Real estate practitioners should be aware of the enactment of a number of changes to the automatic stay provisions in The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) which will become effective October 17, 2005. Most attorneys are somewhat familiar with the automatic stay provisions set forth in 11 U.S.C. § 362(a). But what § 362(a) giveth to debtors, § 362(b), § 362(c) and § 362(d) can taketh away. Section 362(b) is the section of the Bankruptcy Code that defines which types of actions are not subject to the automatic stay. Section 362(c) is the section of the Code that defines the duration of the automatic stay. Finally, Section 362(d) is the section which governs the conditions for lifting or conditioning the stay by the court. All three of these sections are substantially changed under the Act. This article will discuss some of the changes to the automatic stay which may be of interest to real estate practitioners.
(1) Additional matters now outside the scope of the automatic stay under 11 U.S.C. § 362(b).
(a) Residential Evictions and Unlawful Detainer Actions.
In cases involving residential property where the debtor resides as a tenant under a lease or rental agreement and where the lessor has obtained a judgment for possession before the date of the bankruptcy filing, the automatic stay in most instances is ineffective immediately. 11 U.S.C. § 362(b)(22).
Section 362(b)(22) must be read in conjunction with Section 362(l), however. Under § 362(l), if the debtor complies with a series of requirements, the stay may remain in place for thirty days.
First, the debtor must list the name and address of the lessor of the residential property where he resides and the judgment on his bankruptcy petition. 11 U.S.C. § 362(l)(5). The debtor must also file and serve upon the lessor a sworn certification which provides (1) that applicable nonbankruptcy law provides for a cure of the default after judgment for possession has been entered; and (2) that the debtor has deposited with the clerk of the court the rent which will fall due during the thirty-day period.
The lessor may object to the debtor’s certification. If the lessor does object, the court is required to hold a hearing within ten days of the service and filing of the objection to determine if the debtor’s certification is true. 11 U.S.C. § 362(1)(3)(A). If the court sustains the lessor’s objection, then the stay is immediately not effective.
Within thirty days of filing his bankruptcy petition, the debtor must also file a second certification that he has cured the entire monetary default that gave rise to the judgment for possession. 11 U.S.C. § 362(b)(22) and (l). If the debtor files this second certification, the stay remains in effect. 11 U.S.C. § 362(l)(2). If the debtor has filed the first certification but not the second, the stay is not effective thirty days after he has filed his bankruptcy petition.
In addition, the automatic stay has limited application in residential evictions where a debtor tenant resides in the property under a lease or rental agreement and the lessor seeks possession of the property on the basis of endangerment of the property or the illegal use of controlled substances on the property. To limit the application of the stay in such circumstances, the lessor must file with the bankruptcy court and serve on the debtor a certification stating that an eviction was started pre-petition or that the debtor within the thirty days preceding the petition endangered the property and/or illegally used or allowed to be used a controlled substance on the property. 11 U.S.C. § 362(b)(23).
The automatic stay will terminate fifteen days following the lessor’s filing and service of the certification unless the debtor files an objection to the truth of the lessor’s certification. 11 U.S.C. § 362(m)(1) and (m)(2)(A). If this occurs, the court must hold a hearing within ten days to determine if the situation giving rise to the lessor’s certification existed or has been remedied. 11 U.S.C. § 362(m)(2)(B). If the debtor prevails, the automatic stay remains in place. If the lessor prevails, the court need not grant an order lifting the stay; rather, it shall serve upon the debtor and lessor the court’s order upholding the lessor’s certification. 11 U.S.C. § 362(m)(2)(D).
(b) Foreclosure of Security Interests in Real Property.
The automatic stay will not apply to an action to enforce a lien against real property in circumstances where the debtor is ineligible to be a debtor under
§ 109(g) or if the current case was filed in violation of a bankruptcy court order entered in a prior case. 11 U.S.C. § 362(b)(21). Given the necessary factual determinations regarding whether a debtor is actually “ineligible” for bankruptcy relief under §109(g) or whether a new filing actually violates a prior court order, in most cases creditors are likely to continue to opt for the safe harbor of a court order granting relief from stay or declaring there is no stay (particularly if required by title companies).
Also, the automatic stay will not apply to an action to enforce a lien against real property for which an “in rem” order was entered within two years in a previous case, although a debtor in a subsequent case may file a motion for relief from the “in rem” order based upon changed circumstances or for other good cause shown. 11 U.S.C. § 362(b)(20). “In rem” orders are discussed further below.
(2) The Act includes new circumstances under which the automatic stay will expire under 11 U.S.C. § 362(c).
