When a debtor files bankruptcy, an “automatic stay” arises by operation of law which prohibits all actions by creditors to collect, such as foreclosure, repossession, or lawsuit against property of the bankruptcy estate, the debtor, and the debtor’s property (11 U.S.C. (the Bankruptcy Code) §362). Real Estate attorneys frequently see a filing intended to thwart actions against the property, such as foreclosure. Operating like a “blanket injunction,” the stay continues until a court order lifting the stay has been entered or the stay has expired. Actions taken in violation of the stay are void.
Property ceases to be property of the estate if it is sold or abandoned. The trustee may abandon property if it is burdensome or of inconsequential value. (§554) Unless the judge orders otherwise, the property is abandoned back to the debtor. Often, the debtor is behind on their mortgage and the lender, wanting to foreclose, consults a real estate attorney. A recent decision in the 9th Circuit BAP points out just what that means- as property of the debtor, it is still protected by an automatic stay, and a foreclosure is void. The lender should have made sure that the abandonment order included lifting the stay so it could proceed with the sale, or otherwise sought relief from stay..
In re Gasprom, Inc. involved abandonment of a gas station in Oxnard, the principal asset of the debtor. The gas station was subject to a deed of trust securing a debt of over $1 million dollars. The trustee brought a motion to abandon the property. Gasprom objected (to prevent its creditors from exercising their state law rights and remedies, bu the court approved the abandonment. The Abandonment order was silent as to the automatic stay, and the secured creditor held a trustee’s sale later that day. Sixteen days later the case was closed. The trustee’s sale was in violation of the automatic stay -if they waited another 16 days, they would have been in the clear.
The Court found that, when the abandonment order was entered, the property was abandoned back to the debtor. However, the debtor was still protected by the automatic stay.
Some of the confusion may arise in how the automatic stay statute was constructed by the Legislature. Section 362(a) language quoted below protects different things, as pointed out in italics:
DEBTOR & ESTATE (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
ESTATE (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
ESTATE (4) any act to create, perfect, or enforce any lien against property of the estate;
DEBTOR (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
DEBTOR (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.
The Court reasoned that by operation of law, Abandonment Order only terminated one aspect of the stay, the aspect protecting the Gas Station as “property of the estate.” Upon abandonment, the Gas Station no longer was property of the estate; title to the Gas Station reverted to Gasprom. But the abandonment did not by operation of law terminate the aspect of the stay arising from§ 362(a)(5), which protects “property of the debtor.” Absent a ruling by the court granting relief from stay under § 362(d) so as to permit foreclosure to occur, § 362(a)(5) continued to protect the Gas Station from foreclosure, at least until the bankruptcy court closed Gasprom’s bankruptcy case.
Parties in these situations should consult with a Sacramento real estate attorney experienced in bankruptcy proceedings, to ensure they follow the correct course of action.