§ 64.4     Annulment of the Stay
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 64.4, at ¶ ____, LundinOnChapter13.com (last visited __________).

Relief from the stay under 11 U.S.C. § 362(d) can include “terminating, annulling, modifying, or conditioning such stay.”1 Annulling means that the stay is eliminated as of some moment in the past, sometimes as of the filing of the case itself. Annulling the stay can cleanse actions by creditors that would otherwise be violations of the stay.


For example, in Glaser v. Dowell (In re Glaser),2 the Ninth Circuit held that a postpetition foreclosure sale conducted with knowledge of the bankruptcy filing and in violation of the automatic stay can be validated by retroactive annulment under § 362(d).3 After Glaser, the Ninth Circuit adopted a “balancing of the equities” test for annulment of the automatic stay;4 the Bankruptcy Appellate Panel for the Ninth Circuit described this test in a Chapter 13 decision refusing to annul the stay to validate a postpetition foreclosure sale:

[W]e conclude that the proper standard for determining “cause” to annul the automatic stay retroactively is a “balancing of the equities” test. . . . The general trend has been to focus on two factors . . . “(1) whether the creditor was aware of the bankruptcy petition; and (2) whether the debtor engaged in unreasonable or inequitable conduct, or prejudice would result to the creditor.” . . . These two factors are not dispositive. . . . We suggest the following factors to consider when deciding whether to annul the stay: Number of filings . . . Whether . . . the circumstances indicate an intention to delay and hinder creditors . . . . [T]he extent of prejudice to creditors . . . . The Debtor’s overall good faith . . . . Whether creditors knew of stay but nonetheless took action . . . . Whether the debtor has complied, and is other-wise complying, with the Bankruptcy Code and Rules . . . . The relative ease of restoring parties to the status quo ante . . . . The costs of annulment to debtors and creditors . . . How quickly creditors moved for annulment . . . . Whether . . . creditors proceeded to take steps in continued violation of the stay . . . . Whether annulment of the stay will cause irreparable injury to the debtor . . . . Whether stay relief will promote judicial economy.5

The U.S. Court of Appeals for the First Circuit in Soares v. Brockton Credit Union (In re Soares)6 refused to retroactively annul the stay to validate a default judgment and judgment of foreclosure entered by a state court after a Chapter 13 petition. In contrast to the balancing test adopted by the Ninth Circuit, the First Circuit explained that annulment threatens the integrity of the automatic stay itself and should be used in Chapter 13 cases only on compelling facts:

[Section] 362(d) permits bankruptcy courts to lift the automatic stay retroactively and thereby validate actions which otherwise would be void. . . . [A]nnulling the stay erases it retrospectively. . . . [I]f congressional intent is to be honored and the integrity of the automatic stay preserved, retroactive relief should be the long-odds exception, not the general rule. . . . [B]ecause this case involves no sufficiently unusual circumstances, the bankruptcy court abused its discretion in granting retroactive relief from the automatic stay.7

Soares is well reasoned and counsels wisely for the sparing use of stay annulment in Chapter 13 cases. Creditors will find the Ninth Circuit’s balancing test more helpful when annulment is argued as a defense to an action for violation of the automatic stay. If the offending creditor moves for annulment of the stay and is successful, the basis for sanctions or other remedies evaporates because the stay violation no longer exists. The First Circuit has to be correct in Soares that routine use of annulment as a defense to claims of violation of the stay turns the automatic stay on its head and threatens the many salutary effects of the stay in Chapter 13 cases.


There is a growing body of case law, much of it fact-bound, addressing efforts by creditors to erase a violation of the stay by annulment. The stay has been annulled to validate a postpetition foreclosure sale when the debtor could not cure defaults in the mortgage through the Chapter 13 plan.8 In a battle between the purchaser at a tax sale, a foreclosing mortgage holder, and a serially filing Chapter 13 debtor, a bankruptcy court annulled the automatic stay retroactively to permit the purchaser to partially complete the sale before expiration of a limitations period under state law.9 One district court found that entry of judgment by a state court after the Chapter 13 petition violated the automatic stay but should have been validated by annulment because state law issues controlled, the lawsuit had already been tried and the state court order liquidated a complex disputed claim.10 One bankruptcy court found cause to annul the stay to validate a foreclosure sale when the debtor had filed 10 Chapter 13 cases in five years.11 When the debtor could show no prejudice from the setoff of a tax refund against a debt to the Army, the bankruptcy court granted the government nunc pro tunc relief from the stay to validate the setoff.12 On diverse facts and applying various tests, a fair number of reported decisions refuse annulment of the stay to immunize postpetition creditor misconduct.13


1  11 U.S.C. § 362(d) (emphasis added).


