Editor's note: This story originally appeared in the January edition of DS News.
Widely known as the ultimate debtor protection, the automatic stay provided for in section 362 of the United States Bankruptcy Code is perhaps the most important feature of U.S. bankruptcy law. Furthermore, a violation of the automatic stay comes with grave consequences for creditors that run afoul of the statutory injunction.
Notwithstanding the well-deserved reputation as the “supreme debtor sword,” it is also well accepted that the automatic stay not only protects the debtor’s attempt to repay his creditors or reorganize his financial affairs, but the stay also protects creditors by preventing dismemberment of the estate.
Confronted with an aggrieved creditor, a Middle District of Florida bankruptcy court addressed an atypical stay violation in a Chapter 7 case where an automobile creditor lost its title interest to a vehicle during the pendency of a bankruptcy proceeding—and while the stay was in place over the collateral.
The Chapter 7 debtor manifested the desire to surrender a vehicle, which was the collateral that secured the debt for the creditor. In response, the creditor moved the court under section 362 of the Bankruptcy Code for relief from the automatic stay to recover the vehicle and exercise its available state court remedies. The court, after the requisite notice period expired, entered an order granting relief to the creditor.
Prior to the entry of the order granting creditor’s stay relief motion, the debtor dropped off the vehicle at a storage company associated with the Chapter 7 trustee, sold the subject vehicle (to itself) at a private auction, and transferred the certificate of title, designating the storage company as the new registered owner of the vehicle.
The automatic stay prohibits any act to create, perfect, or enforce any lien against property of the estate, according to section 362 (c)(1). Section 541(a)(1) of the Bankruptcy Code broadly defines property of the estate to include, in relevant part, all legal or equitable interests of the debtor in property as of the commencement of the case, regardless of where the property is located or who holds it.
All acts in violation of the automatic stay are void and without effect. The vehicle (at the time of the bankruptcy petition filing) was unmistakably property of the debtor’s bankruptcy estate. Because of the existence of the automatic stay, the creditor was unable to exercise its rights to the vehicle until after relief from stay was affirmatively granted to that creditor.
As such, the vehicle remained under the protection of the automatic stay; and any act, transfer, or other manipulation in connection to the collateral prior to the stay relief order was a violation of the automatic stay—a stay that protected the secured creditor.
The Middle District of Florida Court ultimately determined that the sale and title transfer of the subject vehicle was an actual violation of the automatic stay; deemed such actions void as a matter of law; and because the vehicle was no longer in possession of the storage company (or the debtor), the secured creditor was awarded monetary damages in the amount of the value of the collateral.
In short, while the automatic stay is indeed the ultimate shield that protects debtors, that same stay cannot simultaneously be used as a sword to eliminate or otherwise detrimentally impact the rights of creditors subject to the stay.