EJF Materials for Feb 07 seminar
Edmond J. Ford
Ford, McDonald & Borden, P.A.
10 Pleasant Street, St. 400
Portsmouth NH 03801
January 10, 2007
I. BAPCPA – the Automatic Stay
The automatic stay was created by 11 U.S.C. §362(a). 11 U.S.C. §362 enjoins actions to
perfect or enforce a pre-petition obligation again the Debtor during the pendency of the case or
against property of the estate so long as the property is property of the estate. 11 U.S.C. §362(a)
The essential structure invokes the automatic stay at the filing of the bankruptcy petition
(either voluntary or involuntary). The stay of 11 U.S.C. §362 continues in effect until the case is
closed, the case is dismissed or, in the context of an individual case, a discharge is granted or
denied. 11 U.S.C. §362 (c) A stay against action against property of the estate terminates when
that property is no longer property of the estate. 11 U.S.C. §362 (c)(1) As a result, prior to the
enactment of BAPCPA, the commencement of a bankruptcy petition had the effect of
enjoining actions against property such as foreclosure actions. Prior to BAPCPA, a bankruptcy
petition also had the effect of enjoining actions to evict the Debtor.
BAPCPA has had the effect of modifying, under certain circumstances, the automatic
A. The Multiple Filer Conundrum
1. Two cases in a Year.
If the case which is pending is the second case in a one-year period, then the automatic
stay lasts only for 30 days. 11 U.S.C. §362(c)(3) Within that 30 days period, the Debtor has to
move for a continuation of the automatic stay and the “Court may extend the stay in particular
cases as to any and all creditors (subject to such conditions or limitations which the Court may
then impose after notice and a hearing completed before the expiration of the 30 day period only
if the party in interest demonstrates that the filing of the later case is in good faith as to the
creditors to be stayed.” 11 U.S.C. §362(c)(3)(B).
The statute creates a presumption which may be rebutted by “clear and convincing
evidence to the contrary” that the case is not filed in good faith. If two or more cases were
pending within the previous one year period or if the Debtor failed to file documents, failed to
provide adequate protection, or failed to perform the terms of the Plan, or if there has not been a
substantial change in the personal or financial or personal affairs of the Debtor or if there is “any
That appears to imply, of necessity, that the pleading to do so would be by motion and that the
notice to creditors would be relatively limited.
other reason to conclude that the later case will be concluded (aa) if a case under Chapter 7 with
a discharge; or (bb) if a case under Chapter 11 or 13 with a confirmed Plan that will be fully
performed. 11 U.S.C. §362(c)(3)(C)(i).
Surprisingly, the statute appears be missing a negation. The actual language of the
statute appears to provide that if the second case is likely to result in a discharge (i.e., that it will
be successful), then it must be dismissed. 11 U.S.C. §362(c)(3)(C)(i)(III).
In addition, a creditor which has commenced an action for relief from the automatic stay
under 11 U.S.C. §362(d) is free of the stay in the second case after the 30th day if “as of the date
of dismissal of [the first case] that action was still pending or had been resolved by terminating,
conditioning or limiting the stay as to the action of such creditor.” 11 U.S.C. §362(c)(3)(C)(ii).
The new provisions relating to the automatic stay in the second case have essentially
three effects: (a) The stay in the second case terminates 30 days after the filing of the petition;
(b) the burden is on the Debtor to show by clear and convincing evidence why the stay should
continue in force, and the Debtor has to immediately bring that motion and obtain an order from
the Court within the 30 days period1
; and (c) that the Debtor gets the continued stay in the
second case only upon showing by clear and convincing evidence that the second case is file din
good faith. The statute and practice is as yet unclear as to how the Courts will deal with the
absence of the appropriate negation in 11 U.S.C. §362(c)(3)(C)(i)(III)(aa).
B. Multiple Filings, the Problem of the Third Case in a Year.
An almost completely parallel provision is given with respect to the third case pending in
a year. 11 U.S.C. §362(c)(4). If it is a third case “pending within the previous year” and the
earlier two were dismissed, then no stay is in effect.
The Debtor can seek to ask the Court to impose a stay if the Debtor does so within 30
days. The showing must be that the later case is filed in good faith as to the creditors to be
stayed. Again, the presumption is against such a finding and the person seeking to establish that
the third bankruptcy filing was made in good faith has to rebut the presumption by clear and
convincing evidence. 11 U.S.C. §362(c)(4)(D). Again, the Debtor or other party in interest can
rebut the presumption but the presumption arises if it is the third case pending within the year if
the previous case was dismissed for the failure to file certain documents or if there has not been a
substantial change in the personal or financial affairs of the Debtor. 11 U.S.C. §362 (c)(4)(D).
In the context of the third case in a year, the statutory drafters got the negation right. In the
context of the third case, if the Debtor can establish that there is reason to conclude that the later
case will be complete with a discharge (or if it is a case under Chapter 11 or 13 with a confirmed
Plan), that will be fully performed then, in either of those cases, the Debtor has carried the
burden of establishing good faith and may proceed.
C. Multiple Cases: How do you Confirm Relief?
The new statutory provisions, in the context of the multiple filer, grants automatic relief
from the automatic stay unless the Debtor seeks and obtains an order to the contrary. The
problem from the practitioner’s standpoint is how do you get record confirmation that there is no
order to the contrary? How do you confirm that the grounds for the earlier dismissal were
appropriate so as to permit the foreclosure sale to continue?
