By: Zach Williams, Associate, Fox Rothschild LLP (Las Vegas, NV)
On April 5, 2022, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) published an opinion, Censo, LLC v. Newrez, LLC, BAP No. NV-21-1125-LTF (Apr. 5, 2022), which provides a framework for addressing whether a non-bankruptcy court’s postpetition order on a pending matter violates the automatic stay.
In Censo, the former owner of a mortgaged condominium unit (the “Property”) defaulted on his homeowner’s association (“HOA”) assessments, and the HOA foreclosed on the Property. A predecessor entity to the debtor purchased the Property from the 2013 foreclosure proceedings, subject to the mortgage, and transferred the Property to the debtor entity in 2019.
In 2014, the foreclosed former owner sued the purchaser, HOA, mortgagee, and various other entities in federal district court, seeking a declaration that the foreclosure was invalid because of certain alleged defects in the mortgage. Various claims and counterclaims were filed by the purchaser, arguing that the HOA’s foreclosure effectively extinguished the mortgage.
Ultimately, the mortgagee filed a motion for summary judgement, seeking declaratory relief that the purchaser bought the Property subject to the mortgage. The purchaser turned debtor subsequently filed a chapter 11 petition. Neither the debtor nor the mortgagee filed a notice of automatic stay notifying the district court of the bankruptcy case. Shortly thereafter, the district court entered an order granting the motion for summary judgment and declaring that the debtor took the Property subject to the mortgage.
In the bankruptcy proceeding, the debtor filed an adversary complaint against the mortgagee, again arguing that the mortgage was defective due to, among other things, an incorrect description of the Property. The mortgagee filed a motion to dismiss the adversary complaint, which was granted by the bankruptcy court primarily based on issue preclusion as a result of the district court’s postpetition ruling on the summary judgment motion.
The debtor appealed, and ultimately only raised the issue of whether the district court’s postpetition order was a violation of the automatic stay.
The BAP analyzed each applicable subsection of Section 362(a) of the Bankruptcy Code, beginning with Section 362(a)(1), of which he noted that the plain language of the provision indicated that the automatic stay applied only to actions against the debtor. Accordingly, the BAP described the distinction between “offensive” and “defensive” creditor claims as follows:
The cases holding that a creditor’s defense of claims brought by a debtor do not violate the automatic stay typically involve facially defensive actions such as moving for summary judgment requesting dismissal of a complaint filed by a debtor. On the other hand, the commencement or continuation of a creditor’s counterclaim for affirmative relief will generally be construed as a stay violation. Id. (citations omitted).
Ultimately, the BAP determined that the debtor initiated the fight against the mortgagee by attempting to invalidate the mortgage, and that the mortgagee was merely “defending its lien against [the debtor’s’] attack.”
The BAP then analyzed Section 362(a)(3), which prohibits any act to take possession or exercise control over property of the estate. The BAP, citing the Supreme Court’s decision in City of Chicago v. Fulton, reasoned that “acts that simply maintain the status quo do not violate the automatic stay.”
Accordingly, because the mortgage existed as of the petition date, the district court order was held to have “simply affirmed the validity of the existing lien” and did not affect possession or control of the property of the debtor’s estate.
Finally, in addressing Sections 362(a)(4) and (a)(5), the BAP emphasized that “not every post-petition act or omission that could conceivably affect property of the debtor or the estate is a stay violation.” For this unfortunate debtor, no violations of Sections 362(a)(4) or (a)(5) were found because the district court’s order did not try to create, perfect, or enforce a lien against property of the estate.
The BAP upheld the bankruptcy court’s decision to dismiss the adversary complaint and provided the framework for determining whether a non-bankruptcy court’s postpetition order should be considered a violation of the automatic stay.
Going forward, the framework outlined by the BAP in the Censo decision may empower non-bankruptcy courts to enter postpetition orders on defensive creditor claims that may have been previously considered violations of the automatic stay. However, on April 27, 2022, Censo filed a notice of appeal to the Ninth Circuit. It remains to be seen if the Ninth Circuit will adopt the framework set forth by the BAP, or apply another standard. Should the Ninth Circuit adopt the framework, courts in the Ninth Circuit should cautiously and carefully distinguish between offensive and defensive creditor claims to ensure proper enforcement of the automatic stay.