Daily Development for
Friday, April 4, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKRUPTCY; RELIEF FROM STAY; IN REM ORDERS; EQUITABLE SERVITUDE: Where extraordinary circumstances exist, a BankruptcyCourt may fashion its order for relief from stay so that it is binding * against the property* for 180 days; and such order may be characterized as a new species of equitable servitude which it authorized to be recorded in the real estate records.

In re Snow, 201 B.R. 968 (Bankr. C.D.Cal. 1996).

The bankrupt already apparently had staved off foreclosure of its real estate by creating mortgagee junior to the foreclosing mortgagee and having this junior mortgagee go into bankruptcy, thus invoking the automatic stay with respect to the security property. Further, the bankrupt had created a cotenancy with a number of other individuals, and one of these individuals now had filed a subsequent bankruptcy, disclosing only that its sole asset was the land interests that was the subject of the foreclosure.

The court clearly suspected that bad faith filing had occurred, and might occur in the future. Consequently, it established a remedy that would automatically grant relief from the stay for the purposes of the first mortgagee's foreclosure action. Further, to forestall more shenanigans by the debtor, the court elected to declare that the relief from the stay would be applicable to any subsequent purchaser of the property for the next following 180 days - long enough for the mortgagee's foreclosure to occur.

In order to accomplish the result of binding subsequent purchasers, not then before the court and unknowable for notice purposes, the court adopted the device of the traditional equitable servitude. Acknowledging that the law of equitable servitudes had never before been applied to such orders, and that an "in rem" relief from stay order did not fit the requirements for an equitable servitude under either California state law or the Anglo-American law generally of equitable servitudes, the Bankruptcy Court found it "appropriate to extend the law of equitable servitude to such a servitude imposed by a court on real property, so that it binds subsequent owners" (p. 974). The order was made binding for 180 days, which the Bankruptcy Court found to be the "customary window" for such extraordinary relief in bankruptcy. However, the court would not make its order binding on those property interest held by the debtor's five co-tenants, who, the court ruefully admits "planned further mischief" (p. 976).

Reporter's Comment: Bankruptcy Judge Sam Bufford is one of the most prolific and intellectually spontaneous opinion writers in California's Central District Bankruptcy Court. He is to be commended for his thoughtful attention to the exasperating abuse of seriatim bankruptcy filings, "which," Judge Bufford writes, "unfortunately, are not uncommon in this district." Regardless of how one reacts to his purported extension of the law of equitable servitude, no experienced creditor's lawyer will find fault with the result.

For me, the most interesting passage is at the top of page 974, where the opinion states that a lender cannot extract a prepetition promise not to invoke the automatic stay at all, because "such a promise would be unenforceable." Instead, the court permits the filing but immediately provides for the undoing of the stay resulting from the filing.

Editor's Comment: The court admits that the order binding future grantees is not exactly parallel to traditional equitable servitudes because the order does not result from an agreement between parties with a mutual concern about the land. The court nevertheless insists that the nature of its order is of the sort that would "touch and concern" the land and that therefore it is appropriate that it run to subsequent owners.

As the Reporter suggests, the editor understands that a bankruptcy court might want to take special steps to prevent spurious bankruptcy petitions involving the same land inthe future. It the court has the power to do this under its general equitable powers, then the author has no quarrel with such a device. But there was no need to muck up further the law of equitable servitudes by suggesting that a judicial decree dealing with the impact of a federal statute regarding creditor's rights can in any way be viewed as "touching and concerning" the land. The court concludes that its order does touch and concern the land, but its analysis consists of little more than a declaration to that effect.

The editor confesses that in some jurisdictions the "touch and concern" concept is bankrupt, but that does mean that the doctrine can be fully corrupted in federal bankruptcy courts. Let the judge get his own doctrine instead of bending a traditionally recognized common law concept into an unrecognizable pretzel.