In Re: Eileen Fogarty

20-2187-bk
In re: Eileen Fogarty
In the
United States Court of Appeals
For the Second Circuit
______________
August Term, 2020
(Argued: June 24, 2021 Decided: July 6, 2022)
Docket No. 20-2187
______________
IN RE: EILEEN FOGARTY,
Debtor.
______________
BAYVIEW LOAN SERVICING LLC,
Appellant,
– v. –
EILEEN FOGARTY,
Debtor-Appellee,
R. KENNETH BARNARD, TRUSTEE, UNITED STATES TRUSTEE,
Trustees-Appellees. *
______________
* The Clerk of Court is directed to amend the case caption to conform to the above.
B e f o r e:
CARNEY and BIANCO, Circuit Judges, and GARAUFIS, District Judge. †
______________
Debtor-Appellee Eileen Fogarty held a 99% interest in 72 Grandview LLC, which
in turn owned a residential property that Fogarty occupied as her primary residence.
Appellant Bayview Loan Servicing LLC initiated a foreclosure action in which both 72
Grandview LLC and Fogarty were named as defendants. After Bayview obtained a
judgment that authorized it to proceed with a foreclosure sale, Fogarty filed a Chapter 7
bankruptcy petition and notified Bayview that, in her view, proceeding with the
foreclosure sale would violate the automatic stay that took effect when she filed her
bankruptcy petition. See 11 U.S.C. § 362. Nonetheless, Bayview proceeded with the
foreclosure sale without relief from the automatic stay from the bankruptcy court.
Fogarty then sought sanctions against Bayview, see id. § 362(k), arguing that
Bayview willfully violated the automatic stay. The bankruptcy court denied Fogarty’s
motion, but the district court reversed that decision and remanded for the calculation of
fees and other damages that would be charged as sanctions. Bayview now appeals. We
hold that two of the Bankruptcy Code’s automatic stay provisions, 11 U.S.C. § 362(a)(1)
and (a)(2), are violated by an entity that proceeds with the foreclosure sale of a property
when the debtor is a named party in the foreclosure proceedings, even if the debtor
holds only a possessory interest in the property. Bayview willfully violated the
automatic stay when it proceeded with the foreclosure sale while knowing that Fogarty
had filed a bankruptcy petition. We therefore affirm the district court’s order.
AFFIRMED AND REMANDED.
______________
JOHN E. BRIGANDI, Knuckles, Komosinski & Manfro, LLP,
Upper Saddle River, NJ, for Bayview Loan Servicing
LLC.
Judge Nicholas G. Garaufis, of the United States District Court for the Eastern District of
†
New York, sitting by designation.
2
HEATH S. BERGER (Brad A. Schlossberg, on the brief), Berger,
Fischoff, Shumer, Wexler & Goodman, LLP, Syosset,
NY, for Eileen Fogarty.
______________
CARNEY, Circuit Judge:
Debtor-Appellee Eileen Fogarty held a 99% interest in 72 Grandview LLC (the
“LLC”), an entity that owned a property (the “Property”) that Fogarty occupied as her
primary residence. In 2010, the LLC stopped making payments on the Mortgage and
Note secured by the Property, leading Appellant Bayview Loan Servicing LLC
(“Bayview”) in 2011 to initiate a state court foreclosure action (the “Foreclosure
Action”) as the owner and holder of the Note and Mortgage. Seeking a state court order
that would permit the sale, Bayview named both the LLC and Fogarty as defendants in
the Foreclosure Action.
In January 2018, Bayview obtained a judgment in the Foreclosure Action, which
in effect authorized Bayview to sell the Property under the supervision of a court-
appointed referee. The sale was scheduled for April 2018. Four days before the
scheduled sale, Fogarty petitioned for bankruptcy in the Eastern District of New York
under Chapter 7 of the Bankruptcy Code. On the eve of the sale, her counsel notified
Bayview of her petition and her position that proceeding with the sale would violate the
automatic stay triggered by her petition. See 11 U.S.C. § 362. Bayview promptly
countered that, since the LLC alone owned the Property and the LLC had not filed for
bankruptcy, no relevant stay was in effect. It then proceeded as scheduled and the
Property was sold to a third party.
Fogarty then sought sanctions against Bayview in the bankruptcy court, asserting
Bayview’s willful violation of the automatic stay. See id. § 362(k). The bankruptcy court
(Scarcella, J.) denied Fogarty’s motion, but on appeal the district court (Gershon, J.)
reversed, finding that because Fogarty was a named defendant in the Foreclosure
3
Action, the sale violated the automatic stay. It further found the violation to be willful
because Bayview knew of the petition when it proceeded. It remanded to the
bankruptcy court for assessment and award of actual damages and consideration of a
punitive damages award. Bayview now appeals.
