Contributed by Adam Lavine
For those readers who have a sophisticated understanding of bankruptcy law, the holdings of Jester v. Wells Fargo Bank, N.A. (In re Jester) will not be surprising. Nevertheless, this decision from the Bankruptcy Appellate Panel of the Tenth Circuit provides bankruptcy practitioners a helpful citation and case example regarding an issue that arises in nearly every case: the interplay between the automatic stay and state law proceedings against the debtor.
In Jester, the debtor filed for chapter 7 relief after a foreclosure action had already commenced against the debtor’s real property. The debtor subsequently received a discharge, but the lien on the property rode through the case. After the debtor’s case had closed, the debtor entered into a forbearance agreement with the secured creditor. Under the terms of the agreement, the debtor would retain the real property and avoid foreclosure, provided that the debtor remained current on the mortgage. Shortly after the forbearance agreement was executed, the debtor defaulted. The secured creditor promptly commenced its second state law foreclosure action.
In response to the foreclosure, the debtor filed a motion before the bankruptcy court seeking to reopen its case, arguing, among other things, that the secured creditor had violated the automatic stay by (i) failing to voluntarily dismiss the first foreclosure action upon learning of the debtor’s bankruptcy, (ii) negotiating the forbearance agreement, and (iii) attempting to collect payments owed under the forbearance agreement.
First, the court held that the secured creditor had no affirmative duty to dismiss the prepetition foreclosure action upon learning that the debtor had filed for bankruptcy. Therefore, the failure to dismiss the foreclosure action did not violate the stay. Second, the court held that neither the negotiation of the forbearance agreement, nor the secured creditor’s attempts to collect debts accrued thereunder, violated the automatic stay because these events occurred after the debtor had received a discharge. Accordingly, the Bankruptcy Appellate Panel refused to reopen the case on the basis of the alleged violations of the automatic stay.
These holdings are helpful to keep in your back pocket for when a client, counsel, or state court unfamiliar with bankruptcy law asks about the automatic stay’s impact on a state law case. Indeed, Jester provides the perfect citation for the rule that, although the automatic stay requires creditors to refrain from any activity that would advance a prepetition action, it does not require such an action to be dismissed.
Adam Lavine is an Associate at Weil Gotshal & Manges, LLP in New York.
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