Daily Development for
Friday, August 7, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
These three cases are reported and discussed by Jim Stillman, Murphy, Weir & Butler, San Francisco.

BANKRUPTCY; AUTOMATIC STAY; ANNULMENT: An automatic stay will not be annulled so as to validate a post-petition foreclosure sale where the creditor knew of the bankruptcy filing, even though it was the debtor's third eve-of-foreclosure chapter 13 case.

In re Boswell, 1997 Bankr. LEXIS 266 (Bankr. W.D.Va. 1997).

The import of the automatic stay "demands that courts be especially hesitant to validate actions committed during the pendency of the stay," the Bankruptcy Court wrote. The order dismissing the debtor's previous case had forbidden her to file for 180 days, under section 109(g)(2). The debtor waited before filing her third case until nine days after the prohibitory period had expired. She had paid her administrative fees and timely filed schedules.

Reporter's Comment: What a comedy of errors! After obtaining the 180 day no-file order in the second case, the bank miscounted days (see n. 2) and renoticed its foreclosure sale for ten days after the prohibitory period expired. When the debtor showed up at the sale with (naturally) a third bankruptcy petition, the creditor's representatives huddled with the foreclosure trustee and promised to indemnify him, if he would conduct the sale notwithstanding the stay.

BANKRUPTCY; AUTOMATIC STAY; ENFORCEMENT AGAINST FRAUDULENT CONVEYANCE: A creditor violates the automatic stay by enforcing its claim against property of which the debtor had, prepetition, made a fraudulent conveyance, because regardless of the status of title, the creditor's action is to enforce "a claim against the debtor" in contravention of section 362(a)(6).

In re Just Brakes Corporate Systems, Inc., 108 F.3d 881 (8th Cir. 1997).

"This factor distinguishes this case from cases holding that § 362(a)(6) does not automatically stay post-petition acts to collect creditors' independent claims against debtors' guarantors" (n. 3.) Only individual debtors are entitled under section 362(h) to punitive damages in the event of a violation of the stay, and the Bankruptcy Court did not have power to make any other punishment, such as by contempt, for a violation of section 362(a).

BANKRUPTCY; AUTOMATIC STAY; MINISTERIAL ACT; VOID VERSUS VOIDABLE: The intervention of the automatic stay renders void the post-petition entry of a default foreclosure judgment, although the creditor had requested entry of default prior to the bankruptcy filing.

In re Soares, 107 F.3d 969 (1st Cir. 1997).

The creditor knew that a bankruptcy case had been filed but neglected to notify the state court, which entered the default 17 days into the case. When the debtor asked the state court to set aside its foreclosure judgment, the state court judge ruled that its post-petition action had been "ministerial." Calling the creditor's line of argument "mere buzznacking," the Court of Appeals held that entry of the default judgment in this case was plainly a judicial function, because there is no record that the state court judge decided to grant the default judgment prepetition. Joining "a majority insofar as we can tell" of Courts of Appeal (p. 976), the Sixth Circuit held that violations of the stay are void, so as to "place the burden of validating the action after the fact squarely on the shoulders of the offending creditor." The stay would not be retroactively annulled on these facts.

Reporter's Comment: I am surprised by the volume of litigation reaching the light of publication (including several cases reported this Quarter) on the issue of annulment, or "retroactive relief" of the stay. The Sixth Circuit is right, here, in noting that "retroactive relief should be the long-odds exception, not the general rule,..." and instances in which such relief "is justified are likely to be few and far between" (p. 977).

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