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The Automatic Stay in Bankruptcy

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The Automatic Stay in Bankruptcy University of Michigan Journal of Law Reform Volume 11 1978 The Automatic Stay in Bankruptcy Frank R. Kennedy University of Michigan Law School Follow this and additional works at: https://repository.law.umich.edu/mjlr Part of the Bankruptcy Law Commons, and the Legislation Commons Recommended Citation Frank R. Kennedy, The Automatic Stay in Bankruptcy, 11 U. MICH. J. L. REFORM 175 (1978). Available at: https://repository.law.umich.edu/mjlr/vol11/iss2/2 This Article is brought to you for free and open access by the University of Michigan Journal of Law Reform at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in University of Michigan Journal of Law Reform by an authorized editor of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. THE AUTOMATIC STAY IN BANKRUPTCY Table of Contents Page I. ORIGINS ................................................. 179 A. The Stays of the Farm-Debtor Relief Acts ................ 179 B. The Statutory Stays of Chapter X and Chapter XII ......... 182 C. The Mandatory Stay of Section l la ...................... 184 D. The Dischargeability Legislation of 1970 .................. 186 E. The Protection of the Bankrupt Estate Against Lien Enforcement ........................................... 187 F. The Exclusive Jurisdiction of the Debtor and its Property in Debtor Relief Cases .......................... 188 II. VALIDITY OF THE STAY ............................... 190 A. Constitutional Considerations ............................ 190 B. The Scope of the Rule-Making Power ..................... 192 C. Conflict with Congressional Policy ...... '. ................. 194 Ill. THE SCOPE OF THE STAY ............................. 190 A. The Stay of In Personam Actions Under Rule 401 .......... 195 B. The Stay of Lien Enforcement Under Rule 601 ............ 203 I. Liens Against Property in the Custody of the Court ...... 203 2. Judicial Liens Obtained Within Four Months of Bankruptcy ........................................ 204 C. The Stay of Pro~eedings Against the Debtor in Debtor Rehabilitation Cases .................................... 205 D. The Stay of Acts and Proceedings to Enforce Liens Against the Property of the Debtor in Debtor Rehabilitation Cases .................................... 210 IV. THE DURATION OF THE STAY ........................ 215 A. General Limitations .................................... 215 B. Effect on Collection of Educational Loans ............... 215 C. Effect of Conversion of a Case from One Chapter to Another 218 D. Effect of the Stay on Statutes of Limitation .............. 219 V. RELIEF FROM THE STAY ............................... 223 A. Procedure ............................................. 223 1. Pleadings ............................................ 223 2. Standing of a Secured Creditor in a Chapter XIII Case .... 225 · 3. Ex Parte Relief ....................................... 226 4. Burden of Pleading and Proof .......................... 226 5. Counterclaims ........................................ 227 a. Compulsoriness of the Counterclaim .................. 229 b. Inappropriateness of Hinging Jurisdiction and Venue on the Stay Rules ............................ ·....... 230 c. Need for Expeditious Determination of Need for Relief from Stay ............................... 232 B. Considerations Favoring and Opposing Continuation of the Stay ................................................ 233 1. In Personam Actions Against a Bankrupt . : .............. 233 2. Acts and Actions to Enforce Liens Against Property of the Bankrupt in the Custody of the Bankruptcy Court ........ 234 3. Enforcement of Liens Obtained by Judicial Proceedings Within Four Months of Bankruptcy ..................... 235 4. Proceedings and Enforcement of Judgments Against the Debtor Relief Cases ................................... 235 5. Acts and Proceedings to Enforce Liens Against the Property of the Debtor in Debtor Relief Cases ........... 238 a. Likelihood of Successful Rehabilitation ............... 239 b. Essentiality of the Encumbered Property ............. 243 c. Presence of Equity and Potential Injury to the Creditor's Security ................................. 244 d. Progress Toward Formulation and Implementation of a Plan ............................................. 250 e. Hospitality for Proponents of Rehabilitation ........... 252 f. The "Balance of Hurt" ............................. 253 C. Modes of Relief from an Automatic Stay .................. 253 VI. EFFECTS AND ENFORCEMENT OF THE AUTOMATIC STAY ..................................... 257 A. Effects of Acts in Violation of the Stay ................. 257 B. Contempt and Other Sanctions ......................... 