New Mexico Court Reminds that Prosecuting Prepetition Claims in Bankruptcy May Still Violate the Automatic Stay | Dorsey & Whitney LLP
There are several ways for a creditor of a bankrupt entity (or debtor) to pursue bankruptcy claims directly. If the creditor is involved in a prior litigation with the debtor, he could seek a waiver of the automatic stay to continue to liquidate his claim against the debtor in a forum other than bankruptcy, pursuant to 11 USC § 362 (d) (1 ). It could also remand the pre-trial trial to federal court, in accordance with a few remand statutes, including 28 USC §§ 1441 and 1452.
If there is no dispute before the petition, the creditor could initiate its own adversarial proceedings against the debtor, in accordance with bankruptcy rule 7001. The creditor could also simply file a proof of claim and participate in the normal process of resolution of claims, in accordance with certain provisions of Chapter 5. of the Bankruptcy Code and the 3000 Rules of Bankruptcy Procedure.
Each of these remedies has advantages and disadvantages, depending on the circumstances. But, the only thing a creditor should keep in mind is that they simply cannot pursue any of these remedies without following certain restrictions relating to each. The consequences could be prejudicial to the creditor’s claim.
Take, for example, the recent case of In re Roman Catholic Church of the Archdiocese of Santa Fe, Case n ° 18-13027-t11 (Bankr. DNM May 13, 2021) [ECF 696], where Justice Thuma recently adopted the minority position, holding that a creditor cannot pursue his pre-petition request in a debtor bankruptcy case without first obtaining relief from the automatic stay. The Court rejected the creditor’s efforts in the Archdiocese of Santa Fe case, but without prejudice.
The debtor was a Roman Catholic church in Santa Fe. Pretition, the creditor alleged that the debtor continually defamed him, including his name on several public releases that included lists of some religious officials accused of committing certain crimes.
The creditor claimed he was not one of those church officials and repeatedly asked the debtor to stop making such public releases. But, the debtor would not. Ultimately, the creditor sued the debtor for libel, invasion of privacy, and intentional inflection of emotional distress. In the middle of this lawsuit, the debtor filed for bankruptcy.
In bankruptcy, the creditor filed proof of claim for his alleged damages for his claims in state courts. Although he admitted that the automatic stay applied to his action in state court, he also filed a petition in the bankruptcy court essentially asking that the debtor be prohibited from continuing to publish his name in the courts. Press Releases. This request is at the heart of the Court’s opinion.
The Court first found that although the creditor’s claim included an equitable remedy which was not originally included in the claimant’s state legal action, it was still the initiation of the claim. ‘legal proceedings against the debtor which “could have been initiated before” as prohibited by article 362 of the Bankruptcy Code. See 11 USC §§ 362 (a) (1). This made the new request enjoined by the automatic stay.
The court then turned to the more thorny question of whether “it violates the automatic stay for a creditor to sue the debtor in bankruptcy court on a prior claim.”
The majority rule is that creditors can bring such lawsuits in bankruptcy court without violating the stay. See, for example, With regard to North Coast Village, Ltd., 135 BR 641, 643 (9th Cir. BAP 1992); In re Transcolor Corp., 296 BR 343, 358 (Bankr. D. Md. 2003); In re Uni-Marts, LLC, 404 BR 767, 783 (Bankr. D. Del. 2009); see also In re Miller, 397 F.3d 726, 730 (9th Cir. 2005); In the case of Cashco, 599 BR 138, 146 (Bankr. DNM 2019); In re Bird, 229 BR 90, 95 (SDNY 1999)).
Much of the reasoning of the majority rests on practical concerns; that is to say, there are many things that a bankrupt creditor does to advance their claim, such as filing or pursuing a proof of claim or filing a motion to lift the stay. So applying the suspension to each of these efforts would lead to absurd results.
The minority view is based on the plain language of Article 362 (a) (1), which expressly prohibits the filing of proceedings against the bankrupt debtor on a prior claim. See, for example, Bridges v. Continental AFA Dispensing Co. (In re Continental AFA Dispensing Co.), 403 BR 653, 659 (Bankr. ED Mo. 2009); Healy / Mellon-Stuart Co. v. Coastal Group, Inc. (In re Coastal Group, Inc.), 100 BR 177, 178 (Bankr. D. Del. 1989); In re Hodges, 83 BR 25, 26 (Bankr. ND Cal. 1988); In the case of Penney, 76 BR 160, 161 (Bankr. ND Cal. 1987) (creditor cannot initiate adversarial proceedings under Fed. R. Bankr. P. 7001 without leave of court); see also In re Ionosphere Clubs, Inc., 922 F.2d 984, 993 (2d Cir. 1990) (the automatic stay applies to the dispute between the debtor and the union over a
collective agreement, even if the case goes to bankruptcy court).
Opinion of the Court
Justice Thuma sided with the minority, agreeing that the plain language of section 362 (a) (1) is clear and disapproving that the application of this provision would lead to absurd results, as the practical examples cited by the majority derive specifically from the Bankruptcy Code and could not have been the subject of a prior request. See, for example, Hodges, 83 BR to 26 (“[a]n an action brought in bankruptcy court can only be considered a violation of the automatic stay where there is no Code basis for the action ”).
The Court also distinguished the prosecution of a bankrupt debtor from the filing of a proof of claim, in that the latter proceeding involves a contested case (and not an adversarial proceeding) and that the debtor has control of the process. claims administration, which is “much more efficient” than a suit.
Thus, the Court quashed the creditor’s request for equitable relief – which was considered to be akin to adversarial proceedings – and ruled that the creditor must, first, file a petition for suspension of the lift and, second, file adversarial proceedings, pursue fair redress during the debtor’s bankruptcy (in accordance with bankruptcy rule 7001 (7)). Alternatively, the creditor could withdraw their lawsuit in bankruptcy court, in accordance with bankruptcy rule 9027, which provides, in part, that the withdrawal can take place 30 days after a motion to stay-lift has been granted.
There are gray areas in the Bankruptcy Code, as in any other law. While Judge Thuma takes the minority view on post-petition prosecutions, one of the real benefits of his legal advice Archdiocese of Santa Fe is that it reminds creditors to err on the side of caution when exploring gray areas, especially when it comes to automatic stay – or, at least, check what point of view your local court has taken.