The Automatic Stay in Bankruptcy: An Overview

This article provides a background on the mechanics of the automatic stay, including its purpose, how it is commenced and terminated, and certain prohibitions, limitations, and exceptions to the stay. This article also discusses the grounds for relief from the stay and the types of relief available, the consequences of violation, stay waivers, and strategies creditors can use to minimize the risk that these waivers will be held unenforceable.

Introduction

The automatic stay (or the “stay”) is one of the most important protections and powerful tools available to a debtor in bankruptcy. It is provided for in section 362 of the Bankruptcy Code. Triggered immediately on filing of the bankruptcy petition, it automatically stops substantially all acts and proceedings against the debtor and its property. It is a nationwide, possibly even worldwide, injunction barring almost all actions against the debtor and its property, including the exercise of remedies concerning collateral, enforcement of prepetition judgments, litigation, collection efforts, and acts to create, perfect, and enforce liens granted before the date the bankruptcy petition was filed. The automatic stay only applies to prepetition events and does not bar suit against the debtor based on a cause of action arising postpetition.

The automatic stay has a broad scope, applying to all creditors, whether secured or unsecured, and to all of the debtor’s property, wherever located. It forbids creditors from pursuing both formal and informal actions and remedies against the debtor and its property. It also covers remedies that could be exercised outside of the US. However, consensual negotiations with the debtor are permitted.

Despite the power of the automatic stay, it is temporary (it may be lifted by the court under certain circumstances) and it is subject to certain exceptions.

This article is a discussion of:

• The purpose of the automatic stay (see Purpose of the Automatic Stay, below).
• What actions are prohibited (see Prohibited Acts, below).
• What actions are excepted (see Limitations and Exceptions, below).
• The various bases for relief (see Relief from the Stay, below).
• The consequences of violation (see Violations of the Stay, below).

Purpose of the Automatic Stay

The automatic stay protects the interests of both debtors and creditors. The primary purpose is to assist the debtor. From the debtor’s perspective, it provides a breathing spell from the pressure and demands of creditors. The automatic stay provides the debtor with an opportunity to address business problems and negotiate a plan of reorganization without interference from creditors.

Secondarily, the automatic stay generally benefits the creditor group. The stay prevents depletion of the bankruptcy estate by creditors who, to the detriment of other creditors, race to the courthouse or use “self-help” remedies to enforce their rights. In this way, the automatic stay enables the orderly administration of the bankruptcy estate, which in turn promotes the policy of equality of distribution.

Commencement and Termination

The automatic stay is triggered by the filing of the bankruptcy petition and becomes effective without a court order and without notice to creditors.

The automatic stay is terminated automatically in two situations:

• As to particular property, the stay is automatically terminated when this property is no longer property of the estate. For example, if the property is transferred or the trustee abandons the property (unless it reverts to the debtor), it ceases to be property of the estate and a creditor is no longer barred from enforcing its lien on that property (§ 362(c)(1), Bankruptcy Code).
• Generally, the stay automatically terminates on the earliest of:
  • The case being closed or dismissed.
  • The time a discharge is granted or denied.

(§ 362(c)(2), Bankruptcy Code).

Prohibited Acts

Certain actions are expressly prohibited by the automatic stay (§ 362(a), Bankruptcy Code). Virtually all creditor collection activities are included. The following eight broad categories of acts are banned:

• Filing or continuing to litigate a previously filed judicial, administrative, or other proceeding against the debtor to collect a prepetition claim (§ 362(a)(1), Bankruptcy Code), subject to the following limitations:
  • the prosecution of causes of action that arise after the bankruptcy is filed are not stayed, such as an action for failure to pay postpetition rent;
  • only proceedings against the debtor are stayed. For example, an appeal where the debtor was the plaintiff would not be stayed (see Proceedings Brought by the Debtor, below);
  • the majority of courts do not stay proceedings on prepetition claims that are brought in the bankruptcy court (see Snavely v. Miller (In re Miller), 397 F.3d 726, 730 (9th Cir. 2005); Armco Inc. v. North Atl. Ins. Co. Ltd. (In re Bird), 229 B.R. 90, 95 (S.D.N.Y. 1999)). However, a minority of courts hold that suits in the bankruptcy court can violate the automatic stay if the claim is one that the creditor could have brought before bankruptcy and does not arise under the Bankruptcy Code (see In re Roman Catholic Church of the Archdiocese of Santa Fe , 627 B.R. 916, 920-22 (Bankr. D. N.M. 2021)); and
  • requesting and obtaining continuances of a prepetition lawsuit against a debtor do not violate the automatic stay (see Perryman v. Dal Poggetto (In re Perryman), 631 B.R. 899, 903-04 (B.A.P. 9th Cir. 2021)).
    
    The US Court of Appeals for the Second Circuit recently set a "bright-line rule" that if the debtor is a named party in a prepetition proceeding or action, the automatic stay applies to stop further proceedings under section 362(a)(1) of the Bankruptcy Code, even if the debtor's interest in the underlying property is merely possessory (Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62, 76 (2d Cir. 2022)).
• Enforcing a prepetition judgment against the debtor or property of the estate (§ 362(a)(2), Bankruptcy Code; see In re Fogarty, 39 F.4th at 76).
• Obtaining possession or control over estate property, regardless of whether the underlying claim arose before or after the filing of the bankruptcy petition (§ 362(a)(3), Bankruptcy Code). This includes both tangible property (such as land, buildings, and machinery) and intangible property rights (such as rights acquired under a license agreement).
• Creating, perfecting, or enforcing a lien against property of the estate (§ 362(a)(4), Bankruptcy Code). See Perfection of Security Interests, below, for limited exceptions to this prohibition under the stay.
• Creating, perfecting, or enforcing a lien against property of the debtor to the extent that the lien secures a prepetition claim (§ 362(a)(5), Bankruptcy Code). Property of the debtor is broader than property of the estate (for example, property of the debtor includes abandoned property, exempt property, and property acquired postpetition).
• Any act to collect, recover, or assess a claim against the debtor that arose prepetition (§ 362(a)(6), Bankruptcy Code).
• The setoff of mutual prepetition debts arising from different transactions (§ 362(a)(7), Bankruptcy Code). This means a prepetition debt owing to the debtor cannot be netted against a claim asserted against the debtor if they arise from different transactions. In contrast, recoupment, or netting mutual debts arising out of the same transaction, is not stayed (see Recoupment, below).
• US Tax Court proceedings concerning the debtor’s tax liability for a taxable period determined by the bankruptcy court (§ 362(a)(8), Bankruptcy Code). These proceedings are stayed because the bankruptcy court has the power to adjudicate relevant tax liability issues.

