Court of Appeal Delves Into Bankruptcy Law; Did it Get it Right? Find Out at Your Own Peril!

• Publication year: 2021
• Author: Paul J. Pascuzzi and Nicholas Kohlmeyer

Court of Appeal Delves into Bankruptcy Law; Did It Get It Right? Find Out at Your Own Peril!

Paul J. Pascuzzi and Nicholas Kohlmeyer

Paul J. Pascuzzi is the Managing Partner at Felderstein Fitzgerald Willoughby Pascuzzi & Rios LLP in Sacramento. Mr. Pascuzzi is a former chair of the Business Law Section Executive Committee and the Insolvency Law Committee. Mr. Pascuzzi's practice focuses on all aspects of business bankruptcy and insolvency law. www.ffwplaw.com

Nicholas Kohlmeyer is an associate at Felderstein Fitzgerald Willoughby Pascuzzi & Rios LLP. Mr. Pascuzzi's and Mr. Kohlmeyer's practices focus on all aspects of business bankruptcy and insolvency law. www.ffwplaw.com

In Rubin v. Ross, 65 Cal. App. 5th 153 (Cal. App. 4th 2021), the California Court of Appeal for the Fourth Appellate District held that the automatic stay protections afforded all debtors in a bankruptcy proceeding pursuant to 11 U.S.C. § 362 did not prevent a judgment creditor from renewing a judgment against the debtor while the automatic stay was still in place. The court further held that although the automatic stay did not prevent the judgment creditor from renewing its judgment, 11 U.S.C. § 108(c) nevertheless extended the judgment creditor's time to renew the judgment until thirty days after the automatic stay was terminated.

Business lawyers should know that this ruling is contrary to California bankruptcy and district court opinions, more fully discussed herein, which have explicitly held that the automatic stay protections of 11 U.S.C. § 362 do in fact prevent a judgment creditor from renewing a judgment against the debtor during the pendency of a bankruptcy proceeding. This article will cover the basics of the automatic stay, the operation of § 108(c) in extending certain deadlines when the automatic stay is implicated, and the current status of federal court opinions on this issue. The takeaway point is that business law practitioners should be wary of relying on a state court decision when dealing with potential violations of the automatic stay.¹

The Automatic Stay

Pursuant to § 362, a petition filed under the Bankruptcy Code operates as a stay of, inter alia, proceedings, actions, or acts against the debtor or property of the estate. The stay of § 362 is automatic, very broad, and effective worldwide. The automatic stay prevents litigation, lien enforcement, and other actions, judicial or otherwise, that are attempts to enforce or collect prepetition debts. Essentially, the automatic stay may safely be said to apply to virtually all types of actions by creditors against the debtor and the debtor's assets. The automatic stay terminates as to the debtor's property when the property is no longer part of the estate (e.g., abandoned by the bankruptcy trustee), and as to the debtor itself when the case is closed or dismissed, or when an individual is granted a discharge. Usually, the automatic stay is replaced by the discharge injunction once the stay terminates.²

Section 108(c) extends the time period for commencing or continuing civil actions that are stayed by § 362. Section 108(c) provides that if an action on a claim against the debtor in a court other than a bankruptcy court is stayed due to the bankruptcy case, any time deadline for commencing or continuing the action is extended to thirty days after notice of termination or expiration of the automatic stay if the deadline would have occurred on an earlier date.

Although the reach of the automatic stay is broad, it is not unlimited. Certain actions that would otherwise fall within the scope of the automatic stay are excepted from the stay.³ Section 362(d) also recognizes circumstances in which a party subject to the automatic stay may be entitled

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to relief from the stay. Section 362(d) provides grounds for seeking relief from the automatic stay and, in conjunction with Federal Rule of Bankruptcy Procedure Rule 4001, provides a procedure for seeking such relief from the Bankruptcy Court generally by filing a motion.

It should be noted that § 362(k) provides an explicit damage remedy for an individual injured by a violation of the automatic stay and includes the authority to award costs and attorneys' fees, and, in appropriate circumstances, punitive damages against the offending creditor. The award of punitive damages is assessed on a case-by-case basis, but it has been said that a willful violation of the stay will justify punitive damages when there is evidence that the creditor's actions were...