2  56 F.3d 71 (9th Cir. 1995).


3  Accord Jones v. Garcia (In re Jones), 53 F.3d 411 (5th Cir. 1995) (Mortgage foreclosure sale three weeks after filing of Chapter 13 case did not violate automatic stay because mortgage holder received no notice of the filing, notice was not recorded in the county property records, and bankruptcy court appropriately annulled the automatic stay retroactively under § 362(d).); Rowe v. Ocwen Fed. Bank & Trust, 220 B.R. 591, 595 (E.D. Tex. 1997) (Bankruptcy court appropriately used its authority under § 362(d) “to lift the automatic stay ab initio. By doing so, the court validated the foreclosure sale of Rowe’s house.” In alternative, because fifth bankruptcy was filed in violation of § 109(g), petition was a “nullity and consequently, the automatic stay never actually came into effect.”); In re Syed, 238 B.R. 126, 132–33 (Bankr. N.D. Ill.) (Annulment of the stay to validate a postpetition foreclosure sale is appropriate when debtor caused single asset real property to be conveyed to herself on the eve of filing bankruptcy, statements and schedules did not inform City of ownership and there is no reasonable prospect for a reorganization because of the dilapidated condition of the building. “It is appropriate to annul the automatic stay retroactively whenever a creditor did not have actual knowledge of the applicability of the automatic stay at the time the creditor violated the stay, and the creditor would be unfairly prejudiced if the debtor could raise the stay as a defense to the action or proceeding in which the creditor seeks to perfect an interest in the premises. . . . In the instant case, the City proceeded to public sale of the premises after due inquiry was made, without actual notice that the § 362(a) automatic stay was applicable to the premises. In addition, it was the Debtor’s own actions of obtaining a quitclaim deed to the premises on the eve of foreclosure sale, her filing in bankruptcy on the same date as the sale, and failing at the time to file schedules listing the premises as an asset of the bankruptcy estate, all of which obstructed or delayed the City’s inquiry into whether or not the automatic stay was applicable to foreclosure sale of the premises.”), motion for reconsideration denied, 238 B.R. 133 (Bankr. N.D. Ill. 1999); In re Hall, 216 B.R. 702 (Bankr. E.D.N.Y. 1998) (Four bankruptcy cases in two years, each filed to frustrate foreclosure, justified annulment of stay retroactively to validate a foreclosure sale that occurred six days after petition.); In re Stork, 212 B.R. 970 (Bankr. N.D. Cal. 1997) (Purchaser at foreclosure sale who recorded foreclosure deed 16 days after Chapter 13 petition is entitled to annulment of automatic stay to validate recording of the deed because purchaser recorded deed before debtor recorded a notice of bankruptcy and § 549(c) protects the purchaser from avoidance.).


4  See National Envtl. Waste Corp. v. City of Riverside (In re National Envtl. Waste Corp.), 129 F.3d 1052, 1055 (9th Cir. 1997), cert. denied, 524 U.S. 952, 118 S. Ct. 2368, 141 L. Ed. 2d 736 (1998).


5  Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 24–26 (B.A.P. 9th Cir. 2003). See also Stinson v. Bi-Rite Restaurant Supply, Inc. (In re Stinson), 295 B.R. 109 (B.A.P. 9th Cir. 2003) (BAP affirms bankruptcy court’s refusal to retroactively annul stay when creditor took and recorded judgment before entry of order dismissing Chapter 13 case.); Aheong v. Mellon Mortgage Co. (In re Aheong), 276 B.R. 233 (B.A.P. 9th Cir. 2002) (Bankruptcy court has jurisdiction to annul stay after dismissal and closing of Chapter 13 case; bankruptcy court appropriately annulled stay in first of three bankruptcy cases to validate foreclosure proceeding. It was not necessary to reopen closed Chapter 13 case to consider creditor’s motion for annulment of automatic stay.).


