§ 63.1 — Strategic Considerations
Revised: February 4, 2004
Relief from the automatic stay is available under § 362(d):
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization; or . . .1
Preconfirmation relief from the stay is expensive, and most of the time creditors and debtors are better off negotiating adequate protection payments2 or an acceptable treatment through the plan. Quickly confirming a plan is the debtor’s best strategy for avoiding preconfirmation stay relief litigation.
In jurisdictions that delay the hearing on confirmation,3 there are incentives for creditors with secured claims to request preconfirmation relief from the stay. The Chapter 13 debtor remains in possession of property subject to liens,4 and a preconfirmation request for relief from the stay is a technique for the secured claim holder to force the debtor to provide adequate protection of its collateral pending confirmation. A preconfirmation request for relief from the stay combined with a demand for adequate protection may result in preconfirmation payments to the trustee or directly to a creditor as the cost of delay.5 If the debtor is unable to provide adequate protection, relief from the stay before confirmation will be appropriate.6
In jurisdictions where the confirmation hearing is immediate to the meeting of creditors, a secured claim holder’s request for relief from the stay is unlikely to produce adequate protection payments more quickly than would the ordinary process of confirmation. The creditor is entitled to at least a preliminary hearing within 30 days of the filing of a request for relief from the stay,7 but the likelihood of success is small when the debtor is able to promptly propose and confirm a plan that satisfies the secured claim holder’s rights under § 1325. A confirmed plan is almost always fatal to a secured claim holder’s preconfirmation request for relief from the stay.8
Sometimes the filing of a preconfirmation request for relief from the stay is a strategy to educate the court about a problem in the case. For example, good-faith attacks at the threshold of a Chapter 13 case are often delivered in the form of a motion to dismiss combined with a request for relief from the stay.9 When the debtor is a repeat filer, the frustrated secured claim holder that has been repeatedly derailed on the eve of foreclosure will often file a preconfirmation request for relief from the stay. The debtor’s bad faith and the claim of abuse of the bankruptcy process can be raised as cause for relief from the stay, which can be combined with a motion to dismiss or convert.10
Without regard to the speed at which Chapter 13 cases move in a particular jurisdiction, the enactment of 11 U.S.C. § 109(g) in 1984 (previously codified as 11 U.S.C. § 109(f)) has encouraged the strategic filing of preconfirmation requests for relief from the stay. Under 11 U.S.C. § 109(g)(2), an individual debtor is ineligible to refile a bankruptcy case within 180 days of the voluntary dismissal of a prior case if the prior case was dismissed “following the filing of a request for relief from the automatic stay.”11 A preconfirmation request for relief from the stay invokes the § 109(g)(2) bar in the event the debtor voluntarily dismisses the case. The § 109(g)(2) bar applies even if the debtor defeats the creditor’s request for relief from the stay.12
Moving for stay relief in every Chapter 13 case is discouraged by the speed with which confirmation is reached in many jurisdictions and by the fact that the stakes rarely justify the expense. But it is appropriate to seek preconfirmation relief from the stay when the debtor is freeloading—delaying confirmation and using a creditor’s collateral without making adequate protection payments. With the enactment of 11 U.S.C. § 1326(a), which requires debtors to commence making the payments proposed by a plan within 30 days after the plan is filed,13 the usual remedy for freeloading is a motion to dismiss under 11 U.S.C. § 1307(c)(4).14 A request for relief from the stay has the advantage of invoking the 180-day bar to refiling in § 109(g)(2) if the debtor tries to avoid responsibility by voluntarily dismissing the case. One court granted relief from the stay to all creditors and denied the trustee’s motion to dismiss when the debtor failed to make payments, trapping the debtor in the Chapter 13 case and forcing the debtor to face jeopardy under § 109(g)(2) if the debtor voluntarily dismissed.15
The Bankruptcy Reform Act of 1994 may create new strategic considerations with respect to the automatic stay in a narrow class of Chapter 13 cases involving “single asset real estate”—“real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto having aggregate noncontingent, liquidated secured debts in an amount no more than $4,000,000.”16 With respect to single asset real estate, the bankruptcy court “shall grant relief from the stay” to any creditor with a claim secured by the property
unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period)—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien), which payments are in an amount equal to interest at a current fair market rate on the value of the creditor’s interest in the real estate.17
With increases in the eligibility limits,18 Chapter 13 debtors will own rental property that fits the definition of single asset real estate. After October 22, 1994, a creditor with a claim secured by single asset real estate is entitled to relief from the stay not later than 90 days after the filing unless the debtor has filed a plan that has a reasonable possibility of being confirmed within a reasonable time or the debtor has commenced monthly payments at least equal to the current fair market interest on the value of the creditor’s interest in the real estate.19
Arguably, the phrase “plan of reorganization” in new § 362(d)(3) indicates that Congress had Chapter 11, not Chapter 13, in mind when it added single asset real estate to the Code. However, the use of the word reorganization in § 362(d)(2) has not stopped courts from applying that stay relief provision in Chapter 13 cases,20 and there is nothing else in the new ground for relief from the stay with respect to single asset real estate to exclude Chapter 13 cases. Because Chapter 13 debtors must file a plan with the petition, or within 15 days of the petition,21 and because many Chapter 13 plans reach confirmation within 90 days of filing of the case,22 it is unlikely that single asset real estate will generate significant stay relief problems in Chapter 13 cases.