To take any of the above actions, the creditor must ask the court for relief from the stay (see Relief from the Stay, below). For examples of how the automatic stay prohibits lender actions, see How Lenders are Affected by the Automatic Stay, below.

Inaction

Courts disagree about whether a failure to act can violate the automatic stay. For example, this issue may arise when a creditor refuses to turn over property that it properly repossessed before the petition date.

Under the majority view held in the US Courts of Appeals for the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, a creditor’s refusal to return property after a turnover demand is an act to exercise control over the property that violates the stay (see In re Fulton, 926 F.3d 916, 923-27 (7th Cir. 2019); Weber v. SEFCU (In re Weber), 719 F.3d 72, 79-81 (2d Cir. 2013); California Emp’t Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151-52 (9th Cir. 1996); Motors Acceptance Corp. v. Rozier (In re Rozier), 376 F.3d 1323, 1324 (11th Cir. 2004); Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F.2d 773, 774-75 (8th Cir. 1989)).

The US Courts of Appeals for the Third and Tenth Circuits and the District of Columbia have adopted the minority position that mere inaction cannot violate the stay when a creditor passively retains property that it obtained prepetition (see In re Denby-Peterson, 941 F.3d 115, 126 (3d Cir. 2019) (holding that a secured creditor is not required to turn over property of the debtor until the debtor obtains a court order requiring turnover); WD Equip., LLC v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. 2017); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C. Cir. 1991)).

For example, a court applied the ruling in In re Cowen to hold that an automatic lien created by the Kansas workers’ compensation statute to enforce subrogation rights given to an employer to allow reimbursement from the employee’s recoveries against third parties for amounts paid by the employer as workers’ compensation benefits did not violate the automatic stay (see Davis v. Tyson Prepared Foods, Inc. (In re Garcia), 2017 WL 2951439, at *5-6 (Bankr. D. Kan. July 7, 2017), aff'd, 740 F. App'x 163 (10th Cir. 2018)). In contrast, another court applied In re Fulton to hold that a creditor violated the automatic stay by continuing to exercise control over garnished funds postpetition (see In re Nimitz, 2019 WL 7580141, at *3-5 (Bankr. E.D. Va. Dec. 16, 2019)).

On December 18, 2019, the US Supreme Court granted certiorari in City of Chicago v. Fulton to resolve the circuit split concerning this issue (see 140 S. Ct. 680 (2019)). On January 14, 2021, the Court vacated and remanded the Seventh Circuit’s decision, ruling that merely holding property does not violate the stay, because a stay violation requires an affirmative act that would “disturb the status quo of estate property” as of the petition date (City of Chicago v. Fulton, 141 S.Ct. 585, 587 (2021). However, the US Supreme Court limited its ruling in In re Fulton to section 363(a)(3) of the Bankruptcy Code, which prohibits any act to obtain possession of, or exercise control over, estate property, and did not address potential automatic stay violations set out in other sections, including sections 362(a)(4), (6), and (7) of the Bankruptcy Code.

Following the US Supreme Court’s decision in In re Fulton:

• On remand, the Seventh Circuit remanded to the bankruptcy court to determine whether the creditor violated sections 362(a)(4) (enforcing a lien against property) or (a)(6) (acting to recover a claim), despite the US Supreme Court’s decision that the creditor did not violate section 362(a)(3) (see In re Fulton, 843 F. App’x 799, 800 (7th Cir. 2021)).
• At least one court has refused to dismiss a complaint expanding the scope of Fulton to other subsections of section 362(a) and also held that Fulton “at least left open the possibility that inaction combined with other facts might nonetheless violate the automatic stay” (Barrera-Perez v. City of Chicago (In re Cordova), 635 B.R. 321, 343 (Bankr. N.D. Ill. 2021)).
• At least two courts have held that creditors retaining a valid prepetition attachment of a debtor’s bank account did not violate the automatic stay because the creditors did not pursue garnishment proceedings postpetition and therefore they only maintained the status quo (see Stuart v. City of Scottsdale (In re Stuart), 632 B.R. 531, 538-44 (B.A.P. 9th Cir. 2021); Margavitch v. Southlake Holdings, LLC (In re Margavitch), 2021 WL 4597760, at *5-8 (Bankr. M.D. Pa. Oct. 6, 2021)).

Limitations and Exceptions

While the scope of the automatic stay is extremely broad, it is limited by judicial and statutory exceptions. The judicial limitations have evolved over time and represent judges’ interpretations of the statute. The statutory exceptions reflect policy decisions where Congress has determined that the rights of certain parties prevail over the need to protect the debtor from its creditors.

