Written By: Alan S. Wolf
On March 20, 2007, Judge Thomas Catliota of the U.S. Bankruptcy Court, District of Maryland (Greenbelt), issued a troubling ruling in In re King, Case No. 06-15660-TJC. In that case, the debtor, Marnitta King, was a joint owner of real property in Maryland. The other joint owner was Timothy Savoy. The property was secured by a mortgage held by Wells Fargo. Ms. King filed three Chapter 13 bankruptcy cases within one year. Mr. Savoy had not filed bankruptcy during this time. On the third filing, Wells Fargo went to sale without first seeking relief from stay due to section 362(c)(4)(A)(i), which provides as follows:
“[I]f a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under section 707(b), the stay under subsection (a) shall not go into effect upon the filing of the later case.”
The debtor then brought action in the bankruptcy court to overturn the sale, alleging that while the automatic stay provided by 11 U.S.C. Section 362(a) was no longer in effect, the co-debtor stay of 11 U.S.C. Section 1301 was still in effect and precluded the sale. Specifically, Section 1301 provides as follows:
“Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless (1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or (2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.”
The court agreed with the debtor and the sale was set aside. The court found that while section 362(c)(4)(A)(i) did preclude the normal stay, the 362(a) stay, from going into effect, it did not preclude the co-debtor stay of Section 1301 from going into effect. Thus, since the co-debtor stay was still in existence when Wells Fargo went to sale, the court held that the foreclosure sale was in violation of the stay and invalid.
The co-debtor stay is very troubling. It is likely that Congress really intended all stays, even the co-debtor stay, to terminate under Section 362(c)(4)(A)(i). However, the statute is so poorly worded that it gives courts wiggle room to avoid what was certainly Congress’s intent. When given this discretion, bankruptcy judges almost invariably side with the debtor since many of them hate the new bankruptcy legislation.
Loan servicers should note the King case and speak to their local counsel where a new filing falls within section 362(c)(4)(A)(i) but there is a co-debtor.