Chapter 13 Debtor, Who Could Not Get Automatic Stay, Had Standing to Enforce Co-Debtor Stay, and the Post-petition Sale of Her Home was Void

Chapter 13 Debtor, Who Could Not Get Automatic Stay, Had Standing to Enforce Co-Debtor Stay, and the Post-petition Sale of Her Home was Void

Before the court is the Debtor’s Motion to Approve the Setting Aside/Vacate [sic] of Judicial Sale (the “Motion”) filed the Debtor. The Motion seeks to vacate a post-petition sale and acts relating thereto conducted by  “PHL” of property on which the Debtor and a third-party are co-obligated, as the sale and such acts violated the co-debtor stay. By further filing, the Debtor also seeks sanctions against PHL for violating the co-debtor stay and the later-imposed automatic stay.

As noted above, the Motion presents a number of questions that are issues of first impression before the court. With respect to standing, the Motion raises the question of a debtor’s role in enforcing the co-debtor stay, especially when that debtor is statutorily without automatic stay
protection due to repeated bankruptcy filings. With respect to the co-debtor stay, the Motion raises the question of whether a quasi in rem foreclosure proceeding under Illinois law violates the limited scope of the co-debtor stay. Finally, with respect to damages, the Motion raises the question of what damages, if any, a debtor is entitled to with regard to a co-debtor stay violation.

The issue before the court represents the latest in the push and pull between a secured lender seeking to enforce its rights in collateral and a debtor intent on preventing the same. The collateral in question is real property
(the “Property”). The Debtor owns the Property as a tenant in the entirety with her spouse, the “Co-Debtor”. The Property is encumbered by a mortgage originally in favor of Fremont Investment & Loan that was recorded on October 27, 2005 and signed by both the Debtor and the Co-Debtor as wife and husband.2 As noted in footnote 2, supra, that mortgage has had a series of Lenders associated with it.

It appears that, beginning in 2012, the Debtor began using the bankruptcy system to prevent the Lenders’ collections efforts. The Debtor attempted five bankruptcy cases in the five years preceding this case. PHL or one of the then present Lenders was noticed in each case, and in the three cases that made it beyond the initial stages, filed a proof of claim. While the Debtor was
successful in confirming a plan in three of the cases, all of the cases ended in dismissal for failure to make required payments (four for failure to make plan payments, one for failure to pay the filing fee).

Because two of the Debtor’s previous bankruptcy cases were pending and dismissed in the year prior to the Petition Date, see supra n.3, the Debtor received no bankruptcy stay protection automatically on the Petition Date. 11 U.S.C. § 362(c)(4). As this is a chapter 13 case, however, the protection of the co-debtor stay was afforded automatically on the Petition Date. 11 U.S.C.
§ 1301(a). Despite the existence of that co-debtor stay, the Property being listed in the Debtor’s schedules A/B and D and notice of the bankruptcy being provided to PHL,4 however, the day after the Petition Date the Property was apparently sold at public auction (the “Sale”).  Both the Debtor and the Co-Debtor were named as defendants in the foreclosure

The court imposed the automatic stay on March 9, 2017. See Order Imposing Automatic Stay. Despite having notice of the Debtor’s motion, see Motion to Impose Stay (service list on notice of motion attached thereto), PHL did not object. PHL has also not sought relief from the imposed stay or the co-debtor stay.6 Thereafter on March 16, 2017, the Debtor sought by motion
declaratory judgment that the co-debtor stay was in effect in the Debtor’s case. That motion was denied as an improvident request for an advisory opinion, without prejudice to the Debtor seeking relief in another form.
On April 20, 2017, the court confirmed the Debtor’s chapter 13 Plan. See Confirmation Order. The Plan treats PHL’s Proof of Claim by providing that the Debtor is responsible for making postpetition mortgage payments directly to PHL and that arrears be paid out of Plan payments submitted to the chapter 13 trustee. PHL did not file an objection to the Debtor’s Plan.

On April 21, 2017, the Debtor sought an emergency hearing on the Motion at bar. Because the Debtor failed to plead affirmative relief for which an emergency hearing was necessary, that emergency hearing was denied. Thereafter, on April 22, 2017, the Debtor filed the Motion on ordinary notice. Notice of the Motion was provided to PHL. The initial Hearing on the Motion was set for April 27, 2017.

Nonetheless, three days later, on April 25, 2017,9 PHL sought to have the Sale confirmed by the state court. Among other things, PHL proposed a personal deficiency judgment in the amount of $193,151.93 against both the Debtor and the Co-Debtor. It is unclear whether or if the Motion to Approve Sale was set for presentment before the state court and equally unclear how the state court disposed of the matter at that hearing, if such a hearing took
place. Neither the Debtor nor PHL explained this in their supplements.11 The Debtor does allege, however, that PHL’s counsel “argued that there was no such concept as a co-debtor automatic stay.” Assuming that is true, it is nonetheless unclear if that statement was made before the state court or was made privately to Debtor’s counsel.

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