Bankruptcy Court Addresses Eligibility, Non-formal Notice of Bankruptcy and a Creditor’s Affirmative Duty to Correct Technical Violations of the Automatic Stay

Bankruptcy Court Addresses Eligibility, Non-formal Notice of Bankruptcy and a Creditor’s Affirmative Duty to Correct Technical Violations of the Automatic Stay

A bankruptcy court recently ruled on several issues of importance to all potential debtors. First, the court examined the effect of a prior dismissal order (for failure to timely file certain schedules, statements or other documents) on a subsequent bankruptcy petition. Specifically, the court examined the small slice of cases where the automatic stay does not apply in a second case when the Debtor is not an “eligible Debtor” under 11 U.S.C. § 109(g). The court also examined the split in authority on who bears the burden of proof of proving eligibility.

Further the court examined whether a creditor, who unknowingly completed a foreclosure sale during the second case, violated the automatic stay by not promptly undoing the sale upon notification of the bankruptcy. Further the court extensively discussed the different non-traditional methods that creditors can receive binding notice of a bankruptcy and their responsibility thereafter. The court also examined whether a technical violation can turn into a willful violation and whether a creditor has an affirmative duty to correct a technical violation.

Procedural History

This case stems from two petitions for chapter 13 relief filed by a pro se Debtor. The first case was dismissed for failure to file certain schedules, statements, or other documents as required by the rules.

The Debtor filed her second chapter 13 bankruptcy on December 16, 2011 and the mortgage creditor conducted a foreclosure sale on December 20, 2011 at 12:57 p.m. Later that day the mortgage creditor received notice of the bankruptcy on December 20, 2011 at 3:52 p.m. The following day December 21, 2011 the Debtor’s bankruptcy was dismissed for failure to satisfy the credit counseling requirement.

The Debtor then sued the creditor in District Court alleging multiple defendants fraudulently conspired against her to cause her to default in her mortgage payments and foreclosed on her property in violation of the automatic stay. The District Court granted the defendant’s motion to dismiss. The Debtor appealed to the Fourth Circuit Court of Appeals and lost, Debtor moved to reconsider the appeal which was granted. The Fourth Circuit reversed the District Court and remanded the case to the District Court, which then assigned the case to the Bankruptcy Court to determine whether a stay violation occurred. The court had before it cross motions for summary judgment on this issue.

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