March 18, 2019

March 15, 2019

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Abandonment Does Not Lift Stay Re: Bankruptcy

In a well-reasoned plain language opinion that leads to a pretty silly result, the Ninth Circuit Bankruptcy Appellate Panel held that the abandonment of fully-encumbered property by the trustee in a corporate chapter 7 case does not terminate the automatic stay because the property reverts to the corporate debtor and thus remains protected by the section 362(a)(5) stay of actions against “property of the debtor.”  Gasprom, Inc. v. Fateh (In re Gasprom, Inc.), No. CC-12-1567-KuKiTa, __ WL __ (9th Cir. B.A.P. Oct. 28, 2013).

While strong policy reasons support this result in the case of a human debtor, it is hard to justify in the corporate liquidation context. Indeed, in this action the formal closure of the chapter 7 case a few weeks after the abandonment terminated the stay, but unfortunately not before the secured creditor held its foreclosure sale.  Faced with a motion by the corporate debtor to reopen the case, void the sale, and impose sanctions on the secured creditor, the bankruptcy judge held that the stay had terminated and, in the alternative,sua sponte retroactively annulled the stay in an effort to protect the sale.  The BAP reversed on both points, rejecting the retroactive annulment on the grounds that the judge’s failure to develop a record meant that the court had not considered the factors necessary to exercise the discretion required to annul the stay.  While the lesson from this case is that a secured creditor must seek an order lifting the stay when it persuades a trustee or a debtor-in-possession to abandon collateral, it is unfortunate such a step is necessary in a corporate case.

This outcome highlights my frustration with so many “plain language” cases that parrot the Supreme Court’s rationale for not adopting uncontroversial minor statutory fixes that will make the bankruptcy system function better – the argument that Congress can amend the statute if it disagrees with the plain language interpretation.  It is hard to see why that argument doesn’t cut both ways.  Why not fix the statute to create a sensible “corporate debtor” exception and let Congress legislatively reverse that result if anyone cares?  Indeed a judicial fix approach seems to better reflect the respective competence of the legislative and judicial branches.  The legislature should not be expected to anticipate all of the possible minor factual variations that may arise or to draft perfect but infinitely detailed language to fit its legislative goals.  And, when a problem does arise, is the cumbersome legislative process really a more appropriate way to address minor details that will have no great impact on the national welfare?

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Businesses faced with changes in the competitive global economy and within their own industries increasingly turn to financial restructuring as an option to reorganize and de-leverage core businesses, shed excess assets for underperforming divisions, and reformulate long-term objectives. Greenberg Traurig's internationally recognized Restructuring & Bankruptcy Practice has broad advisory and litigation experience with the often-complex issues that arise in reorganizations, restructurings, workouts, liquidations, and distressed acquisitions and sales, in both domestic...