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Chapter 11: Automatic Stay
News Room

Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)
 

ID Name Group Other Code
Sec
Cross
Ref
Problem Referenced Proposed Solutions
NBRC-0016 Lyle J. Barnes Practitioner
362(b)(11)
Section 362(b)(11), which was designed to protect unsuspecting financial institutions which are involved in receiving and presenting checks in the collection process, was not intended to cover creditors who run a busines on post-dated checks. The payee on a check should have no greater rights than any other unsecured creditor and should not be permitted to circumvent the automatic stay and seek payment outside of bankruptcy. The law should be changed in order to bring into the fold a new type of creditor, the Post-dated Check Creditor.
NBRC-0042 David J. Bardin Attorney; Arent, Fox, Kintner, Plotkin & Kahn. DC counsel for Cult Awareness Network. Testified at Open Forum at July Meeting. 362(a)
Should the stay under Ch. 11 automatically or at least presumptively extend to officers and directors of non-profit debtor corporations as individuals when sued jointly with the debtor If so, should the law distinguish between volunteer and paid individuals No solution suggested. Volunteered time to the Commission.
NBRC-0199 Heidi Heitkamp, on behalf of the Natl. Assoc. of Attys. General, Bankruptcy & Taxation Working Group Chair of Bankruptcy & Taxation Working Group of Natl. Assoc. of Attorneys General; Attorney General of ND
362 105 "Strongly supports" the positions set forth in the letter dated 12/12/96 by J. Christopher Kohn, Director, United States Department of Justice, Civil Division, Commercial Litigation Branch, regarding the bankruptcy court's injunctive powers. The author states that the Bankruptcy Code fails to prevent defendants who file bankruptcy from using the automatic stay to shield themselves from state enforcement of police and regulatory powers. She acknowledges that collection of purely monetary judgments, even those entered in police and regulatory actions, should be deferred to the normal bankruptcy process. However, the exercise of state police and regulatory power often requires the state to act against items such as licenses or permits that may be property of the estate, and in cases such as civil or criminal forfeitures, that the state seize assets where the goods have been manufactured in violation of the law. In these instances, the Code should clearly prohibit the defendant from using the automatic stay as a defense to state enforcement. Section 362 should be clarified to prevent defendants who file bankruptcy from using the automatic stay as a defense to state police and regulatory enforcement that occurring outside the normal bankruptcy process. Additionally, § 105 should be limited and clarified with regard to police and regulatory actions so that defendants cannot use this section as a "back-door way" for overruling the exemption from the automatic stay. The author concludes that "it would be a very rare situation where it would be appropriate to exempt a debtor from the operation of laws applicable to other parties."
NBRC-0207 J. Christopher Kohn Director, Commercial Litigation Branch (DOJ)
362
This nine-page memorandum is a follow-up to the government Round Table discussions in Santa Fe and San Diego. Those discussions focused in part on clarifying the automatic stay to enable police and regulatory actions to impact estate property. The Code's automatic stay provisions currently treats police and regulatory actions in two exceptions, §§ 362(b)(4) and (b)(5). The principle behind these exceptions is that bankruptcy should not prevent police and regulatory actions and judgment enforcement so long as government is not enforcing monetary judgments. This intent can be frustrated by the Code's failure to exempt police and regulatory actions from § 362(a)(3), which stays acts to seize or control state property, and from § 362(a)(6), which stays acts to seize claims. Working Group Proposal #7, which was intended to address these concerns by adding language to § 362(b)(4) enabling governments to exercise control over estate property, is too limited and technically flawed. Section 362(a)(3) should be added to the police power provisions excepted by §§ 362(b)(4) and (b)(5).
NBRC-0207 J. Christopher Kohn Director, Commercial Litigation Branch (DOJ)
362 105 This nine-page memorandum is a follow-up to the government Round Table discussions in Santa Fe and San Diego. Those discussions focused in part on limiting overly expansive notions of a bankruptcy court's injunctive power, especially with regard to police and regulatory activities. In response to the NBRC's request, the author provides case citations that illustrate the Branch's concerns relating to overly expansive use of a bankruptcy court injunctive power. Viewed as a whole, the Branch believes that these cases demonstrate several points: (1) the cases are neither limited in number nor aberrational in character; (2) governmental actions are often enjoined even where the action is conceded to be exempt under the police and regulatory exception; (3) the court decisions generally focus on the perceived "harm" to the estate or its chances of reorganization without identification of a substantive right held by the debtor which the injunction, in theory, should