Automatic Stay- There are exceptions though

Posted by Kevin on June 3, 2011 under Bankruptcy Blog | Be the First to Comment

In a previous post, I reviewed a case in the Eastern District of NY which extended the automatic stay to include actions against an separate, non-filing entity where the debtor is a guarantor.  Stay applied.

However, in a recent PA bankruptcy case, the court found that the automatic stay was not violated.  In that case, A sued B (eventual debtor), C & D before A filed bankruptcy claiming that A fraudulently transferred property to B & C.  A fraudulent transfer occurs when a person owes creditors and owns property (usually real estate).  The debtor transfers the property for less than fair market value to a third party (usually a friend or relative) so that the creditors cannot get their hands on the property once the creditor has obtained a judgment.

After the filing of the bankruptcy, A filed an amended complaint .  The amended complaint repeated the allegations against the debtor and added 5 new claims against 4 new defendants.  Debtor filed a motion for sanctions against A for violation of the automatic stay.

Court said no stay violation.  Although A filed papers referring to debtor post petition, there were no new claims against the debtor.  Moreover, the court stated that A had a right to continue the lawsuit against B, C and the new defendants.  A then claimed a stay violation on the grounds that the lawsuit referred to the property that the debtor owned but transferred.  Now, that is pretty slick.  The court, however, was slicker in ruling  no stay violation.  The court said that the debtor lacked standing to make that claim since the debtor did not own the property that was allegedly fraudulently transferred at the time of the filing.  In addition, the debtor did not list the transferred property as exempt in the schedules.

The debtor was using the automatic stay as a club to slow down a creditor who was trying to overturn a transfer of property in a state court action.  The bankruptcy court was saying, in effect, you want to play that kind of “hardball”, then you have to list the property as yours or admit that you have some interest in the property.  By doing so, however, the debtor would be admitting that the transfer was fraudulent.

This case and the case in the previous blog go a long way to demonstrate that even basic bankruptcy concepts can get complex depending on the facts of the case.  A prospective debtor should be aware of this and seriously consider retaining experienced counsel before filing.