15: Automatic Stay
© Charles Tabb 2010
What is the “automatic stay”?
• INJUNCTION
– Stops collection of pre-bk debts
– Protects property of estate
• AUTOMATIC
– Effective upon filing of petition
– Without notice
– Self-executing
enforcement
• Actions that violate the stay are ineffective
• Whether or not actor had notice of stay
• If actor knew of stay, can be sanctioned
11:59:59 am
Noon
petition filed
foreclosure sale
Role in bankruptcy system
1st – protect integrity of collective action for CRs
 Stops all collection efforts, protects estate
STAY
Estate
assets
Need permission
• Cr must get permission from bankruptcy court to
proceed
– Ex. to foreclose lien
• Called “relief from stay” , § 362(d)
• Avoid chaos and scramble for assets; orderly,
supervised process instead
Collective proceeding replaces race
• For most claims (especially unsecured claims),
no race at all
• Orderly process:
– all CRs file claims, Trustee sorts out, and makes
distribution on pro rata basis
role
• 2nd – facilitates “fresh start”
Gives debtor a “breathing spell”
Can’t be harassed by CRs any more
on pre-bk debts!
• No more phone calls
• No more dunning letters
• No more repos
• No more sheriff levies
Scope: how broad?
• Acts stayed  § 362(a)
– if not listed in (a), not stayed
• Exceptions  § 362(b)
• Injunction
– If either not stayed under (a), or excepted under
(b), always possible to ask the bankruptcy court to
issue an actual injunction : recall section 105
“necessary and proper clause-type” provsion.
Scope of stay
• General principles under § 362(a)
– 1. Timing – prepetition claims only
Claim
Claim
Stayed
Not Stayed
Who protect?
• 2. Only protect Debtor
Not protect Co-debtors
What protect?
• 3. Protects
– A. Property of estate from ALL interference
– B. Property of debtor from collection of
prepetition debts
4.1(a)
• Creditor has a properly perfected security
interest in Debtor’s Jeep to secure a debt of
$15,000. Debtor defaults. One week later,
Debtor files chapter 7. Creditor seizes the
Jeep and sells it pursuant to Creditor’s statelaw default remedies, without any knowledge
of the bankruptcy filing.
Answer 4.1(a)
• Repo & sale of collateral?
• Violates § 362(a): (1), (3), (4), (6). Any way for CR
to proceed?
• If CR wants to proceed against collateral, must get
relief from stay, § 362(d)
4.1(b)
• Same facts as in question a, except Creditor
seized the Jeep before the Debtor filed
bankruptcy and scheduled the sale for May 1
at 2:00 p.m. Debtor filed bankruptcy at 1:59
p.m. on May 1. Creditor then sold the Jeep at
2:00 p.m.
Answer 4.1(b)
• Repo before bankruptcy, foreclosure sale after
• Violates same sections as in problem 4.1(a).
• Even if repo before, can’t continue with
foreclosure sale
• Again, must ask Bk court for relief from stay
4.1(c)
• Creditor obtains a judgment against Debtor
for $10,000 before Debtor files bankruptcy.
Debtor files chapter 7 on May 1. On May 2
Creditor has a writ of execution issued and
sends the sheriff to levy on Debtor’s
nonexempt property.
Answer 4.1(c)
• Enforcement of prepetition judgment
• Violates same sections as in problem a, and
also § 362(a)(2)
4.1(d)
• Creditor has a writ of garnishment issued and
served on Debtor’s Employer on June 1.
Under state law, Employer must send Creditor
25% of Debtor’s paycheck each month
thereafter, without the Creditor having to take
any further steps. Debtor files chapter 7 on
June 2. One June 9, Employer sends Creditor
a check pursuant to the garnishment order.
Answer 4.1(d)
• Ongoing garnishment?
• CR has obligation to stop ongoing garnishment,
see § 362(a)(1) (“continuation”.) What if CR
cashes check?
