Bankruptcy Nuts ‘n’ Bolts

June 11, 2015

Table of Contents

Chapter 4 1:45-2:45pm Representing Creditors in Chapter 7 and 13: Getting Relief from Stay, Sales Free & Clear of Liens, Cramdown and Lienstripping of Secured Claims Thomas S. Linde, Schweet Linde & Coulson, PLLC

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1. Article – Representing Creditors in Chapter 7 and Chapter 13

BANKRUPTCY NUTS ‘n’ BOLTS: REPRESENTING CREDITORS IN CHAPTER 7 and CHAPTER 13 THOMAS S. LINDE SCHWEET LINDE & COULSON, PLLC 575 S. Michigan Street Seattle, Washington 98108 TELEPHONE: (206) 381-0125 FACSIMILE: (206) 381-0101 E-Mail Address: tomlinde@schweetlaw.com COPYRIGHT: May, 2015

THOMAS S. LINDE is a member of Schweet Linde & Coulson, PLLC. He concentrates his practice in the areas of real estate law and creditors' rights and remedies, including real estate transactions and financing, judicial and non-judicial real property foreclosures, real estate contract forfeitures, evictions, and the representation of creditors in bankruptcy proceedings. Mr. Linde received his B.A. degree, magna cum laude, from the University of Washington and his J.D. degree, with honors, from the University of Washington School of Law. He is a frequent speaker at continuing legal education seminars relating to creditors' rights and remedies. Mr. Linde is a member of the King County, Washington State and American Bar Associations and the American Bankruptcy Institute. He is a past chair of the CLE Committee for the Washington State Bar Association, a past chair of the Bankruptcy Section for the King County Bar Association, a current executive board member of the Creditor-Debtor Section of the Washington State Bar Association, and a current co-chair of the Bankruptcy Section of the Federal Bar Association for the Western District of Washington.

I. OVERVIEW OF BANKRUPTCY CHAPTERS There are three principal chapters for bankruptcy all of which can affect the interests of creditors: Chapter 7, Chapter 11, and Chapter 13. In addition, there is Chapter 12 which applies to family farms or fisherman. The provisions of Chapter 12 will not be discussed specifically in these materials though many of the same basic concepts discussed herein are applicable in a Chapter 12 proceeding. In all chapters, the filing of a bankruptcy petition creates a bankruptcy estate which is broadly defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). In a Chapter 13 case, the estate also includes all property the debtor acquires after commencement but before the case is closed, dismissed or converted. 11 U.S.C. § 1306(a)(1). If included in a bankruptcy estate, the disposition of the estate’s interests in property (wherever located) is subject to the jurisdiction of the bankruptcy court (which is not limited by state boundaries) and the requirements of the Bankruptcy Code. A. CHAPTER 7. A Chapter 7 is a liquidation proceeding wherein a trustee is appointed by the bankruptcy court to determine if there are sufficient non exempt assets available to administer and liquidate for the benefit of creditors. If non-exempt assets do exist, the trustee will administer and liquidate them and distribute the proceeds to creditors in accordance with the distribution and priority requirements of the Bankruptcy Code. 11 U.S.C. §726 and 11 U.S.C. § 507. B. CHAPTER 11. A Chapter 11 is a reorganization proceeding employed mostly by business debtors and allows the debtor to retain control of its assets subject to the requirements of the Bankruptcy Code while the debtor proposes a plan of reorganization to address and restructure its debts. The specific requirements and procedures for accomplishing a reorganization are governed by the provisions of Chapter 11 of the Bankruptcy Code found at 11 U.S.C. § 1101 et seq. C. CHAPTER 13. A Chapter 13 is a reorganization proceeding for “individual” debtors with regular income who are underneath certain debt limits and generally does not involve a business, unless it is a sole proprietorship. Like Chapter 11, Chapter 13 also allows the individual to retain control of his or her assets subject to the requirements of the Bankruptcy Code while the debtor proposes a plan of reorganization to address and restructure his or her debts. The specific requirements and procedures for accomplishing an individual reorganization are governed by the provisions of Chapter 13 found at 11 U.S.C. § 1301 et seq.

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Under The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter referred to as the “Act”), an individual debtor’s qualification for Chapter 7 will now be determined by applying a “means test” which will require that certain debtors whose income exceeds their state’s median income to file Chapter 13. The Act became effective in all cases filed after October 17, 2005. II. SALES OF PROPERTY INCLUDED IN A BANKRUPTCY ESTATE Under certain circumstances, the Bankruptcy Code gives the debtor and/or the trustee the ability to sell (after notice and hearing to all creditors and affected parties) real property of the estate “free and clear of any interest in such property”. 11 U.S.C. § 363(f). This is an extremely potent tool (to clear title) but can only be exercised if certain facts can be established. Moreover, if the sale is approved by the bankruptcy court, the adequate protection requirements of the Bankruptcy Code require that the liens, encumbrances and other interests which are removed from the property sold attach to the sale proceeds in the same order of priority. Under 11 U.S.C. § 363(f), property of a bankruptcy estate may be sold free and clear of liens of an entity other than the estate only if:

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than

the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

11 U.S.C. Section 363(f).

A sale free and clear of liens can be approved if applicable state law where the property is located would allow such a sale. 11 U.S.C. § 363(f)(1); In re Rose, 113 B.R. 534 (W.D. Mo. 1990) (interpreting Missouri law). In Washington, property can be sold free and clear of liens under state law in the context of a state court receivership proceeding. RCW 7.60.260. A sale can also be approved free and clear of liens if the holders of the liens consent. 11 U.S.C. § 363(f)(2). The failure to object to the bankruptcy court in response to receipt of notice of a motion to sell free and clear of liens can be implied as consent. In re

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Elliot, 94 B.R. 343 (Bankr. E.D. Pa. 1988).

Generally, sales free and clear of liens cannot be approved unless there are sufficient proceeds from the sale to payoff the liens in full and produce some equity for the benefit of the bankruptcy estate. 11 U.S.C. § 363(f)(3); See In re Riverside Investment Partnership, 674 F.2d 634, 640 (7th Cir. 1982); In re Stroud Wholesale, Inc.. 47 B.R. 99 (E.D.N.C. 1985). As the Seventh Circuit stated in In re Riverside Investment Partnership:

As a general rule, the bankruptcy court should not order property sold "free and clear of" liens unless the court is satisfied that the sale proceeds will fully compensate secured lienholders and produce some equity for the benefit of the bankrupt's estate. See Freeman Furniture Factories, Inc. v. Bowlds, 136 F.2d 136, 140 (6th Cir. 1943); Hoehn v. McIntosh, 110 F.2d 199, 202 (6th Cir. 1940); In re Unikraft Homes of Virginia, Inc. 370 F.Supp. 667, 670-71 (W.D.Va. 1974); In re Bernhard Altmann International Corp., 226 F.Supp. 201, 205-06 S.D.N.Y. 1963); Cf. Standard Brass Corp. v. Farmers National Bank, 388 F.2d 86, 89 (7th Cir. 1967) (trustees abused discretion by selling property free of lien when sale returned no equity to bankrupt's estate).