Judicially Crafted Limitations

Non-Debtors

The stay does not extend to third parties, such as a debtor’s guarantors, affiliates, co-debtors, officers and principals, co-defendants, and partners. It generally only applies to the debtor and its property (see Teachers Ins. & Annuity Ass’n v. Butler, 803 F.2d 61, 65 (2d Cir. 1986); Nevada Power Co. v. Calpine Corp. (In re Calpine Corp.), 365 B.R. 401, 408 (S.D.N.Y. 2007); Diocese of Rochester v. AB 100 Doe (In re Diocese of Rochester), 2022 WL 1638966, at *4-5 (Bankr. W.D.N.Y. May 23, 2022)). As a result, a creditor may pursue its claims against the debtor’s guarantors and co-debtors to the extent that they are non-debtors in the bankruptcy. However, the extension of the automatic stay to non-debtors is “extraordinary relief” (see In re SDNY 19 Mad Park, LLC, 2014 WL 4473873 (Bankr. S.D.N.Y. Sept. 11, 2014)).

Creditors should be aware that there are certain situations where a non-debtor may be protected:

• Courts have extended the automatic stay to non-debtors when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor’s estate (see Residential Capital, LLC v. Federal Hous. Fin. Agency (In re Residential Capital, LLC), 529 F. App’x 69 (2d Cir. 2013). This relief requires a showing of special circumstances and that an action against a non-debtor party threatens the debtor’s reorganization efforts. Examples include a claim against a non-debtor for an obligation guaranteed by the debtor, a claim against the debtor’s insurer, and actions where there is an identity of interest between the debtor and the non-debtor defendant such that the debtor may be considered the real defendant (see Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287-88 (2d Cir. 2003); Gucci Am., Inc. v. Duty Free Apparel, Ltd., 328 F. Supp.2d 439, 441-42 (S.D.N.Y. 2004)). Similarly, the US Bankruptcy Court for the Southern District of New York extended the automatic stay to bar a creditor’s actions against a third party which duplicated the trustee’s fraudulent transfer claims against the same party, ruling that those claims were property of the estate (see Fox v. Picard (In re Madoff), 848 F.Supp.2d 469, 478-85 (S.D.N.Y. 2012)).
• In unusual circumstances, a court may invoke its equitable powers to protect any third party which it deems important to the success of the debtor’s reorganization (see Union Trust Phila., LLC v. Singer Equip. Co., Inc. (In re Union Trust Phila., LLC), 460 B.R. 644, 657-58 (E.D. Pa. 2011)) or to enjoin litigation against non-debtors if doing so is “likely to enhance the prospects for a successful resolution of the disputes attending [the] bankruptcy” (Caesars Entm’t Operating Co., Inc. v. BOKF, N.A. (In re Caesars Entm’t Operating Co., Inc.), 808 F.3d 1186, 1188 (7th Cir. 2015)). A court has equitable powers to issue orders “necessary or appropriate to carry out the provisions of this title” (§ 105, Bankruptcy Code). Courts may invoke this power to prohibit creditor action against third parties, known as a “section 105 injunction.” Unlike the automatic stay injunction, it is not automatically triggered. This relief requires a hearing on notice to interested parties and must satisfy the typical equitable standard for issuance of injunctions (see In re Calpine, 365 B.R. at 409-14). For example, the US Bankruptcy Court for the Southern District of New York issued a section 105 injunction where a creditor’s action against a third party threatened the trustee’s ability to reach a settlement on its fraudulent transfer claims against the same party (see In re Madoff, 848 F.Supp.2d at 485-87).

Letters of Credit

The automatic stay has been interpreted to allow a beneficiary to draw down on a letter of credit issued on the account of a debtor (see Elegant Merch., Inc. v. Republic Nat’l Bank (In re Elegant Merch., Inc.), 41 B.R. 398 (Bankr. S.D.N.Y. 1984); In re M.J. Sales & Distrib. Co., Inc., 25 B.R. 608, 615 (Bankr. S.D.N.Y. 1982)). Drawing on a letter of credit does not create, perfect, or enforce a lien on the debtor’s property. Presumably the lender would have already perfected its liens on the debtor’s property securing the letter of credit before the bankruptcy filing. These perfected liens remain valid in the bankruptcy whether or not the letter of credit is drawn.

Once drawn down by the beneficiary, the lender issuing the letter of credit would immediately have a secured claim against the debtor for reimbursement. However, any attempt by the lender to enforce its claim is subject to the automatic stay. The lender’s only recourse is to file a claim against the debtor under normal claim settling procedures. Also, drawing on the letter of credit would not divest the debtor of estate property, because the bank honors a letter of credit by paying the beneficiary of the letter with its own funds, not with the debtor’s assets. Finally, enjoining payment of letters of credit would frustrate their primary commercial purpose, which is the intended substitution of the known and secured credit of a bank for the unknown and risky credit of the other party to the transaction.

Administrative Freeze on Bank Account

The US Supreme Court further limited the scope of the automatic stay to allow a bank to impose a temporary administrative freeze on the account of a debtor who owes the bank money. The US Supreme Court reasoned that a bank’s mere placing of an administrative hold, pending resolution of its claim, on the debtor’s account up to an amount the bank claimed was subject to setoff, was not itself a prohibited act of setoff (see Prohibited Acts, above), and did not violate the automatic stay (see Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995)).

Proceedings Brought by the Debtor

Most courts have held that the stay does not apply to proceedings originally brought by the debtor, including all subsequent appeals in those proceedings, regardless of which party brings the appeal (see Freeman v. Commissioner of Internal Revenue, 799 F.2d 1091, 1092-93 (5th Cir. 1986); Baack v. Horizon Womens Care Pro. LLC (In re Horizon Womens Care Pro. LLC), 506 B.R. 553, 556-57 (Bankr. D. Colo. 2014)). Conversely, these courts have interpreted the stay to apply only to actions originally brought against the debtor, including all subsequent appeals in those proceedings, regardless of whether the debtor is the appellant or the appellee (see TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th Cir. 2011); Association of St. Croix Condo. Owners v. St. Croix Hotel Corp., 682 F.2d 446, 449 (3d Cir. 1982)). Most recently, the US Bankruptcy Appellate Panel for the Ninth Circuit clarified that a nonbankruptcy court's postpetition order does not violate the stay when a creditor is defending against claims brought by a debtor prepetition (see Censo, LLC v. NewRez, LLC (In re Censo, LLC), 638 B.R. 416 (B.A.P. 9th Cir. 2022)).

