Skip to main content

Search

Home Foreclosures: 9.2.4 Litigating in a Bankruptcy Case

Lawsuits within a bankruptcy case are called “adversary proceedings.” The proceedings are initiated by a complaint and are governed by rules that closely parallel the Federal Rules of Civil Procedure.24 Depending on the specific circumstances of the case, the bankruptcy court may be a preferable forum for litigating foreclosure related claims and defenses.25 The jurisdiction of bankruptcy courts to resolve such disputes is generally quite broad, though it is more frequently exercised in chapter 13 c

Home Foreclosures: 9.3.1.1 The Automatic Stay

One of the most important weapons in the consumer bankruptcy arsenal is the automatic stay provision of the Bankruptcy Code.27 Few other legal steps that may be taken by a consumer can effectuate relief so simply, so effectively, and so dramatically. The instant that a bankruptcy case is filed, the automatic stay takes effect, freezing almost all actions against the debtor and the debtor’s property, including a foreclosure or sale of secured property.

Home Foreclosures: 9.3.1.2 The Codebtor Stay

In addition to the automatic stay available in every bankruptcy case, chapter 13 provides a special automatic stay of creditor actions against most people who are codebtors with the debtor.42 This codebtor stay, which can relieve creditor pressure on friends or relatives of the debtor, may be an important reason to file a chapter 13 case.

Home Foreclosures: 9.3.3.1 General Rule

Depending upon the circumstances, the duration of the automatic stay varies significantly. If the circumstances require, the stay can be ended by the court almost immediately, although such immediate relief is very unusual in consumer bankruptcy cases. As a practical matter, the stay is usually not lifted in less than thirty days after the petition has been filed. Indeed, the stay may last for the duration of the case, three to six months in straight chapter 7 cases and up to five years in chapter 13 cases.50

Home Foreclosures: 9.3.3.3 In Rem Stay Relief

Another provision of the 2005 Act allows creditors with claims secured by real property to seek in rem stay relief in certain limited circumstances.72 If the court enters an in rem order and the order is properly recorded, the stay does not apply with respect to the property in a later case filed within two years after the date of the order.73

An in rem order may be granted if the secured creditor proves that:

Home Foreclosures: 9.3.4.1 Stay of Legal Proceedings

The acts prohibited by the automatic stay are set out in a series of overlapping statutory provisions.80 Almost all forms of legal actions are brought to an immediate halt by filing the petition.81 Replevin actions, foreclosures, deficiency actions, attachments,82 garnishments,83 and executions are among the many types of legal proceedings affected by this provision.

Home Foreclosures: 9.3.5 Notice of the Automatic Stay

Effective and early notice to creditors of the existence of the automatic stay is critical for two reasons. First, a creditor without notice may take actions against the debtor or their property, because it is not aware that such actions are precluded. Although these actions are generally void, it may cost the debtor and their advocate substantial time and expense to have these actions reversed. Second, once a creditor has notice, almost any creditor activity in violation of the stay will be illegal and actionable for the debtor.102

Home Foreclosures: 9.3.6.1 Remedies for Violations of the Stay

It has long been held that actions taken in violation of the stay are void.117 This means that any actions taken after the bankruptcy filing, including foreclosure sales, repossessions and judgments are without legal effect.118 This is true whether or not the violation occurred with knowledge of the stay, though there are limited exceptions to this general rule.119

Home Foreclosures: 9.3.6.2 Violations of the Stay by Government Entities

Another issue which unfortunately often arises are the remedies available against government entities for violations of the stay. If the stay is violated through state action as defined for purposes of the civil rights laws,150 remedies under 42 U.S.C. § 1983 may be available against officials who violate the stay under color of law. This is because a violation of 11 U.S.C.

Home Foreclosures: 9.3.6.3 Procedure

Although several courts have held that relief under section 362(k) may be available by motion,162 it may be preferable to proceed by complaint pursuant to the adversary rules, especially if injunctive relief or a contempt remedy is sought.163 This will eliminate any potential issues about the due process rights of the party defending.

Home Foreclosures: 9.3.7.1 Overview

Another issue that may come up in a bankruptcy case which is filed to address a foreclosure is a motion by the creditor for relief from the automatic stay in order to proceed with the foreclosure process. In some cases the creditor will be seeking permission from the bankruptcy court to proceed with the sale of property which has already been foreclosed. In others, the creditor will seek relief from stay in order to foreclose or otherwise enforce the lien.