674 F.2d at 640. There is a split of authority on this issue however, with some courts holding that the term “value of all liens” in 11 U.S.C. Section 363(f)(3) means the actual economic value of the lien and thus if it can be shown that an objecting creditor’s lien has no value, the property can be sold free and clear of the lien for a price which will not pay the lien in full. See, In re Beker Industries Corp., 63 B.R. 474 (Bankr. S.D.N.Y. 1986). For a good discussion of the split of authority on this issue see the decisions in In re WDH Howell, LLC, 298 B.R. 527 (D.N.J. 2003); In re Terrace Chalet Apartments, 159 B.R. 821 (N.D. Ill. 1993). Recently, however, the Ninth Circuit Bankruptcy Appellate Panel adopted the position articulated by the 7th Circuit in Riverside Investment Partnership by analyzing the language of 11 U.S.C. § 363(f)(3) and concluding:

But another reason, rooted in the text of the paragraph, exists to reject such an expansive reading. Paragraph (3) permits the sale free and clear only when “the price at which such property is to be sold is greater than the aggregate value of all liens....” 11 U.S.C. § 363(f)(3) (emphasis added). If, as DB and the Trustee assert, “aggregate value of all liens” means the aggregate amount of all allowed secured claims as used in § 506(a), then the paragraph could never be used to authorize a sale free and clear in circumstances like those present here; that is, when the claims exceed the value of the collateral that secures them. In any case in which the value of the property being sold is less than the total amount of claims held by secured creditors, the total of all allowed secured claims will equal, not exceed, the sales

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price, and the statute requires the price to be “greater than” the “value of all liens.” See, e.g., In re Gen. Bearing Corp., 136 B.R. 361, 366 (Bankr.S.D.N.Y.1992).

As a result, we join those courts cited above that hold that § 363(f)(3) does not authorize the sale free and clear of a lienholder's interest if the price of the estate property is equal to or less than the aggregate amount of all claims held by creditors who hold a lien or security interest in the property being sold.

In re PW, LLC, 391 B.R. 25, 40 (Bankr. 9th Cir. 2008)(emphasis added)(hereinafter referred to as “Clear Channel”). Real property can also be sold free and clear of an interest in “bona fide” dispute. 11 U.S.C. § 363(f)(4). This is a factual determination but there must be an objective basis for the dispute.

Finally, real property can be sold free and clear of an interest if the holder of the interest could be compelled to accept a money satisfaction for the lien or interest. Not all interests in property can be replaced by money however. For example, property may not be sold free of use covenants which the holder can enforce with equitable remedies. Gouveia v. Tasbir, 37 F.3d 295 (7th Cir. 1994). The Ninth Circuit Bankruptcy Appellate Panel addressed this provision recently in Clear Channel stating:

Paragraph (5) requires that there be, or that there be the possibility of, some

proceeding, either at law or at equity, in which the nondebtor could be forced to accept money in satisfaction of its interest. [Footnote omitted] The bankruptcy court reasoned that there was no need to prove the existence or possibility of a qualifying legal or equitable proceeding when the interest at issue was a lien because all liens, by definition, are capable of being satisfied by money. [Footnote omitted]

The language of § 363(f)(5) indicates that compelling a nondebtor to accept a

monetary satisfaction cannot be the sole focus of the inquiry under that paragraph. The statute additionally requires that “such entity could be compelled, in a legal or equitable proceeding, to accept” such a monetary satisfaction. 11 U.S.C. § 363(f)(5) (emphasis added). The question is thus whether there is an available type or form of legal or equitable proceeding in which a court could compel Clear Channel to release its lien for payment of an amount that was less than full value of Clear Channel's claim. Neither the Trustee nor DB has directed us to any such proceeding under nonbankruptcy law, and the bankruptcy court made no such finding.

The Trustee points out that courts have found that cramdown under § 1129(b)(2) is

a qualifying legal or equitable proceeding.[footnote omitted] See, e.g., In re Gulf States Steel, 285 B.R. at 508; In re Grand Slam USA, Inc., 178 B.R. 460, 462 (E.D.Mich.1995); In re Healthco, 174 B.R. at 176; In re Terrace Chalet Apts., 159 B.R. at 829.

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We disagree with the reasoning of these courts. As a leading treatise recognizes, use of the cramdown mechanism to allow a sale free and clear under § 363(f)(5) uses circular reasoning-it sanctions the effect of cramdown without requiring any of § 1129(b)'s substantive and procedural protections. 3 Collier on Bankruptcy, supra, at ¶ 363.06[6]. If the proceeding authorizing the satisfaction was found elsewhere in the Bankruptcy Code, then an estate would not need § 363(f)(5) at all; it could simply use the other Code provision.

In addition, this reasoning undercuts the required showing of a separate proceeding.

For example, it is correct that § 1129(b)(2) permits a cramdown of a lien to the value of the collateral, but it does so only in the context of plan confirmation. To isolate and separate the cramdown from the checks and balances inherent in the plan process undermines the entire confirmation process, and courts have been leery of using § 363(b) to gut plan confirmation or render it superfluous.

We thus hold that Congress did not intend under § 363(f)(5) that nonconsensual

confirmation be a type of legal or equitable proceeding to which that paragraph refers. As a result, the availability of cramdown under § 1129(b)(2) is not a legal or equitable proceeding to which § 363(f)(5) is applicable.

391 B.R. at 45-46 (emphasis added).

However, at least one bankruptcy judge in Washington has distinquished Clear Channel on the basis that under Washington state law there are legal or equitable foreclosure proceedings under which a subordinate secured creditor could be compelled to accept less than the full amount of its debt in exchange for a release of its lien. In re Jolan, 403 B.R. 866 (Bankr. W.D. WA. 2009). As Judge Brandt noted in his decision:

As in Clear Channel, subsection (f)(5) is the only subsection of § 363 which might here permit the trustee's proposed auction if the proceeds do not cover the debts secured by the collateral sold. But there are legal and equitable proceedings in Washington in which a junior lienholder could be compelled to accept a money satisfaction: a senior secured party's disposition of collateral after under the default remedies provided in part VI of Article 9, Secured Transactions, of Washington's Uniform Commercial Code, RCW 62A.9A.

And a receiver may sell free and clear of liens under RCW 7.60.260, with the liens attaching to the proceeds. Since a receivership can be commenced by parties having interests in less than all of a debtor's property, and the receivership estate may be an entire business with numerous properties, RCW 7.60.025, the receiver may sell free and

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clear of even the interests of first lienholders. Other possibilities include:

• the liquidation of a probate estate, RCW 11.56.020;

• a personal property tax sale, RCW 84.56.070; and

• a federal tax lien sale, 26 U.S.C. §§ 6335, 6339(c), and 6342(c).

And were the trustee proposing to sell real property, judicial and nonjudicial foreclosures in Washington operate to clear junior lienholders' interests, and their liens attach to proceeds in excess of the costs of sale and the obligation or judgment foreclosed. RCW 61.12 and 61.24. Likewise, a real property tax sale. See RCW 84.64.080.