BAPCPA created at least two different answers. First, in the context of the third
bankruptcy pending within one year, the code requires that “On request of a party in interest, the
Court shall promptly enter an order confirming that no stay is in effect.”
11U.S.C.§362(c)(4)(A)(ii) The statute fails to articulate what constitutes a “request.” In general,
the bankruptcy practice is governed by the federal rules. Federal rules provide that any request to
a Court is made by motion. The local bankruptcy rules reiterate that in the context of the
bankruptcy procedure. L.B.R. 7101(a) (“Motion practice refers to all requests for entry of an
order by the Court other than adversary proceedings…”)
So a request of a party in interest for an order confirming that no stay is in effect would
be done, under New Hampshire practice, by a motion together with a notice of hearing,
memorandum and a proposed form of order. (L.B.R. 7102) and the Court’s order confirming
that no stay is in effect under 11 U.S.C. §362(a) is automatic.
In the context of the second case pending within one year, 11 U.S.C. §362(c)(3) does not
contain an equivalent provision that the Court shall “promptly enter an order confirming that no
stay is in effect. However, BAPCPA amended 11 U.S.C. §362 to add 11 U.S.C. §362(j)
requiring that, “On the request of a party in interest, the Court shall issue an order under
subsection (c) confirming that the automatic stay has been terminated.”
Since the provisions relating to multiple bankruptcy filings are all provisions under
subsection (c) of 11 U.S.C. §362, the Court is authorized to issue an order confirming that no
stay is in effect. The difference between the confirmation available under 11 U.S.C. §362(c)(3)
and the confirmation available under 11 U.S.C. §362(c)(4) is the absence of the word “promptly”
in connection with the second bankruptcy filing.
New subsection 11 U.S.C. §362(j) may improve practice for real estate attorneys as to
other instances where the bankruptcy stay has terminated. BAPCPA inserted subsection (j)
which authorizes the Court to issue an order confirming the absence of the stay under subsection
(c). The absence of a stay under subsection (c) arises not merely in the context of a serial filer,
but also if property is no longer property of the estate(11 U.S.C. §362(c)(1)) and also in the event
that the case is closed, the case is dismissed or a discharge has been granted or denied. 11
These two kinds of situations which arise on a regular basis wherein such an order might
be useful even in the absence of serial filing. The first is where the trustee in bankruptcy has
abandoned the property. It is not uncommon to see a creditor move for relief from the automatic
stay with respect to property which has already been abandoned or with respect to a case which
has been closed. In either event, the remedy provided by new subsection (j) provides relief from
the unnecessary expenditure of the applicable filing fee.
D. Who Cares?: The Relief Obtained by the Debtor From the Entry of a Discharge.
The treatment of serial filings under 11 U.S.C. §362(c) would, perhaps, cause one to ask
why a Debtor would file a second or third case. One answer is that it is not uncommon for
Debtors, especially pro se Debtors, to fail to file all of the applicable papers required to effect
their bankruptcy. It is not uncommon to see a second or third case filed by a competent Debtor’s
lawyer where the first or the first and second cases were filed pro se. The Debtor still gets a
benefit by virtue of the effect of 11 U.S.C. §727 which grants to that Debtor a discharge. The
11 U.S.C. §727 discharge is unaffected by the dismissal prior to the entry of discharge. See 11
U.S.C. §727(a)(8)(denying a discharge if the Debtor has been granted a discharge under that
Section within eight years prior to the date of filing.) As a result, the discharge injunction
remains in full force and effect. The Debtor may not get the automatic stay, but in due course, if
the Debtor has appropriately completed the new Debtor education requirement (See 11 U.S.C.
§727 (a)(11)) the Debtor will obtain a discharge which voids any judgment against the Debtor
obtained relating to a debt which has been discharged. 11 U.S.C. §524(a)(1).
The upshot is that a secured creditor can foreclose, will be freed from the automatic stay
to pursue such foreclosure, is not barred by the discharge injunction against continuing the
pursuit of such foreclosure, but cannot assert any deficiency against the Debtor as a personal
liability of the Debtor. To the extent that the Debtor has exempt property which passed through
the bankruptcy estate, that exempt property is not subject to attachment with respect to a debt
which has been discharged. 11 U.S.C. §522(c)
E. In Rem Relief
The serial filer was not the only issue which BAPCPA sought to deal with. In addition,
the drafters of BAPCPA were concerned with the possibility of real property being shifted
between entities, each of which subsequently field so as to prolong the delay incurred by secured
creditors. To deal with this apparent concern, BAPCPA inserted new subsection in Section (d)
of 11 U.S.C. §362. 11 U.S.C. §362(d)(4) grants relief from the automatic stay with respect to
by a creditor whose claim is secured by an interest in such real property if the Court finds
that filing of the petition was part of a scheme to delay, hinder and defraud creditors that
involved either: (A) a transfer of all or part ownership of, or other interests in, such real
property without the consent of the secured creditor or Court approval; or (B) multiple
bankruptcy filings affecting such real property. 11 U.S.C. §362(d)(4)
The following hanging paragraph then authorizes the recording of an order under 11 U.S.C.
§362(d)(4) and provides that an order entered under that Section:
shall be binding in any other case under this title purporting to affect such real property
filed not later than two years after the date of the entry of such order by the Court, except
that a Debtor in a subsequent case under this title may move for relief from such order
based upon changed circumstances or for good cause shown, after notice and a hearing.