1 11 U.S.C. § 362(d)(1), (d)(2). Section 362(d)(3) is discussed below in this section.
2 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation and 67.6 [ Negotiating for a Secured Claim Holder ] § 57.9 Negotiating for a Secured Claim Holder.
3 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
4 See § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1 Debtor Has Exclusive Possession and Control of Estate Property.
5 See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
6 See § 81.1 [ Lack of Adequate Protection ] § 64.1 Lack of Adequate Protection.
7 11 U.S.C. § 362(e). In cases filed after October 22, 1994, § 101 of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (1994), amended § 362(e) to require that if a preliminary stay relief hearing is held, a final hearing must be “concluded not later than 30 days after the conclusion of such preliminary hearing, unless the 30-day period is extended with the consent of the parties in interest or for a specific time which the court finds is required by compelling circumstances.” See § 80.1 [ Timing, Procedure and Form ] § 63.2 Timing, Procedure and Form.
8 See § 242.1 [ Confirmation as a Defense to Relief from the Stay ] § 124.2 Confirmation as a Defense to Relief from the Stay.
10 See § 334.1 [ Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings ] § 152.4 Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings. See, e.g., 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 relief from the stay retroactively to validate a foreclosure sale that occurred after the petition.); In re Green, 214 B.R. 503 (Bankr. N.D. Ala. 1997) (Cause for relief from the stay that debtor filed seven bankruptcy cases between 1990 and 1997 to prevent collection of child support, support is the only debt listed and debtor’s conduct is “contemptible.”).
11 See §§ 21.1 [ 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General ] § 25.1 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General and 23.1 [ 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay ] § 25.3 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay.
12 See § 23.1 [ 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay ] § 25.3 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay.
14 See §§ 43.4 [ Consequences of Failure to Commence Payments ] § 44.4 Consequences of Failure to Commence Payments and 67.5 [ Policing Debtor’s Compliance with Preconfirmation Duties ] § 57.8 Policing Debtor’s Compliance with Preconfirmation Duties.
15 In re McDaniels, 213 B.R. 197, 201 (Bankr. M.D. Ga. 1997) (On trustee’s motion to dismiss for failure to make payments, court sua sponte grants relief from the stay to all creditors but denies the motion to dismiss. Mortgage holder was granted relief from the stay before the trustee moved to dismiss. Court observes that if the trustee’s motion to dismiss is granted, the mortgage company may be precluded from completing its foreclosure sale before the debtor refiles. Debtor has no intention of making any further payments under the plan, and the court grants relief from the stay to all creditors as an equitable remedy that leaves the case pending but permits the mortgage holder to foreclose. Debtors have “a complete remedy in section 1307(b) wherein Debtor has the absolute right to cause the dismissal of the case. The fact that section 109(g)(2) may attach consequences to the exercise of that remedy which could limit the refiling of a new case does not present to the Court any imperative to construct some other course for Debtors to be dismissed from this case without such consequences.”).
16 11 U.S.C. § 101(51B), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 218, 108 Stat. 4106 (1994).
17 11 U.S.C. § 362(d)(3), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 218, 108 Stat. 4106 (1994).
18 See § 11.1 [ Dollar Amounts ] § 14.1 Dollar Amounts.
19 See, e.g., In re Syed, 238 B.R. 126, 132 (Bankr. N.D. Ill.) (Cause for annulment of automatic stay to validate postpetition foreclosure sale that debtor caused wholly owned corporation to deed single asset real estate to herself to stop foreclosure sale and debtor was without prospects of rehabilitation. Debtor took title to a dilapidated 10-story, 77 unit residential rental building on the eve of a foreclosure sale by the City of Chicago. “The premises is single asset real estate under 11 U.S.C. § 362(d)(3) and as defined by 11 U.S.C. § 101(51B). The Debtor has not filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time. Nor has Debtor commenced payments to each creditor whose claims are secured by the premises, as required by 11 U.S.C. § 362(d)(3)(A) and (B).”), on reconsideration, 238 B.R. 133 (Bankr. N.D. Ill. 1999).
20 See § 83.1 [ Application of § 362(d)(2) in Chapter 13 Cases ] § 64.5 Application of § 362(d)(2) in Chapter 13 Cases.
21 See §§ 36.2 [ Plan ] § 36.24 Plan, 38.2 [ Time for Filing Schedules, Statement of Financial Affairs, Plan and Other Documents ] § 37.4 Time for Filing Schedules, Statement of Financial Affairs, Plan and Other Documents and 55.1 [ Debtor Must File a Plan ] § 51.2 Debtor Must File a Plan.
22 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.