In Censo, LLC v. Newrez, LLC, BAP No. NV-21-1125-LTF (April 5, 2022), the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) offered guidance and clarity on when a non-bankruptcy court’s post-petition order on a pending matter violates the automatic stay.
In Censo, the former owner (“Former Owner”) of a condominium unit (the “Property”) defaulted on his homeowner’s association (“HOA”) assessments, and the HOA foreclosed on the Property. A predecessor entity to the debtor (“Purchaser”) purchased the Property, subject to the mortgage, at a 2013 foreclosure proceeding and transferred the Property to the debtor entity in 2019.
In 2014, the Former Owner sued the Purchaser, HOA board members, and various other entities in federal district court, seeking to quiet title to the Property and requesting declaratory relief that the foreclosure was invalid because of alleged defects in the mortgage. The Purchaser filed various claims and counterclaims, arguing that the HOA’s foreclosure effectively extinguished the mortgage.
Ultimately, the mortgagee filed a motion for summary judgment, seeking declaratory relief that the Purchaser bought the Property subject to the mortgage. Censo subsequently filed a Chapter 11 petition. Neither Censo, the debtor, nor the mortgagee filed a notice of automatic stay notifying the district court of the bankruptcy case. The district court entered an order granting the motion for summary judgment and declaring that Censo, the debtor, took the Property subject to the mortgage. The debtor appealed but only raised the issue of whether the district court’s post-petition order was a violation of the automatic stay under 11 U.S.C. § 362(a).
The BAP held that the entry of the district court’s post-petition order was not a violation of the automatic stay under 11 U.S.C. § 362(a). In so holding, the BAP analyzed each applicable subsection of Section 362(a) of the Bankruptcy Code and offered guidance and clarity on (and a sort of framework for addressing) whether a non-bankruptcy court’s post-petition order on a pending matter violates the automatic stay.
Under the plain language of 11 U.S.C. § 362(a)(1), the automatic stay only applies to actions against the debtor. Courts have held that defensive claims – actions such as moving for summary judgment or dismissal of a complaint filed by a debtor – do not violate the automatic stay. However, offensive claims – commencement or continuation of a creditor’s counterclaim for affirmative relief – will be construed as a violation of the automatic stay. Since the debtor initiated the fight against the mortgagee by attempting to invalidate the mortgage, the mortgagee was only defending its lien, so there was not a violation under 11 U.S.C. § 362(a)(1).
Under 11 U.S.C. § 362(a)(3), which prohibits any act to take possession or exercise control over property of the estate, the BAP cited to the Supreme Court’s decision in City of Chicago v. Fulton, that acts that simply maintain the status quo do not violate the automatic stay. There must be an affirmative act that was taken at the time when the bankruptcy petition was filed in order to disturb the status quo and violate the automatic stay. Since the mortgage existed as of the petition date, the district court order merely affirmed the validity of the existing lien. The district court order also did not affect the possession or control of the Property. Therefore, the district court order did not disturb the status quo and did not violate 11 U.S.C. § 362(a)(3).
Under 11 U.S.C. §§ 362(a)(4) and (a)(5), the automatic stay applies to any act to create, perfect, or enforce a lien against property of the estate or property of the debtor, if the lien secures a pre-petition claim. The debtor did not offer any evidence and the court did not find any evidence that the district court’s order tried to create, perfect, or enforce a lien against property of the estate, so there was no violation of 11 U.S.C. §§ 362(a)(4) and (a)(5).
The BAP held that the entry of the district court’s post-petition order was not a violation of the automatic stay under 11 U.S.C. § 362(a). The BAP offered guidance and clarity on when a non-bankruptcy court’s post-petition order violated the automatic stay. This case may have a rather large impact in future bankruptcy cases because this decision provides clear guidance on when it is permissible for a non-bankruptcy court to enter post-petition orders on defensive creditor claims that may have been previously considered violations of the automatic stay.