protect; and (4) unless expressly limited, debtors will continue to challenege, on a case-by-case basis, whether a given police or regulatory law is really "necessary," and courts, viewing the issue through the lens of the debtor's reorganization effort, will often decide that it is not. Commercial Litigation Division proposes two amendments to § 105 to address these concerns: "(e) In issuing an injunction, the court shall apply the standards and procedures applicable to a district court under nonbankruptcy law, except to the extent procedures are modified by the Federal Rules of Bankruptcy Procedure. (2) A police or regulatory act of a governmental unit that is not stayed or proscribed by a specific provision of this title may be enjoined only to the extent authorized by nonbankruptcy law."
NBRC-0311 Samuel L. Bufford Bankruptcy Judge (C.D. Cal.)
362(b)(4)
The proposed amendment to § 362(b)(4) presents two problems: (1) The proposed revision would substantially magnify the problem that arises when a government agency invokes this provision to terminate a license or to destroy debtor's property without a court hearing, namely that the burden of going to court for relief is shifted from the creditor to the debtor and that notice to other affected creditors is eliminated; (2) If the government unit is part of state government, the proposed amendment would allow the government unit to use the Eleventh Amendment to avoid a bankruptcy court's jurisdiction, and the court would be powerless to control prejudice to other creditors resulting from the government's appropriation of property belonging to the estate. Author opposes the proposed amendment to § 362(b)(4), and recommends that where government action would have a substantial impact on the value of a debtor's business, the automatic stay should apply. Affected creditors should be given notice, and the court should have an opportunity to balance the interests of all parties before permitting the government to take action that destroys substantial value belonging to the estate.
NBRC-0318 Paul Mignini, Jr., Mary E. Wysocki and Charles M. Tatelbaum President-National Association of Credit Management ("NACM"), Chair-NACM Government Affairs Committee, and NACM Legislative and Bankruptcy Counsel, respectively
362(h)
NACM sought the input of all NACM members with respect to proposed changes to the bankruptcy laws. The NACM Government Affairs Committee, without discussing the rationales for their suggestions, prepared the proposals below. NACM's Government Affairs Committee concludes that § 362(h) should be amended to: substitute the word "person" for "individual."
NBRC-0324 Richard H. Walker General Counsel, U.S. Securities and Exchange Commission
362, 1109
In this submission representing the preliminary views from SEC staff, the author states that: (1) the SEC has a strong interest in ensuring that the bankruptcy courts are not used as a "haven for wrongdoers" in subversion of congressional intent; (2) scare enforcement resources should not be diverted into unnecessary or duplicative litigation in bankruptcy court; and (3) the SEC also has an interest pursuant to § 1109(a) as a party-in-interest, in protecting the interest of public investors who hold securities in companies involved in the bankruptcy system, ensuring adequate disclosure of reorganization plans that provide for the issuance of unregistered securities, and preventing the misuse of the Bankruptcy Code's exemption from Securities Act Registration. In furtherance of these interests and in order to assure that the automatic stay is not used to hinder legitimate SEC efforts, the author proposes that the Bankruptcy Code be amended to: (1) Clarify the scope of the governmental police or regulatory exception in §§ 362(b)(4) and (5); (2) Clarify the standard for enjoining acts within the police/regulatory exception; (3) Clarify grounds for lifing the stay. The author also urges the NBRC to schedule a meeting devoted solely to governmental concerns because the interaction of the Bankruptcy Code and governmental activities raises unique issues.
NBRC-0324 Richard H. Walker General Counsel, U.S. Securities and Exchange Commission
362, 1109
In this submission representing the preliminary views from SEC staff, the author states that: (1) the SEC has a strong interest in ensuring that the bankruptcy courts are not used as a "haven for wrongdoers" in subversion of congressional intent; (2) scare enforcement resources should not be diverted into unnecessary or duplicative litigation in bankruptcy court; and (3) the SEC also has an interest pursuant to § 1109(a) as a party-in-interest, in protecting the interest of public investors who hold securities in companies involved in the bankruptcy system, ensuring adequate disclosure of reorganization plans that provide for the issuance of unregistered securities, and preventing the misuse of the Bankruptcy Code's exemption from Securities Act Registration. In furtherance of these interests, the author recommends that the NBRC study whether individuals should be eligible to file under chapter 11, and if so, whether eligibility standards should be promulgated for them He also recommends that the NBRC study whether it is time to adopt eligibility standards for corporate chapter 11's.
NBRC-0369 Sybil Niden Goldrich Author of article in the Fresno Bee