6  107 F.3d 969 (1st Cir. 1997).


7  107 F.3d at 976–78. Accord Colon v. Rivera (In re Colon), 265 B.R. 639, 643–45 (B.A.P. 1st Cir. 2001) (Bankruptcy court abused its discretion by granting retroactive relief from the stay to former spouse who violated automatic stay by continuing support collection action after notice of Chapter 13 case. “Having concluded that Rivera’s actions violated the automatic stay, the court was obligated to consider Colon’s damages claims. . . . [T]he court instead decided sua sponte that the stay would be modified retroactively to validate Rivera’s otherwise unlawful (and void) post-petition actions . . . . It was a clear abuse of discretion, amounting to a denial of due process, for the bankruptcy court to grant Rivera retroactive relief from stay with no notice to the parties that such a result might be in the offing. . . . [Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969 (1st Cir. 1997)] made clear that ‘retroactive relief should be the long-odds exception’ . . . . Although we do not opine that a less-than-innocent creditor may never qualify for retroactive relief, we have difficulty imagining a case where a creditor who consciously and repeatedly violates the stay over an extended period (like Rivera did) would be entitled to retroactive relief.”); Elbar Inv., Inc. v. Pierce (In re Pierce), 272 B.R. 198, 204–12 (Bankr. S.D. Tex. 2001) (Tax sale moments after Chapter 13 petition was invalid but could be validated by annulment of stay. “The Court did not grant Elbar retroactive relief from stay because the Court did not find that the Debtor filed her case in bad faith . . . . [A] foreclosure or judicial sale that violates the § 362 automatic stay has no legal effect, regardless of whether the parties knew that the statutory stay existed, unless the bankruptcy court retroactively annuls the stay and thereby authorizes (validates) the sale. . . . [R]etroactive annulment of the stay is an extraordinary remedy . . . . [T]he bankruptcy court has declined to exercise its discretion to give Elbar retroactive relief from the automatic stay to validate the Constable’s sale of the Debtor’s home.”); In re Hoskins, 266 B.R. 872 (Bankr. W.D. Mo. 2001) (That the debtor failed to raise the automatic stay as a defense is a “compelling circumstance” justifying retroactive relief from the stay when creditor violated the automatic stay by removing a state court collection action to federal district court.); In re Stockwell, 262 B.R. 275, 280 (Bankr. D. Vt. 2001) (When debtors defaulted in payments to mortgage holder “outside” the plan and did not tell successor mortgage holder about Chapter 13 case until after foreclosure sale, but mortgage holder had “institutional knowledge” of the bankruptcy case, mortgage holder gets stay annulled retroactive to commencement of foreclosure sale but must reinstate six-month redemption period that expired during the Chapter 13 case. “[T]he automatic stay should only be annulled to give effect to actions taken in violation of the stay in limited circumstances. . . . ‘[A]ny equitable exception to the stay should be narrow and only applied in extreme circumstances.’”); In re Williams, 257 B.R. 297 (Bankr. W.D. Mo. 2001) (Based on “exceptional circumstances, the stay is annulled retroactively to validate a postpetition foreclosure sale. Chapter 13 case was dismissed. Debtor moved to vacate dismissal. Mortgage holder did not get notice of motion to vacate dismissal. Bankruptcy court vacated the order of dismissal. Mortgage holder’s counsel did not get order reinstating the case. Foreclosure sale was conducted and when the mess-up was discovered, mortgage holder sought relief from the stay. Bankruptcy court annulled the stay retroactively to validate the foreclosure sale based on findings that the debtor acted in bad faith by failing to make postpetition mortgage payments, the debtor evaded notice of the foreclosure sale, the mortgage holder detrimentally relied on the sale by transferring the property to an innocent third party and the innocent purchaser would be damaged.); In re Murray, 193 B.R. 20, 21–22 (Bankr. E.D. Cal. 1996) (Declines to retroactively annul or grant relief from stay to validate IRS assessment. IRS assessed tax liabilities against a Chapter 13 debtor without obtaining relief from the stay. Debtors objected to proof of claim on ground that service had violated the automatic stay. IRS opposed debtors’ objection by seeking retroactive annulment of stay to validate its assessment. “Acts in violation of the automatic stay are void. Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992). However, the court may grant retroactive relief from the automatic stay ‘for cause.’ . . . [R]etroactively lifting the automatic stay in the instant case would unjustly harm the integrity of the bankruptcy process—because the Service has nonchalantly and continuously acted in violation of the stay. . . . [T]his court observes with concern that the Service has routinely made assessments in violation of the automatic stay despite notice of a taxpayer’s bankruptcy petition. The Service should not be rewarded for its negligent, if not willful, disregard of the Bankruptcy Code. Any harm to the Service from enforcing the stay does not outweigh the harm to the bankruptcy process if the stay were lifted to ratify repeated abuses.”).


