By Michaela M. White, Professor Of Law, Creighton Law School
Bankruptcy’s stay and injunction provisions affect state proceedings far more often than any other sections of the Code. Extensive changes were made to bankruptcy stays by the 2005 amendments. Collier Family Law ¶ 5.01—5.07.
It is important that counsel understand when the Code stays state actions and when it does not. Otherwise, some proceedings might continue in violation of the stay, needlessly wasting the state’s and the litigants’ resources, while other actions might be halted unnecessarily and erroneously. Furthermore, counsel conversant with the stays, and the steps litigants may take to terminate or obtain relief from them, may promote efficiency and justice by timely inquiries of, and suggestions to, the court and the other parties. Finally, the stay provisions are important to the extent that they affect statutory, judicial or contractual deadlines for certain actions.
Bankruptcy stays principally arise out of §§ 362, 1201, 1301, 105 and 524. Section 362 applies to all bankruptcy proceedings and provides for a comprehensive stay to arise automatically upon the filing of any bankruptcy petition. The 2005 amendments carve out a narrow exception to the general rule that an automatic stay arises upon the filing of a bankruptcy petition. This exception applies to debtors who have had two or more cases dismissed within the year before the petition is filed. In such cases, no stay arises automatically when yet another petition is filed. In a related amendment, the stay is effective for only 30 days, unless extended by the bankruptcy court, if the debtor filed the chapter 7, 11 or 13 case within one year of the dismissal of an earlier case. Collier Family Law ¶ 5.03.
Sections 1201 and 1301 also involve automatic stays, but they arise only in chapters 12 and 13, respectively, and protect only individuals who, although not debtors, are co-obligors with the debtor with respect to consumer debts. Thus, in chapter 12, §§ 362 and 1201 apply, while in chapter 13, §§ 362 and 1301 apply.
Section 105, by contrast, does not explicitly refer to the issuance of a stay. Instead, it states that a bankruptcy court “may issue any order, process or judgment that is necessary or appropriate to carry out” the Code’s provisions. Courts frequently rely on §105 in individual cases to issue stays that are essentially injunctions. Of course, these stays are not automatic; they depend on the court’s issuance of an order. Moreover, the parameters of stays issued under § 105 are not specified by statute. Instead, their scope depends on the terms of the court orders that create them.
Section 524 provides that the grant of a bankruptcy discharge operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset any discharged debt as a personal liability of the debtor. Section 524 also provides that the discharge operates as an injunction against certain actions with respect to community property. Although the § 524 injunctions arise automatically, they do not arise on the filing of a bankruptcy petition, but only if and when the court grants the debtor a discharge. WWC at 15-16.
Exceptions to the Automatic Stay for Domestic Relations Matters
Perhaps the most important exception to the stay, especially in chapter 7 cases, allows a creditor to collect a domestic support obligation from property that is not property of the estate. (§ 362(b)(2)(B)). This exception permits a support creditor to reach a chapter 7 debtor’s post-petition wages and other property acquired after the case in payment of the debt. Property claimed as exempt by the debtor is not property of the estate, and it too may be reached to collect support claims. Of course, family debt creditors are entitled to a first priority pro rata distributive share of any assets of the estate, but meanwhile such creditors may pursue payment by collecting the obligation from post-petition earnings and other non-estate property. Since post-petition earnings as well as other assets the debtor acquired after filing are property of the estate in chapter 11, 12 and 13 cases, this exception is of more limited utility in reorganization cases. However, the debtor’s reorganization plan must give very favorable treatment to domestic support claims or it cannot be confirmed. The required treatment of support obligations in reorganization cases is detailed in Chapter IX.
A family debt creditor must be collecting a debt that qualifies as a “domestic support obligation” to avail herself of this non-estate property safe harbor. It is not always clear whether a debt is a property settlement debt or a domestic support obligation. Chapter VIII discusses the distinctions between the two kinds of family debts. In case of doubt, cautious practice dictates obtaining a ruling on the status of the debt from the bankruptcy court in the form of a motion for relief from the stay before attempting to collect a debt from non-estate property.
As amended in 2005, § 362(b)(2) creates a number of additional and very broad exceptions to the automatic stay where domestic relations matters are concerned. The statute authorizes many domestic relations cases to be initiated or to continue despite the fact that a party to the proceeding files for bankruptcy. Section 362(b)(2) provides that the stay does not apply to the commencement or continuation of actions or proceedings:
• to establish paternity;
• to establish or modify an order for a domestic support obligation;
• concerning child custody or visitation;
• to dissolve a marriage, as long as it doesn’t determine the division of property of the estate; and
• regarding domestic violence.
