THE AUTOMATIC STAY AND NON-DISCHARGEABLE DEBTS IN CHAPTER 7
AND CHAPTER 11: IS IT IS VALUABLE AS YOU
THINK?
Published on by: Ian M. Falcone
THE AUTOMATIC STAY AND NON-DISCHARGEABLE DEBTS IN CHAPTER 7
AND CHAPTER 11: IS IT IS VALUABLE AS YOU
THINK?
We have all seen the advertisements: “Stop the phone calls! Stop the garnishments! Stop the lawsuits! Call Now!”
But does the automatic stay always deliver on its promise? The answer to that may be, at least in
limited circumstances, surprisingly, no.
11 U.S.C. 362 states:
(a) Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or 303 of this title [11 USCS § 301,
302,
or 303],
or an application filed under section 5(a)(3) of the Securities Investor
Protection Act of 1970 [15 USCS § 78eee(a)(3)], operates as a stay,
applicable to all entities, of--
(1)
the commencement or continuation, including the issuance or employment of
process, of a judicial, administrative, or other action or proceeding against
the debtor that was or could have been commenced before the commencement of the
case under this title, or to recover a claim against the debtor that arose
before the commencement of the case under this title;
(2)
the enforcement, against the debtor or against property of the estate, of a
judgment obtained before the commencement of the case under this title;
(3)
any act to obtain possession of property of the estate or of property from the
estate or to exercise control over property of the estate;
(4)
any act to create, perfect, or enforce any lien against property of the estate;
(5)
any act to create, perfect, or enforce against property of the debtor any lien
to the extent that such lien secures a claim that arose before the commencement
of the case under this title;
(6)
any act to collect, assess, or recover a claim against the debtor that arose
before the commencement of the case under this title;
(7)
the setoff of any debt owing to the debtor that arose before the commencement
of the case under this title against any claim against the debtor; and
(8)
the commencement or continuation of a proceeding before the United States Tax
Court concerning a tax liability of a debtor that is a corporation for a
taxable period the bankruptcy court may determine or concerning the tax
liability of a debtor who is an individual for a taxable period ending before
the date of the order for relief under this
However, it is what the stay does NOT apply to that is more
troubling:
(B)
of the collection of a domestic support obligation from property that is not
property of the estate: (emphasis
added)
11 U.S.C. 541 excludes certain property from the
bankruptcy estate as follows:
(b) Property of the estate does not include--
(1)
any power that the debtor may exercise solely for the benefit of an entity
other than the debtor;
(2)
any interest of the debtor as a lessee under a lease of nonresidential real
property that has terminated at the expiration of the stated term of such lease
before the commencement of the case under this title, and ceases to include any
interest of the debtor as a lessee under a lease of nonresidential real
property that has terminated at the expiration of the stated term of such lease
during the case;
(3)
any eligibility of the debtor to participate in programs authorized under the
Higher Education Act of 1965 (20 U.S.C. 1001 et seq.; 42 U.S.C. 2751 et seq.), or any
accreditation status or State licensure of the debtor as an educational
institution;
(4)
any interest of the debtor in liquid or gaseous hydrocarbons to the extent
that--
(A)
(i)
the debtor has transferred or has agreed to transfer such interest pursuant to
a farmout agreement or any written agreement directly related to a farmout
agreement; and
(ii)
but for the operation of this paragraph, the estate could include the interest
referred to in clause (i) only by virtue of section 365 or 544(a)(3) of this title [11 USCS § 365
or 544(a)(3)];
or
(B)
(i)
the debtor has transferred such interest pursuant to a written conveyance of a
production payment to an entity that does not participate in the operation of
the property from which such production payment is transferred; and
(ii)
but for the operation of this paragraph, the estate could include the interest
referred to in clause (i) only by virtue of section 365 or 542 of this title [11 USCS § 365
or 542];
(5)
funds placed in an education individual retirement account (as defined in section 530(b)(1) of
the Internal Revenue Code of 1986 [26 USCS § 530(b)(1)]) not later than 365 days
before the date of the filing of the petition in a case under this title, but--
(A)
only if the designated beneficiary of such account was a child, stepchild,
grandchild, or stepgrandchild of the debtor for the taxable year for which
funds were placed in such account;
(B)
only to the extent that such funds--
(i)
are not pledged or promised to any entity in connection with any extension of
credit; and
(ii)
are not excess contributions (as described in section 4973(e) of the Internal Revenue Code of 1986
[26 USCS §
4973(e)]); and
(C)
in the case of funds placed in all such accounts having the same designated
beneficiary not earlier than 720 days nor later than 365 days before such date,
only so much of such funds as does not exceed $ 5,850;
(6)
funds used to purchase a tuition credit or certificate or contributed to an
account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986
[26 USCS §
529(b)(1)(A)] under a qualified State tuition program (as defined in
section 529(b)(1) of such Code [26 USCS § 529(b)(1)]) not later than 365 days
before the date of the filing of the petition in a case under this title, but--
(A)
only if the designated beneficiary of the amounts paid or contributed to such
tuition program was a child, stepchild, grandchild, or stepgrandchild of the
debtor for the taxable year for which funds were paid or contributed;
(B)
with respect to the aggregate amount paid or contributed to such program having
the same designated beneficiary, only so much of such amount as does not exceed
the total contributions permitted under section 529(b)(6) of such Code [26 USCS § 529(b)(6)]
with respect to such beneficiary, as adjusted beginning on the date of the