• If cashes check, violates (a)(2), (5), (6)
4.1(e)
• Debtor, Inc. has a checking account with a
balance of $5,000 at Bank. Debtor also is in
default on a loan debt of $8,000 owing to
Bank. Debtor files chapter 11. Bank sets off
the checking account against the loan debt,
reducing the loan balance to $3,000 and
reducing the checking account balance to
zero.
Answer 4.1(e)
• Setoff
• Violates § 362(a)(7), also (a)(3) & (6)
• Analogous to lien enforcement
• Must ask for relief from stay before set off
4.1(f)
• Same facts as in question e, except Bank does
not actually set off the checking account.
Instead, Bank freezes the account, denying
Debtor access to it.
Answer 4.1(f)
• Freeze?
• Supreme Court held ≠ violation under (a)(7) or (3)
(Citizens’ Bank v. Strumpf)
• Preserve setoff right, not exercise it
– Read in harmony with 553(a) [preserves the right of setoff]
and 542(b)[entity that owes a debt to estate must pay it
(turnover) except to the extent of right of setoff]
4.1(g)
• Debtor leases space from Lessor for use as a
restaurant. Debtor defaults on its lease.
Debtor files chapter 11. Lessor posts the
following notice in the lobby outside the
restaurant, on Lessor’s own property, in large
block letters:
DEBTOR IS A DEADBEAT!! DEBTOR DOES NOT
PAY ITS DEBTS. SHAME!
Answer 4.1(g)
• Other acts to collect?
OR
?
What about § 362(a)(6)? “any act to collect”
 what was Cr trying to accomplish?
* possible 1st Amendment free speech issue
4.1(h)
• Debtor graduated from University with
honors. Debtor owes $2,000 in parking tickets
to University. Debtor files chapter 7.
University refuses to give Debtor his diploma
or to release Debtor’s transcript.
Transcript?
504 E. Pennsylvania Avenue
Champaign, Illinois 61820
University of Illinois
College of Law
Student Name: Oliver Wendell Holmes
College: Law – Urbana Champaign
Day/Month of Birth: 02/02/1902
Fall 2007
LAW
LAW
LAW
LAW
LAW
NO.
TITLE
602
603
606
609
627
Property
Torts
Constitutional Law I
Legal Writing & Analysis
Legal Research
4
4
4
2
1
A+
A+
A+
S
S
16
16
16
0
0
Contracts
Criminal Law
Civil Procedure
Introduction to Advocacy
4
4
4
3
A+
A+
A+
S
16
16
16
0
Spring 2008
LAW 601
LAW 604
LAW 607
LAW 610
TOTAL:
CR.
Earned Hrs
30.00
GPA Hrs
24
Gr.
Points
96
PTS.
GPA
4.0
Answer 4.1(h)
• Withholding transcript?
In re Kuehn, 563 F.3d 289 (7th Cir. 2009)
• Act to collect, § 362(a)(6)
 “coercive effect“ test
4.1(i)
• Debtor has been seeing Creditor, a
chiropractor, for years. Debtor falls behind
$500 in payments owing to Creditor. Debtor
files chapter 7. Creditor refuses to treat
Debtor any longer, even on a current cash
basis, unless Debtor pays his past due debt.
Answer 4.1(i)
• Refusal to deal?
OR
?
Refusal to deal?
• Argue
• It’s a free country! No obligation to treat a
patient.
• Not acting to collect, just declining to treat
 indeed, no “ACT” at all
Refusal to deal?
• Argue
• “Coercive effect” test – an “act to collect”
• Would treat patient IF paid debt
Remedy?
• If find that chiropractor DID violate the stay,
what remedy?
Just sanction CR for stay violation?
Or enter mandatory injunction ordering Cr to
treat the patient?
4.1(j)
• Same facts as question i, except Creditor asks
Debtor (nicely) if Debtor would be willing to
reaffirm his prepetition debt.
Answer 4.1(j)
• Request to reaffirm?
• Argue
 “any act to collect”, (a)(6)
-- pressure on DR
• Argue
 Code allows reaffirmations,
§ 524(c) – closely regulated
4.1(k)
• Insurance Co. insures Debtor’s business for
fire and casualty risk. The insurance policy
permits either party to cancel the policy on 30
days’ notice at any time and for any reason.