Because there are in Washington legal and equitable proceedings by which lienholders may be compelled to accept money satisfactions, § 363(f)(5) here permits a sale free and clear of liens, with the liens attaching to the proceeds, notwithstanding that those proceeds may be insufficient to pay all liens.

403 B.R. at 869-870 (emphasis added)(footnotes omitted).

PROCEDURE FOR SALES FREE AND CLEAR OF LIENS Because the sale of real property of a bankruptcy estate is almost always outside the

ordinary course of business of the debtor, it must be done on notice and hearing to all creditors and affected parties. Though the procedure can be altered by local rule and the notice period can be shortened by the court, generally, under Bankruptcy Rule 2002(a)(2), twenty days notice is required for a motion to approve a sale. Notice to all parties affected by the sale is essential or the sale if approved can be set aside. Bankruptcy Rule 6004; In re Ex-CelConcrete Company, Inc., 178 B.R. 198 (Bankr. 9th Cir. 1995). The required contents of the notice for approval of a sale can be found in Bankruptcy Rule 2002 {c}.

11 U.S.C. 363 provides some additional rights to affected interest holders in real property subject to a proposed sale. For example, if an entity with an interest in the property requests it, the bankruptcy court can prohibit or condition a sale as is necessary to provide adequate protection of the entity’s interest. 11 U.S.C. Section 363(e). Next, a lienholder can elect to bid at any sale proposed to be held under this provision of the Bankruptcy Code and can offset the amount of its claim against the purchase price. 11 U.S.C. § 363(k). Also, it is possible that, in addition to the lienholders, independent third parties can bid for the property proposed to be sold with an auction actually occurring in the bankruptcy courtroom under the direction of the bankruptcy judge.

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Finally, under certain circumstances, the bankruptcy court can order property in which the debtor only holds a partial interest sold free and clear of the interests of the other co-owners. 11 U.S.C. § 363(h). To accomplish this however, an adversary proceeding against the co-owners must be commenced. Bankruptcy Rule 7001(3). FINALITY OF SALES FREE AND CLEAR OF LIENS Under 11 U.S.C. Section 363(m), an order approving a sale free and clear of liens is enforceable even if reversed on appeal unless there is an order staying the sale order pending appeal. However, please note that under revised Bankruptcy Rule 6004(g), an order approving a sale free and clear of liens is automatically stayed for 10 days after entry unless the Court orders otherwise. Please note however that the Ninth Circuit Bankruptcy Appellate Panel recently held in In re PW, LLC that though 11 U.S.C § 363(m) applies to a sale authorized under §363(b)it does not apply to prevent the reversal of a bankruptcy court order under §363(f) which also stripped liens. The PW, LLC court stated:

In short, DB knew or should have known all along that lien-stripping might not work. So its assertion that the sale was inseparable from the lien-stripping rings hollow, as does its argument that a stay was required to avoid mootness. See Suter, 504 F.3d at 990 (failure to obtain stay not always fatal to mootness defense). We conclude that, on these facts, lien-stripping under § 363(f)(5) is not protected under § 363(m).[Footnote omitted]

391 B.R. at 37 (emphasis added) Thus, under the PW, LLC ruling, though an approved sale which is not stayed on appeal will be enforced, any provisions in the order stripping liens in the sale order is subject to reversal. The net effect of this decision remains to be seen though currently it will have a severe chilling effect on sales under § 363 given the potential uncertainty which can arise in any sale in which the stripping of a lien is disputed. PRACTICE TIP: If you are seeking bankruptcy court approval of a sale which is going to close shortly, include in your proposed order that the ten day stay imposed by Bankruptcy Rule 6004(g) does not apply. Finally, it is important to stress that proper notice is key in obtaining an order authorizing a sale free and clear of liens. Potentially, if a lienholder whose lien was affected by the sale was not provided sufficient notice of the sale, then said lienholder in theory could attempt to collaterally attack an approved sale under Fed R. Civ. P. 60(b) (which is applicable in bankruptcy cases under Bankruptcy Rule 9024). In re Ex-Cel Concrete Company, 178 B.R. 198 (Bankr. 9th Cir. 1995). Conversely, if a entity with an interest receives proper notice of a motion to sell free and clear and does not timely object, said entity will be bound by the terms of the order approving the sale free and clear of liens and

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estopped from challenging it. In re Matter of Prescott College, 10 B.R. 316 (D. Ariz. 1981). Thus, if a lienholder or other holder of an interest in real property has an objection to a proposed sale “free and clear” of liens, it is essential, that a timely objection be made before the bankruptcy court and established on the record. This lesson was learned the hard way by a ground lessor in a case decided recently by the 7th Circuit in Precision Industries, Inc., v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003). Precision Industries, Inc., was the lessee of certain real property under a long term ground lease with the debtor Qualitech Steel Corporation. In the course of the Chapter 11 proceeding of Qualitech Steel Corporation, the bankruptcy court, after notice and hearing, entered an order allowing the sale of substantially all of Qualitech Steel’s assets free and clear of liens including the real property subject to the ground lease with Precision Industries. Precision Industries received notice of the hearing on the motion to approve the sale and did not object. Subsequently, Precision Industries found itself locked out of the leased property by the new buyer. In the subsequent litigation, the Seventh Circuit concluded as follows:

Thus, section 363(f), as we interpret that provision, permitted the bankruptcy court to allow the sale of Qualitech’s Pittsboro property unencumbered by Precision’s possessory interest as a lessee. Precision neither objected to the sale nor sought the protection that was available under Section 363(e). Its possessory interest was extinquished by the sale.

327 F.3d at 548 (emphasis added). In short, Precision Industries serves to highlight the necessity of filing timely objections to any proposed sale free and clear of liens to obtain the necessary protection from the bankruptcy court of the interest in the real property which is subject to the proposed sale free and clear. Otherwise, the interest could be extinquished by the bankruptcy court’s order without recourse. III. THE AUTOMATIC STAY AND RELIEF FROM THE AUTOMATIC STAY

A. THE AUTOMATIC STAY

One of the principal benefits of filing a bankruptcy petition (in addition to obtaining a discharge) is the automatic stay imposed by 11 U.S.C. § 362(a)(1) and in Chapter 13 proceedings the co-debtor stay imposed by 11 U.S.C. § 1301(a). The policy behind the automatic stay is to provide some relief to the debtor from his or her creditors while the debtor utilizes the provisions of the Bankruptcy Code to either discharge or reorganize his or her debts. The automatic stay becomes effective immediately upon the filing of the bankruptcy petition and its scope is extremely broad prohibiting the

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commencement or continuation of almost any actions against the debtor or the assets of the bankruptcy estate with the limited exception of certain criminal, paternity, domestic support and governmental actions. See 11 U.S.C. § 362(b). In the Ninth Circuit, any action taken in violation of the stay is void, not voidable. In re Schwartz, 954 F.2d 569 (9th. Cir. 1992). For example, a trustee’s sale of real property conducted after the filing of a bankruptcy petition (and even without notice of the bankruptcy filing) is void if an order terminating the automatic stay has not been entered before the trustee’s sale was held. The grounds for lifting the automatic stay can be found in 11 U.S.C. § 362(d) which provides in pertinent part:

On request of a party in interest and after notice and a hearing, the court shall grant relief from 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 is

such property; and (B) such property is not necessary to an effective reorganization; 11 U.S.C. § 362(d). “Cause” is not defined in the Bankruptcy Code and has been interpreted by case law to include many different factual circumstances. It is determined on a case-by-case basis. In re Castle Rock Properties, 781 F.2d 159 (9th. Cir. 1986). One aspect of cause is bad faith under which the court under a “totality of the circumstances” test will determine if the debtor is proceeding or commenced the bankruptcy case with the requisite good faith imposed upon debtors by the Bankruptcy Code. In re Arnold, 806 F.2d 937, (9th Cir. 1986). Adequate protection (or the lack of it) is one of the principal components of cause and is generally determined by comparing the value of the collateral against the amount and priority of the interest for which relief from stay is being sought. If an equity cushion exists, adequate protection may be found. In re Mellor, 734 F.2d 1400 (9th Cir. 1984). Adequate protection can also be established by requiring the debtor to make periodic payments to the creditor to preserve the status quo of the creditor’s position while the bankruptcy case is pending.

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Note that the inquiry of the bankruptcy court is different under 11 U.S.C. §362(d)(2) which is the second prong under which relief from stay can be granted. Under this provision, the court looks to see if, after evaluating all the liens against it, the debtor has any equity in the subject property (not whether there is an equity cushion protecting the creditor’s interest). Under 11 U.S.C. § 362(d)(2), if the debtor has no equity, the court must determine if the property is “necessary” for a reorganization. Clearly, this inquiry is not applicable in a Chapter 7 liquidation. However, this inquiry is very relevant in a Chapter 11 or 13 proceeding and the court will focus on whether the property at issue is necessary for the debtor to retain in order to accomplish a feasible reorganization while complying with the other requirements of the Bankruptcy Code (including adequate protection). No foreclosure or other proceeding to enforce a security interest in real property included in a bankruptcy estate can proceed without an order terminating the automatic stay from the bankruptcy court. However, the Ninth Circuit has held that the mere postponement of a trustee’s sale simply preserves the status quo and does not violate the automatic stay. In re Peters, 101 F.3d 618 (9th Cir. 1996). B. CHANGES TO THE AUTOMATIC STAY UNDER BAPCPA. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter referred to as the “Act”) enacted a number of changes to the automatic stay. These changes are primarily in three main areas: (1) additional matters that are now defined to not be subject to the stay of 11 U.S.C. Section 362(a); (2) circumstances where the automatic stay can expire without a court order including when the debtor: (a) has had multiple prior filings; or (b) does not perform certain actions required under the Bankruptcy Code, as amended by the Act; and (3) the implementation of “in rem” relief with respect to specific real property in circumstances where the court finds the petition was filed as part of a “scheme to delay, hinder and defraud creditors”. I. Additional Actions Now Defined to Not Be Subject to the Stay. The Act implements several additional provisions to 11 U.S.C. Section 362(b), which is the section in the Bankruptcy Code that defines which types of actions are not subject to the automatic stay. A summary of some of the actions added by the Act which potentially relate to real estate which are now not be subject to the automatic stay follows: 1. Unlawful Detainer Actions. In cases involving residential property, the automatic stay will no longer apply to cases under which the debtor resides as a tenant under a lease or rental agreement and where the lessor has obtained before the date of the bankruptcy filing,

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a judgment for possession. 11 U.S.C. Section 362(b)(22). Under the provisions of 11 U.S.C. Section 362(l) however, the debtor can obtain a 30-day stay of the pending unlawful detainer by filing with the bankruptcy petition and serving the lessor with a sworn certification which provides: (1) that applicable nonbankruptcy law provides for a cure of the default after judgment for possession has been entered; and (2) that the debtor has deposited with the clerk of the court the rent which will fall due during the 30-day period. The lessor can object to the debtor’s certification and the court is required to hold a hearing within 10 days of the service and filing of the objection to determine if the debtor’s certification is true. 11 U.S.C. Section 362(l)(3)(A). If, within the 30 day period, the debtor certifies a cure under applicable nonbankruptcy law, the stay will then remain in place. 11 U.S.C. Section 362(l)(2). In addition, the automatic stay will not apply to residential evictions under which the tenant resides in the property under a lease or rental agreement and the lessor seeks possession of the property on the basis of endangerment of the property or the illegal use of controlled substances on the property. However, the lessor must file with the bankruptcy court and serve the debtor with a sworn statement stating that an eviction on this basis was started pre-petition or that the debtor within the 30 days preceding the petition has endangered the property and/or illegally used or allowed to be used a controlled substance on the property. 11 U.S.C. Section 362(b)(23). Upon the filing and service of the lessor’s certification, the automatic stay will terminate 15 days later unless the debtor files with the court an objection to the truth of the lessor’s certification. 11 U.S.C. Section 362(m)(1) and (m)(2)(A). Again, if this occurs, the court must hold a hearing within 10 days to determine if the situation giving rise to the lessor’s certification existed or has been remedied. 11 U.S.C. Section 362(m)(2)(B). If the debtor prevails, the automatic stay remains in place. 11 U.S.C. Section 362(m)(2)(C). If the lessor prevails, an order lifting the stay shall not be necessary and the clerk of the court shall serve upon the debtor and the lessor, a copy of the court’s order upholding the lessor’s certification. 11 U.S.C. Section 362(m)(2)(D). 2. Foreclosure of Security Interests in Real Property. The automatic stay will not apply to an action to enforce a lien against real property in circumstances where the debtor is ineligible to be a debtor under 11 U.S.C. Section 109(g) or if the current case was filed in violation of a bankruptcy court order entered in a prior case. 11 U.S.C. Section 362(b)(21). Given the necessary factual prerequisites for this section to apply and the corresponding uncertainty arising as a result (particularly under the provisions of Section 109(g)), it is likely that secured creditors will still seek the safe harbor of a court order in subsequent cases (particularly if required by the title companies). In addition, the automatic stay will not apply to an “in rem” order entered within two years in a previous case, except that the debtor in a subsequent case may move for relief from the “in rem” order based upon changed circumstances or for other good cause shown. 11 U.S.C. Section 362(b)(20). The basis for entry of an “in rem” order will be discussed below.