Similarly, some courts have held that sales or transfers of property initiated by the debtor are not subject to the automatic stay (see Burkart v. Coleman (In re Tippett), 542 F.3d 684, 691-92 (9th Cir. 2008)).

Recoupment

Courts have determined that the stay does not apply to recoupment actions, which are actions to net mutual claims arising out of the same transaction (see Reiter v. Cooper, 507 U.S. 258, 265 n.2 (1993); Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 147 (2d Cir. 2002); New York State Elec. & Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93, 96 (2d Cir. 1997)).

Statute of Limitations and Expiration of Contracts

Most courts have held that the automatic stay does not apply to suspend time limitations to begin certain actions (although section 108 of the Bankruptcy Code may otherwise stop the running of certain time limits) (for example, see Aslanidis v. United States Lines, Inc., 7 F.3d 1067, 1074-75 (2d Cir. 1993); US Lines, Inc. v. US Lines Reorganization Trust, 262 B.R. 223, 235-36 (Bankr. S.D.N.Y. 2001)).

The stay does not prevent termination of a contract which expires by its own terms after commencement of a bankruptcy case (for example, see In re Margulis, 323 B.R. 130, 133 (Bankr. S.D.N.Y. 2005); In re Policy Realty Corp., 242 B.R. 121, 126 (Bankr. S.D.N.Y. 1999)).

Corporate Governance

Courts have determined that the automatic stay does not affect a debtor’s corporate governance obligations, such as holding a stockholders’ meeting, unless it can be shown that the call for the meeting amounted to “clear abuse” (a determination which depends on whether the debtor’s rehabilitation will be seriously threatened or merely delayed) (see Johns-Manville Corp. v. Equity Sec. Holders Comm. (In re Johns-Manville Corp.), 801 F.2d 60, 64 (2d Cir. 1986); In re SS Body Armor I, 527 B.R. 597, 604-07 (Bankr. D. Del. 2015); Fogel v. US Energy Sys., Inc., 2008 WL 151857 (Del. Ch. Jan. 15, 2008)).

Ministerial Acts

Courts have held that the automatic stay does not apply to bar ministerial acts that involve no deliberation or discretion, such as the entry of a judgment by a court clerk (see McCarthy v. North Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1080 (9th Cir. 2000); Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527-28 (2d Cir. 1994)).

Fraudulently Transferred Property

The US Courts of Appeals for the Second and Tenth Circuits have held that the automatic stay does not apply to unrecovered property that is the subject of a fraudulent transfer claim because this property does not become part of the estate until it is recovered under section 541(a)(3) of the Bankruptcy Code (see Rajala v. Gardner, 709 F.3d 1031, 1037-38 (10th Cir. 2013); Federal Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 130-31 (2d Cir. 1992)). However, the US Court of Appeals for the Fifth Circuit has held that the automatic stay does apply to unrecovered fraudulently transferred property because this property is part of the estate (see American Nat’l Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 1275 (5th Cir. 1983)). Courts outside of these jurisdictions are split on the issue.

Statutory Exceptions

There are 28 policy-based exceptions to the automatic stay (§ 362(b), Bankruptcy Code). Some of these exceptions only apply in distinct situations and are rarely invoked. For example, any action by an accreditation agency regarding the licensing of the debtor as an educational institution is not subject to the stay. Other exceptions to the stay tend to arise more often in individual bankruptcies, such as criminal proceedings against the debtor and the withholding of income for domestic support obligations.

The most commonly invoked exception is any action by a governmental unit to enforce its “police and regulatory power” (§ 362(b)(4), Bankruptcy Code). This refers to acts to protect the public health, safety, or welfare, such as preventing fraud, protecting the environment, or protecting the consumer. These public policy-driven actions are excepted from the stay, but actions protecting pecuniary interests, such as seeking to collect a debt owed to the government, are not excepted. The government is not given special status as a creditor.

Perfection of Security Interests

From a secured creditor’s perspective, the most relevant exception concerns perfection of security interests under relation-back statutes (§ 362(b)(3), Bankruptcy Code). Acts to perfect, or to maintain or continue the perfection of a security interest, to the extent permitted in the Bankruptcy Code, are excepted from the automatic stay. They are permitted by the Bankruptcy Code in two situations:

• Perfection, maintenance, or continuation of perfection of an interest in property is not prohibited by the stay if applicable non-bankruptcy law recognizes the effectiveness of retroactive perfection (§ 546(b), Bankruptcy Code). For example, the Uniform Commercial Code (UCC) provides for the retroactive perfection of a purchase-money security interest (PMSI) (UCC § 9-324(a)). This means that under state law, the general rule is that an unperfected purchase-money security interest is effective against an entity that acquires rights in this property before the interest is perfected, if perfection occurs within the grace period fixed by the statute (20 days) (§ 546(b)(1)(A), Bankruptcy Code). The filing of a UCC-3 continuation statement is also excepted from the automatic stay (if it occurs within the time fixed by applicable non-bankruptcy law) (§ 546(b)(1)(B), Bankruptcy Code).
• The Bankruptcy Code contains a similar concept (§ 547(e)(2)(A), Bankruptcy Code). It provides that perfection of an interest in property (and perfection of purchase-money security interests under section 547(c)(3)(B) of the Bankruptcy Code) is not prohibited by the automatic stay if it occurs within a 30-day grace period.

However, if the statute does not allow the lien to relate back to a prepetition period, then the exception does not apply (see In re Linear Elec. Co., Inc., 852 F.3d 313 (3d Cir. 2017)).