Debtor files chapter 11. The next day
Insurance Co. cancels the policy, giving Debtor
the 30-day notice.
Answer 4.1(k)
• Cancellation of insurance?
• Violates stay, § 362(a)(3). What is the policy?
– Insurance policy = property estate
– Cancellation = “exercise control”
Keep insuring?
• Does that mean that Insurance Co. has to KEEP
insuring DR?
What about CBOT?
• The Dr’s (and thus the estate’s) property interest is
limited  unqualified 30-day cancellation right
* however, in a bankruptcy case, we’ll see that the non-dr
party’s K right to cancel is trumped by Code (see § 365(e)) if
termination is solely b/c of bk filing
So INS Co must ask Bk Court for relief from stay. What
might the INS Co. argue to be cause?
Show “cause” – increased risk
4.1(l)
• Same facts as question k, except that
Insurance Co. gives Debtor the 30-day
cancellation notice the day before Debtor files
chapter 11.
Answer 4.1(l)
• Running of cancellation period?
• No violation
• No “act” of any sort
• Once cancellation notice given pre-bk, defined
Dr’s property right – only 30 more days. That’s all
D had.
4.1(m)
• Creditor loans $5,000 to Debtor and, as a
condition thereto, requires Debtor’s mother
(“Mom”) to co-sign the note. Debtor defaults
and files chapter 7. Creditor sues Mom
Answer 4.1(m)
• Sue co-DR?
• No violation
• Stay only protects DR. Would the result be
different if D were in Ch.13? See 1301.
• In chapter 13 do have a special “co-debtor” stay,
§ 1301
The Repo/turnover puzzle
• Facts – in chronological order:
1. Dr defaults
2. SP rightfully repos collateral
3. Dr files bk (usually chapter 11 or 13)
Butner/CBOT
• At time of bankruptcy, what are the respective
property interests of the SP and DR?
SP
DR
– Possession
– Right to sell
title
Estate
What does DR (as DIP) want?
• Wants the whole pie back!
• i.e., wants SP to turn over the repo’d collateral
to the Dr (as DIP, representing estate)
SP’s piece of pie
Dr (as DIP)
But it isn’t the Dr’s pie any more!
• Why should SP have to do that? Once SP has
rightfully repo’d the collateral prior to bk, SP
now has a big piece of the pie that is its
“property” – NOT the DR’s
Whiting Pools
• Supreme Court case of United States v.
Whiting Pools, Inc. raises issue whether the SP
who has rightfully repo’d prior to bk has any
obligation to turn over the repo’d collateral:
turnover provision, 542.
Statutory scheme
The “turnover” statute:
 § 542(a): “an entity … in possession of
property that the trustee may use … under §
363 … shall deliver” that property to the Tee
Statute, cont.
2nd step: what is “property that the trustee may
use … under § 363”?
“trustee may use … property of the estate”
§ 363(b),(c)
Statute, cont.
• 3rd step: what is “property of the estate”?
“all legal or equitable interests of the debtor
in property as of the commencement of the
case”
§ 541(a)(1). [Plus some post-petition stuff,
e.g., 546(a)(6)]
summary
542(a) (“property tee may use under 363”)
363(b) & (c) (“property of estate”)
541(a)(1)
(“legal or equitable interests of
DR as of commencement”)
Statute, finale
• As of “the commencement of the case,” did
the debtor have a “legal or equitable interest
… in property” that included possession?
Statute, finale
NO
(“possession”)
SP
DR
Holding in Whiting Pools?
• In Whiting Pools, what did Supreme Court
hold about SP’s obligation to turn over the
collateral it had rightfully repo’d?
Turn it all over!
Estate (DR as DIP)
Practical Effect?
• What is the practical effect of the reading the
Court gives section 542? See first full
paragraph, p.196.
Effect
• Read § 542(a) as effectively giving estate a
possessory right in the collateral itself
“… In effect, § 542(a) grants to the estate a
possessory interest in certain property of the
debtor that was not held by the debtor at the
commencement of reorganization
proceedings.
