Restructuring

Contributed by Debra McElligott
In the latest installment of our “Breaking the Code” series, we take a look at the rarely-mentioned section 108(c) of the Bankruptcy Code, which governs the effect of certain deadlines relating to nonbankruptcy legal actions:
Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of –  

• the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
• 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

The BAP Breaks the Code
Although the words “commencing” and “continuing” appear to be central to the application of section 108(c), neither is defined in the Bankruptcy Code.  In Good v. Daff (In re Swintek), a recent case of first impression, the United States Bankruptcy Appellate Panel for the Ninth Circuit shed some light on this issue.  The court in Swintek considered whether section 108(c) tolled or extended a state law expiration period for a judgment creditor’s lien.  Finding that the creditor’s renewal of the lien constituted a “commencement” or “continuation,” the court held that section 108(c) tolled the expiration period.
In Swintek, Richard Swintek, the debtor, filed a chapter 7 case in September 2010.  Karen Good, a judgment creditor, sought a determination on the priority of her lien against Swintek, which arose out of an Order for Appearance and Examination (ORAP).  An ORAP requires a judgment debtor to appear in court for an examination and aids a creditor in enforcing his or her money judgment.  Service of an ORAP on a judgment debtor creates and establishes the priority of an ORAP lien.  Good obtained an ORAP in June 2010 and served Swintek with the order in July 2010.  Good alleged that, pursuant to California state law, she obtained a lien on all of Swintek’s personal property assets upon serving him and that all funds held by the chapter 7 trustee were subject to her lien.
The chapter 7 trustee filed a motion to dismiss, arguing that Good’s ORAP lien expired in June 2011, as California state law imposed a one-year expiration period.  The trustee also argued that this one-year expiration period was not tolled by section 108(c).  After the trustee’s motion was dismissed, Good filed an amended complaint, arguing that the ORAP lien constituted an “enforcement” lien and that, because she could not enforce the lien due to the automatic stay, section 108(c) tolled the one-year enforcement period.  The trustee, on the other hand, argued that the lien was created by service, rather than the “commencement” or “continuation” of a case, making section 108(c) inapplicable.  The United States Bankruptcy Court for the Central District of California held in favor of the trustee, adopting its prior decision in Wolfe v. Palladino (In re Harris) that an ORAP is not a “commencement” or “continuation” of a civil action, but an “anomalous lien” arising after a judgment has been entered.  Good appealed.
Clarifying “Commencement” and “Continuation”
The Bankruptcy Appellate Panel considered whether the bankruptcy court erred in determining that section 108(c) did not toll the one-year expiration period.  The court acknowledged that two California bankruptcy courts have addressed the question of whether section 108(c) tolls the start of an expiration period for an ORAP lien.  These courts, however, reached different conclusions and did not provide a thorough analysis of the issue.  Instead of applying one of these cases, the Bankruptcy Appellate Panel concluded that In re Spirtos, a decision from the United States Court of Appeals for the Ninth Circuit, governs the question.
In Spirtos, a judgment creditor held a lien that was void under California state law, which makes judgment liens unenforceable after ten years.  The creditor, who failed to renew her lien before the ten-year period had expired, had obtained the judgment in 1983 against a debtor who filed for bankruptcy in 1987 and received a discharge in 1996.  The Ninth Circuit held that the period to renew the lien had not expired.  Section 108(c) applied because the statute at issue was a nonbankruptcy law fixing a certain period in which to renew the judgment, and because the expiration period was running at the time of the debtor’s bankruptcy filing, it did not expire until 30 days after the end of the automatic stay.  The court rejected the argument that section 108(c) did not apply because the automatic stay did not bar the renewal of a lien, noting that a creditor’s inability to enforce the judgment is what tolls the expiration period.
Although Spirtos did not involve an ORAP lien, the Bankruptcy Appellate Panel highlighted many similarities between Spirtos and Swintek.  First, both courts were faced with a state statute fixing a certain time period after which a lien expires.  Second, an ORAP lien, like a judgment lien, is created by an “enforcement process.”  Finally, both creditors were prohibited from enforcing their liens because the property that was subject to the judgment liens was property of the estate.  In addition to the factual similarities between the two cases, the Bankruptcy Appellate Panel noted that the Ninth Circuit did not focus on the meaning of “commencing” or “continuing” in section 108(c); rather, it arguably considered lien renewals a “continuation” of a civil action.  The Bankruptcy Appellate Panel took a similar approach, stating that it failed to see how an ORAP lien – which is generally filed in the same court where the judgment was entered and docketed in the same action – is not a continuation of an initial civil action.  Finally, the court focused on policy concerns, noting that not applying section 108(c) would “give the debtor the power to eliminate certain secured claims simply by filing for bankruptcy at the appropriate time and then allowing the limitation period to run while it remained under the protection of the automatic stay.”
Implications
The Swintek case serves as a helpful case study of section 108(c).  The takeaways from this installment of Breaking the Code are that section 108(c) may apply even when the act in question is not clearly a “commencement” or “continuation” of a civil action and that principles of equity may guide a court to apply the section so that would-be debtors cannot take advantage of secured creditors by filing for bankruptcy on a particular date.