259 Editor's Note: This is Part I of Professor Kennedy's discussion of the automatic stay in bankruptcy. Part II, "Automatic Stays Under the Proposed Bankruptcy Legislation," will appear in Volume 12, Issue 1, of the University of Michigan Journal of Law Reform. THE AUTOMATIC STAY IN BANKRUPTCY FRANK R. KENNEDY* The filing of a petition under the Bankruptcy Act consitutes an automa­ tic stay of all litigation against the debtor and most acts and actions against the debtor's property. The stay is one of the most notable features of the Rules of Bankruptcy Procedure promulgated by the Supreme Court. 1 The constitutional and statutory basis for the automatic stay has been challenged, and the propriety and the scope of the stay have been contested and ruled on, in many reported opinions. The need and justifi­ cation for an automatic stay in bankruptcy and debtor relief cases have been widely acknowledged, and an automatic stay seems certain to be included in any comprehensive bankruptcy reform legislation likely to be enacted by Congress.2 The role of this procedural device is still suffi­ ciently new, its full implications sufficiently unexplored and unap­ preciated, and its day-to-day operations and effects sufficiently contro­ versial and unsettled that an article devoted to the automatic stay seems useful at this stage of its development. 3 * Professor of Law, University of Michigan. As Reporter for the Advisory Committee on Bankruptcy Rules, I was considerably involved in the drafting of the automatic stay rules and, as Executive Director of the Commission on Bankruptcy Laws of the United States, in the drafting of a section on the automatic stay in the Bankruptcy Act of 1973 proposed by the Commission. I thus come to questions addressed to the validity of the automatic stay rules and the soundness of the policy decisions implicit in the proposal for a stay section in proposed bankruptcy legislation with a predisposition in favor of affirmative answers. I wish to acknowledge research assistance rendered in the preparation of this article by Richard Rufner, a member of the third-year class of the University of Michigan Law School. ' Automatic stays are prescribed by the following Rules of Bankruptcy Procedure: 401, 601, 8-501, 9-4, 10-601, 11-44, 12-43, and 13-401. The Rules of Bankruptcy Procedure were promulgated by the Supreme Court pursuant to 28 U.S.C. § 2075 (1970). Rules 401, 601, and 13-401 became effective·on October I, 1973; Rule 11-44 on July I, 1974; Rules 10-601 and 12-43 on August I, 1975; and Rules 8-501 and 9-4 on August I, 1976. The Rules, together with the Advisory Committee's Notes, are published in 11 U.S.C. app. (1975 Supp.). [Hereinafter references to the Rules of Bankruptcy Procedure will be cited either as Rules or Bankr. Rules]. In accordance with general practice, citations to the present Bankruptcy Act in this article will refer only to the original numbering of the Act as enacted in the Statutes at Large, not to the numbering of Title 11 of the United States Code. The proposed bankruptcy legislation pending in Congress and referred to in note 2 infra will eliminate the confusing discrepancies between the numbers in the original Act and Title 11. 2 See§ 362 of H.R. 8200 and S. 2266, pending in the 95th Congress. H.R. 8200 was passed by the House on February I, 1978. Wall St. J., Feb. 2, 1978, at 8. col. 3. S. 2266, which was introduced on October 31, 1978, has not come to a vote in the Senate. Hereinafter these bills will be cited as H.R. 8200 and S. 2266. · 3 The automatic stay provisions of the rules have been discussed in Miller, The Automatic Stay in Chapter XI Cases-A Catalyst for Rehabilitation or an Abuse of Creditors' Rights, 94 BANKR. L.J. 676 (1977); Peitzman & Smith, The Secured Creditor's Complaint: Relief from the Automatic Stays in Bankruptcy Proceedings. 65 CAL. L. REV. 1216 (1977); Webster, Collateral Control Decisions in Chapter Cases-Clear Rules v. Judicial Discre­ tion, 51 AM. BANKR. L.J. 197 (1977); Werth & Reed, The Chapter XI Stay Order and the Secured Creditor, 38 OHIO ST. L.J. 33 (1977); 12 W. COLLIER, BANKRUPTCY ,i,i 401.1-401.7 (14th ed. 1975); 13 id. ,i,i 601.01-601.10 (1975); 13A id. ,i,i 10-601.01 et. seq. (1976); 14 id. ,i,i 177 178 Journal of Law Reform [Vol. 11: 177 Although the scope of the stay will be. more fully elaborated later in this article, it will facilitate understanding to set out briefly at the threshold of the discussion the general features of the automatic stay. The filing of a petition for adjudication of a debtor as a bankrupt or for relief under one of the six debtor relief chapters of the Bankruptcy Act not only com­ mences a case under the Act4 but also operates ipso facto as a stay of certain judicial proceedings and acts.5
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