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II. Circumstances Under Which the Automatic Stay Will Expire. 11 U.S.C. Section 362(c), which governs the duration of the automatic stay, was extensively amended by the Act. Now, the automatic stay will expire automatically under a number of factual circumstances summarized below unless a party in interest (usually the debtor or the trustee) makes a timely request before the court to extend the stay. 1. Stay Terminated if Individual Debtor Has Had One Prior Filing Dismissed within 1 Year. In individual cases, the Act provides that if a case is filed by individual debtors within 1 year of an earlier dismissed case, the automatic stay will terminate, “with respect to the debtor”, 30 days after the new case is filed unless during that 30 day period, a party in interest files a motion with the court to extend the stay on the basis that the second filing was in good faith. 11 U.S.C. Section 362(c)(3)(A)and(B). A new case is presumed to be not in good faith as to all creditors (with said presumption only rebutted by clear and convincing evidence) if: (1) the debtor has been a debtor in more than one prior proceeding within one year of filing; (2) the debtor has had a prior case dismissed because of the debtor’s failure to file required pleadings without substantial excuse, or to provide adequate protection as ordered by the court, or to perform the terms of a confirmed plan; or (3) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous bankruptcy petition or any other reason to conclude that the most recent case will be concluded with a discharge or confirmed plan. 11 U.S.C. Section 362(c)(3)(C)(i). In addition, a new filing is also presumed to be not in good faith as to any creditor who had filed a motion to lift the automatic stay in the previous case, if said motion was pending at the time of dismissal or had been resolved by terminating, conditioning or limiting the stay. 11 U.S.C. Section 362(c)(3)(C)(ii). If, however, a previous case was dismissed due to the creation of a debt repayment plan, for purposes of subsection (c)(3), any subsequent case commenced by a debtor shall not be presumed to be filed not in good faith. 11 U.S.C. Section 362(i). The actual effectiveness of this new provision remains to be seen based on the language of the amended statute which provides that the stay shall only terminate “with respect to the debtor”. 11 U.S.C. Section 362(c)(3)(A). Using a plain language analysis, courts interpreting this provision have found that it does not provide for the automatic termination of the automatic stay in favor of “property of the estate” which is referred to through out the Bankruptcy Code. In re Jones, 339 B.R. 360 (Bankr. E.D. N.C. 2006). As the bankruptcy court stated in In re Jones:

It is abundantly clear from the plain language of §362(c)(3)(A) that the stay that terminates under that section is not the stay that protects property of the estate.

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This analysis was adopted by the Bankruptcy Appellate Panel for the First Circuit where in vacating the order of the bankruptcy court the appellate panel stated:

While a complete termination of the automatic stay would also have made sense, that is not what the statute provides. Section 362(c)(3)(A) provides for a partial termination of the stay, which, although a lesser penalty than complete termination, nonetheless discourages abusive filings and, therefore, is a result that is neither absurd nor demonstrably at odds with the intention of the drafters. With regard to the Debtor's residence, the automatic stay remains in effect to the extent that the residence is property of the bankruptcy estate. Because the automatic stay never lapsed with respect to property of the estate, it is unnecessary for the Panel to consider issues regarding extensions of the stay. Therefore, we decline to comment on the thirty-day timing provision of section 362(c)(3)(B) and the bankruptcy court's conclusion that it lacked the power under section 105(a) to extend the automatic stay.

In re Jumpp, 2006 WL 3802702 (Bankr. 1st Cir. December 28, 2006). It is important to note that at least one local bankruptcy court has adopted the analysis of In re Jones. Thus, to avoid any uncertainty arising from the language of the amended statute, in cases where there has been a previous dismissal within one year, the best practice will be to move for an order to terminate the automatic stay to terminate the stay as to property of the estate which is usually what a secured creditor is primarily after, i.e. the ability to pursue its collateral. 2. No Stay if Individual Debtor Has Had 2 or More Prior Filings Dismissed Within 1 Year. In individual cases, the Act provides that if a case is filed by individual debtors within 1 year of 2 earlier dismissed cases, the automatic stay of 11 U.S.C. Section 362(a) (including the stay against “property of the estate”) shall not go into effect at all upon the filing of the third case and that, upon request of a party in interest, the court shall promptly enter an order confirming that no stay is in effect in the latest case. 11 U.S.C. Section 362(c)(4). If within 30 days of filing of the petition a party in interest so requests, the court may order the stay to take effect in the latest case as to any or all creditors, but only if the party in interest demonstrates that the latest filing is in good faith. Again, in this circumstance, a new case is presumed to be not in good faith as to all creditors (with said presumption only rebutted by clear and convincing evidence) if: (1) the debtor has been a debtor in at least 2 prior proceedings within one year of filing; (2) the debtor has had a prior case dismissed because of the debtor’s failure to file required pleadings without substantial excuse, or to provide adequate protection as ordered by the

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court, or to perform the terms of a confirmed plan; or (3) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous bankruptcy petition or any other reason to conclude that the most recent case will be concluded with a discharge or confirmed plan. 11 U.S.C. Section 362(c)(3)(D)(i). In addition, a new filing is also presumed to be not in good faith as to any creditor who had filed a motion to lift the automatic stay in the previous case, if said motion was pending at the time of dismissal or had been resolved by terminating, conditioning or limiting the stay. 11 U.S.C. Section 362(c)(3)(D)(ii). 3. Stay Terminated if Small Business Debtor Has Had a Bankruptcy in Preceding 2 Years. In small business Chapter 11 cases, the Act provides that if the small business debtor was: (1) a small business debtor in a small business case pending at the time of the latest filing; or (2) a small business debtor in a previous small business case dismissed within two years of the latest petition; or (3) a small business debtor in a small business case in which an order confirming a plan was entered within 2 years of the latest filing, then the automatic stay shall not apply. 11 U.S.C. Section 362(n)(1). This provision does not apply to an involuntary case involving no collusion by the debtor with creditors; or to the filing of a petition if the small business debtor can prove by a preponderance of the evidence that the filing of the latest petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the case then pending was filed; and it is more likely than not that the court will confirm a feasible non-liquidating plan within a reasonable period of time. 11 U.S.C. Section 362(n)(2). The procedure for the debtor to establish the above is unclear but it is assumed it would be by motion to be filed by the small business debtor simultaneously with the latest petition or shortly thereafter. 4. Stay Terminated if Final Decision not Made within 60 Days. In individual cases, the Act provides that the stay will terminate 60 days after a request for relief unless a final decision is rendered by the court during the 60 day period beginning with the date of the request, unless the 60 day period is extended by agreement of the parties in interest or is extended by the court for good cause, as described in findings made by the court. 11 U.S.C. Section 362(e)(2). 5. Single Asset Cases. The provisions relating to lifting the automatic stay in single asset cases are modified extensively and require within 90 days of the order for relief either (1) the filing of a plan with a reasonable possibility of confirmation within a reasonable time; or (2) the commencement of monthly interest payments to the secured lender at the “nondefault contract rate” which monthly interest payments “may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on or after the date of the commencement of the case by or from the property 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)”. 11 U.S.C. Section 362(d)(3)(A) and (B).

