Fall 2006
Volume 3, Number 1
Table of Contents

Residential Landlord Tenant Under Barf 1

BARF was the first major rewrite of the Bankruptcy Code since 1978.  It makes major changes in all aspects of the practice of bankruptcy law, including landlord tenant relationships. 

The first change involves the Stay of proceedings pursuant to §362.  Section 362(b) now excepts from the automatic stay the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides. 

What this means that the stay does not apply to the continuation (not commencement) of an unlawful detainer action immediately without an Order unless the debtor files with the petition a certification stating whether a) a judgment for possession had been entered before the petition and whether under non-bankruptcy law the debtor could cure the monetary default after the entry of the judgment and the debtor deposited with the clerk of the Bankruptcy Court the rent that would be due during the next 30 days and within 30 days the debtor has cured the monetary default.

The stay is also terminated by order, upon a hearing that must be held within10 days of the filing of the landlord’s objection to any certification.  It is also terminated immediately if the court so determines.  It automatically terminates 30 days after the petition if the debtor files the first certification but not the second. 

If there was a judgment for possession entered prior to filing, it must be indicated on the petition including the name and address of the landlord. 

The stay does not apply if the landlord files a certification that the eviction is based upon endangering the property or because of the illegal use of controlled circumstances or that the debtor has  allowed others to endanger the property or illegally use controlled substances on the property.

If a judgment for possession has been obtained before the bankruptcy case is filed for a property in which the debtor resides, the debtor must indicate on the bankruptcy petition that such a judgment has been obtained, and state the name and address of the lessor. If no certification is filed with the petition, or no further certification is filed within 30 days of the petition, the clerk must immediately serve on the debtor and the lessor a certified copy of the docket indicating the failure of the debtor to file the certifications and the applicability of the stay exception under § 362(b)(22).

Section 362(b)(22) imposes new administrative burdens on bankruptcy court clerks.  These are burdens that the clerks are not yet prepared to handle.  In addition to the notification requirements the clerk will now have to accept rental payment deposits by debtors.  In the past, payment into the registry of the court required a specific order to put it in and another order to get it out.  The interim rules are unclear whether an order is required.  Section 362(l)(5)(D) also requires the clerk of the court to arrange for the prompt transmittal to the lessor of any rent deposited with the court.  In theory it seems like a reasonable solution.  Reality is, however different and it is anticipated that there will be any number of problems with the implementation.  The federal judiciary has had massive budget cuts.  The staffing to handle all of these and other new obligations is not there and there is no budget to provide for additional staffing.  In the Western District of Washington, the court has adopted a local rule to attempt to solve the problem.  Local Bankruptcy Rule 4001-1 provides:

(b) Rent Deposits Under Section 362(l). Any deposit of rent made by or on behalf of a debtor pursuant to 11 U.S.C. § 362(l)(1)(B) must be in the form of a cashier’s check or a money order payable to the order of the lessor, and delivered to the clerk upon filing of the petition and certification made under Section 362(l)(1). The debtor must at the same time file a copy of the judgment of possession or eviction and proof of service of the certification under Section 362(l)(1) upon the lessor. Upon receipt of the cashier’s check or money order, the clerk will promptly transmit the check/money order to the lessor by certified mail/return receipt requested, at the address of the lessor as stated in the certification filed by the debtor under Section 362(l)(1), unless the clerk is instructed in writing by the debtor or landlord to use a different address.

Exception for Eviction Based on Illegal Use of Controlled Substances or Endangerment to Property

New § 362(b)(23) creates an exception from the stay if the landlord files and serves on the debtor a certification under penalty of perjury that: (1) an eviction based on the illegal use of controlled substances or endangerment to the property or (2) the debtor has within 30 days before the certification either endangered the property or illegally used or allowed to be used controlled substances at the property.  This provision does not apply until 15 days after the lessor files and serves a certification even though it is placed in § 362(b) as an exception to the stay.