11 U.S.C. §362(d)
Apparently Congress was concerned that local registries of deeds would not accept for recording
a copy of a bankruptcy court order, whether certified or otherwise, so Congress inserted the
following additional language:
Any federal, state or local governmental unit that accepts notice of interests or lien on
real property shall accept any certified copy of an order described in this subsection for
indexing and recording.
The intent of that provision would appear to create a form of in rem relief. Thus, no matter who
subsequently acquires the property, any subsequent filing that affects that property will not
enjoin or stay the foreclosure thereon for two years.
Again, the automatic stay is only one of several stays applicable in the bankruptcy code.
Other stays include the stay of the discharge of 11 U.S.C. §524, the stays available in a Chapter
13 Plan and the stays available in a Chapter 11 Plan. As a result, the in rem relief could
conceivably be lost by a creditor if the case gets filed and the creditor fails to foreclose before
the confirmation of the Plan.
F. Serial Filing under Chapter 13 – Issues
A Chapter 13 co-Debtor stay arises under 11 U.S.C. §1301 with respect to consumer debt
where the consumer and that co-Debtor is liable thereon. The provisions applicable to serial
filers inserted in 11 U.S.C. §362(c) apply only to cases filed by or against a Debtor. An
individual who is not a Debtor but who is protected by the co-Debtor stay of 11 U.S.C. §1301
retains that protection even if the case protecting such individual is the second or third
proceeding. See 11 U.S.C. §1301.
G. New Time Limit Issues
1. Old Law.
11 U.S.C. §362(e) (now denominated as Section (e)(1) provided that when a creditor made a
request for relief from the automatic stay, the Court had to hold a preliminary hearing within 30
days and a final hearing within 30 days of the conclusion of the preliminary hearing. The Court
was required to order that the stay be continued in effect pending the conclusion of the final
hearing “if there is a reasonable likelihood that the party opposing relief from such stay will
prevail at the conclusion of the final hearing.”
11 U.S.C. §362(e)(1) therefore leads to a 60-day period within which the Court must
enter an order. The total 60-day period may be extended only with the “consent of the parties in
interest or for a specified amount of time that the Court finds is required by compelling
2. New Law.
Congress seems not to have been happy with the 60-day period so provided, nor with the
standard of “compelling circumstances” and therefore added a new subsection(e)(2) in the case
of an individual Debtor. New 11 U.S.C. §362(e)(2) provides that the stay terminates on the date
that is 60 days after a request is made unless the Court makes a final decision during the 60 day
period or the 60 day period is extended by “agreement of all parties in interest” or “by the Court
for such specific period of time as the Court finds is required for good cause, as described in
findings made by the Court.” 11 U.S.C. §362(e)(2)
Congress appears to have intended to constrain the power of the Court to enter orders
continuing the stay in effect by requiring that the Court make specific finds in which it describes
the “good cause.” The Congress also appears to have intended to constrain a Court’s ability to
continue the preliminary hearing which continuation of the preliminary hearing may be arguably
for extending the total time period under 11 U.S.C. §362(e)(1).
H. Standards for Relief from the Automatic Stay
BAPCPA left essentially unchanged the basic standards for relief from the automatic stay
in 11 U.S.C. 362(d)(1) and (2). Those standards are essentially that a creditor may obtain relief
from the automatic stay upon a showing of “cause, including the lack of adequate protection of
an interest in property of such party in interest; or with respect to an act against property of the
estate a showing that the debtor does not have any equity in such property and that such property
is not necessary to an effective reorganization.” 11 U.S.C. §362(d)(1) and (2). The only change
effected by BAPCPA with respect to that standard formulation is the insertion of the more
stringent 60-day time limit under 11 U.S.C. §362(e).
BAPCPA has, however, changed the rules slightly with respect to single asset cases. The
old rules with respect to single asset real estate cases were that if a Debtor were a single real
estate asset debtor, then it would have to begin making payments within 90 days after the entry
of the order for relief and the payments would be in an amount at least equal to interest at the
current fair market rate of interest on the value of the creditor’s interest in the real estate.
BAPCPA changed that in two respects: first, the payments must commence at the later of
90 days after the entry of order for relief or 30 days after the Court determines that the Debtor is
a single asset real estate debtor. 11 U.S.C. §362(d)(3). The effect of that change is to free
debtors of a potential trap of mis-identifying themselves as something other than single asset real
The second change is that the monthly payments are in an amount equal to not the current
fair market rate of interest, but at the “then-applicable non-default contract rate of interest.” 11
As a third change, BAPCPA has also clarified that the debtor can use the rents arising
from the real estate to make those payments. 11 U.S.C. §362(d)(1)(3)(B)(i). That authority to
use is at least arguable in contravention of the prohibition of the use of cash collateral without
the secure creditor’s consent which arises in 11 U.S.C. §363.
Finally, BAPCPA retains the rule that if a debtor has filed a Plan of Reorganization
which has a “reasonable possibility of being confirmed within a reasonable time” then the
special single-asset Plan relief provision of 11 U.S.C. §362(d)(3) does not apply and the secured
creditor is left with its usual remedies under 11 U.S.C. §362(d)(1) or (2).
BAPCPA also slightly changed the definition of a single real estate asset case so as to
remove the cap on the size of the case. The old rule had been that a single asset real estate case
was one which had liquidated secured debts in an amount not more than $4.0 million. BAPCPA
has made the level of secured debt irrelevant. No matter how big the case is, it can still be a
single asset real estate case. BAPCPA has also removed from the ambit of the single asset real
estate rules any case which is filed by a family farmer.