Relief from the Stay

Relief from the stay may be granted by the court on its own motion or on request from a party in interest after notice and a hearing. The parties requesting relief from the stay tend to be secured creditors. It is the creditor’s responsibility to seek relief from the stay before taking any action against the debtor or its property. A prudent creditor will always do so, or risk sanctions for violations of the stay (see Violations of the Stay, below).

Although courts may be reluctant to grant relief from the stay early in a bankruptcy case, there are several reasons why creditors should still consider seeking early relief from the stay:

• Some courts have held that the right to receive adequate protection is not triggered until the creditor seeks relief from the stay (see In re Continental Airlines, Inc., 154 B.R. 176, 180-81 (Bankr. D. Del. 1993)).
• The Bankruptcy Code provides the stay is terminated concerning the party seeking relief 30 days after it made the request for relief, unless the court orders the stay to continue in effect (§ 362(e), Bankruptcy Code).
• Seeking early relief can create a baseline to establish “cause” justifying relief from the stay (see “For Cause” Including Lack of Adequate Protection, below). “Cause” can encompass many factors, such as undue delay, misconduct, mismanagement, or waste. If an early request for relief is denied, a later request can highlight the debtor’s lack of progress during the case, using the first request as a reference point.

On January 14, 2020, the US Supreme Court resolved a circuit split and ruled that a bankruptcy court’s order unreservedly denying relief from the automatic stay is a final, immediately appealable order under 28 U.S.C. Section 158(a) (see Ritzen Grp. Inc. v. Jackson Masonry, LLC, 140 S.Ct. 582 (2020)). Resolving an issue left undecided by Ritzen, the US Court of Appeal for the Ninth Circuit later held that denial of a stay-relief motion without prejudice can still be a final, appealable order (see Harrington v. Mayer (In re Mayer), 28 F.4th 67, 71-72 (9th Cir. 2022)).

Types of Relief

The nature of relief available will depend on the facts of each case and if certain grounds for relief are present (see Grounds for Relief, below). The type of relief granted, if any, is within the complete discretion of the court. The court may terminate, annul, modify, or condition the stay (§ 362(d), Bankruptcy Code).

• Termination. The stay is over and the creditor may take action against the debtor.
• Annulment. The stay is annulled, as if it had never come into existence. As a consequence, annulling the stay retroactively validates actions taken when the stay was in effect. Annulment is a rare remedy that is usually available only to innocent creditors who are unaware of the bankruptcy or when there is wrongdoing on the part of the debtor. For example, the court may annul the stay when the debtor did not file the bankruptcy petition in good faith. The court will evaluate the conduct of both the debtor and the creditor in weighing the equities. This type of relief is granted sparingly only in unusual and compelling circumstances.
• Modification. The stay is altered so that certain acts may be permitted. Generally, modification must be justified by a showing that continuation of the stay will affirmatively harm the creditor. For example, the stay may be modified to permit repossession of certain property or to allow a trial to proceed in a state court, if prohibiting these acts would prejudice the creditor’s rights. Stay modification is required even if the relief is being sought to defend or protect the estate (see State Farm Ins. Co. v. Carapella (In re Gaime), 17 F.4th 1349, 1353 (11th Cir. 2021)).
• Conditioning. The termination, modification, or the continuance of the stay is conditioned on any number of circumstances that may be appropriate in a given case. For example, modification of the stay may be conditioned on each party complying with a stipulation that, on remand of a case to the state court, they will file a joint motion to consolidate the case with a pending case.

Retroactive Relief from the Automatic Stay

According to the US Supreme Court, nunc pro tunc orders are not permissible (see Roman Catholic Archdiocese of San Juan, P.R. v. Acevedo Feliciano, 140 S. Ct. 696, 700-01 (2020)). In other words, a nunc pro tunc order can only memorialize an action that the court actually took at a previous time but was not officially recorded. Courts differ on the applicability of the Acevedo ban on nunc pro tunc orders to orders granting relief from the automatic stay.

The US Bankruptcy Court for the Eastern District of New York follows Acevedo, finding that a court cannot grant nunc pro tunc relief from the automatic stay (see In re Telles, 2020 WL 2121254, at *5 (Bankr. E.D.N.Y. Apr. 30, 2020)). However, the US Bankruptcy Appellate Panel for the Ninth Circuit distinguished Acevedo, finding that it does not bar bankruptcy courts from annulling the automatic stay nunc pro tunc (see Merriman v. Fattorini (In re Merriman), 616 B.R. 381, 391-95 (B.A.P. 9th Cir. 2020)).

Grounds for Relief

There are four grounds for obtaining relief from the automatic stay (§ 362(d), Bankruptcy Code):

“For Cause” Including Lack of Adequate Protection

From a secured creditor’s perspective, this is the most important basis for relief. Secured creditors are entitled to adequate protection to protect against actual or threatened diminution in the value of their collateral during the bankruptcy case (§ 361, Bankruptcy Code). Collateral can be hard assets (property) or soft assets (cash). Diminution in value may be caused by a variety of factors, including depreciation, physical loss or damage, declining fair market values, failure to insure or maintain the property, or the non-payment of taxes. These type of losses are attributable to the stay because the creditor is enjoined by the stay from foreclosing or taking any other action to protect the value of its collateral.

If the debtor is unable or unwilling to provide adequate protection to a secured creditor, there is sufficient cause for the court to order relief from the stay (§ 362(d)(1), Bankruptcy Code). The creditor can then foreclose on the collateral and realize an amount sufficient to recover the balance due on the debt.

Conversely, if the value of the collateral is not depreciating, or if the loss is not attributable to the stay, then the debtor is not required to furnish adequate protection to the creditor, and there is no basis for relief from the stay. For example, a loss is not attributable to the stay if a creditor was enjoined from enforcing its lien by a prepetition order issued by a nonbankruptcy court. The creditor’s inability to foreclose in this scenario is totally unrelated to the bankruptcy filing.