8  See In re Christian, 199 B.R. 382, 389 (Bankr. N.D. Ill. 1996) (After reinstatement of dismissed Chapter 13 case, Citibank violated stay by not seeking relief from stay before it procured confirmation of its foreclosure sale in state court. However, because foreclosure sale was completed before reinstatement of the Chapter 13 case, the debtor could not cure defaults with respect to the underlying mortgage, and equity favored annulment of the stay to validate Citibank’s actions. “Citibank should not have proceeded to confirmation of the sale without obtaining relief from the automatic stay imposed by Section 362 of the Code. Prior to the confirmation hearing, Christian had at least a possessory interest in his home, and that interest became property of the estate pursuant to Section 541(a) of the Code. Confirmation of the judicial sale was thus, at the very least, ‘the enforcement against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case,’ an act prohibited by Section 362(a)(2). However, because Christian could not cure the default in his mortgage or modify Citibank’s rights through his Chapter 13 plan, Citibank would have had cause for relief from the automatic stay, pursuant to Section 362(d) of the Code. . . . Annulment of the stay is therefore appropriate.”), rev’d, 214 B.R. 352, 356 (N.D. Ill. 1997) (“Because I have held that Section 1322(c)(1) permits a debtor to cure a mortgage default until the foreclosure sale is confirmed, the [bankruptcy] court’s decision to annul must be reversed. I am remanding the case . . . for a new determination whether the balance of equities favors granting the annulment of the stay or the imposition of sanctions for violating it.”), after remand, 231 B.R. 288 (N.D. Ill. 1999) (Bankruptcy court again retroactively annulled the automatic stay; on further appeal, district court affirms retroactive annulment based on findings that the debtor failed to take any action after reinstatement of the Chapter 13 plan and that Citibank detrimentally relied on that inaction to complete the foreclosure sale, make improvements to the property, and resell the property to a third party.). Accord In re Allen, 300 B.R. 105 (Bankr. D.D.C.) (Stay is annulled to validate postpetition foreclosure sale when debtor acquired an interest in real property from her son three days before petition in violation of due on transfer clause, debtor could not cure default through the plan and Chapter 13 filing was an abuse of bankruptcy process.), stay denied pending appeal, 300 B.R. 127 (Bankr. D.D.C. 2003); In re Jay, No. 02-21010, 2002 WL 31941459, at *5–*6 (Bankr. D. Idaho Dec. 31, 2002) (unpublished) (Stay is annulled to validate postpetition recording of trustee’s deed when foreclosure sale was completed under Idaho law the day before petition. “Annulment (sometimes called ‘retroactive termination’) would render the stay terminated as of the moment it arose at the petition’s filing, and the availability of this potential remedy in proper circumstances has been judicially recognized. . . . Debtors’ interest in the residence was effectively and completely foreclosed . . . . They have no redemptive or similar right. . . . Neither possession nor the limited interests of record provide Debtors with sufficient interest to defeat the purchaser’s claim or its entitlement to stay relief. . . . The stay will be annulled, thus validating the [postpetition] recording of the trustee’s deed.”); In re Easley, Nos. 01-10151DWS, 00-33236DWS, 2001 WL 755460, at *3 (Bankr. E.D. Pa. June 26, 2001) (unpublished) (Appropriate to annul the stay retroactively to debtor’s prior Chapter 13 case when mortgage holder conducted a foreclosure sale without notice or knowledge of the prior case and did not know of the second filing when the sheriff’s deed was delivered. “I reject the position that stay annulment is only warranted where the movant has proven the debtor’s bad faith. Instead I believe that the other most relevant factor is whether there is any legitimate purpose to be realized by enforcing the stay and not validating the actions taken without notice of bankruptcy. . . . [Debtor’s counsel] readily admitted that Debtor was unable to reorganize and had no basis to defend the Relief Motion in this case. . . . The consequence therefore of denying the relief would be to compel the Bank to needlessly repeat the foreclosure action.”).