Finally, BAPCPA also added a new grounds for stay relief that conforms to the concept
of in rem relief. 11 U.S.C. §362(d)(4). Here, if the secured creditor establishes, and the Court
finds, that the “filing of the petition was part of a scheme to delay, hinder and defraud creditors
that involved either- -(A) transfer of all or part ownership of or other interest in such real
property without the consent of the secured creditor or Court approval; or (B) multiple
bankruptcy filing affecting such property.” In such a case, relief shall be granted apparently
irrespective of the existence adequate protection and irrespective of the existence of equity in the
such property. See 11 U.S.C. §362(d)(4). Such an order then becomes binding upon the
property for two years if the order is then recorded in the registry of deeds. 11 U.S.C.
II. BAPCPA – Leases of Real Estate
The bankruptcy code, as amended by BAPCPA, continues its tradition of treating
residential and non-residential real estate leases differently. With respect to residential and nonresidential real estate leases, there are at least two sets of issues: first, whether or not the debtor,
the debtor-in-possession or trustee can assume the lease, and, what the conditions are under
which the lessor (if the lessor is not the debtor) may evict the debtor in the face of the automatic
A. Assumption and Rejection.
Leases are treated with other executory contracts in 11 U.S.C. §365. Because 11 U.S.C.
§365 is in Chapter 3 of the bankruptcy code, it applies in any of the following kinds of cases:
Chapter 7, Chapter 11, 12 or 13, but not a Chapter 15. 11 U.S.C. §103(a) .
The concept of assumption of an executory contract is that the representative of the
bankruptcy estate undertakes the contract anew. As a result, the representative of the
bankruptcy estate, on behalf of the estate, undertakes all of the enforceable terms of the contract
and is subject to all of its benefits and must pay all of its obligations.
In a Chapter 7 case, the trustee has to determine to “assume or reject an executory
contract or unexpired lease of residential real property within 60 days after the order for relief or
within such additional time which the Court, for cause, within such 60-day period, fixes.” 11
U.S.C. §365(d)(1) . In the event that the trustee fails to act, then the contract is deemed to have
been rejected. Id. The power of the trustee to assume or reject is different from a right or
obligation belonging to the debtor. In a Chapter 7 case, the debtor has none of the Trustee’s
powers with certain limited exceptions. Compare 11 U.S.C. §1107; See 11 U.S.C. §522(h)
(granting to the debtor the power to avoid certain transfers of exempt property under Section 5 of
the bankruptcy code).
When the trustee determines to reject or by default allows rejection of a lease, then the
counter party to that contract (here, the landlord) has an unsecured claim for the damages arising
from rejection. 11 U.S.C. §503(g)(1)
If the property is non-residential real estate subject to a lease, then a different set of rules
apply. First, in the context of non-residential real estate, the trustee is required to perform “all of
the obligations of the debtor” that arise from and after the order for relief until the lease is either
assumed or rejected. 11 U.S.C. §365(d)(3). The statute says that that obligation is an obligation
which arises “notwithstanding §503(b)(1) of Title 11.” The references to 503(b)(1) is a
reference to a the allowance of the actual and necessary costs and expenses of preserving the
estate. It appears to suggest that until a lease of non-residential real estate is assumed or
rejected, the lessor has an entitlement to claim rents even if the payment of those rents puts the
landlord ahead of the administrative expense claims.
B. Non-residential Real Estate and Time Limits to Assume or Reject
BAPCPA changed the rules with respect to the time periods to assume or reject nonresidential real estate. The old rule was that the trustee had to assume or reject within 60 days
after the filing of the bankruptcy case and that the Court could ”for cause” within that 60 days
period fix some later term within which the lease could be assumed or rejected. BAPCPA
removed the power of the court to fix an unlimited extended period. The experience seems to
have been that Courts, at the request of Chapter 11 debtors, would extend the time to assume or
reject for a period which could amount to years. In the place of the 60-day rules, BAPCPA
insert a new 120-day rule with much more limited power to extend the time period to assume or
The new 120-day rule is that the trustee has the power to assume or reject within 120
days of the entry of an order for relief, and, that the Court may extend the period for 90 days on
motion by the trustee “for cause.” 11 U.S.C. §365(d)(4). The 120-day plus the 90 days is a total
of 210 days. The code then grants the Court the authority to grant a further extension only with
the “prior written case of the lessor in each instance.” 11 U.S.C. §365(d)(4)(B)(ii).
The amendments to the rules or the assumption or rejection of non-residential real estate
appear to be aimed at Chapter 11 practice. The rules recite the powers and the limitations on the
powers of the trustee. However, in a Chapter 11 case, the “Debtor-in -possession” has the power
of a trustee serving under that Chapter. 11 U.S.C. §1107(a). The effect is to give to lessors in a
chapter 11 case the ability to require that their leases either be assumed or rejected within 210
days of the entry of an order for relief.
In a Chapter 7 case the Debtor has no power to assume or reject and that power would be
reserved exclusively to the Chapter 7 trustee. A trustee would be well served to make that
determination promptly. A trustee in a Chapter 7 case which involved non-residential real estate
which has little or not assets would not want to be exposed to the ongoing liability for the
payment of rent (conceivably ahead of Chapter 7 trustee fees) unless the trustee is fairly
confident that leasehold interest itself has economic value.