Many of the methods frequently used to collect domestic support obligations are also carved out from the reach of the stay:
• withholding income that is property of the estate or property of the debtor for payment of a domestic support obligation;
• withholding, suspending or restricting a driver’s license, a professional or occupational license, or a recreational license under state law, as specified by the Social Security Act (42 U.S.C. § 666(a)(16));
• reporting overdue support as specified in the Social Security Act (42 U.S.C. § 666(a)(7));
• intercepting a tax refund, as required by the Social Security Act or under an analogous state law; and
• enforcing a medical obligation as specified by the Social Security Act (Title IV).
Thus, BAPCA made major changes that enhance the establishment and enforcement of domestic relations obligations and proceedings despite the debtor’s bankruptcy. As under former law, civil actions and proceedings to establish paternity or support obligations, as well as proceedings to collect support obligations from property that is not property of the estate, are not stayed. Unlike former law, however, the marriage bond may now be dissolved, and civil actions or proceedings involving domestic violence may be commenced or continued without a technical stay violation. Most significant are the BAPCPA amendments that facilitate collection of support obligations directly by exempting from the stay wage withholding and tax interceptions. Such amounts can now also be collected indirectly through license withholding, suspension or restriction, and the reporting of overdue support to consumer reporting agencies.
Finally, criminal actions are not stayed (11 U.S.C. § 362(b)(1)). If the debtor in bankruptcy was the target of, or a defendant in, a pending criminal action that was related to a domestic relations matter, or the subject of a criminal (as opposed to civil) contempt for failing to abide by court orders, the commencement or continuation of that criminal action would not be affected by the automatic stay.
Relief from the Stay
Bankruptcy courts routinely acknowledge state court expertise in financial and nonfinancial domestic relations matters. Consequently, bankruptcy courts usually abstain from domestic relations matters and remand them to state courts or expressly grant relief from the stay under § 362(d) to permit state courts to resolve them.
Actions to determine the division of property attendant upon dissolution of the marriage are still stayed by a bankruptcy filing. Thus, to pursue these matters in state court, a litigant must still obtain an order from the bankruptcy court granting relief from the stay. Many bankruptcy courts allow property rights to be determined, but prohibit the actual division of property until the bankruptcy case is concluded. In many jurisdictions, trustees often agree to relief from the stay but reserve the right to approve any determination of property rights.
Sanctions for Violation of the Stay
There are several bases for sanctions for violation of the automatic stay. The Code imposes strict liability in the event of a creditor’s willful violation. Section 362(k) states that an individual who is injured by any willful violation of a stay “shall” recover actual damages, including costs and attorneys’ fees. In addition, this provision states that in appropriate circumstances, such individuals may recover punitive damages. Because § 362(k) refers to an “individual,” most courts have held that this section does not authorize recoveries by a debtor that is not an “individual,” such as a partnership or corporation.
The majority of courts hold that the contempt power is also available to sanction conduct in violation of the stay. Finally, some courts have invoked the broad equitable powers of § 105 of the Code to impose sanctions on those who violate the automatic stay. Sanctions pursuant to § 105 have been levied on violators even when the debtor is not an individual.
Governmental units are not immune from the reach of bankruptcy cases and may be sanctioned for conduct violating the stay just as their nongovernmental counterparts. State court judges, however, may be entitled to judicial immunity from personal liability for violations of the stay.
Effect of an Action that Violates § 362
The majority of courts hold that actions in violation of the stay are void and have no legal effect. This means, for example, that any judgments entered in violation of the stay would be nugatory, any foreclosures or repossessions would be ineffective and the property in question returned to the debtor. The minority rule is that acts that violate the stay are voidable, not void. The distinction is important because “void” actions cannot be validated later, while “voidable” actions can be ratified by the bankruptcy court. Only the bankruptcy court has jurisdiction to terminate, modify or annul the stay. Other courts (state and federal) have the power to determine whether the stay applies to their actions, although the federal courts are split as to whether they must defer to a decision by the state court on the applicability of the stay.
Ideally, the Code or the Federal Rules of Bankruptcy Procedure should require every debtor to give prompt notice of the bankruptcy filing to every nonbankruptcy court in which the debtor is a party to litigation. Nevertheless, no such requirement exists. The unfortunate result is that a state court judge may or may not know if a litigant is in bankruptcy when issuing an order or entering a judgment in violation of the stay.
Upon the filing of petitions in chapters 12 or 13, §§ 1201 and 1301 respectively, provide for a stay of a civil action by a creditor to collect a consumer debt of the debtor from any individual liable on such debt with the debtor unless (1) the individual became liable on the debt in ordinary course of that individual’s business, or (2) the bankruptcy case is closed, dismissed or converted to chapter 7. Creditors that file state court proceedings may violate these stays if they do not halt the proceedings once the stays go into effect. The types of conduct prohibited by these co-debtor stays are not as extensively detailed as that proscribed by § 362. Sections 1201 and 1301 specifically state that a creditor may present and give notice of dishonor of a negotiable instrument.