Home Foreclosures: 9.3.7.2 Form of Proceeding

The rules provide that the proper method of proceeding for relief from the automatic stay “shall” be by motion under Rule of Bankruptcy Procedure 9014.167 Indeed, the stay may not be eliminated without court approval even if the parties agree to relief.168 The trustee and, if the court orders, other creditors are entitled to notice of any agreement to terminate the stay before it is approved, if a motion for relief from stay was not previously served.169

Home Foreclosures: 9.3.7.3 Standing of Moving Party to Seek Stay Relief and Indispensable Parties

In a proceeding for relief from the stay, the failure to serve both the debtor and the trustee should lead to a motion to dismiss for lack of an indispensable party.176 The debtor usually has possession of property and will be a defendant in legal proceedings if the stay is lifted. The trustee is also an indispensable party because the trustee has at least a possible interest in almost every case involving property.

Home Foreclosures: 9.3.7.4 Time Limits for Court Actions

The Bankruptcy Code sets out strict time limits for stay litigation.187 Section 362(e) provides that there must be a preliminary hearing on a request for relief from the stay within thirty days; if that hearing is not held, the stay is automatically terminated.

Home Foreclosures: 9.3.7.5 Grounds for Relief from Stay

The stay may be lifted “for cause”194 or through a court’s exercise of discretion to grant equitable relief to prevent undue harm. Thus, courts may lift stays of litigation affecting the debtor’s financial condition or a nondischargeable debt when the debt would clearly be nondischargeable or when proceedings elsewhere have already significantly progressed.195 But the bankruptcy court may instead decide to determine a dischargeability issue itself before allowing another court to proceed.

Home Foreclosures: 9.3.7.6 Debtor Must Conduct Speedy Discovery

Discovery is available concerning motions for relief from stay based on Federal Rule of Civil Procedure 9014. Obtaining discovery on a motion for relief from stay may provide an early opportunity not just to obtain materials related to the motion, but also to obtain other items which may be useful if litigation against the creditor is contemplated.

Home Foreclosures: 9.3.7.7 Burden of Proof

The Bankruptcy Code provides that the burden of proof in stay litigation is on the party seeking relief from the stay as to the issue of the debtor’s equity in property.221 In other words, if the question of equity is central to whether a creditor’s interest is adequately protected from harm due to the stay, the creditor must prove that the debtor lacks sufficient equity to provide adequate protection.222 The burden of proof for all other issues is on the party opposing relief from the stay.

Home Foreclosures: 9.3.7.8.1 Generally

A common problem in bankruptcy cases involving disputed secured claims arises when the creditor files an early motion for relief from the automatic stay to proceed with a foreclosure. For example, suppose you file a chapter 13 case for a client who has defaulted on both a first mortgage and a home equity loan.

Home Foreclosures: 9.3.7.8.2 Responding to the motion

Although it is generally true that you cannot raise counterclaims directly to a motion for relief from stay, it is clear that defenses are permitted.226 It is thus possible to plead that the motion should be denied because the creditor has no cognizable claim, or has a claim which is substantially less than the amount asserted. It is helpful, if possible, to set out the actual defenses fully and to explain how they would reduce or eliminate the creditor’s claim in an accompanying memorandum of law.

Home Foreclosures: 9.3.7.8.3 The applicable legal standard for evaluating consumer defenses to a motion for relief

A number of courts have held that the existence of defenses to a creditor’s claim is relevant to a determination of that creditor’s motion for relief.227 Commonly, upon a showing of “likelihood of success on the merits” courts will continue the stay until the objection to claim can be heard and finally determined.228 These courts liken the process of continuing the automatic stay to a request for preliminary injunctive relief.

Home Foreclosures: 9.3.7.8.4 Practice tips

1. Make sure the underlying issues are joined quickly. Often the court is more comfortable continuing the stay if it is convinced that the underlying issues can be resolved relatively quickly. Thus, it is a good idea to file an adversary proceeding challenging the creditor’s claim at an early stage, preferably before the hearing on the motion for relief. You can then point to the existence of that proceeding and your willingness to expedite it as evidence that the creditor will not be required to wait too long before a determination of its rights.

Student Loan Law: 17.3.2.4 Manipulation of Outcome Measures

Unfortunately, profit and growth motives create incentives for schools to inflate or otherwise misrepresent performance data—such as completion and job placement rates—in order to maintain and grow profits.449 According to a complaint filed by the California Attorney General against Corinthian, Corinthian’s “marketing studies show that student ‘[e]nrollment largely hinges on selling affordability & [job] placement.’ . . .