In a case of apparent first impression in the Tenth Circuit, the U.S. Bankruptcy Court for the District of Colorado recently held that the reopening of a closed case under § 350 does not result in the re-imposition of the automatic stay in the reopened proceedings. In re Brumfiel, 514 B.R. 637 (Bankr. Colo. 2014).
The facts in Brumfiel present a classic case of a debtor failing to disclose in her bankruptcy schedules a claim against a third party, then attempting to pursue that claim after receiving a discharge. In the Brumfiel case, the claim consisted of a claim against the debtor’s mortgage lender, who was conducting foreclosure proceedings against the debtor’s home. The lender had initially commenced non-judicial foreclosure under a “Rule 120 proceeding” but had subsequently opted to proceed with a Rule 105 judicial foreclosure proceeding. The debtor filed bankruptcy, staying the foreclosure proceeding. The debtor did not schedule any claims against the lender in her bankruptcy schedules. Following her discharge, the lender again pursued its foreclosure action, and the debtor filed an action against the lender asserting claims for wrongful foreclosure, fraud, common law conspiracy and intentional and negligent infliction of emotional distress. After the court dismissed her action for lack of standing based on her failure to disclose the claims in her bankruptcy schedules, the debtor filed a motion pursuant to § 350 to reopen her bankruptcy case, with the stated goal of obtaining the trustee’s abandonment of the claims against the lender so the debtor could pursue them. The debtor did not, however, ask the court to re-impose the automatic stay.
The lender filed a motion for relief from stay. The debtor opposed the motion for relief, contending the loan documents were forgeries or counterfeit documents, despite the fact that the state court in both the Rule 120 and Rule 105 actions had found the lender was the holder of the original note and deed of trust. The bankruptcy court faced the following two questions: (1) did the automatic stay apply in the reopened case, thereby requiring the lender to seek relief from stay in the first instance and (2) if the automatic stay had been re-imposed, did the lender establish a basis for relief from stay.
As to the first question, the court decided that the automatic stay was not re-imposed on the reopening of the bankruptcy case. The court reasoned that only the filing of a petition imposes the automatic stay, and there is no language in § 350 providing for the re-imposition of the automatic stay on the reopening of a case. Further, the court noted that the reopening of a bankruptcy case may be accomplished on limited notice, and that reopening is a ministerial act having no substantive effect in and of itself. The court distinguished the decision of In re Diviney, 211 B.R. 951 (Bankr. N.D. Okla. 1997), aff’d, 225 B.R. 762 (B.A.P. 10th Cir. 1998), abrogated on other grounds by In re Johnson, 501 F.3d 1163 (10th Cir. 2007), because in Diviney, the order reopening the case also provided for the vacating of the prior order of dismissal and restoration of the case to its pre-dismissal position. InBrumfiel, the debtor did not request that the order reopening her case vacate the order closing it, nor did the debtor request the order re-impose the automatic stay. Consequently, the court held that the automatic stay was not re-imposed on the reopening of the case.
As to the second question, the court noted the Tenth Circuit’s opinion in In re Miller, 666 F.3d 1255 (10th Cir. 2012), where the Tenth Circuit held that a standing determination in a Rule 120 proceeding has no preclusive effect, and a creditor seeking relief from stay in order to proceed with a foreclosure must produce evidence of a right to payment. However, the court noted that a motion for relief from stay is a summary proceeding, to be determined on an expedited basis, and the creditor does not have to prove standing by a preponderance of the evidence. Instead, the creditor must show a colorable claim to an interest in the property. Disputes over the creditor’s rights in the property will be ultimately determined by the court adjudicating the foreclosure. In this case, the original note and deed of trust had been deposited with the state court, and the bankruptcy court had before it only copies of the relevant documents. The bankruptcy court found that the lender had established a colorable claim to the property, and the debtor’s failure to make payments on the loan, to insure the property or pay the property taxes for several years established cause for relief from stay. Further, the case was a chapter 7 proceeding, and so the property was not necessary to any effective reorganization.