Tag Archives: Automatic stay; bankruptcy

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It is generally accepted that the debtor may not waive the automatic stay.  If the debtor affirmatively acts, such as by commencing litigation post-bankruptcy, the defendant is permitted to defend itself without running afoul of the automatic stay (although, in defining the parameters of a defense, many courts distinguish between mandatory counterclaims, which are allowed, and permissible counterclaims, which are not). 

Although the Bankruptcy Code contains a fairly detailed list of actions which are and which are not precluded by the automatic stay, it does not address the ramifications of failing to abide by its dictates, except in one respect. Under Bankruptcy Code section 362(h), any “individual” injured by a willful violation of the stay is entitled to recover actual damages, including attorneys’ fees, and in appropriate circumstances, may recover punitive damages. However, other than providing for a remedy, the Bankruptcy Code does not explain whether actions taken in violation of the stay are void from their inception, and should be deemed never to have occurred, or whether such actions are merely voidable, such that they will be permitted to stand unless and until the debtor, the bankruptcy trustee or some other party-in-interest in the bankruptcy case complains to the court. The distinction is an important one, given the potentially significant legal and property rights and remedies connected with a wide variety of actions that arguably run afoul of the automatic stay, whether they be voluntary, involuntary, knowing or unknowing.

In Kalb v. Feuerstein, the United States Supreme Court examined the issue under the former Bankruptcy Act and held that actions in violation of the automatic stay are void. The circuit courts that have addressed this issue in the context of the present day Bankruptcy Code are split. The minority view is that an act taken in violation of the automatic stay is not void, but merely voidable. The Fifth and District of Columbia Circuits subscribe to this position. A majority of the circuits hold that an action in violation of the automatic stay is void ab initio, although some courts, like the Third Circuit, have recognized that the bankruptcy court’s power to grant relief from the stay retroactively may make a stay violation merely voidable under appropriate circumstances.

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The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. The stay automatically goes into effect when the bankruptcy petition is filed and provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s finances. 11 U.S.C. § 362(a).

The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. § 362(b). For example, the stay does not apply to the commencement or continuation of a criminal action or proceeding against the debtor or the commencement or continuation of a civil action or proceeding

  • for the establishment of paternity;
  • for the establishment or modification of an order for domestic support obligations;
  • concerning child custody or visitation; or
  • for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate.

Under specific circumstances, the secured creditor can obtain relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt. 11 U.S.C. § 362(d). Unsecured creditors can also seek relief from the automatic stay, for example, to continue state court litigation that was pending before the Chapter 11 case was filed.