Some courts subscribe to the theory that if a creditor is oversecured, the excess value is an “equity cushion“ which is sufficient to protect the creditor without the need for adequate protection (and therefore, no cause to lift the stay).

Aside from lack of adequate protection, the court has broad discretion to determine what is “cause” for granting relief from the automatic stay. It is dependent on the particular facts of each case. For example, a court may lift the stay for cause to allow a tort plaintiff to proceed in a different forum against the debtor, if the plaintiff agrees that liability would be limited to the extent of the debtor’s insurance coverage. Cause for relief from the stay can also exist if the debtor did not file the bankruptcy petition in good faith, or if the debtor fails to maintain, preserve, or insure collateral.

Acts Against Property

A secured creditor may obtain relief from the automatic stay for acts against property if both the:

• Debtor does not have equity in the property.
• Property is not necessary to an effective reorganization.

(§ 362(d)(2), Bankruptcy Code).

• Debtor has no equity in the property. The first requirement is satisfied if the total of all encumbrances, or junior liens, exceeds the value of the property. This differs from the equity cushion analysis, which ignores subordinate liens. This can be proved with an appraisal, testimony of an appraiser, or with the debtor’s own financial information in its filed schedules. The creditor must satisfy this burden.
• Property not necessary for an effective reorganization. It is the debtor’s burden to prove that the property is necessary for an effective reorganization. To meet the second requirement, the creditor must rebut this assertion by showing that an effective reorganization may occur without the property in issue, or alternatively, that the debtor is unlikely to successfully reorganize within a reasonable time.
  • Property not necessary. That the property is crucial for the debtor’s mere survival is not enough. It must be essential for an effective reorganization with a reasonable possibility of success within a reasonable time. For example, equipment used by the debtor to manufacture goods to make its Chapter 11 payments could arguably be property necessary to an effective reorganization. As another example, certain real property would be necessary to an effective reorganization for a debtor whose business is managing or leasing real estate. Conversely, for a debtor engaged in the business of drilling oil and gas wells, these wells, while helpful, are arguably not necessary for an effective reorganization, as they are speculative and depleting assets.
  • No effective reorganization. The logic is if there can be no effective reorganization, then none of the debtor’s property is necessary. The US Supreme Court has suggested that this should be a meaningful test (see United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988)). The debtor must show that an effective reorganization is in prospect or that there exists a reasonable possibility of a successful reorganization in the near future. The creditor may rebut this assertion in any number of ways, such as by establishing that the debtor cannot effectively reorganize due to market conditions, or has no realistic prospect of obtaining postpetition financing, or various other reasons related to the debtor’s business operations including the deteriorating condition of the debtor’s property or the property’s inability to generate sufficient cash flow.

As a practical matter, it may be more difficult to obtain relief from the stay on this ground early in the case. Courts require a less detailed showing of the likelihood of a successful reorganization during the first 120 days of a Chapter 11 case, during which time the debtor is given the exclusive right to propose a plan of reorganization (§ 1121(b), Bankruptcy Code). However, even within the first 120 days, relief will be granted if there is a lack of any realistic prospect of effective reorganization (see In re 4th St. E. Investors, Inc., 2012 WL 1745500 (Bankr. C.D. Cal. May 15, 2012)).

Single Asset Real Estate

Single asset real estate cases involve business operations with a single real estate property or project, other than residential real property with less than four residential units, which generates substantially all of the gross income of the debtor (§ 101(51B), Bankruptcy Code). They are usually two-party disputes, and do not resemble a typical Chapter 11 business reorganization case. A secured creditor in such a case may foreclose on its collateral unless one of the following occurs within the first 90 days of the case (or a later date extended by the court for cause):

• The debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time.
• The debtor starts paying monthly interest payments to the secured creditor at the non-default contract rate of interest.

(§ 362(d)(3), Bankruptcy Code).

Acts Against Real Estate

Acts against real estate, such as eviction or foreclosure, may not be stayed if the court finds that the case was filed as “part of a scheme to delay, hinder, and defraud creditors” either by multiple bankruptcy filings, or by transferring all or part of an interest in this property without the consent of the secured creditor or the court (§ 362(d)(4), Bankruptcy Code). The court order granting relief from the stay is recorded in local real property records and is binding for two years in any future case involving the same property, unless the subsequent debtor can show changed circumstances or good cause.

Violations of the Stay

An individual debtor who is injured by a willful violation of the automatic stay may recover actual damages, including costs, attorneys’ fees, and, if appropriate, punitive damages (§ 362(k), Bankruptcy Code). Willfulness does not require that the creditor intended to violate the stay, but rather that its acts violating the stay were intentional (see California Coast Univ. v. Aleckna (In re Aleckna), 13 F.4th 337, 342 (3d Cir. 2021); University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d. 1065, 1087 (3d Cir. 1992)). A creditor’s good faith belief that its actions complied with the stay does not, on its own, establish a defense to willfulness (see In re Aleckna, 13 F.4th at 342). However, a defendant does not willfully violate the stay if the law governing the alleged violation was sufficiently uncertain and the defendant, in good faith, relied on persuasive legal authority to support its position (see In re Aleckna, 13 F.4th at 342-44).

A willful stay violation may permit a debtor to recover attorneys’ fees incurred in stopping the stay violation and litigating a damages claim for this violation, including defending the damages award on appeal (see Mantiply v. Horne (In re Horne), 876 F.3d 1076, 1081 (11th Cir. 2017)). The Ninth Circuit recently held that a debtor is entitled to appellate counsel fees for successfully challenging the bankruptcy court’s award of attorney fees and winning larger damages for a willful violation of the stay (see Easley v. Collection Serv. of Nev., 910 F.3d 1286, 1290-93 (9th Cir. 2018)). More recently, the Third Circuit held that a claim to recover damages under section 362(k) of the Bankruptcy Code may exist independently of the underlying bankruptcy case, and creates a private right of action that may be maintained without reopening a closed or dismissed bankruptcy case (see Healthcare Real Estate Partners LLC v. Summit Healthcare REIT, Inc. (In re Healthcare Real Estate Partners, LLC), 941 F.3d 64, 68-72 (3d Cir. 2019)).