The rules relating to the assumption or rejection of non-residential real estate also impact
Chapter 13 cases. A Chapter 13 case is not a little Chapter 11. There is no equivalent provision
in Chapter 13 to Section 1107. Section 1107 is the section in Chapter 11 practice which grants
to the debtor-in-possession all of the powers of a trustee. A chapter 13 debtor is not a debtor in
possession and does not have all of the rights and powers of a trustee.
Among the rights and powers of a trustee which the Chapter 13 debtor does not have is
the power to assume or reject under 11 U.S.C. §365. The power to assume or reject in a Chapter
13 case is contained only in the Plan. 11 U.S.C. §1322(b)(7). Section 1322(b)(7) provides that
the Plan may “subject to §365 of this Title, provide for the assumption or rejection or assignment
of any unexpired contract or lease of the debtor not previously rejected.” It would seem
therefore that the Chapter 13 debtor may assume an unexpired lease of real property only if the
Chapter 13 Debtor obtains confirmation on or within 120 days after the entry of an order for
relief. In the meantime, however, the poor Chapter 13 trustee is saddled with the obligation to
make payments after the order for relief until the lease is assumed or rejected. 11 U.S.C.
The potential trap for a Chapter 13 debtor is therefore that the Chapter 13 Plan might be
confirmed after the 120 day period has passed. BAPCPA may have solved that problem by
insisting that the hearing on confirmation on a Plan be held “not later than 45 days after the
meeting of creditors under Section §341(a).” 11 U.S.C. §1324(b). The meeting under §341(a) is
required to be held within “a reasonable time after the order for relief is entered.” 11 U.S.C.
§341(a). The rules require that the first meeting of creditors take place no fewer than 20 and no
more than 40 days after the order for relief. F.R.Bankr. P. 2003(a). The entry of the order for
relief occurs in a voluntary case when a case is filed. 11 U.S.C. §301(d). In an involuntary case,
the date of the entry of an order for relief is the date that the Court enters an order either because
the petition is not “timely controverted” or because the Court has found after trial that the debtor
is generally not paying its debts as they become due or that a custodian or other trustee or agent
was appointed or authorized to take charge of less than substantially all of the property of the
debtor for the purpose of enforcing a lien on such property. 11 U.S.C. §303(h).
In the ordinary run of things, (i.e., in the voluntary case context) there is no more than 40
days from the filing of the petition to the first meeting of creditors, and 45 days thereafter for the
holding of a hearing on the confirmation of Plan of Reorganization in a Chapter 13 case. 11
U.S.C. §1324(b). Thus, the total period from the entry of an order for relief to the hearing on the
Chapter 13 Plan would be 85 days, less than the 120 day period contained in §365.
C. Residential Real Estate: The Automatic Stay and Leases
With respect to non-residential real estate, the code has a fairly simple rule on the
automatic stay: if a non-residential lease has “terminated by expiration of the stated term of the
lease before the commencement of or during a case under this Title” then there is no injunction
by virtue of the automatic stay against acts by the lessor to “obtain possession of such property.”
11 U.S.C. §362(b)(10). Of course, that language leaves open the possibility of drafting a lease
such that the “Stated term of the lease expires with the happening of a default.”
A non- residential lessor has a certain degree of protection by virtue of the obligation of
the trustee to make the post petition payments in accordance with the lease’s terms. 11 U.S.C.
For either residential or non-residential real estate, once the trustee makes a
determination as to whether to assume or reject, the trustee or the debtor in possession is then
obligated to either cure or “provide adequate assurance that the trustee will promptly cure such
defaults.” 11 U.S.C. §365(b)(1)(A). In addition, in order to cure defaults in a pre-petition lease
to be assumed, the trustee or debtor in possession must either compensate or provide adequate
assurance that they will promptly compensate the lessor from any “actual pecuniary loss” arising
from the default. 11 U.S.C. §365(b)(1)(D). Finally, the trustee or debtor in possession must
“provide adequate assurance of future performance” under such contract or lease. 11 U.S.C.
If the lease has been terminated, then there is nothing left to assume, and the debtor no
longer has an unexpired lease which the trustee may assume or reject. See 11 U.S.C. §365(a).
BAPCPA raises the possibility that a non-residential lessor may seek to use new 11
U.S.C. §362(j) to obtain confirmation that the “automatic stay has terminated” by virtue of 11
One wonders what Congress intended to happen if the debtor resided in the residential
property but not as a tenant. Did Congress intend that the stay not apply or that the stay apply
indefinitely? The statute is silent.
U.S.C. §362(c). 11 U.S.C. §362(c) raises the possibility that the automatic stay shall have
terminated at the time that the leasehold property and is no longer property of the estate.” 11
D. The Enforcement of a Judgment for Possession
In the residential real estate context, a whole new scheme has been adopted by BAPCPA.
The triggering event of the scheme is the entry “before the date of the bankruptcy petition of a
“judgment for possession of such property against the debtor.” 11 U.S.C. §362(b)(22).
New Section §362(b)(22) applies only if the real estate involved is residential real estate
and is real estate in which the debtor “resides as a tenant.”2
The structure of the statute with
respect to 362(b)(22) is convoluted: first, 11 U.S.C. §362(a) enjoins eight specific acts. 11
U.S.C. §362(b)(22) then excludes from that injunction to the extent that it is an injunction under
362(a)(3), only one of the eight different acts that are enjoined.