The author tells of her personal history with defective Dow Corning breast implants, and states that Dow Corning has used chapter 11 to avoid indefinitely paying money owed to women for damaging their health. She adds that Dow Corning has used the bankruptcy to post some of its highest earning quarters ever. Bankruptcy Code should be amended to prevent companies from using the Code to "put its own survival ahead of ethical considerations."
NBRC-0396 Heidi Heitkamp National Association of Attorneys General ("NAAG"); Attorney General, North Dakota; Chair of the NAAG Bankruptcy and Taxation Working Group
362 105 NAAG strongly supports the positions expressed by the Department of Justice with respect to proposed changes to §§ 362 and 105. Collection of purely monetary judgments should be deferred to the normal bankruptcy process. However, on many occasions, the proper exercise of the state's police and regulatory powers means that it must act against items such as licenses or permits that may be property of the esate, or that it must seize assets in situations where goods have been manufactured in violation of the law. Bankruptcy Code must be clarified to protect the legitimate exercise of state police and regulatory powers from imposition of the automatic stay.
NBRC-0551 Chris Greer Deputy Assistant Secretary, Office of Mulltifamily Housing Programs, U.S. Department of Housing and Urban Development Statement of Chris Greer submitted on behalf of HUD.

Representatives from HUD participated in the discussions of the Small Business Working Group during the January meeting in Washington, D.C. They were invited to submit a formal statement to the Commission describing their recommendations for changes in the bankruptcy code, to which this letter is a response. "In the case of insured loans, FHA insures mortgages made by private lending institutions to finance the construction of multifamily housing by private developers. Nearly all of the multifamily properties are held by single asset partnerships. Most were organized as tax shelters which by now have tax bases near or at zero. If the owner defaults, FHA pays the private lender for its claim and takes over the mortgage. In order to protect the property, the residents, and the government's financial interest, HUD often must act quickly to foreclose. In response, however, owners often file for bankruptcy, automatically staying the foreclosure." "...HUD urges the Commission to recommend changes in the bankruptcy code to exempt HUD from stays against foreclosure on both FHA insured loans and direct loans for multifamily housing and health care facilities so that the Department can better fulfill its mission."
NBRC-0636 Donald F. Harris Attorney, Legal Services Bureau, Taxation and Revenue Department, State of New Mexico
362(a)(3)
Section 362(a)(3) forbids a creditor from "exercising control over property of the estate" in violation of the automatic stay. Does this mean that a creditor holding property legally seized pre-petition is in violation of the automatic stay if the property is not immediately returned to the debtor or trustee Author cites In re Knaus, which says yes, and In re Young, which says no. Author's experience suggests that the Knaus solution, although perhaps legally correct, is illogical and unwieldy, and that in practice, the courts adopt a wait-and-see attitude more akin to Young. "Please read In re Young, 193 B.R. 620 (Bankr. D.C. 1996) and consider whether the Commission should address this issue."
NBRC-0637 Armand J. Kornfeld Attorney
362(b) (12) & (13)
11 U.S.C. § 362(b) (12) and (13) grant the government relief from the automatic stay to pursue and complete foreclosures under Preferred Ship Mortgages against a vessel. The automatic relief from stay provision makes it virtually impossible for a vessel owner to reorganize over the govenment's objections. The 90-day trigger date arises prior to the exclusivity periods, ina normal Chapter 11 case, for even the filing of a Disclosure Statement and Plan, much less the 180 days available to a debtor to confirm a Plan within the exclusivity period. "The purpose of this letter is to request that the Commission review this issue and, at the very least, consider extending the trigger date for relief from stay being granted to the government to a period beyond the existing exclusivity periods."
NBRC-0662 Chris Quinn-Brintnall Sr. Deputy Prosecuting Attorney, Pierce County, Washington
362(b)(4) 105 Bankruptcy courts should not be able to stay government enforcement of public safety requirements when the public is being put at risk merely to protect financial interests. Modify the automatic stay provisions and authority of the bankruptcy court to eliminate interference with government enforcement of public safety provisions.
NBRC-0689 Harvey R. Miller & Paul M. Basta Attorneys, Weil, Gotshal & Manges LLP


This is a Memorandum by the authors to Professor Elizabeth Warren on the "Enforceabiltiy of prepetition Waivers of the Authomatic Stay" which she forwarded to the Chapter 11 Working Group as background material.
NBRC-0746 Benjamin Sweet Owner, Sweet Properties


Author feels he was "victimized" by the automatic stay provision when a commercial tenant of his merged with another firm and moved out while owing rent, then filed banktuptcy. "It took over 6 months to get the bankruptcy court to release [the premesis] back to me - most of the time in which the premises was vacant!" "...I request that NBRC recommends to Congress that the current Bankruptcy Code be changed to exempt rental agreements from the automatic stay provision."
NBRC-0897 Samuel L. Bufford United States Bankruptcy Judge, Central District of California


Author writes to address the issue of in rem relief from stay orders. He wrote an opinion which authorizes a court to grant a relief from stay order that binds subsequent transferees of the real property at issue, by authorizing the recordation of the order in the real estate recording office. "It does not apear that further legislation is needed to make this pricedure effective. I think that the present statute is adequate for the purpose."
NBRC-1066 Thomas B. Donovan Bankruptcy Judge, Central District of California
362
Author is forwarding a proposal for dealing with the in rem issue in relief from stay matters. "Congress should authorize the courts to control the number of times a debtor can obtain the automatic stay involving the same property by an appropriate amendment to the Bankruptcy Code. Such an amendment would permit the courts to issue orders granting relief from the automatic stay that bind a specific property and any party claiming an interest in that property as well as prevent that asset from becoming property of the bankruptcy estate."
NBRC-1133 William J. Burnett Attorney, Saul, Ewing, Remick & Saul Article: "Prepetition Waivers of the Automatic Stay: Automatic Enforcement Equals Automatic Trouble", in Journal of Bankruptcy Law and Practice, Vol. 5, No. 3, March/April 1996. 362(a)
Author submits a copy of a law review article which he wrote. Author suggests that pre-petition waivers of the automatic stay should not be enforced.


 

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