AIMS Washington Update  --  April 29, 2005

BANKRUPTCY REFORM ENACTED 

Any apartment owner or manager who has ever tried to remove a problem resident for non-payment of rent, illegal activity or any other legitimate reason only to have the resident file for bankruptcy protection at the eleventh hour to avoid eviction has just been granted long-awaited relief from Congress.  On April 20, the President signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8), which revises the Bankruptcy Code's automatic stay and makes it more favorable for owners seeking possession of their property.  This 500-page bill was eight years in the making and is the most sweeping change to the Bankruptcy Code since 1978.  

Background
NAA/NMHC have been involved in the Bankruptcy Reform effort since 1995 when the Congressionally-chartered National Bankruptcy Review Commission began its landmark study of the nation's bankruptcy laws.  Alarmed at the increasing number of consumer bankruptcy filings, Congress charged the Commission with making recommendations to improve the U.S. Bankruptcy Code.  NAA/NMHC members participated in this process and submitted letters to the Commission describing how residents had abused the system to avoid paying rent.  They told of residents who damaged the property, and in many cases, conducted illegal activity on the premises, all while being protected from eviction by the Bankruptcy Code.  The Commission heard powerful testimony and received over 300 letters, including seven from members of Congress, concerning persistent, systemic abuse of the automatic stay by residential tenants who had successfully forestalled eviction for months by filing a bankruptcy petition.  After an extensive evaluation, the Commission issued its report on October 20, 1997.  While the recently passed legislation does not, in any large part, reflect the recommendations made in that report, it did set in motion the effort to enact meaningful bankruptcy reform. 

According to the American Bankruptcy Institute, personal bankruptcies peaked in 2003 when 1.6 million cases were filed.  That translated into one for every 73 households, and was nearly double the amount since 1993.  At that time, bankruptcies were being filed at a rate of 185 per hour.  The primary goal of the reform movement was to require people who could afford to repay some of their outstanding debt to make payments.  Proponents of comprehensive reform have felt that the fundamental flaw in the Bankruptcy Code is that anyone can file regardless of need.  While the new law still offers those with the least ability to repay a chance to erase their debt, it creates many new hoops debtors must jump through before getting a fresh start.   

The biggest change is the addition of a means test to determine whether a debtor falls into Chapter 13 bankruptcy, which requires payments to creditors, or a Chapter 7 bankruptcy, which discharges all debts after liquidating all non-exempt property.  The new law also imposes a counseling requirement of every filer.  At least six months before filing, debtors must complete courses in personal financial management before their debts can be discharged.  Other enhanced consumer protections include raising the priority of child-support and alimony payments and requiring that credit card issuers disclose how long it will take to pay off a balance when paying just the minimum amount due every month.  

Automatic Stay Revisions
Of particular interest to the apartment community is the revision made to the Code's automatic stay provision.  Under current law, when a resident files for bankruptcy all creditor collection efforts, such as wage garnishments, legal actions and eviction proceedings, are stopped.  The stay goes into effect the very day the bankruptcy petition is filed, offering a resident facing eviction an immediate benefit.  The stated purpose of the automatic stay is to give the debtor "breathing room" so they can attempt a repayment plan or, if appropriate, liquidate property and discharge their debt.  

The automatic stay was intended to protect creditors as well.  Without the stay, creditors would compete with each other to obtain payment from the debtor, clearly rewarding those who acted first.  While some creditors may benefit from this, apartment owners get little relief because the Bankruptcy Code not only prohibits owners from pursuing back rent, it also requires them to continue to extend credit, i.e., free housing, until the stay is lifted and the eviction can proceed. 

The new bankruptcy law makes two changes to the automatic stay that offer relief to owners pursuing evictions. The first allows an eviction proceeding to continue if the owner obtained a judgment of possession before the bankruptcy petition was filed.  This is a major improvement over the current system, in which a bankruptcy filing provides last-minute protection from eviction.  The changes are not without protections for the resident, however. The debtor continues to be protected for 30 days if he or she can certify that state law allows them to cure the default and if the debtor deposits the next rental payment with the clerk. 

In addition, if during that 30 days the debtor files a certificate that he or she has cured the monetary default, the owner must terminate the eviction process.  While not perfect, when combined with the higher barriers to filing bankruptcy petitions generally, this provision should yield positive results for the industry. 

The second change allows an eviction to proceed if the property is in danger or if there is illegal drug use on the property.  For this to take effect, the owner must certify that an eviction action has commenced or that illegal or dangerous activity has occurred in the 30 days preceding the filing the certification.  The resident debtor can file an objection, however, in which case a court hearing must be held within 10 days. 

Because bankruptcy law is highly technical and these changes are significant, it is difficult to predict the impact the changes will have in every scenario; that is, how they will be implemented and interpreted by bankruptcy trustees and judges.   