New 11 U.S.C. §362(l) then says that the exclusion of (b)(22) shall apply on the date that
is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the
petition and serves on the lessor a certain certificate.” 11 U.S.C. §362(l)(1) The certificate is the
statement by the debtor under penalties of perjury that applicable non-bankruptcy law permits
the debtor to cure the entire monetary default even though the judgment for possession was
entered; and that the debtor has deposited with the clerk of the court rent that would become due
during the 30 day period after the filing of the bankruptcy petition. Once the debtor has filed
that certificate then the debtor must file a second certificate under pains and penalties of perjury
that the debtor or an adult dependent of the debtor, has in fact cured the default by making the
payment. 11 U.S.C. §362(b)(22)
The landlord then may file an objection to either of the certificates filed by the debtor.
The court then holds a hearing within 10 days after the landlord has filed and served that
objection to determine whether or not the statements made by the debtor in the certificates were
true. 11 U.S.C. §362(l)(3).
If a judgment has not been entered before the bankruptcy petition was commenced, then
the landlord appears to be relegated to seeking relief from the automatic stay on the usual
It is uncertain under the language of the statute whether a “judgment for possession”
means a final judgment no longer subject to appeal, and unappealed, or merely a judgment for
possession whether or not an appeal has been brought.
A second new exception to the automatic stay was inserted by BAPCPA for the benefit of
residential landlords in new Section 362(b)(23). This new exception to the automatic stay is an
exception for the prosecution of any eviction action “that seeks possession of the residential
property in which the debtor resides as a tenant under a lease or a rental agreement based on
endangerment of such property or the illegal use of controlled substances on such property…” 11
U.S.C. §362(b)(23) In order to take advantage of the new exception to the automatic stay, the
lessor must file with the Court and serve upon the debtor “a certification under penalty of perjury
that such eviction action has been filed or that the debtor during the 30 day period preceding the
date of the filing of the certification has endangered property or illegal used or allowed to be
used a controlled substance on the property.” 11 U.S.C. §362(b)(23)
Again, like new subsection (b)(22), there is a process during which the debtor may obtain
relief by objecting to the certification and filing his or her own statement under pains and
penalties of perjury. 11 U.S.C. §362(m)(2)(A). The Court is again required to hold adhering
within 10 days. 11 U.S.C. §362(m)(2)(B). An odd thing about new subsection 362(b)(23) is that
the eviction action must be “based on endangerment of such property or the illegal use of
controlled substances on such property.” Those two forms of eviction action are rare in New
Hampshire practice. Instead, the eviction action is ordinarily simply based on the failure to pay
rent. An eviction action based on the failure to pay rent might involve allegations or cross-allegations relating to the use of controlled substances on the property, but the fundamental
eviction is ordinarily based on the failure to pay rent, since that is what gives the landlord in
New Hampshire practice the ability to effect the eviction on 7 days’ notice. See, N.H. R.S.A.
III. The Sale of Property in a Bankruptcy proceeding.
11 U.S.C. §363 governs the sale of property by the trustee in a bankruptcy proceeding.
The sale of property by trustee is different from the sale of property by the debtor. The
difference is highlighted in the Chapter 7 case (where the Debtor and the trustee are two
dramatically different actors) and in the Chapter 13 case where the debtor has only certain
limited powers of the trustee. Among the powers of the trustee that the debtor has in a Chapter
13 case is the power to sell free and clear of liens, claims and encumbrances under 11 U.S.C.
§363(f). 11 U.S.C. §1303
A trustee, a debtor in possession under Chapters 11 or 12 and a Chapter 13 each have the
power to sell property free and clear of any interest in such property under certain conditions.
The conditions are five conditions. The five conditions are phrased in the alternative (the
disjunctive “or”) and they are “non-exclusive”. 11 U.S.C. §102(5). The five grounds upon
which property can be sold free and clear of an interest in the property are (1) that applicable
non-bankruptcy law permits such a sale free and clear; (2) that the entity claiming an interest in
the property consents to the sale; (3) that the interest which the property is being sold free of is a
lien and the price is greater than the aggregate value of all liens on the property; and (4) that the
interest of which the property is being sold free of is in “bona fide dispute” or (5) that the entity
may be “compelled” in a legal or equitable proceeding to accept a monetary satisfaction of such
interest.” 11 U.S.C. §363(f). The reference in the fifth condition appears to be a reference to at
less some forms of equitable partition of real estate.
In addition to the possibility of the trustee selling free and clear of interests, the trustee
(and the Chapter 11 debtor, but not the Chapter 13 debtor) has the power to sell free and clear of
any rights of dower or curtesy 11 U.S.C. §362(g), an the trustee, a debtor in possession under
Chapters 11 or 13 but not a Chapter 13 debtor, may sell the interest of the estate and “any co-owner” if, but only if:
(1) partition is impracticable;
(2) the sale of the estate’s interest alone would “realize significantly
less for the estate than the sale of such property free of the interest
of such co-owners”;
(3) that the benefit to the estate outweigh the detriment if any to the
(4) that the property is not used for the transmission, distribution or
sale of electrically energy or natural or synthetic gas.
11 U.S.C. §363(h)
A sale free and clear of a co-owner’s interest must meet each of those four elements.
