By: Paul Arrow, Esq.

January 2016

Immediately upon the commencement of a bankruptcy case an automatic stay prohibits actions against the debtor to, among other things, collect pre-petition obligations and to obtain control over property of the bankruptcy estate.  The automatic stay furthers fundamental policy goals of  providing a debtor with the “breathing space” to reorganize or otherwise address its problems, and providing an orderly process for dealing with creditor claims.  A violation of the stay can be costly, resulting in an award of actual and possibly punitive damages.  Two recent rulings of the Ninth Circuit Court of Appeals have fine-tuned the contours of the stay.  One ruling benefits creditors by limiting the application of the stay in the unlawful detainer context, at least in California.  The other increases the risk to creditors of violating the stay by expanding the measure of damages that may be recovered for a stay violation.

The scope automatic stay is very broad and applies to protect all legal and equitable interests of a debtor.  This includes virtually all actions against a debtor in connection with a pre-petition obligation, and actions to exercise control over property of the bankruptcy estate.  Many courts have found that the stay extends to protect even a debtor’s bare possession of property  In Eden Place, LLC v. Perl (In re Perl), 2016 U.S. App LEXIS 246, however, the panel ruled that the stay did not apply to an action to evict the former owner of real property.  The panel found that under California law, once the creditor obtained an unlawful detainer judgment again the debtor, the debtor no longer held any legally cognizable interest in the property. Accordingly, the stay did not apply to prohibit the eviction action.  This is good news for creditors in California that might otherwise have gone through the foreclosure and unlawful detainer process, only to be stymied by a last minute bankruptcy filing and the specter of the automatic stay.

Another recent ruling, however, expands the scope of damages on account of a stay violation.  Previously, in the Ninth Circuit such damages could not include attorney’s fees and costs incurred in prosecuting the damages action.  The Ninth Circuit was the outlier as most other jurisdictions permitted such damages.  That has now changed.  In America’s Servicing Company v. Irene Michelle-Schwartz-Tallard (In Re Irene Michelle-Schwartz-Tallard), 803 F.3rd 1095 (9th Cir. 2015), the panel overruled a previous decision and brought the Ninth Circuit in line with the rest of the country.  Now, stay violators in the Ninth Circuit may be subject to the full measure of damages, including the costs of prosecuting the damages action.  This ruling serves to underscore the risk of violating the stay and the need for careful consideration of any actions following the commencement of a bankruptcy case.