Effect
• If the secured party can’t get or retain
possession, what protection is afforded that
creditor regarding its property interest in the
collateral? See top p.196
• The Bankruptcy Code provides secured creditors
various rights, including the right to adequate
protection, and these rights replace the
protection afforded by possession.”
The deal
SP
Turnover 542(a)
Estate
“Adequate Protection” 361
Role of “adequate protection”
• For the SP, “adequate protection” under § 361
replaces its non-bk procedural rights to insure
protection of its substantive property rights.
What if C’s substantive rights aren’t given
adequate protection? See 362(d)(1).
• If C does not get adequate protection, could
get relief from stay under § 362(d)(1)
– Then could foreclose lien and sell collateral
– But need permission from bk court
Pareto efficient
• Theory of Bankruptcy Code in dealing with
secured crs  Pareto efficiency
• Make one group better off (residual claimants,
such as unsecured Crs and equity) without
making any other group (SP) worse off
Applied in Whiting pools
• See Pareto efficiency on facts of Whiting
Pools:
– Collateral in the hands of the Dr is worth ~ $162K,
can be used to run business, unsecured Crs paid
much more
– Only worth $35K in hands of IRS (liquidation
value)
– Adequate protection: give IRS the “value” of their
collateral right
• i.e., IRS cannot be worse off
Adequate Protection and Pareto
• Necessary condition of Pareto efficiency is
that no group be worse off
• In bankruptcy, when make SP turn over
collateral, have to be sure that the “adequate
protection” it is given is fully compensatory for
the rights it gives up, namely, possession and
the right to foreclose
Outcome Justified, but any legislative
or judicial authority?
• Supreme Court also relied on history
– Legislative history – testimony that a DR to
reorganize needs to be able to get back repo’d
collateral
– Precedent under prior law (RFC v Kaplan) –
allowed similar relief
When does turnover right end?
• How long does the estate’s turnover power
under § 542(a) persist to give the estate the
power to pull back into the estate property
that a SP has repo’d?
End of turnover power
• Turnover power ends when Dr has NO
property interest left at time files bankruptcy
• When the “pie” is all gone,
can’t get it back
So, if SP has already sold collateral at
foreclosure, no turnover power left
Turnover without
Adequate Protection?
• Thompson case raises the issue of whether a
SP who has rightfully repo’d prior to Bk has an
obligation not only to turn over the collateral
to the estate under § 542(a), but indeed to do
so before it is given adequate protection
scenario
•
•
•
•
•
Dr default
SP repos (often DR’s car)
DR files bk (often chapter 13)
Dr says “give me back my car”
SP says, “sure, as soon you give us adequate
protection”
• DR says – that is a stay violation!
Violate what?
• SP says, “violate what?”
• We are rightfully in possession of the
• Answer: § 362(a)(3) – “exercise control” over
property of the estate
What property of estate?
• Since SP is rightful possessor of car, what
exactly IS the “property of the estate” over
which it is “exercising control”?
(mis)-reading Whiting Pools
• Courts hold: the turnover power (542(a)) gives
the estate a possessory right in the collateral
• Automatic and self-executing!
• Thus SP is NOT lawfully in possession, estate
has the possessory interest, and SP is thus
exercising control over estate property
Is that right?
What happened to role of adequate protection?
What about the deal?
Turnover 542(a)
SP
Estate
“Adequate Protection” 361
Review statutes
• 542(a)  refer to property can use under 363
• 363  condition use of property on providing
adequate protection, see 363(e)
What about Whiting Pools, though?
• Courts always cite Whiting Pools as support
for automatic turnover power
• But in Whiting Pools the IRS WAS given
adequate protection before it had to turn over
the collateral
Coordinating with stay relief?
• SP can get relief from stay if not given
adequate protection, 362(d)(1)
• DR can get turnover, via 542(a)/363(e), if gives
“adequate protection”
 Makes sense to have the Dr and SP file
dueling motions with the court – Dr for
turnover, SP for stay relief – with the single
and identical issue being: adequate protection