The usual process is for a sale free and clear of all liens, claims, encumbrances and
interest to be done by motion. A sale free and clear of all liens, claims, encumbrances and
interest is treated as a contested matter. F.R. Bankr. P. 6004(c). Contested matters are subject to
many of the rules associated with adversary proceedings. F.R.Bankr. P. 9014(c)
The notice is required to include the time within which objections may be filed and
served upon the opposing party. F.R. Bankr. P. 6004(c)
In order for a sale free and clear of all liens, claims, encumbrances and interest to be
effective, the person claiming under the interest of which the property is sold free of must be
properly served. In the absence of service reasonably calculated to provide notice, a sale may be
effective. See, e.g., Flowers v. Jones, 126 S.Ct.1708 (2006) (notice is defective where served by
certified mail, return receipt requested where the circumstances gave rise to the inference that a
supplemental notice by regular mail would have provided notice even though the certified mail
was never accepted.).
IV. Avoidance Actions and the Fraudulent Transfer Statutes.
There are a number of types of avoidance actions which real estate practitioners might
need to be aware of. These materials will deal with only a couple.
A. General Rules Governing Avoidance
The trustee (or in certain circumstances, the debtor) has the power to avoid transfers.
The most common of those are preference actions, fraudulent transfer actions and actions under
11 U.S.C. §522(f).
None of those provisions are self-executing. Instead, each of them authorizes either the
trustee or the debtor to do something to avoid a lien. For example, 11 U.S.C. §522(f) says that
the debtor “may avoid the fixing of a lien” to the extent that the lien impairs an exemption to
which the debtor would otherwise have been entitled…if such lien is [a] judicial lien. 11 U.S.C.
§522(f)(1)(A). The operative word is “may.” Unless the debtor, or in an appropriate cases the
trustee, brings the cause of action, the lien is not avoided.
When the trustee brings an action to avoid a lien (usually as a preference or as a
fraudulent transfer), the recovery is dictated by 11 U.S.C. §550. The recovery, however, is
limited and the action by the trustee to recover the property “may not be commenced after the
earlier of…the time the case is closed or dismissed.” 11 U.S.C. §550(f). So, if a trustee never
brings an action to avoid a preference or fraudulent transfer and the case is closed, then the
interest conveyed survives even though the recovery might have been obvious. Similarly, if a
grant of a property interest is not properly perfected under state law but is, nevertheless, effective
as between the debtor and the counterparty, and if neither the trustee nor any other person sued
on it before the time the case is closed or dismissed, then the conveyance survives. The
conveyance survives even though it is recorded in the wrong county, the conveyance survives
even though no UCC-1 financing statement was recorded. The conveyance survives s long as it
is effective under state law to convey a property interest to the counterparty.
B. Fraudulent Transfers
A trustee in bankruptcy (and therefore a Chapter 11 debtor or a Chapter 12 debtor, but
not a Chapter 13 debtor) has the power to avoid a transfer which meets the definition of a
fraudulent transfer if it is made or incurred within two years of the date of the bankruptcy
petition. 11 U.S.C. §548(a). BAPCPA modified the look-back period here from one year to two
A transfer is fraudulent if it is undertaken with either the actual intent to hinder, delay or
defraud creditors or if it is for less than reasonably equivalent value at a time when the debtor
was insolvent, or was made insolvent by the transfer or was engaged in the business transaction
for which the debtor’s remaining property constituted insufficient capital or if the debtor
intended to incur or believed that the debtor would incur debts beyond its ability to re-pay or if it
was a transfer to an insider under an employment contract outside of the ordinary course of
business. 11 U.S.C. §548(a).
In addition to the powers under the federal statute (§548), the trustee in bankruptcy also
has the power to avoid any transfer which could be avoided by an actual unsecured creditor of
the debtor. 11 U.S.C. §544(b). Because the state statute has a 4-year look-back (N.H. R.S.A.
§545-a), the trustee therefore has the two-year look-back under the federal statute and also the
four-year look-back under the state statute. The trick for the state statute, however, is that in
order for the trustee to invoke the state statute, the trustee must find among the debtor’s
creditors, a creditor holding an unsecured claim that is allowable who could have avoided the
So, if the debtor transferred property in 2003 and then filed a bankruptcy petition in 2007
the trustee must file a creditor existing in 2007 holding an allowable claim who could have
brought the fraudulent conveyance action against the debtor in 2003.
Typically, that means that the trustee must find a creditor who existed at the time of the
transfer. On the other hand, for certain kinds of transfers (i.e., those made with the actual intent
to hinder, delay or defraud creditors), because those transfers are avoidable by both present and
future creditors, pretty much any existing unsecured creditor will do the job. See N.H.
BAPCPA also created a new kind of avoidable transfer with a new look-back period.
The new look-back period is ten years. The new §548(e) permits the trustee to avoid any
transfer to a “self-settled trust or similar device by the debtor where the debtor was the
beneficiary of such trust and the debtor made the transfer with the actual intent to hinder, delay
or defraud the entity to which the debtor was or became indebted.” 11 U.S.C. §548(e)(1).
For secured lenders, an important aspect of the fraudulent transfer statutes to note is that
the transfer of a mortgage a bona fide lender is almost never avoidable as fraudulent transfer
itself because “value” includes the ‘securing of a present or antecedent debt of the debtor.”
Thus, a mortgage is almost never avoidable as a transfer which is constructively fraudulent. It is
almost never avoidable as a transfer which is constructively fraudulent because it is always for
reasonably equivalent value.
