof with respect to all other issues.¹⁹ This allocation is straightforward in the context of § 362(d)(2), where once the creditor establishes a lack of equity in the property, the debtor must establish the property is necessary to an effective reorganization. In most instances, once a creditor establishes lack of equity, the debtor's chances of defeating a motion for relief from stay...