Some jurisdictions have extended this provision to other entities, such as corporations and partnerships debtors. New York courts have limited this provision to natural persons only, while Delaware courts have extended it to corporate debtors. Corporate debtors in all jurisdictions may seek contempt proceedings for willful violations of the stay. Courts have used their civil contempt power under section 105(a) of the Bankruptcy Code to hold that even stay violations caused by computer error are willful violations of the stay (see In re Wedco Mfg., Inc., 2014 WL 5573433 (Bankr. D. Wy. Oct. 31, 2014)).

While courts tend to order severe sanctions against willful violators of the stay, they are generally lenient towards those who inadvertently violate the stay in good faith. Yet, even innocent violations run the risk of sanctions. Even merely technical violations of the stay do not absolve creditors from liability under section 363(k) (see Koeberer v. California Bank of Com. (In re Koeberer), 632 B.R. 680, 690 (B.A.P. 9th Cir. 2021)). The court may impose compensatory damages even if the creditor acted in good faith and on the advice of counsel. At a minimum, actions taken in violation of the stay are void as a matter of law. A monetary penalty may not be imposed unless the stay violation occurred after the creditor received actual notice of the bankruptcy filing (§ 342(g)(2), Bankruptcy Code).

There are several ways creditors can avoid running afoul of the automatic stay. The best approach is to negotiate a resolution of the matter before the debtor files for bankruptcy to avoid the issue of the stay completely. If that is not possible, the next approach should be to negotiate with the debtor to obtain a stipulated order permitting the creditor to take the desired action despite the stay. For example, the debtor may stipulate that a creditor may have relief from the stay if the creditor agrees to limit its recovery to insurance policy proceeds. As a last resort, a creditor can litigate for relief from the stay, if one or more of the grounds for relief applies (see Grounds for Relief, above) or for a declaration that the stay does not apply (see Limitations and Exceptions, above).

US Supreme Court’s Decision in Taggart

At least one court has rejected a strict liability standard for violating a corporate debtor's automatic stay because it would be inconsistent under the US Supreme Court's decision in Taggart v. Lorenzen (139 S. Ct. 1795 (2019)), which rejected a strict liability standard for violating an individual debtor's discharge injunction in a Chapter 7 case (see Harker v. Eastport Holdings, LLC (In re GYPC, Inc.), 634 B.R. 983, 989-91 (Bankr. S.D. Ohio 2021); see also Tate v. Fairfax Vill. I Condo. (In re Tate), 2020 WL 634293, at *3 n.2 (Bankr. D.C.C. Feb. 10, 2020) (citing Taggart in finding a willful stay violation in a Chapter 13 case and imposing sanctions under section 362(k)(1) of the Bankruptcy Code); but see In re Spiech Farms, LLC, 603 B.R. 395, 408 n.22 (Bankr. W.D Mich. 2019) (stating in a Chapter 7 case that "[t]his court does not read Taggart to change the Sixth Circuit's standard for determining whether a creditor can be held in contempt for violating the automatic stay")).

Waivers of the Stay

The automatic stay causes delay and inconvenience to creditors who want to exercise remedies to realize the value of their collateral. For example, lenders should consider requesting a waiver of the stay before a bankruptcy is filed in forbearance agreements executed during loan workout negotiations and in the resulting restructuring agreements. While the Bankruptcy Code does not expressly prohibit prepetition waivers of the stay, they are not self-executing in favor of creditors, nor per se enforceable. Despite language in the waiver providing for the automatic lifting of the stay on the filing of the bankruptcy petition, the creditor must file a motion for relief from the stay, with notice to all creditors and other parties in interest.

Courts balance several factors in determining the enforceability of these waivers (see Southwest Ga. Bank v. Desai (In re Desai), 282 B.R. 527, 532 (Bankr. M.D. Ga. 2002)). Generally, courts consider a prepetition waiver of the stay as a factor in the decision whether to grant relief from the stay. The importance of the prepetition waiver in the decision may depend on the context in which the waiver was obtained. According to at least one court, stay waivers contained only in initial loan documents should be given little weight (as they are likely boilerplate), while those contained in a confirmed plan of reorganization should be respected (as they are negotiated and approved after notice to all interested parties) and those granted in forbearance agreements, workouts, and other agreements should be considered on a case-by-case basis (see In re Bryan Road, LLC, 382 B.R. 844, 848 (Bankr. S.D. Fla. 2008)). For example, one court approved a stay waiver on the grounds that the debtor, postpetition, specifically ratified and agreed to be bound by the forbearance agreement containing the stay waiver (see In re Triple A & R Cap. Inv., Inc., 519 B.R. 581, 586 (Bankr. D. P.R. 2014)). Another court enforced a stay waiver provision in a forbearance agreement, finding that the waiver did not automatically entitle the lender to relief from the stay, but rather gave the lender the ability to seek this relief unopposed by the debtor/borrower (see SummitBridge Nat’l Invs. VI, LLC v. Orchard Hills Baptist Church, Inc. (In re Orchard Hills Baptist Church, Inc.), 608 B.R. 309, 317 (Bankr. N.D. Ga. 2019)).

