Exceptions to the Automatic Stay Focus Antitrust & Trade/Bankruptcy Law

BY JASON T. RODRIGUEZ

Most attorneys are aware that when a bankruptcy case is filed, an extremely broad injunction automatically goes into effect protecting the debtor, the newly formed estate, and related property from all manner of collection by creditors. This injunction is known as the “automatic stay” and arises from section 362 of the Bankruptcy Code.

The automatic stay is immediately effective regardless of notice. In the Fifth Circuit, all actions taken in violation of the stay—regardless of notice—are voidable by the bankruptcy court. Moreover, a knowing or willful violation risks severe sanctions, penalties, and attorney’s fees.

However, there are exceptions to this powerful injunction for the skilled (and brave) attorney.

Depending on how you count, there are over 30 statutory exceptions to the automatic stay. This article will briefly touch on the ones you are most likely to encounter.

Most attorneys are aware that criminal matters are not affected by the automatic stay, though there is some case law on the extent of that exception when the criminal proceeding is to recover a debt (think hot check). By the same token, the automatic stay will not stay Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) actions (e.g., hazardous site cleanup) by the federal government.

By far, the most common event occurs within consumer bankruptcy cases. If an individual files a second bankruptcy within a year, the automatic stay will terminate 30 days after filing. However, this can be (and usually is) extended by motion. Similarly, if an individual files a third bankruptcy within a year, the automatic stay will not go into effect upon filing. Again, the debtor can request by motion that the stay be imposed.

One of the exceptions that most surprises attorneys is that the Bankruptcy Code allows liens to be filed after the bankruptcy case is filed if state law permits the lien to be effective prior to the bankruptcy filing. This exception shows up commonly in oil and gas cases where the mechanics and materialman’s liens are allowed to relate back in time. The same section allows credi - tors to maintain and continue their existing lien perfection, such as filing UCC3 continuations.

Landlords have powerful exceptions under the code. If a lease has ended by its contractual terms prior to the bankruptcy filing, the automatic stay will not prevent a landlord from obtaining possession of the debtor’s premises. Further, if a landlord has obtained an order of possession prior to the bankruptcy case being filed, the automatic stay will not prevent the eviction of the debtor-tenant.

The stay exceptions also contain some of the “safe harbor” provisions of the code, which allows counterparties to contracts dealing with mortgage securities to avoid the stay.

The code also excepts some legal actions related to domestic matters. For example, the stay does not prevent: a suit to determine paternity, a suit concerning domestic support obligations, a divorce (but not the division of assets of the bankruptcy estate), suits concerning domestic violence, a suit to collect domestic support from non-estate property, or withholding of wages for domestic support, among other things.

The automatic stay will not stop an audit of a taxpayer, nor demand for tax returns. The code also allows the IRS to impose post-bankruptcy tax liens in certain circumstances.

For the attorneys who are a little more adventurous, the code excepts an eviction if the debtor is using the premises for an illegal purpose or drug use. Additionally, the bankruptcy code excepts from the stay any action against the debtor if it is not a proper debtor in bankruptcy.

Among the other various exceptions, the code excepts from the stay an action by HUD in certain circumstances to foreclosure on real property with five or more units, various SEC actions, a notice and presentment of a negotiable instrument, and the creation and enforcement of ad valorem liens.

Finally, the most recent addition to the statutory list of exceptions permits an amateur athletics body to replace its governing board notwithstanding the automatic stay. This exception was added in the wake of the Larry Nasser scandal.

The typical method of proceeding against a debtor after bankruptcy is by filing a motion for relief from the automatic stay. The elements for that requested relief are statutory and will usually require a hearing with evidence. Only then may a court enter an order permitting the action by lifting the automatic stay. The statutory exceptions, when properly used, will allow a party to bypass the bankruptcy court entirely. Like most aspects of the Bankruptcy Code, this privilege is balanced by a significant risk of downside if the creditor misjudges its rights and then becomes subject to swift and severe sanctions by the bankruptcy court.

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