Mortgage Foreclosure: Beware the Automatic Stay

Kline v. Deutsche Bank Nat’l Trust Co. (In re Kline), 172 B.R. 98 (B.A.P. 10th Cir. 2012) –

Under Section 362 of the Bankruptcy Code, filing a bankruptcy case automatically stays a wide variety of actions, including commencing or continuing a case against the debtor or collecting prepetition claims from the debtor.  In Kline, Deutsche Bank commenced foreclosure of a condominium by filing a complaint on March 9, 2005.  It then filed an amended complaint on March 16, 2005.  The original complaint was served on March 18, 2005, and the amended complaint was served on March 29, 2005.  In the meantime, the owner of the condo (an individual) filed a chapter 13 bankruptcy case on March 21, 2005.  The bank was not aware of the bankruptcy filing until it received an e-mail from its servicer on April 11, 2005.

Upon learning of the bankruptcy, the bank suspended action in the foreclosure case but did not dismiss it, and sought relief from the automatic stay in the bankruptcy court.  A default order granting relief from the stay was entered on July 1, 2005, and the bankruptcy court dismissed the debtor’s bankruptcy case on July 13, 2005.

Between August 2005 and June 2006 the bank and the debtor litigated a variety of issues in state court, which the debtor appealed unsuccessfully.  Ultimately a foreclosure judgment that was entered in December 2005 remained in effect.

Under Section 362(k) of the Bankruptcy Code, an individual debtor injured by a willful violation of the stay can recover actual damages, including attorneys’ fees, and possibly punitive damages.

In June 2006 the debtor attempted to reopen her bankruptcy case so that she could seek relief against the bank, its counsel and other individuals for their alleged willful violation of the stay.  Although the bankruptcy court declined to reopen the case, it noted that it was arguably unnecessary to reopen the case in order to pursue an adversary proceeding regarding the willful stay violation.

The debtor eventually filed an adversary proceeding in 2008 against the bank and several individuals.  When the bank and its counsel were dismissed from that case, she filed a second adversary proceeding against them in March 2009 seeking damages for their willful violation of the stay.  The bankruptcy court finally denied the requested relief and entered judgment for the defendants in September 2011.

The debtor appealed to the Bankruptcy Appellate Panel, which issued an opinion in June 2012 upholding the bankruptcy court’s decision:

  • The court agreed with the bankruptcy court that service of the amended complaint constituted a technical, but not a willful, violation of the automatic stay.  Consequently service was void, but did not provide a basis for damages.
  • The court noted that there is a duty to remedy a violation of the stay, and the failure to remedy a violation could case the violation to become willful.  While recognizing that the duty to remedy a violation may require affirmative action in certain cases – for example, if property is transferred in violation of the stay, the remedy includes returning the property to the debtor – the court found that nothing further was required in order to remedy the violation in this circumstance.
  • As for the bank’s actions in completing the foreclosure in late 2005, by that time the bankruptcy case had been dismissed so that the automatic stay was no longer in effect, and thus could not give rise to damages in connection with a violation of the stay.

A review of the docket suggests that this litigation was arduous for the defendants.  Acting pro se, the debtor filed pleadings such as “Plaintiff’s Motion Requesting a Change to Local Rules and Bankruptcy Court Web Site,” as well as four Rule 11 motions and one contempt motion (all of which were denied).  Although the only thing the bank did wrong was to serve a complaint after a bankruptcy petition was filed when it had no knowledge of the bankruptcy, it was still litigating the stay issue seven years later.

As suggested by this case, bankruptcy courts take the automatic stay very seriously.  A lender is well advised to take particular care not to violate the automatic stay.  In addition, as indicated in this case, if there is an unintentional technical violation it may not be sufficient to simply stop doing whatever it was that violated the stay.  A lender must also consider whether there is a further duty to remedy the violation.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
This entry was posted in Financing, Real Estate and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s