Overall, it is unclear whether, and under what conditions, these waivers will be upheld. Other factors courts consider include:

• The sophistication of the party making the waiver and if both parties were represented by experienced counsel.
• The consideration given for the waiver, including the length of the waiver period, and the risks assumed and concessions granted by the lender.
• The effect on other parties, such as unsecured creditors and junior lienholders.
• The feasibility of the debtor’s plan.
• The presence of any evidence that the waiver was obtained by coercion, fraud, or mutual mistake of material facts.
• Whether enforcing the waiver will promote the public policy of encouraging out-of-court restructurings and settlements.
• Whether there appears to be a likelihood of reorganization.
• The extent to which the creditor would be otherwise prejudiced if the waiver is not enforced.
• The time gap and changes in circumstances between the date of the waiver and the date of the bankruptcy filing.
• Whether the debtor has equity in the property and if the creditor is otherwise entitled to relief from the stay under section 362(d) of the Bankruptcy Code (see Grounds for Relief, above).

The weight given to each factor is determined on a case-by-case basis in the court’s discretion, based on the facts and circumstances surrounding the granting of the waiver. Many courts will enforce prepetition stay waivers even if the bankruptcy filing was not in bad faith and even if the debtor has some equity in the property (making relief otherwise unavailable under section 362(d) (see Acts Against Property, above)), if other compelling factors are present. The burden is on the party opposing enforcement of the waiver (the debtor) to demonstrate that the court should not enforce it. Enforcement of prepetition stay waivers is seen most often in single asset real estate cases, which involve few assets and usually only one creditor (see Single Asset Real Estate, above). That said, there is no consistency or predictability in this area. Some courts will only enforce stay waivers in single asset real estate cases, while other courts find them per se enforceable, and yet other courts will only enforce these agreements under certain conditions.

Enforcement of Stay Waivers

To minimize the risk that a prepetition waiver of the stay will be held unenforceable, the workout or restructuring agreement should:

• Set out a complete picture of the facts, serving as a statement of the parties’ intent at the time the documents are executed.
• Clearly specify the facts and circumstances which support a basis for relief from the stay, such as the debtor has no equity in the property and no realistic prospect for successful reorganization (see Grounds for Relief, above).
• Clearly reflect the parties’ intention that enforcement of the waiver was a significant, if not primary, motivation for the creditor to enter into the agreement.
• Specifically state that enforcement of the waiver is expressly subject to the court’s approval, to avoid the implication that the creditor is threatening the court’s authority to decide the enforceability of the waiver.

It is also advisable that:

• Creditors clearly establish that they gave consideration for the stay waiver. This consideration may take the form of forbearance to exercise remedies, loan concessions, or amendments to the credit agreement. However, creditors should not bargain too much away in exchange for the waiver, as the existence of the waiver is only one factor that courts consider in their lift-stay analysis (see Waivers of the Stay, above), and it is likely that creditors still must demonstrate some ground for relief from the stay (see Grounds for Relief, above).
• If there are other creditors with significant claims against the borrower, these creditors specifically consent in writing to the stay waiver, or become party to the actual stay waiver document.
• The borrower be represented and advised by experienced counsel.
• The creditor be able to definitively show that the debtor has no equity in the property (for example, the outstanding loan balance exceeds the value of the collateral securing the loan) (see Acts Against Property, above).
• Creditors consider inserting a stay waiver in a consensual plan of reorganization to protect against future bankruptcies. A stay waiver approved by a court in a plan and confirmation order should be enforceable (see In re Bryan Road, 382 B.R. at 848; In re Desai, 282 B.R. at 530 n.2). For example, one court enforced a stay waiver contained in a court-approved settlement agreement in the debtor’s prior Chapter 11 case (see In re BGM Pasadena, LLC, 2016 WL 1738109 (Bankr. C.D. Cal. Apr. 27, 2016)).

How Lenders Are Affected by the Automatic Stay

In practice, the automatic stay forbids lenders (as well as all other creditors) from taking most actions against the debtor, including:

• Informal collection actions, such as calling the debtor or sending threatening letters to demand payment.
• Sending notices of default under a credit agreement. This is why bankruptcy is an automatic event of default in most credit agreements.
• Obtaining liens on property of the estate.
• Perfecting liens by filing or possession, including filing a financing statement under Article 9 of the UCC to perfect a security interest in estate property (see Perfection of Security Interests, above, for limited exceptions).
• Foreclosing on collateral to enforce a security interest in estate property. In fact, one bankruptcy court held that a creditor violated the automatic stay when it foreclosed on property in which the debtor had no ownership interest, but was a guarantor of the underlying debt and a named defendant in a foreclosure judgment. The court held that the foreclosure sale was both a continuation of a judicial action against the debtor and the continuation of a judicial action to recover a claim against the debtor, in violation of section 362(a)(1) of the Bankruptcy Code (see In re Ebadi, 448 B.R. 308, 314-17 (Bankr. E.D.N.Y. 2011)).
• Repossessing collateral that is property of the estate.
• Selling collateral which was repossessed before the filing of the bankruptcy petition.
• Generally exercising any remedy provided for in a credit agreement.

Checklist for Lenders

Before the bankruptcy petition is filed:

• Ensure that loan documents provide that bankruptcy is an automatic event of default (see How Lenders are Affected by the Automatic Stay, above).
• Try to negotiate a resolution before the debtor files for bankruptcy.
• If possible, obtain an agreed waiver of stay in workout and out-of-court restructuring agreements (see Enforcement of Stay Waivers, above).

After the bankruptcy petition is filed:

• Do not take any action (including sending notice of default) that could violate the stay (see How Lenders are Affected by the Automatic Stay, above).
• Consider any permitted actions that can be taken, for example:
  • freeze the debtor’s bank account (see Administrative Freeze on Bank Account, above); and
  • enforce the debt against non-debtor guarantors (see Non-Debtors, above).
• Consider whether there are any grounds for relief from the stay, notably for lack of adequate protection or if the debtor has no equity in the encumbered property and there is no realistic prospect of a successful reorganization (see Grounds for Relief, above).
• Make any requests for relief from the stay as early as possible in the case (see Relief from the Stay, above).