Creditors Rights Attorneys Must Recognize Clarified Stay Termination Requirements for Chapter 7 Cases
There is a common misconception among both creditors and creditors rights attorneys that once property is abandoned by the Chapter 7 Trustee in a bankruptcy, the protection of the automatic bankruptcy stay no longer applies. This would free a secured creditor with an interest in the abandoned property to enforce its rights in the property. However, the Ninth Circuit made clear in Gasprom, Inc. v. Fateh (In Re Gasprom), 500 B.R. 598 (2013), that the Trustee’s abandonment of property alone is not sufficient to terminate the full protection of the automatic bankruptcy stay under 11 U.S.C. § 362. Creditors must wait until the stay is formally terminated by the court or by the closing of the bankruptcy case. A foreclosure attorney must ensure that an automatic stay is terminated, or that the bankruptcy case is closed, before issuing guidance that the client may proceed with foreclosure.
In Gasprom, the Court entered an order authorizing the abandonment by the Chapter 7 Trustee of a commercial real estate property, a non-operational gas station, following a properly noticed hearing (“Abandonment Order”). The holder of the first deed of trust for the gas station proceeded with foreclosure immediately upon entry of the Abandonment Order without otherwise seeking relief from the automatic bankruptcy stay. The Chapter 7 case was subsequently closed, thereby terminating the automatic stay in its entirety. The Debtor then filed a motion to reopen its bankruptcy case and to invalidate the foreclosure sale, arguing that the sale by the first lienholder violated the automatic bankruptcy stay. The first lienholder argued that the automatic stay of §362 terminated once the property was abandoned by the Chapter 7 Trustee. The Court ultimately agreed with the Debtor’s argument and invalidated the foreclosure sale. The Court explained that § 362 provides two layers of protection to a debtor in bankruptcy: (1) the stay protects property of the bankruptcy estate (§362(c)(1)); and (2) protects property of the debtor (§362(a)(5).
The law is well settled that the automatic stay terminates as to property of the bankruptcy estate when property is abandoned by the Chapter 7 Trustee. However, upon abandonment by the Chapter 7 Trustee, the bankruptcy estate’s interest in the property reverts to the debtor. The Court in Gasprom makes clear that while the automatic stay pursuant to §362(c)(1) terminates when property is abandoned by the Chapter 7 Trustee, the automatic bankruptcy stay imposed by §362(a)(5) remains in effect specifically because the abandoned property reverts to the debtor and becomes property of the debtor for purposes of §362(a)(5). Accordingly, unless and until a secured creditor with an interest in the abandoned property obtains relief from the automatic stay, or unless and until the Chapter 7 bankruptcy case is closed, the automatic bankruptcy stay continues to apply.
A thorough understanding of the provisions of the Bankruptcy Code is key to protecting a secured creditor’s rights and to avoiding a violation of the automatic stay. In Gasprom, the first lienholder’s failure to understand the provisions of §362 led to the unfortunate result of violating the automatic stay and invalidating the lienholder’s foreclosure sale.
Poniatowski, Leding, and Parkih, A San Francisco Bay Area Creditor’s Rights Attorney Ensures Avoidance of Stay Violations
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