The Pitfalls of 362(e)
Section 362(e) of the Bankruptcy Code provides a potentially powerful tool for secured creditors. When a court does not timely hear and respond to a creditor's request for relief from the §362(a) bankruptcy stay, §362(e) gives the creditor automatic relief in as little as 30 days without needing to succeed on any substantive arguments. This article will address questions as to what extent a creditor can rely upon §362(e) stay relief and what a debtor can do to prevent such relief. On paper, §362(e) resounds with finality, but as will be shown below, in practice, this is not always the case.
Section 362(e) prevents the "stay by continuance" practice that was pervasive under the Bankruptcy Act. The moment a creditor files a motion for relief from the stay, the first of two §362(e) clocks start ticking. The stay is automatically lifted after 30 days unless the court (1) conducts and concludes a final hearing on the matter at which the court makes a final determination or continues the stay pending the determination; or (2) conducts and concludes a preliminary hearing and finds that there is a reasonable likelihood the non-moving party will prevail at the final hearing, in which case the court may continue the stay pending the conclusion of a final hearing and a determination. If the first hearing was a preliminary hearing, the second clock starts ticking. That clock requires that the final hearing be concluded within the 30 days following the conclusion of the preliminary hearing, unless the time frame is extended "for a specific time which the court finds is required by compelling circumstances."
The bottom line is that, generally, a maximum of 60 days may expire before a final hearing on the motion for relief has been concluded. Note, however, that there is no time limit set forth within which the court must make its determination. Prior to the 1991 amendments, Bankruptcy Rule 4001(a)(2) provided that the stay expired 30 days after the final hearing was commenced. See, Collier on Bankruptcy, ¶362.08[a] (15th ed. 1996).
Section 362(e)'s greatest utility for the creditor is that it prevents a court from continuing the stay without conducting a "hearing." In all but exceptional cases, §362(e) contemplates that "notice and hearing" requires an actual hearing. Grundy National Bank v. Looney (In re Looney), 823 F.2d 788, 792 (4th Cir. 1987); Prudential Ins. Co. v. Ryan Place Joint Venture, 93 B.R. 471, 474 (N.D. Tex. 1988). At an absolute minimum, a court needs to give notice to the petitioning creditor that it intends to act, so that the creditor can request an actual hearing. Looney, 823 F.2d at 791. Though in some situations a preliminary hearing may be as informal as reviewing affidavits and documents, the court must at least review and weigh evidence presented from both sides to qualify as a "hearing." John Hancock Mutual Life Ins. Co. v. Forseen Inc. (In re Forseen Inc.), 81 B.R. 903, 905 (N.D. Ill. 1987); U.S. v. Marine Power & Equipment Co. Inc. (In re Marine Power & Equipment Co. Inc.), 71 B.R. 925, 928 (W.D. Wash. 1987).
Exactly when a hearing concludes needs to be determined for purposes of the two clocks in §362(e). Generally the date of final submission of proposed facts determines the conclusion date, be that the day of the actual in-court hearing or a later date where both parties have submitted findings of fact. In Wedgewood Investment Fund Ltd. v. Wedgewood Realty Group, Ltd. (In re Wedgewood Realty Group Ltd.), 878 F.2d 693, 698 (3d. Cir. 1989), the 3rd Circuit Court of Appeals held that a hearing concluded on the day of the actual formal hearing, where both parties declined to submit proposed findings of fact, rather than concluding about a month later when the non-moving party responded to a legal argument.
Objecting to the automatic lifting of the stay when §362(e) time has expired is not an easy task. Inadvertent failure of the court to timely schedule hearings does not halt the self-executing §362(e). Most courts hold that the party opposing the relief cannot simply say "it wasn't my fault" in response to a court's non-compliance. See, e.g., Looney, 823 F.2d at 792; In re Orfa Corp. of Philadelphia, 170 B.R. 257, 266 (E.D. Pa. 1994). The 5th Circuit stated it expressly: "The debtor must, through 'aggressive litigation management,' obtain a timely hearing if it wants to ensure the continued protection of the automatic stay. …[I]t is the debtor's burden to call the issue to the court's attention if it desires that the stay be continued." River Hills Associates Ltd. v. River Hills Apartments Fund (In re River Hills Apartments Fund), 813 F.2d 702, 707 (5th Cir. 1987).
One well-received argument to prevent the automatic lifting of the stay (if not the only argument) is implied waiver, if the facts support it. Generally, the opposing party must show that the petitioning creditor has taken some action that is "inherently inconsistent with adherence to the time constraints of §362(e)..." Wedgewood, 878 F.2d at 698. Examples include Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982) (petitioning creditor appeared without objection at hearing beyond 30-day time period); Iseberg v. Exchange National Bank and Trust Co. of Chicago (In re Wilmette Partners), 34 B.R. 958, 961 (Bankr. N.D. Ill. 1983) (creditor agreed to continuance of preliminary hearing beyond 30-day time period); In re Small, 38 B.R. 143, 147 (Bankr. D. Md. 1984) (creditor filed discovery requests to which responses were due more than 30 days after its request for relief was filed); and Orfa Corp., 170 B.R. at 268 (E.D. Pa. 1994) (creditor did not comply with local procedural rules requiring notification to all parties once it learned of the hearing date set by the court). The small number of courts that place the burden of obtaining a hearing date on the creditor find implied waiver when the creditor fails to do so. In re McNeely, 51 B.R. 816, 821 (Bankr. D. Utah 1985).
Though waiver is perhaps the only argument to prevent automatic stay relief, most courts permit the reimposition of the stay in certain circumstances through the exercise of its equitable injunctive powers under 11 U.S.C. §105. See Looney, 823 F.2d at 792-93; Wedgewood, 878 F.2d at 700. Here, the "it wasn't my fault" argument is legitimate and may be grounds for reimposing the stay. On the other hand, the 4th Circuit in Wedgewood indicated that §105 relief would not be available when the debtor/opposing party's own actions caused the failure of the court to adhere to §362(e) time constraints. Wedgewood, 878 F.2d at 701.
Holding a contrary view, Marine Power, 71 B.R. at 929-30, and In re Wood, 33 B.R. 320, 321-22 (Bankr. D. Idaho 1983), held that §105 injunctive relief is not available to reimpose a stay that §362(e) has lifted. These courts reasoned that courts may not use §105 equitable powers to authorize something that Congress has explicitly considered and limited. They held that the purpose of Congress in enacting §362(e) was to provide a special protection and a speedy remedy to secured creditors as a result of perceived abuses under the 1898 Act. This purpose is clear and unambiguous and therefore the court may not exercise its power to nullify it. Id.
The proper procedure for requesting §105 relief is contained in Bankruptcy Rules 7001(7) and 7065. The movant should file an adversary proceeding requesting a preliminary injunction and setting forth the elements required for injunctive relief: irreparable harm, harm that outweighs the harm to the creditor that has received relief from the stay, a substantial likelihood of success, and that injunctive relief will not violate public interest. See Wedgewood, 878 F.2d at 700-01. Some courts uphold a court's sua sponte application of §105 if the court makes proper findings, but other courts including the 3rd and 4th Circuits have held that Rule 7065, providing for application of a debtor, trustee or debtor-in-possession, must be strictly followed when requesting §105 relief. See Wedgewood, 878 F.2d at 701-02; Looney, 823 F.2d at 792-93. A party will not be able to argue successfully on appeal that a court exercised §105 powers when the court continued a stay without following §362(e) procedure or expressly making appropriate §105 findings. Reviewing courts have refused to construe a bankruptcy court's action as an exercise of §105 where the bankruptcy court made no reference to it. Id.