9  In re Halas, 194 B.R. 605 (Bankr. N.D. Ill. 1996). Accord In re Bates, 270 B.R. 455, 471 (Bankr. N.D. Ill. 2001) (Appearance in state court and issuance of tax deed after filing of Chapter 13 petition violated stay, but retroactive annulment is appropriate. “The period for redemption expired before the present case was filed, and thus, there was no claim for property taxes that could be treated in this case. BMC, had it known of the bankruptcy filing at the time, could have obtained relief from the automatic stay . . . . To undo the tax deed now would certainly be unfairly prejudicial.”); In re Samaniego, 224 B.R. 154, 163–65 (Bankr. E.D. Wash. 1998) (Recording of tax sale deeds two days after filing of Chapter 13 case violated stay and is void; however, tax sale two weeks before filing stripped debtors of all equitable interests in property, thus it was appropriate to annul the stay retroactive to the date of the petition to validate recording of deeds. Real property sold at a tax sale on December 12, 1997. Tax deeds were executed but not recorded until December 26, 1997. On December 24, 1997, the debtors filed a Chapter 13 petition. Tax sales were regularly conducted under state law, and debtors could not avoid the purchasers’ interests under § 544, 548, or 549. Citing Schwartz v. United States (In re In re Schwartz), 954 F.2d 569 (9th Cir. 1992), “the delivery and recording of the Treasurer’s deeds were void and of no force and effect.” However, “the debtors have no viable rights remaining . . . . The debtors hold bare legal title to the lots sold at the tax sale. They retain no interest in this property of benefit to themselves or their estate. . . . [W]here the purchasers hold equitable title and the debtors retain only bare legal title, cause exists to allow the equitable owner to obtain the legal title. . . . The automatic stay will be annulled as to delivery and recording of the tax deeds.”).


10  Shaw v. Ehrlich, 294 B.R. 260 (W.D. Va. 2003).


11  In re Webb, 294 B.R. 850 (Bankr. E.D. Ark. 2003).


12  In re Shortt, 277 B.R. 683 (Bankr. N.D. Tex. 2002).


13  See, e.g., Stinson v. Bi-Rite Restaurant Supply, Inc. (In re Stinson), 295 B.R. 109, 122 (B.A.P. 9th Cir. 2003) (BAP affirms bankruptcy court’s refusal to retroactively annul stay when creditor took and recorded judgment before entry of order dismissing Chapter 13 case.); In re Giddens, 298 B.R. 329 (Bankr. N.D. Ill. 2003) (In sixth Chapter 13 case, bankruptcy court declines to annul the automatic stay retroactively to validate a tax deed issued in violation of the stay in the first case.); Ford v. Loftin (In re Ford), 296 B.R. 537 (Bankr. N.D. Ga. 2003) (Annulment of stay to validate foreclosure sale is not appropriate because there is equity in the residence, no evidence of bad faith and no evidence that the debtor cannot propose a confirmable plan.); In re Cooper, 273 B.R. 297 (Bankr. D.D.C. 2002) (Mortgage holder is not entitled to annulment of automatic stay to validate postpetition resale of property when purchaser at prepetition nonjudicial foreclosure sale defaulted and trustees under deed of trust elected to resell the property.).