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6. Court May Enter Order Confirming the Expiration of the Stay under the Revised Provisions of 11 U.S.C. Section 362(c). On request of a party in interest, the court shall issue an order under 11 U.S.C. 362 subsection (c) confirming that the automatic stay has been terminated. 11 U.S.C. Section 362(j). Though only referring to terminations arising under subsection (c), presumably, the court can also issue orders confirming that the stay has terminated under the terms of the other provisions referenced above. 7. Sanctions. Generally, a debtor can recover actual damages for willful violations of the automatic stay, including costs and attorney’s fees and in appropriate circumstances punitive damages. 11 U.S.C. Section 362(k). However, the provisions relating to sanctions for willful violations of the automatic stay were amended by the Act and with respect to violations regarding personal property are limited to actual damages only, if the stay violation is taken by an entity with a good faith belief that 11 U.S.C. Section 362(h) applies. 11 U.S.C. Section 362(k)(2). III. In Rem Relief under 11 U.S.C. Section 362(d) Under the Act, a court can enter “in rem” orders terminating, annulling, modifying or conditioning the automatic stay with respect to actions by secured creditors against particular parcels of real property if the court finds a bankruptcy petition to be part of a scheme to delay, hinder, and defraud creditors involving either: (1) the transfer of full or partial ownership interests in the property without the consent of the secured creditor; or (2) multiple bankruptcy filings. 11 U.S.C. Section 362(d)(4)(a) (A)and(B). If entered and recorded in accordance with applicable state law, an “in rem” order is binding in any bankruptcy case that would affect the subject property filed within two years after the “in rem” order is entered. A debtor may seek relief from an “in rem” order in a subsequent case based upon changed circumstances or for good cause shown. C. Dismissal for Failure to File or Produce Documents. Initial Disclosures. If an individual debtor in Chapter 7 or Chapter 13 fails to file all of the documents required by 11 U.S.C. Section 521(a)(1) within 45 days of the date of filing of the petition, the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition. 11 U.S.C. Section 521(i)(1). Any party in interest can request the court to enter an order of dismissal and the court shall enter the order not later than 5 days after such request unless the court has granted the debtor an additional period of 45 days to file the required information. 11 U.S.C Section 521(i)(2) and (3). In addition, upon timely motion

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of the trustee filed before the applicable time limits referenced above, the court may decline to dismiss the case if the court finds that the debtor attempted in good faith to file all the information required and that the best interests of creditors would be served by administration of the case. 11 U.S.C. Section 521(i)(4). Tax Returns. Not later than 7 days before the date set for the first meeting of creditors, the debtor shall provide the trustee and any creditor who timely requests a copy of the federal income tax return for the year ending immediately before the commencement of the case. 11 U.S.C. Section 521(e)(2)(A). If the debtor fails to comply, the court shall dismiss the case unless the debtor can demonstrate that the failure to comply is due to circumstances beyond the control of the debtor. 11 U.S.C. Section 521(e)(2)(B) and (C). In addition, a taxing authority may move for dismissal or conversion of a case, if a debtor fails to file a tax return that becomes due after the commencement of the case or properly obtain an extension. If the debtor does not file the return or obtain the extension within 90 days of the taxing authority’s motion, the court shall convert or dismiss the case whatever is in the best interests of creditors of the estate. 11 U.S.C. Section 521(j). IV. TREATMENT OF SECURED CLAIMS IN REORGANIZATION CASES A debtor seeking reorganization can choose to leave unaffected the rights of the holder of a secured real estate claim. Under certain factual circumstances, however, the provisions of Chapter 7, 11 and 13 can be used to alter the rights of the holder of a secured real estate loan or a judgment lien holder.

A general principal often espoused in bankruptcy cases is that a lien passes through bankruptcy unaffected. Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). Though this is generally true, there are a number of exceptions to this rule. Initially, in bankruptcy, the value of a secured claim is governed by 11 U.S.C. Section 506(a) which provides in pertinent part:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest. . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.

In short, the value of a secured claim is based on the value of the security and the priority of the secured claim vis-à-vis all of the other liens against it. In re Pond, 252 F.3d

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122 (2nd. Cir. 2001). Both 11 U.S.C. §1129(a)(7) and § 1325(a)(5)(B) allow, under certain circumstances, for the potential modification of the payment schedule, interest rate, as well as the splitting of a loan into secured and unsecured portions (if the loan is under-secured). If the loan is over-secured, 11 U.S.C. Section 506(b) requires payment of the full amount of the claim, including interest, and other charges and fees provided for under the loan documents. If the loan is under-secured, the creditor will not be allowed interest on the entire debt and other fees and costs incurred post-petition (though it could be allowed interest on the secured portion of its claim if a plan proposes to pay this over time). CRAMDOWN AND LIENSTRIPPING OF SECURED CLAIMS Generally, any modification of a secured claim in bankruptcy is termed a “cramdown”. As noted above, this can include modifying the loan terms by extending the due date, changing the payments and/or changing the interest rate. In addition, in certain circumstances, the lien of the secured creditor can be stripped. This generally means that the amount of the lien is reduced to the value of the lien in the collateral under the analysis required by 11 U.S.C. Section 506(a). However, it is theoretically possible that a lien can be completely stripped off property if the lien has no value as of the time of the bankruptcy petition. This requires an adversary proceeding under Bankruptcy Rule 7001. Lien stripping is not allowed in Chapter 7 proceedings. Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). A debtor's ability to modify a loan secured by real property is not unlimited. For example, in Chapter 11 cases, a creditor can elect under 11 U.S.C. §1111(b)(2) to have his entire claim treated as an secured claim and if so, any confirmable Chapter 11 plan must provide that the secured creditor receive the present value of its entire secured claim if the debtor wishes to retain the secured property. In a Chapter 13 proceeding, a loan which matures by its term during the term of a Chapter 13 plan cannot be extended beyond the term of the plan and must be paid in full within the plan term (which cannot exceed 60 months under the Bankruptcy Code). In re Ramirez, 62. B.R. 668 (S.D. Cal. 1986). For secured loans which extend by their terms beyond the term of the plan, a Chapter 13 plan can provide for the curing of any default within a reasonable time (usually the plan term) and the maintenance of current payments under the loan documents while the case is pending. 11 U.S.C. § 1322(b)(5). LOANS SECURED ONLY BY THE DEBTORS’ PRINCIPAL RESIDENCE There are additional protections for loans secured by the debtor’s principal residence. If the secured loan is secured only by a security interest in real property that is an individual

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debtor's principal residence (and the lien has some actual value), generally speaking, under 11 U.S.C. § 1123(b)(5) and 11 U.S.C. § 1322(b)(2), no modifications of the loan documents can be made except for the curing of any default within a reasonable time (usually the plan term) and the maintenance of current payments under the loan documents while the case is pending as provided under 11 U.S.C. § 1322(b)(5). Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Numerous cases have addressed the issue of when a loan is secured only by a debtor's principal residence. A loan which is secured by a multifamily residential property in which the debtor resides has been held to be subject to modification. In re Louis, 82 F.3d 1 (1st Cir. 1996). Generally, the determination depends upon the facts and circumstances of the particular case. However, boilerplate language in the loan documents which refers to "rents, issues and profits" or "proceeds" from insurance have generally been held not to constitute "additional security" which renders a loan secured by the debtor's principal residence subject to modification. In re Houglund, 93 B.R. 718 (D. Ore. 1988); affirmed 886 F.2d 1182 (9th Cir. 1989); In re Ross, 107 B.R. 759, 762 (Bankr. W.D. Okla. 1989). One issue centers on whether a loan secured only by a consensual lien against the debtor's principal residence can be completely "stripped off" of the property in a Chapter 11 or 13 proceeding if the debtor can establish that there is absolutely no value to the lien. In 1997, the Ninth Circuit Bankruptcy Appellate Panel held that the Supreme Court's decision in Nobelman did not prohibit a debtor from obtaining a default judgment against a creditor in an adversary proceeding which sought to completely strip off the creditor's lien against the debtor's principal residence when it was undisputed that the lien had absolutely no value. In re Lam, 211 B.R. 36 (Bankr. 9th Cir. 1997). The Lam court stated:

The Nobelman decision holding that section 1322(b)(2) bars a Chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor's principal residence, does not apply to holders of totally unsecured claims. The extension of the protections of section 1322(b) to wholly undersecured lien holders is contrary to the provisions of the bankruptcy code allowing dischargeability of unsecured claims. We reverse the bankruptcy court's order appealed and remand to the bankruptcy court for the entry of default against Thrift and for the entry of the relief prayed for in the Debtors' adversary proceeding complaint.