filing of the petition in a case under this title by the annual increase or
decrease (rounded to the nearest tenth of 1 percent) in the education
expenditure category of the Consumer Price Index prepared by the Department of
Labor; and
(C)
in the case of funds paid or contributed to such program having the same
designated beneficiary not earlier than 720 days nor later than 365 days before
such date, only so much of such funds as does not exceed $ 5,850;
(7)
any amount--
(A)
withheld by an employer from the wages of employees for payment as
contributions--
(i)
to--
(I)
an employee benefit plan that is subject to title I of the Employee Retirement
Income Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an employee
benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986
[26 USCS § 414(d)];
(II)
a deferred compensation plan under section 457 of the Internal Revenue Code of 1986
[26 USCS § 457];
or
(III)
a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986
[26 USCS § 403(b)];
except that such amount under this subparagraph shall not constitute disposable
income as defined in section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
(ii)
to a health insurance plan regulated by State law whether or not subject to
such title; or
(B)
received by an employer from employees for payment as contributions--
(i)
to--
(I)
an employee benefit plan that is subject to title I of the Employee Retirement
Income Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an employee
benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986
[26 USCS § 414(d)];
(II)
a deferred compensation plan under section 457 of the Internal Revenue Code of 1986
[26 USCS § 457];
or
(III)
a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986
[26 USCS § 403(b)];
except
that such amount under this subparagraph shall not constitute disposable
income, as defined in section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
(ii)
to a health insurance plan regulated by State law whether or not subject to
such title;
(8)
subject to subchapter III of chapter 5 [11 USCS §§ 541 et seq.], any interest of the
debtor in property where the debtor pledged or sold tangible personal property
(other than securities or written or printed evidences of indebtedness or
title) as collateral for a loan or advance of money given by a person licensed
under law to make such loans or advances, where--
(A)
the tangible personal property is in the possession of the pledgee or
transferee;
(B)
the debtor has no obligation to repay the money, redeem the collateral, or buy
back the property at a stipulated price; and
(C)
neither the debtor nor the trustee have exercised any right to redeem provided
under the contract or State law, in a timely manner as provided under State law
and section 108(b) [11
USCS § 108(b)]; or
(9)
any interest in cash or cash equivalents that constitute proceeds of a sale by
the debtor of a money order that is made--
(A)
on or after the date that is 14 days prior to the date on which the petition is
filed; and
(B)
under an agreement with a money order issuer that prohibits the commingling of
such proceeds with property of the debtor (notwithstanding that, contrary to
the agreement, the proceeds may have been commingled with property of the
debtor), unless the money order issuer had not taken action, prior
to the filing of the petition, to require compliance with the prohibition. Paragraph
(4) shall not be construed to exclude from the estate any consideration the
debtor retains, receives, or is entitled to receive for transferring an
interest in liquid or gaseous hydrocarbons pursuant to a farm out
agreement.
In most cases, the ERISA related exceptions are probably
most relevant. While IRA’s are considered
part of the bankruptcy estate (although typically protected by state and
federal exemptions), retirement plans such as 401Ks are technically, not part
of the estate. See Patterson v. Shumate,
504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519, 1992 U.S. LEXIS 3546, 60
U.S.L.W. 4550, 15 Employee Benefits Cas. (BNA) 1481, Bankr. L. Rep. (CCH)
P74,621A, 26 Collier Bankr. Cas. 2d (MB) 1119, 23 Bankr. Ct. Dec. 89, 92 Cal.
Daily Op. Service 4996, 92 Daily Journal DAR 7949, 6 Fla. L. Weekly Fed. S 416
(U.S. 1992)
In a recent individual Chapter 11 case, a creditor (the
debtor’s ex-wife) filed a motion for relief from the stay. The debtor had been found in willful contempt
of the parties’ divorce decree in that he had failed to pay his child support
and certain property division obligations.
The ex-wife now wanted permission to pursue the contempt claim,
including incarceration.
The Bankruptcy Court acknowleged that virtually all of the
debtor’s assets at the time the case was filed belonged to the estate and that
any post-petition earnings were also included under Chapter 11.
The Court stated that the debtor’s ex-wife had the right
to pursue collection of the debts from non-estate assets. In fact, had that been the ex-wife’s clear intent,
a motion for relief would probably have not been necessary. Having opened the door that the stay was not
absolute, the Court asked, “Doesn’t the Superior Court have the right enforce
its own contempt order?” So long as
enforcement does interfere with the stay, my answer, reluctantly, was yes. However, I could not fathom how it would be
possible in this case as the debtor had no property rights that would be
excluded form the estate.
In the end, the Court, likely because of the history of
the divorce and contempt cases, granted the motion for relief but added
language that the stay did not allow for collection from assets of the estate
including post-petition earnings. Not
surprisingly, the Superior Court has reinstated its existing Contempt Order,
which includes a provision to incarcerate the debtor. A motion in now pending in the Superior Court
to vacate that order as a violation of the stay.
But the lesson to be learned here, is that, if the
debtor’s actions have been egregious enough, and if the creditor is willing to press
the Court for relief, the mere filing of a bankruptcy case may not be as
valuable as you think.