The debtor is given, pursuant to 362(m), 15 days to file and serve on the lessor an objection to the truth or legal sufficiency of the lessor’s certification.  If the debtor is successful, the exception does not go into effect and the stay under § 362(a)(3) continues to apply until it would normally terminate.  The hearing must be held within 10 days of the filing of the objection and the debtor must demonstrate that the situation which gave rise to the lessor’s certification of or illegal drug use either did not exist or has been remedied in order to prevail.  Given the numerous additional hearings that are contemplated by BARF, getting a hearing within 10 days may be impossible.  There is no clear indication of what happens if the hearing does not happen or if the court continues it.  Since § 362(m)(2)(C) does not state when such a cure must occur, presumably the debtor may remedy the alleged improper activity at any time prior to the hearing.

If no objection to the lessor’s certification is filed, or if court rules against the debtor, the clerk must “immediately” serve on the parties a certified copy of the docket indicating either the failure to object or entry of the court’s order.  Since the exception is limited to the stay provided under § 362(a)(3), the lessor may not proceed with an eviction that seeks to recover on a pre-petition claim against the debtor, such as a claim for damages to the rental property, without first obtaining relief from the stay provided under § 362(a)(6).  In addition, the stay provided under § 362(a)(3) should continue to apply to any attempt by the lessor to obtain possession of the rental property that is unrelated to the certification and not based on the endangerment of the property or the illegal use of controlled substances.

The statutory language in subsections (b)(23) and (m) provide virtually no guidance to the court in making findings about the truth or legal sufficiency of a lessor’s certification that the debtor has “endangered” the property or used or “allowed to be used” a “controlled substance” on the property.  These terms and phrases are not defined in the new subsections or anywhere else in the Code. In fact, the term “endanger” and the phrase “endangerment of property” are not even Residential Landlord and Tenant Act.  As in most of BARF, there are contradictory and different interpretations.  For example, by stating that the illegal drug use must be “on the property,” it is not clear whether this includes only the immediate rental premises occupied by the debtor.  It can be argued that it includes other apartments or common areas in a complex in which the debtor resides.  The issue of what constitutes a sufficient cure by the debtor of the alleged property endangerment or illegal drug use also requires interpretation and analysis.

The lack of clarity in the statute, the brief 10-day period for conducting a hearing on the will impose other challenges for the court and the parties. Although a lessor’s certification filed under § 362(b)(23) should be treated as a contested matter, it is not clear whether the procedures outlined in Bankruptcy Rule 9014 will apply.  Since the lessor’s certification may involve fiercely contested allegations concerning drug use and property endangerment, the lessor should be required to allege sufficient facts in the certification to give notice to the debtor effective notice of what the landlord is claiming.  Presumably Bankruptcy Rule 9014(c) will be applicable to some extent so that the parties may conduct discovery.  However, given the time deadlines, this may be impossible.  It is not clear that the court has the authority to continue the hearing beyond the 10-day period.

The effect of these revisions is unknown.  It would appear that there will not be sufficient time to file pleadings and the  courts will be required to hear oral testimony, make findings on disputed facts and rule on legal issues that they would previously have permitted state courts to deal with.  All that this means is that the stay is gone.  It does not lead to the issuance of a Writ fo Restitution.  That will require a further hearing in Superior Court where the Bankruptcy Court’s findings may or may not be res judicata.  Despite the possible advantage to the lessor of an expedited stay termination under subsections (b)(23) and (m), lessors may prefer to file a stay relief motion rather than submit a certification

The Chapter 13 Trap

When all of these provisions got enacted, Congress forgot about the co-debtor stay under § 1301 when the debtor is in Chapter 13.  Expedited procedures may allow the landlord to terminate the stay as to the debtor, the expedited procedures need not apply in Chapter 13. 

Logic would dictate that if relief from stay is granted pursuant to sub-section (m) that it will also apply to the co-debtor.  However, if it is for a pre-petition debt and the obligation is purely monetary, the result is not so clear.  Only time and the courts will decide.

Acceptance or rejection of the lease.

In a Chapter 7 this is not relevant.  However, in a Chapter 13, the landlord can move the court for an Order Compelling the debtor to accept or reject the lease.  If the lease is accepted, the debtor must cure all of the arrearage and any other default.  If it is rejected, the debtor must vacate the property.  Getting the debtor to accept the lease means that the landlord is entitled to an administrative priority for all post petition payments.  That means the landlord gets paid equivalently with the trustee, the attorney for the debtor, or any other post petition obligation. 2

1 The Bankruptcy Abuse Reform Fiasco (more officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA))

2 There is an exception for domestic support obligations.

 

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