A mortgage could be avoided as a transfer with the actual intent to hinder, delay or
A larger risk, however, for most mortgage lenders, is the problem of their borrower
getting too good a deal. The problem with getting a deal which is too good is that it creates the
possibility the borrower was the recipient of a fraudulent transfer. If the borrower is the
recipient of a fraudulent transfer, either because the transfer is with the actual intent to hinder,
delay or defraud creditors or the borrower purchased the property at a fire sale such that the
purchase was for less than reasonably equivalent value while the debtor was insolvent then the
issue for the lender will be whether or not the trustee in bankruptcy can recover against the
lender. The ability of the trustee in bankruptcy to recover against the lender may not depend so
much on whether the mortgage was a fraudulent transfer as whether or not the lender is protected
by the applicable provisions of 11 U.S.C. §550 (or the analogs under the state Uniform
Fraudulent Transfer Act). 11 U.S.C. §550 says that a trustee in an action to recover an avoidable
transaction can recover from the initial transferee of such transfer or: “any immediate or mediate
transferee of any transferee.” 11 U.S.C. §550(a).
A trustee may not recover from such a subsequent transferee if:
1. That the transferee took for value, in good faith and without knowledge of
the voidablility of the transfer avoided; or
2. Such subsequent transferee is an immediate or mediate good faith
transferee from a transferee who took for value, in good faith without
knowledge of the voidability of the transfer avoided. 11 U.S.C. §550(b).
The question then is whether or not the lender made the mortgage in “good faith” and
without knowledge of the voidability of the transfer avoided. That question in turn may easily
turn into the question as to whether the lender knew or should have known that the borrower was
the buyer in a fraudulent transfer. The lender might know such a thing if:
1. The lender has an appraisal obtained in the course of its due diligence that
indicates that the purchase price is not reasonably equivalent to the value
of the property being obtained; or
2. If the borrower has reason to expect that the transfer was made with the
actual intent to hinder, delay or defraud creditors.
There are certain badges of fraud which Courts often look to determine whether or not a
transfer was with the actual intent to hinder, delay or defraud creditors. The badges of fraud are
well worn and include things such as whether or not the transfer was for less than reasonably
equivalent value, whether the transfer was to an insider, whether the transfer was hidden,
whether after the transfer the transferor retained actual control or possession of the property,
whether the transferor was in financial difficulty, whether the transferor was about to be hit with
a big judgment, whether the transfer was hidden or made public and the like. See N.H. R.S.A.
545-A:4 II A lender lending into a transaction could easily be held to a standard which include
an obligation to inquire as to the bona fides of a transaction.
If a lender is held to such a standard, and if the lender fails to pass such a standard then it
is entirely conceivable that the lender might not be determined to have acted in “good faith”
because a reasonable lender would have known that the transfer was avoidable. The argument
would be that a reasonable lender would have known that was lending into a fraudulent transfer
and should have stayed away.
The responding argument is that 11 U.S.C. §550(b) ought to be understood to refer to
good faith as a subjective test and not an objective test. A subjective test is one which looks to
the actual intent of the actor rather than to what a reasonable person would have done. The
argument is that the phrase “good faith”in 11 U.S.C. §550(b) must be subjective because
thereafter is added the phrase “without knowledge of the voidability of the transfer avoided.” If
good faith included imputed knowledge, then the phrase “without knowledge” within the statute
would be surplusage.
That argument, however, has not been universally successful.
A second area in which the good faith issue comes up is in the results of the avoidance.
If the transfer is avoided, what does the former transferee get? If the former transferee is a
person who has acted in “good faith” and the transfer is avoided under 11 U.S.C. §548 then the
transferee has a lien…to the extent that such transferee…gave value to the debtor in exchange for
such transfer…” A lender would therefore argue that it is acting in good faith and therefore has a
lien irrespective of whether his mortgage might be avoided under 11 U.S.C. §550(b). Again,
however, the issue turns on good faith. The good faith issue turns on whether the standard is
objective or subjective. If a trustee in bankruptcy can adequately argue that the applicable
standard is objective, then the lender could easily find its lien eviscerated, and end up holding
only an unsecured claim in the bankruptcy case.
V. Bankruptcy and Real Estate Taxes.
A. The Automatic Stay
11 U.S.C. §362(b)(18) exempts from the automatic stay the creation or perfection of a
statutory lien for real estate taxes (an “ad valorem property tax”) if the tax “comes due after the
date of the filing of the petition.” 11 U.S.C. §362(b)(18)
Presumably, a tax which was due before the date of the filing of the petition is not
included within that exclusion for the automatic stay. However, under New Hampshire practice,
the lien comes into existence when the tax is due and continues for one year after October 1
thereafter. See, N.H. R.S.A. 80:19. The recording of the lien is an act to continue or maintain
perfection. Because it is an action to continue or maintain perfection, the recording of alien is
probably exempt from the automatic stay pursuant to 11 U.S.C. §362(b)(3).
So, most of the acts of the tax collector to continue the perfection of a real estate tax are
probably permitted even thought the debtor has filed a bankruptcy proceeding.
B. Interest Rates on Taxes
The rule now is that an ad valorem property tax gets the statutory rate even in a
bankruptcy case. See 11 U.S.C. §511(a). That is a change enacted by BAPCPA. Prior to that
change, there was at least the argument that real estate taxes were entitled to no more than a fair
rate of interest.
C. The Determination of Taxes
Prior to the enactment of BAPCPA, it was at least possible that a debtor could utilize the
special powers of the bankruptcy court to appeal the tax determinations under 11 U.S.C. §505.
The bankruptcy court still can act as such an appeal venue, however, the time limits are limited
to the time limits under applicable non-bankruptcy law. 11 U.S.C. §505(a)(2)(C).
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