211 B.R. at 41-42. Because it was a BAP decision, Lam was only persuasive authority and not necessarily binding on the bankruptcy courts in Washington. In re Bank of Maui, 904 F.2d 470 (9th Cir. 1990). However, the Ninth Circuit later addressed the issue directly in In re Zimmer, 313 F.3d 1220 (9th Cir. 2002) and (agreeing with the holding in In re: Lam) held that a deed of trust lien which has no actual value against a debtor’s residence (because prior liens

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exceed the property’s value) can be stripped off by the bankruptcy court. EFFECT OF CONFIRMATION The effect of confirmation of a Chapter 11 or 13 plan is found in 11 U.S.C. § 1141 and 11 U.S.C. § 1327. In interpreting these provisions, courts have found that, assuming proper notice, confirmation of a Chapter 11 or 13 plan has the effect of rendering res judicata any issues which were present between debtors and their creditors at or prior to the order of confirmation. In re Evans, 30 B.R. 530 (Bankr. 9th Cir. 1983); In re Waldman, 88 B.R. 59 (Bankr. E.D. Pa. 1988). All creditors are bound by the terms of a Chapter 11 or 13 plan. Generally, this means that creditors who fail to object to objectionable terms in a plan prior to confirmation will be bound by those terms in the event an order of confirmation becomes final and not subject to appeal. POST-PETITION BORROWING Any attempt by a debtor or trustee to incur new debt post petition and prior to confirmation will require court approval after notice and a hearing. 11 U.S.C. § 363(b)(1). If court approval is not obtained said post petition transactions can be subject to avoidance under 11 U.S.C. Section 549. After confirmation of a Chapter 11, property of the estate vests in the reorganized debtor unless as otherwise provided in the plan or order confirming the plan. 11 U.S.C. § 1141(b). Thus, unless there are provisions in the Chapter 11 plan or order confirming it to the contrary, a reorganized Chapter 11 debtor can in theory obtain new financing without court approval. However, any prudent lender would carefully review the confirmed plan and order confirming it to make sure that bankruptcy court approval for post-confirmation borrowing is not required. In a Chapter 13 proceeding, court approval is prudent for any post-confirmation borrowing as the bankruptcy court generally retains jurisdiction of the debtor’s income during the term of the plan. In addition, the approval of the Chapter 13 Trustee to the incurrence of new post petition consumer debt is required in order to have it paid inside the plan. 11 U.S.C. § 1328(d); 11 U.S.C. §1305. V. JUDGMENT LIEN AVOIDANCE Generally, non-consensual liens (such as most judgment liens arising under state law) which impair a debtor’s exemption in real property can also be avoided under 11 U.S.C Section 522(f). This provision does not apply to consensual liens such as a deed of trust or mortgage or to domestic support obligations. To avoid a judgment lien, which impairs an exemption, the debtor must show that the lien has no value after determining the value of the property and deducting the consensual liens and the allowed exemption therein. If some

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value for the judgment lien exists after deduction of the above, the judgment lien will remain against the property for the determined value. The purpose of avoiding or partially avoiding a judgment lien under this provision is to allow for any post petition appreciation in property (subject to the debtor’s exemption) to accrue for the benefit of the debtor and not the judgment lien creditor. In Washington, an individual debtor has the option of choosing federal or state law exemptions. Effective July 22, 2007, the homestead exemption amount was increased from $40,000.00 to $125,000.00. RCW 6.13.030. The full effect of the substantial increase in the amount of the homestead exemption from $40,000.00 to $125,000.00 has yet to be determined though it can be said with some certainty that it will curtail executions on homestead property under judgments after July 22, 2007. However, one important question is to what extent does the increase in the amount of the homestead exemption have a retroactive effect against a vested judgment lien or deed of trust on a principal residence securing a commercial guaranty which attached to the homestead property before the effective date of the increase? “[T]he presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic.” Landgraf v. USI Film Products, 511 U.S. 244, 225, 114 S.Ct. 1483 (1994). Underlying this statement is the principal that legislatures are primarily policymaking bodies that promulgate rules to govern future conduct. Under Washington case law, amendments to existing law may be applied retroactively in the following three circumstances: (1) the legislature expressly provides for retroactive application in the amendment; (2) the amendment is clearly curative; and (3) the amendment is remedial in purpose. In re F.D. Processing, Inc., 119 Wn.2d 452, 832 P.2d 1303 (1992). Homestead statutes are enacted as a matter of public policy in the interest of humanity; they are created to insure a shelter for each family, not to protect the rights of creditors. Macumber v. Shaffer, 96 Wn.2d 568, 570, 637 P.2d 645 (1981). Washington courts have found amendments to the homestead exemption statute to be remedial in nature. A remedial statute is one which relates to practice, procedure or remedies, and does not affect a vested right. In re F.D. Processing, Inc., 119 Wn.2d at 462-463. An amendment should only be applied retroactively when doing so would further the remedial purpose. However, a remedial statute cannot be retroactively applied if it affects a vested right. Id. at 463. A vested right involves more than a mere expectation; the right must have become a title, legal or equitable, to the present or future enjoyment of the property. Id.

