Tuesday, November 08, 2022

The Automatic Stay and Section 362 of the Bankruptcy Code

 When a bankruptcy petition is filed, section 362(a) of the Bankruptcy Code states that the bankruptcy petition provides a stay on the commencement or continuation of an action or proceeding against the debtor.

An "Automatic Stay" provides relief to the debtor by stopping all litigation and collection efforts against him, giving him pause and time to reorganize his finances.

After bankruptcy filing, creditors who wish to continue litigation against the debtor must file a motion to lift the stay in Bankruptcy Court. The most common bankruptcy motion is a motion to lift the stay.

Last week, we filed two motions to lift the stay, one for a landlord and one for a creditor, so they could finalize an eviction and foreclosure.

The law stayed litigation and landlord tenant actions during the pandemic, now creditors and landlords are free to pursue litigation, resulting in increased bankruptcy filings and motions to lift the stay.

The Second Circuit Court of Appeals recently decided a Motion Lift Stay case, In re Fogarty, 39 F. 4th 62 Court of Appeals, 2nd Circuit 2022 which demonstrates the complexity and questions that can arise in lift stay practice.

Debtor Eileen Fogarty owned a 99% interest in 72 Grandview LLC, which in turn owned a residential property that Fogarty occupied as her primary residence. Bayview Loan Servicing LLC initiated a foreclosure action in which both 72 Grandview LLC and Fogarty were named as defendants. After Bayview obtained a judgment, Fogarty filed a Chapter 7 bankruptcy petition  and Bayview proceeded with the foreclosure sale without seeking relief (i.e. filing a motion for relief from the automatic stay) from the bankruptcy court.

Fogarty then sought sanctions against Bayview arguing that Bayview willfully violated the automatic stay. The bankruptcy court denied Fogarty's motion, but the district court reversed that decision and Bayview appealed to the 2nd Circuit Court of Appeals. 

The 2nd Circuit ruled that Bayview violated the automatic stay based on the fact that the debtor was a named party in the foreclosure proceedings (even if the debtor held only a possessory interest in the property) and Bayview was aware that Fogarty had filed a bankruptcy petition.

The takeaway from the Fogarty case, is that a creditor must proceed with cause after a Debtor files for bankruptcy and when in doubt a creditor should file a motion to lift stay before foreclosing on property. 

Creditors that have questions regarding Motions to Lift Stay can contact Jim Shenwick, Esq   917 363 3391.


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