The new Act includes extensive amendments to 11 U.S.C. § 362(c), the section which governs the duration of the automatic stay. Under the new Act, unless a party in interest (usually the debtor or the trustee) timely requests an extension of the stay, it will automatically expire under several circumstances, including:
(a) The Stay Simply Terminates Within Thirty Days Where Individual Debtor Files A Case Within One Year of An Earlier Dismissed Case
If an individual files a case within one year of an earlier dismissed case (other than one dismissed under §707(b)), the automatic stay will simply terminate thirty days after the new case is filed unless during the initial thirty day period, a party in interest (usually the debtor or the bankruptcy trustee) files a motion with the court to extend the stay on the basis that the second filing was in good faith. 11 U.S.C. § 362(c)(3)(A)(B).
A new case is presumed to be “filed not in good faith” as to all creditors if (1) the debtor has been a debtor in more than one prior proceeding pending within one year of filing; (2) the debtor has had a prior case dismissed because of the debtor’s failure to file required pleadings without substantial excuse, or has failed to provide adequate protection as ordered by the court, or to perform the terms of a confirmed plan; or (3) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous bankruptcy petition or any other reason to conclude that the most recent case will be concluded with a discharge or confirmed plan. 11 U.S.C. § 362(c)(3)(C)(i). A debtor may rebut the presumption that a subsequent case has not been filed in good faith only by presenting clear and convincing evidence of good faith. For example, if a previous case was dismissed due to the creation of a debt repayment plan, for purposes of subsection (c)(3), any subsequent case commenced by a debtor shall not be presumed to be “filed not in good faith”. 11 U.S.C. § 362(i).
(b) There is No Automatic Stay Where Individual Debtor has had Two or More Prior Bankruptcy Filings Dismissed Within the Preceding Year.
In cases where an individual debtor files a bankruptcy petition within one year of two earlier dismissed cases, the automatic stay provisions do not go into effect at all. If a party in interest so requests, the court shall enter an order confirming that no stay is in effect in the latest case. 11 U.S.C. Section 362(c)(4). If, within thirty days of filing of the petition, a party in interest so requests, the court may order that the stay be effective as to any one or all creditors, but only if the party in interest demonstrates that the third filing is in good faith.
As under (a) above, the third filing is presumed not to be in good faith as to all the creditors if (1) the debtor has been a debtor in at least two prior proceedings within one year of filing; (2) the debtor has had a prior case dismissed because of his failure to file required pleadings without substantial excuse, or to provide adequate protection as ordered by the court, or to perform the terms of a confirmed plan; or (3) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous bankruptcy petition or any other reason to conclude that the most recent case will be concluded with a discharge or a confirmed plan. 11 U.S.C. § 362(c)(3)(D)(i).
Additionally, a new filing is presumed to be not in good faith as to any creditor who had filed a motion to life the automatic stay in a previous case, if that motion was pending at the time of dismissal or had been resolved by terminating, conditioning or limiting the stay . 11 U.S.C. § 362 (c)(3) (C) (ii); 11 U.S.C. § 362(c)(3)(D)(ii). A debtor may rebut the presumption that the new filing is not in good faith only by presenting clear and convincing evidence that the filing is in good faith.
(3) The Act allows a court to enter an “in rem” order regarding the automatic stay as to a particular parcel of property under 11 U.S.C. § 362(d) .
Under revised § 362(d), bankruptcy courts will be able to enter “in rem” orders terminating, annulling, modifying or conditioning the automatic stay with respect to actions by secured creditors against particular parcels of real property if the court finds a bankruptcy petition to be part of a scheme to delay, hinder, and defraud creditors involving either 1) the transfer of full or partial ownership interests in the subject real property without the consent of the secured creditor or court approval; or 2) multiple bankruptcy filings affecting the subject real property. 11 U.S.C. § 362(d)(4)(a)(A) and (B). If entered and recorded in accordance with applicable state law, an “in rem” order is binding in any bankruptcy case that would affect the subject real property filed within two years after the “in rem” order is entered. A debtor may seek relief from an “in rem” order in a subsequent bankruptcy case based upon changed circumstances or for good cause shown.
The above is a brief description of certain changes under the Act regarding the automatic stay which may be of interest to real estate practitioners. There are numerous additional changes concerning the automatic stay which affect, for example, domestic support obligations and personal property in individual cases. Overall, the Act constitutes probably the most extensive revisions to the Bankruptcy Code since its original enactment in 1978. Anyone whose practice is remotely affected by bankruptcy will need to familiarize oneself with the Act as bankruptcy practice is going to change profoundly, effective October 17, 2005.