Creditors are entitled to relief from these §§ 1201 and 1301 stays to the extent that (1) as between the debtor and the co-obligor protected by the stay, the co-obligor received the consideration for the creditor’s claim; (2) the debtor’s plan does not propose to pay the claim; or (3) the creditor’s interest would be irreparably harmed by continuation of the stay. Twenty days after a creditor moves for relief on one of these three bases, the relief is automatically granted unless the debtor or any individual liable on the debt with the debtor files and serves upon the movant a written objection to the motion for relief. No Code provisions specify sanctions for violation of the §§ 1201 and 1301 stays.
Section 108(b) extends deadlines for action by the beneficiary of a co-obligor stay until the later of: (1) the applicable nonbankruptcy deadline, plus any applicable suspension, or (2) 60 days after the filing of the bankruptcy petition. To deal with these co-debtor stays, state court judges should generally follow the same steps recommended with respect to § 362 stays.
Property of the Debtor and Exempt Property
After property has been claimed as exempt by the debtor or abandoned by the bankruptcy trustee, it is no longer property of the estate. As we have seen, domestic support obligations may be collected from non-estate property. Unlike most creditors holding nondischargeable debts, DSO creditors can also look to property exempted in the bankruptcy case to satisfy their claims. BAPCPA strengthened the ability of a support creditor’s right to proceed against such property by authorizing collection of these claims, even where the property is immune from the claims of support creditors under state law. The courts have thus far rebuffed efforts by trustees and DSO creditors to liquidate exempt property to pay DSO claims as part of the bankruptcy liquidation of assets. However, the property of a debtor who owes DSOs will be subject to possible post-bankruptcy execution in payment of DSO claims, even if it was previously exempt from these claims under state law.
Enforcement of property-division obligations is not excepted from the stay. It is not always clear whether an obligation in a divorce decree is in the nature of support or amounts to a property division, as many provisions in a decree have elements of both. Thus, if the nature of the obligation is ambiguous, the safest course may be to ask the bankruptcy court for relief from the stay, which may require the court to determine whether the obligation is for support.
Any determinations that affect the division of property between spouses are stayed at least when that property is property of the bankruptcy estate. As will be seen in Chapter VI’s discussion of that concept, what is property of the estate often requires reference to state law. The bankruptcy court might find it appropriate to grant relief from the stay to allow the domestic relations court to determine what is and is not the debtor’s property if it is a state law issue. A decision by a bankruptcy court to abstain from deciding what property the debtor is entitled to is not based on a lack of subject-matter jurisdiction; rather, the bankruptcy court, like other federal courts, prefers to avoid unnecessary involvement in what have traditionally been state law domestic relations decisions.
Contempt Hearings and Orders
A state court’s use of its civil contempt power to enforce a pre-bankruptcy obligation may violate the automatic stay. This is because of the general rule that enforcement or collection of a pre-bankruptcy debt is a violation of the stay. Some courts have held that use of contempt power to enforce what would be a nondischargeable support obligation is not violative of the stay; however, the bankruptcy courts would not uniformly follow that view. As a result, the best course is to require one of the interested parties to file a motion with the bankruptcy court seeking appropriate relief in order to allow a contempt hearing, or enforcement, to continue. The determination of whether a contempt action is a violation of the stay will, of course, depend on whether that action is for criminal or civil contempt (see § 362(b)(1), discussed previously in this chapter).
Domestic Support Obligations vs. Property Settlement Obligations
Although the distinction between a support obligation, or DSO, and a property settlement obligation is less important in the context of dischargeability since BAPCPA, it is still critical with respect to application of the automatic stay. This is because very few matters to determine or enforce support obligations are stayed, whereas all proceedings to determine or collect a property settlement are stayed. Creditors eager to enforce a marital debt do not simply risk a “technical” stay violation; compensatory and punitive damages can be awarded if the debtor is injured by a “willful” violation of the stay. In case of doubt, it is wiser to ask the bankruptcy court for permission to proceed rather than for forgiveness for a violation of the stay.
Professor of Law, Michaela White received her Bachelor of Arts degree in 1976, and her Juris Doctor degree, magna cum laude, in 1979 from Creighton University, where she was on the Creighton Law Review Editorial Staff and a member of the Moot Court Honors Board. She was law clerk to The Honorable Donald R. Ross of the United States Court of Appeals for the Eighth Circuit and for The Honorable Fallon Kelly of the Minnesota Supreme Court. She practiced law in Minnesota from 1980-1983, and then served as the Assistant Attorney General for the Nebraska Department of Justice. Prof. White joined Creighton after serving for six years as a Professor of Law at McGeorge School of Law. Most recently, Prof. White authored the book, When Worlds Collide: Bankruptcy and Domestic Relations Law, 4th Ed. (American Bankruptcy Institute, 2010).