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In F.D. Processing, the Washington State Supreme Court declined to retroactively apply a statutory amendment expressly authorizing liens for milk deliveries within the definition “agricultural product.” The court stated that “applying the 1991 amendment retroactively to this case would “affect” U.S. Bank’s vested interest as long as the retroactive application would cause U.S. Bank to recover a smaller amount of its secured claim.” In re F.D. Processing, 119 Wn.2d at 463. In Macumber, 96 Wn.2d 568, 570, 637 P.2d 645 (1981), the Washington State Supreme Court held that the increase in the homestead exemption from $10,000 to $20,000 was remedial in nature and was to be applied retroactively to unsecured creditors who extended credit prior to the effective date of the increase in the homestead. The court noted that the increase in the exemption did nothing to impair the contractual obligation, but merely modified the unsecured creditor’s remedy by decreasing the amount available to the unsecured creditor by $10,000. Next, in In re Wenner, 61 B.R. 634 (W.D. Wash. 1985), the Federal District Court for the Western District of Washington found that the 1981 amendments to the Homestead Act, RCW 6.12.010 et seq., could not be applied retroactively. The 1981 amendments provided that a homestead was automatically created in the debtor’s permanent residence beginning “at the time the property is occupied.” The court distinguished the case from Macumber, stating that the homestead exemption was arising in a different context here because it concerns the relative priority of a secured judgment creditor and the trustee in bankruptcy. Specifically, the court noted that while in certain circumstances retroactive application of the homestead statute would serve a remedial purpose, it does not follow that the 1981 homestead exemption should be applied retroactively to dislodge a lien that has resulted in a properly filed judgment. The judgment creditor had a vested priority over the debtor’s unsecured creditors, and the court held that the 1981 amendments to the homestead statute may not be applied retroactively for the purpose of nullifying a lien. 61 B.R. at 636. Finally, in Burch v. Monroe, 67 Wn.App. 61, 834 P.2d 33 (Division I 1992), the Washington State Court of Appeals decided whether the subsequent amendment to the homestead statute requiring filing a judgment with the recording officer of the county where the property is located should be applied retroactively to nullify the lien of a creditor who abstracted but did not record the judgment. 67 Wn. App. 61, 834 P.2d 33 (1992). Prior to 1987 amendments to the homestead statute, the law did not require that a judgment be recorded in order for the judgment to attach to the excess over the homestead exemption. The court declined to apply the amendments to the homestead statute retroactively because retroactive application of the statute nullified the judgment creditor’s fully vested property right. The retroactive effect of the increase under Washington state law remains to be answered by a state appellate court, though the issue may become moot with the passage of time. In addition, in the bankruptcy context, there also remain federal questions

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regarding the extent to which applicable state law is preempted under the provisions of the Bankruptcy Code which govern the stripping of judgment liens against exempt property. See, Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). The Honorable Robert Lasnik of the United States District Court for the Western District of Washington at Seattle has ruled, however, that the homestead increase could be applied in a bankruptcy court lien avoidance action involving a judgment recorded against the homestead prior to the effective date of the increase. In re McDole, 2008 WL 4330777 (W.D. WA 2008).

The homestead increase does apply, however, to all judgments properly perfected after July 22, 2007. VI. THE TRUSTEE’S AVOIDANCE POWERS A. PREFERENCES In addition to reorganization, there are additional provisions of the Bankruptcy Code which allow a trustee or debtor in possession to avoid certain pre-petition transfers of a debtor. Generally, one of the purposes of the Bankruptcy Code is to treat all creditors who are similarly situated the same and to prevent a debtor from preferring certain creditors over others. Thus, under the provisions of 11 U.S.C. Section 547, certain pre-bankruptcy transfers by the debtor can be avoided if they occurred while the debtor was insolvent, were made on an antecedent debt, and which enable a creditor to receive more than that creditor would have received if the transfer had not occurred and the debtor was liquidated under Chapter 7. In addition, under the federal bankruptcy preference provision, the transfer must occur within 90 days of the bankruptcy filing (or within one year if the transfer is to an insider, such as a family member). State law preference statutes can also be asserted by a trustee or debtor in possession and applicable state laws may have different time frames under which a preference can be avoided. Avoidable preferences can include the granting of a deed of trust on a previously unsecured loan if all of the other elements of 11 U.S.C. Section 547 or applicable state law can be established. B. FRAUDULENT TRANSFERS Another policy of the Bankruptcy Code is to prevent a debtor from transferring its assets to third parties without fair consideration. In certain circumstances, pre-petition transfers can be avoided if they were made: (1) with actual intent to hinder delay or defraud a creditor; or (2) if the debtor received less than reasonably equivalent value for the transfer and was insolvent or rendered insolvent by the transfer. 11 U.S.C. Section 548. Under the federal bankruptcy fraudulent transfer provision, the transfer must have occurred within one year of the petition. Again, the trustee or debtor in possession can employ state law as well. Washington state law allows for the avoidance of certain transfer for up to four years from

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when the transfer was made (and with certain transfers even longer, if not reasonably discoverable by a creditor). RCW 19.40.091. However, if state law is utilized, the trustee must meet the burden of proof on all of the elements required by state law to avoid a transfer. See Chapter 19.40 RCW. The Supreme Court has ruled that a noncollusive, non-judicial deed of trust foreclosure properly conducted under state law cannot be avoided under 11 U.S.C. Section 548. BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L.Ed.2d 556 (1994). The Court concluded that the “reasonably equivalent value” standard can be satisfied by strict compliance with state law foreclosure procedures recognized by state courts. However, this safe harbor may not apply to a deed in lieu of foreclosure which could be the subject of a later attack in bankruptcy and generally require sufficient estoppel affidavits to establish that the elements of a fraudulent transfer are not present. VIII. EFFECT OF DISMISSAL. Chapter 13 bankruptcy proceedings are voluntary and can be dismissed by the debtor at any time, if the case has not been previously converted. 11 U.S.C. Section 1307(b). Any waiver of the right to dismiss a Chapter 13 is unenforceable, though some courts have held that a debtor's motion can be denied if the debtor is found to not be proceeding in good faith. In re Guadet, 95 B.R. 4 (Bankr. D.R.I. 1989). The right to dismiss a Chapter 11 or Chapter 7 is not automatic and requires a motion to the court with notice and a hearing. 11 U.S.C. Section 1112(b) and 11 U.S.C. Section 707. A Chapter 11 debtor may convert the case to Chapter 7 however, if the case has not been previously converted. 11 U.S.C. § 1112(a). The effect of dismissal of a bankruptcy proceeding is governed by 11 U.S.C. Section 349 which states:

(a) Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title.

(b) Unless the court, for cause orders otherwise, a dismissal of a case other than under section 742 of this title- (1) reinstates-

(A) any proceeding or custodianship superseded under Section 543 of this title;

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(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title,or preserved under section 510(c)(2), 522(i)(2), of 551 of this title; and

(C) any lien voided under section 506(d) of this title; (2) vacates any order, judgment or transfer ordered,under section 522(i)(1), 542, 550, or 553 of this title; and (3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title. 11 U.S.C. Section 349. According to the legislative history, the basic purpose of this statute is to: [U]ndo the bankruptcy case as far as practicable and to restore all property rights to

the position in which they were found at the commencement of the case. This does not necessarily encompass undoing sales of property from the estate to a good faith purchaser. Where there is a question over the scope of the subsection, the court will make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.

H. Rept. No. 95-595 to accompany H.R. 8200, 95th Cong. 1st Sess. (1977) pp. 337, 338. Generally, unless the court orders otherwise, a dismissal is regarded as restoring a creditor and debtor to their pre-petition positions. Thus, one court has found that the dismissal of a Chapter 13 plan after confirmation will not toll a statutory redemption period and that a pre-filing foreclosure was effective as if the Chapter 13 had never been filed. Federal National Ass'n v. Wallace, 33. B.R. 29 (Bankr. W.D. Mich 1983). However, a dismissal does not annul the automatic stay and validate creditor actions which would otherwise be void. For example, in In re Schwartz, 954 F.2d 569 (9th Cir. 1992), the Ninth Circuit held that certain post-petition acts taken by the IRS in violation of the automatic stay in a Chapter 11 proceeding which was ultimately dismissed, violated the automatic stay and were void.

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