As a matter of first impression, we hold that two of the Bankruptcy Code’s
automatic stay provisions, 11 U.S.C. § 362(a)(1) and (a)(2), are violated by the
foreclosure sale of a property when the debtor is a named party in the foreclosure
proceedings, even if the debtor’s direct interest in the property is only possessory.
Accordingly, we conclude that Bayview willfully violated the automatic stay when it
completed the foreclosure sale while knowing that Fogarty, a named defendant in the
Foreclosure Action, had filed a bankruptcy petition. Bayview could and should have
sought relief in advance from the bankruptcy court. We AFFIRM the district court’s
order and we REMAND for further proceedings consistent with this Opinion.
BACKGROUND
I. Factual background 1
At all relevant times, Fogarty resided at the Property, a house and land located at
72 Grandview Drive in Shirley, New York. The LLC was the sole owner of the Property,
and Fogarty held a 99% interest in the LLC. 2 Bayview was the assignee of the LLC’s
Note and the Mortgage on the Property. The Note and Mortgage were executed on
behalf of the LLC by an individual other than Fogarty. Fogarty was not a guarantor of
either the Note or the Mortgage, and the parties agree that she could not be held
personally liable for the LLC’s debts.
1 The facts bearing on the questions before us are not in dispute.
2 The record does not reveal who or what entity owned the remaining 1%.
4
In January 2010, the LLC defaulted on the mortgage loan. One year later, in early
2011, Bayview sued the LLC in Suffolk County Supreme Court, in New York, citing the
continuing default. In its complaint, Bayview named as defendants the LLC, the New
York State Department of Taxation and Finance, and John Does numbered one through
fifty, but not Fogarty. Bayview arranged to have the complaint served on Fogarty as the
Property’s occupant. In October 2014, Bayview requested that Fogarty, as “co-tenant in
possession of a portion of the mortgaged premises,” be substituted for John Doe #1 as a
“party defendant” in the action. App’x at 113. In the same submission, it moved for a
default judgment.
Over three years later, in early 2018, the state court issued a Judgment of
Foreclosure and Sale (the “Foreclosure Judgment”) in favor of Bayview, naming the
LLC, Fogarty, and the New York State Department of Taxation and Finance as
defendants in the case caption, and setting the general terms of the foreclosure sale. 3
Bayview then scheduled a public auction of the Property for 9:45 a.m. on April 17, 2018
(the “Sale”).
On April 13, four days before the scheduled Sale, Fogarty filed a voluntary
petition for bankruptcy in the United States Bankruptcy Court for the Eastern District of
New York. 4 In her Chapter 7 petition, Fogarty stated that she resided at the Property.
On April 16, on the eve of the Sale, counsel for Fogarty contacted counsel for
Bayview by phone, and in a confirmation email that evening conveyed his firm’s
opinion that “pursuant to 11 [U.S.C. §] 362, the automatic stay is in effect” and that
“continuation of the [Sale] will be in violation of the stay.” App’x at 135. The email
3 The judgment is dated January 22, 2018, but is marked as entered on February 14, 2018.
4 As mentioned above, Fogarty alone petitioned for bankruptcy protection; the LLC did not
file a petition.
5
further stated that Fogarty would seek “costs, fees and sanctions for such violation of
the stay” if the Sale proceeded the next day as planned. Id.
Counsel for Bayview responded the next morning, minutes before the scheduled
Sale, dismissing Fogarty’s warning. He explained his view that, because the LLC is a
legal entity distinct from Fogarty, Fogarty’s bankruptcy petition “d[id] not stay acts
against the LLC or assets of the LLC,” such as the Property; thus, the impending Sale of
the LLC’s property would not violate the stay triggered by Fogarty’s personal
bankruptcy petition. Id. at 137. Bayview’s counsel also warned that “any motion for
sanctions against my client or my firm will be met with a cross-motion for sanctions
against you, your firm and your client.” Id.
Bayview proceeded with the Sale as scheduled. The Property was sold to a third
party. The “Terms of Sale” document, dated April 17, in which the supervising referee
set the particulars of the sale, was filed in the bankruptcy court not long after. The
document named both the LLC and Fogarty as defendants in the caption. It set the date
for delivery of the referee’s deed as May 17.
II. Procedural history
A few weeks later, on May 11, Fogarty moved for sanctions against Bayview in
the bankruptcy court. Invoking 11 U.S.C. § 362(k), 5 she sought actual damages, costs,
attorney’s fees, and punitive damages based on Bayview’s decision to proceed with the
sale. 6 Fogarty argued that conducting the sale constituted a willful violation of two of
Section 362(k) provides, in pertinent part, that “an individual injured by any willful
5
violation of a stay provided by this section shall recover actual damages, including costs and
attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C.
