Is a post-petition court order of non-bankruptcy a violation of the automatic stay? : Ninth Circuit Bankruptcy Appeals Board Provides Clarification on Recent Detention | Fox Rothschild LLP

On April 5, 2022, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) issued a notice, Censo, LLC v. Newrez, LLCBAP No. NV-21-1125-LTF (April 5, 2022), which provides a framework for determining whether a non-bankruptcy court’s post-application order on an ongoing matter violates the automatic stay.

In Census, the former owner of a mortgaged condominium unit (the “Property”) defaulted on his homeowners association (“HOA”) appraisals, and the HOA was seized on the Property. A successor debtor entity purchased the property in the 2013 foreclosure proceeding, subject to the mortgage, and transferred the property to the debtor entity in 2019.

In 2014, the former foreclosed owner sued the buyer, HOA, mortgagee and various other entities in federal district court, seeking a declaration that the foreclosure was invalid due to certain alleged defects in the mortgage. Various claims and counterclaims were filed by the buyer, arguing that the HOA’s foreclosure effectively extinguished the mortgage.

Ultimately, the mortgagee filed a motion for summary judgment, seeking declaratory judgment that the purchaser purchased the property subject to the mortgage. The buyer-turned-debtor then filed a Chapter 11 petition. Neither the debtor nor the mortgagee filed a notice of stay advising the district court of the bankruptcy case. Shortly thereafter, the district court issued an order granting the motion for summary judgment and declaring that the debtor had taken the property subject to the mortgage.

As part of the bankruptcy proceedings, the debtor filed a contradictory complaint against the mortgagee, again arguing that the mortgage was defective due, among other things, to an incorrect description of the Property. The mortgagee filed a motion to dismiss the opponent’s claim, which was granted by the bankruptcy court based on the exclusion of the matter following the district court’s decision after the motion on the motion for summary judgment.

The debtor appealed and ultimately only raised the issue of whether the district court’s post-application order was a violation of the automatic stay.

BAP analyzed each applicable subsection of Section 362(a) of the Bankruptcy Code, beginning with Section 362(a)(1), which it noted that the plain language of the provision indicated that the automatic stay applied only to actions against the debtor. Accordingly, the BAP described the distinction between “offensive” and “defensive” creditor claims as follows:

Cases where defending a creditor against claims brought by a debtor do not violate the automatic stay generally involve facial defensive actions such as seeking summary judgment seeking the dismissal of a claim brought by a debtor. On the other hand, the commencement or continuation of a creditor’s counterclaim for affirmative relief will generally be construed as a breach of the stay. Identifier. (quotes omitted).

Ultimately, the BAP determined that the debtor had engaged the mortgagee in an attempt to invalidate the mortgage, and that the mortgagee was only “defending its lien against [the debtor’s’] offensive.”

The BAP then analyzed section 362(a)(3), which prohibits any act aimed at taking possession of or exercising control over the property of the estate. The BAP, citing the Supreme Court decision in City of Chicago vs. Fultonheld that “acts that simply maintain the status quo do not violate automatic suspension”.

Accordingly, because the mortgage existed on the date of the petition, the district court order was held to have “merely affirmed the validity of the existing lien” and did not affect the possession or control of the property of the estate of the debtor.

Finally, in dealing with sections 362(a)(4) and (a)(5), the BAP pointed out that “all acts or omissions subsequent to the petition which may affect the property of the debtor or the estate do not constitute not a suspended sentence violation”. For this unfortunate debtor, no violation of Sections 362(a)(4) or (a)(5) was found because the district court order did not attempt to create, perfect or apply a lien on the property of the estate.

The BAP upheld the bankruptcy court’s decision to dismiss the opposing party’s complaint and provided the framework for determining whether the post-application order from a court other than bankruptcy should be considered a violation of the automatic suspension.

Going forward, the framework described by the BAP in the Census The ruling may empower non-bankruptcy courts to make post-petition orders on defensive creditor claims that may have previously been deemed violations of the automatic stay. However, on April 27, 2022, Censo filed a notice of appeal with the Ninth Circuit. It remains to be seen whether the Ninth Circuit will adopt the framework defined by the BAP, or apply another standard. If the Ninth Circuit adopts the framework, Ninth Circuit courts should carefully and carefully distinguish between creditors’ offensive and defensive claims to ensure the proper enforcement of the automatic stay.

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