§ 67.6     Annulment of Codebtor Stay
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 67.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

As detailed elsewhere,1 § 362(d) provides for “terminating, annulling, modifying, or conditioning” the automatic stay. There is no comparable statutory provision for annulment of the § 1301 codebtor stay; instead, courts typically focus on whether there are grounds to grant relief from the codebtor stay under § 1301(c).2 Annulment 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 may cleanse actions by creditors that would otherwise be violations of the stay.

[2]

A few courts have concluded that annulment of the codebtor stay is appropriate under “limited circumstances; for example, annulment may be allowed in a unique situation to balance the equities between the parties.”3 The “balancing of equities” test often applied to determine whether to annul the § 362 stay4 has been applied by some courts in the context of annulling the codebtor stay. The district court in Morris v. Zabu Holding Co. (In re Morris)5 adopted this rationale:

Although the co-debtor stay and the debtor stay arise from separate provisions under the Code, the Court finds the case law governing the automatic stay under § 362 instructive as § 1301 was enacted, not to protect co-debtors, but to prevent creditors from circumventing the § 362 automatic stay by putting indirect pressure on the debtor through her co-debtors.6
[3]

The bankruptcy court in Morris had granted relief from the automatic stay to permit foreclosure, but the stay relief motion did not mention the debtor’s spouse, who held a tenancy by the entireties interest. The spouse had signed the mortgage but was not an obligor on the note. The debtor did not respond to the stay relief motion. After foreclosure and conveyance to a third party, the debtor argued that the foreclosure violated the § 1301 codebtor stay. The bankruptcy court weighed the following factors: the creditor’s knowledge that there was a cosigner on the mortgage; the debtor’s knowledge of the foreclosure action without resisting stay relief; the debtor’s four-month delay in seeking to invalidate the foreclosure; and the innocent third parties after foreclosure. Balancing the equities, the bankruptcy court found that it would have lifted the codebtor stay had it been requested to do so and that annulment of the codebtor stay was appropriate to validate the foreclosure sale.7 In affirming, the district court found no abuse of discretion.8

[4]

While the circumstances for annulment may be limited, these cases illustrate that, under appropriate facts, authority exists to balance the equities and annul the codebtor stay.


 

1  11 U.S.C. § 362(d) (emphasis added), discussed in § 82.2 [ Annulment of the Stay ] § 64.4  Annulment of the Stay.

 

2  See § 67.1  Codebtor Received the Consideration§ 67.2  Plan Does Not Pay Debt in Full§ 67.3  Postpetition Interest, Attorneys’ Fees, Costs and Other Charges§ 67.4  Can Creditor Collect Original Contract Payment from Codebtor? and § 67.5  Irreparable Harm.

 

3  Harris v. Margaretten (In re Harris), 203 B.R. 46, 50 (Bankr. E.D. Va. 1994), aff’d, 100 F.3d 940 (4th Cir. 1996). Accord In re Allen, 300 B.R. 105 (Bankr. D.D.C. 2003) (annulment of codebtor stay granted when creditor was unaware of bankruptcy filing and debtor acted abusively to stop foreclosure).

 

4  See § 82.2 [ Annulment of the Stay ] § 64.4  Annulment of the Stay.

 

5  385 B.R. 823 (E.D. Va. 2008), aff’g In re Morris, 365 B.R. 613 (Bankr. E.D. Va. 2007).

 

6  385 B.R. at 830 n.8.

 

7  In re Morris, 365 B.R. 613 (Bankr. E.D. Va. 2007).

 

8  Morris v. Zabu Holding Co. (In re Morris), 385 B.R. 823, 831 (E.D. Va. 2008) (“The court, however, notes that it may be appropriate for the bankruptcy court to impose damages against any party that created, encouraged, or actively participated in violations of the co-debtor stay, even though those violations have been subsequently ratified by annulment of the co-debtor stay.”).