BANKRUPTCY BILL SIGNED INTO LAW

President Bush signed the NAA/NMHC-supported Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 108-9) into law on April 20. Of specific interest to the multifamily industry is an improvement made to the automatic stay provision of the U.S. Bankruptcy Code. Currently, Section 362 of the Code commands that all collection efforts by creditors cease upon the filing of a bankruptcy petition. For rental housing providers, this prevents the continuation of an eviction proceeding. As a result, residents are permitted to remain in their apartments rent-free for what could be several months. The automatic stay provision even applies when the property owner is aware of illegal drug use and property destruction.

Section 311 of the new law, which goes into effect on October 18, provides relief for rental providers from the automatic stay provisions. While not a perfect solution, Congress recognized the abusive practices and revised the automatic stay provision and placed limitations on when a resident may stay an eviction. Specifically, section 311 denies an automatic stay of a real property eviction in the following scenarios:

1. When an owner or manager obtains a judgment for possession prior to the date the resident filed a petition for bankruptcy. This is a significant improvement over current law, which rewards those who simply file a petition with the court clerk without regard for the rigorous process already followed by the property owner to rightfully regain possession of their property.

Legal Alert   Re: Bankruptcy Court                         April 26, 2004

In San Diego and Orange Counties, Sheriffs will no longer conduct lockouts without court approval if a tenant files for bankruptcy after an unlawful detainer judgment is entered.  This change in policy is the result of a recent Southern District of the United States Bankruptcy court ruling in which the court ruled that a landlord must obtain relief from stay before proceeding with the lockout.  This ruling mirrors the current position of the Central District.  Previously, San Diego and Orange County Sheriffs would proceed with a lockout without an order for relief from stay if the tenant filed for bankruptcy after an unlawful detainer judgment was entered in State Court..

California law currently provides that “. . . a writ of possession issued pursuant to a judgment for possession in an unlawful detainer action shall be enforced pursuant to this chapter without delay, notwithstanding receipt of notice of the filing by the defendant of a bankruptcy proceeding”. 

 Bankruptcy Court Judge Myers declared the state law unconstitutional and in violation of the Supremacy Clause of the United States Constitution. Sheriffs in San Diego and Orange County will now join Los Angeles’ Sheriffs’ practice of refusing to conduct lock-outs when a bankruptcy action is filed after entry of an unlawful detainer judgment.  Rental owners will now be required to file a formal motion in Bankruptcy Court requesting the continuation of their eviction notwithstanding the bankruptcy filing. While virtually all of these motions for relief from stay for residential properties are granted, the time delays and additional expenses for property owners in bringing these motions will be another burden for rental property owners.

 Kimball, Tirey & St. John attorneys represent residential and commercial property clients step-by-step through every phase of the eviction process. Our proven, strategic approach to each case dramatically increases your chances of a successful and expeditious outcome.  Our practice includes obtaining orders for relief from stay when necessary.

This legal alert is for general information purposes only.  Before acting be sure to receive legal advice from our office.  For past legal alerts and articles on other related topics, please consult the resource library section of our website at www.kts-law.com.

What To Do When Your Tenant Declares Bankruptcy

By: Ted Kimball and Patricia Tirey of Kimball, Tirey & St. John

     When a residential tenant declares bankruptcy, all attempts at collection of rent are automatically stopped. This includes the serving of notices and / or the filing or maintenance of a court action for Unlawful Detainers (eviction). If a rental property owner or manager elects to continue with the eviction or attempts to collect rent, they could be held in contempt of bankruptcy court, subject to fines, penalties and even imprisonment.

     An owner or manager's decision could also mean the difference between a delay of a few weeks and a delay of several months or even longer. It is therefore important for residential property owners and managers to be aware of the legal ramifications when a tenant files for bankruptcy, especially since the number of bankruptcy fillings is on the rise. New bankruptcy filings broke a record during the second quarter of 2001, rising close to 25 percent more than for the same period a year ago. In fact, our country is on track to break the all time bankruptcy filing record of 1998, when more than 1.4 million cases were filed.

     A common although improper reason for filing a bankruptcy is to delay an eviction. Typically, since the eviction is completed in state court, the bankruptcy is dismissed instead of discharged. What many tenants fail to realize is that they are perpetrating a fraud on the bankruptcy court by filing the action for delaying purposes only. When the bankruptcy is ultimately dismissed the tenant still owes his/her back rent, plus attorney's fees and court costs, plus the derogative "black mark" on his or her credit.

     It is important to be ready to respond immediately if your tenant files for bankruptcy. This is especially true if the tenant fails to pay rent or is being evicted. The first thing to do is request the bankruptcy court's permission to commence or continue with the eviction process. This is accomplished by filing a Motion for relief from the Automatic Stay. Some tenants will dismiss their petition and re-file a second bankruptcy petition in an attempt to further delay the process. The motion should be worded so as to make it possible for the eviction to continue notwithstanding the dismissal and re-filling of a new bankruptcy petition. Most bankruptcy judges will agree to grant the motion with this added protection.

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