§ 362(k)(1).
Fogarty also unsuccessfully sought an order from the bankruptcy court vacating the April
6
17 Sale, but she does not pursue that form of relief on appeal.
6
the Bankruptcy Code’s automatic stay provisions: Section 362(a)(1), involving “the
commencement or continuation . . . of a judicial . . . or other action or proceeding
against the debtor,” and Section 362(a)(2), involving “the enforcement, against the
debtor or against property of the estate, of a judgment obtained before the
commencement of the case under [the Bankruptcy Code].” Bayview opposed the
motion and cross-moved for sanctions against Fogarty.
On May 15, the bankruptcy court held oral argument and denied both motions. 7
In a brief written order two weeks later, it emphasized that Fogarty could not be held
personally liable for the LLC’s default on the Note and Mortgage. In the bankruptcy
court’s view, the fact of her nonliability rendered the Foreclosure Action an action
“solely in rem.” App’x at 218. Accordingly, Bayview did not violate the automatic stay
when it proceeded with the Sale. 8
Fogarty timely appealed the bankruptcy court’s decision to the United States
District Court for the Eastern District of New York, and the district court reversed the
bankruptcy court’s order. It identified two reasons for its ruling. First, because Fogarty
was a named defendant in the Foreclosure Action and that action was the basis for the
Sale, Bayview violated the stay by proceeding with the Sale. Second, the Sale
“significantly lessened the barriers to evicting [Fogarty] from the Property” under New
York law. App’x at 87. Thus, it reasoned, the Sale interfered with Fogarty’s possessory
interest in the Property. Because that interest was part of Fogarty’s bankruptcy estate, it
was protected by the automatic stay.
7 Bayview does not here challenge the bankruptcy court’s denial of its cross-motion for
sanctions.
8The third-party purchaser subsequently appeared in the bankruptcy court and successfully
sought relief from the automatic stay, allowing him to pursue eviction proceedings against
Fogarty. Those proceedings resulted in Fogarty’s eviction from the Property.
7
Finally, the district court determined that the stay violation was willful,
explaining that the relevant inquiry for that analysis is only whether Bayview intended
to take the action that violated the automatic stay. Bayview indisputably intended to do
so here, with full knowledge of the bankruptcy filing. 9 Accordingly, the district court
held, Fogarty is entitled to actual damages as a sanction against Bayview. It remanded
the case to the bankruptcy court to determine the appropriate amount of those damages
and also to consider whether punitive damages should be awarded.
Bayview timely appealed.
DISCUSSION
On appeal from a district court’s decision on matters arising from bankruptcy
court proceedings, “we independently review the bankruptcy court’s decision,
accepting the bankruptcy court’s factual findings unless they are clearly erroneous and
reviewing its conclusions of law de novo.” In re DiBattista, 33 F.4th 698, 702 (2d Cir.
2022). 10 “A bankruptcy court’s decision on sanctions is reviewed for abuse of
discretion,” a standard that is necessarily met by a ruling that rests on “an erroneous
view of the law or on a clearly erroneous assessment of the evidence.” Id. The correct
scope of the Bankruptcy Code’s automatic stay provisions presents an issue of law as to
which the bankruptcy court’s decision is subject to de novo review. Picard v. Fairfield
Greenwich Ltd., 762 F.3d 199, 206 (2d Cir. 2014). 11
9 On appeal, Bayview does not challenge the district court’s conclusion with respect to
willfulness.
10Unless otherwise noted, in quoting caselaw this Opinion omits all alterations, citations,
footnotes, and internal quotation marks.
11 The parties did not raise any concerns about our appellate jurisdiction in their briefing or
at oral argument. Nonetheless, we are “duty bound to examine this issue” nostra sponte. In re
8
On such review, we hold that the Bankruptcy Code’s automatic stay provisions
relied on by Fogarty, 11 U.S.C. § 362(a)(1) and (a)(2), are violated by the foreclosure sale
of a property when the debtor is a named party in the foreclosure proceedings, even if
the debtor holds only a possessory interest in the property. Accordingly, we conclude
that Bayview willfully violated the automatic stay when it completed the Sale while
knowing that Fogarty, a named party in the Foreclosure Action, had filed a bankruptcy
petition. Because Bayview willfully violated the automatic stay, Fogarty is entitled to
sanctions. See 11 U.S.C. § 362(k). In concluding otherwise, the bankruptcy court made
Prudential Lines, Inc., 59 F.3d 327, 331 (2d Cir. 1995). District courts have jurisdiction over
appeals from the final order of a bankruptcy court, see 28 U.S.C. § 158(a), and our court has
jurisdiction over appeals of “all final decisions, judgments, orders, and decrees” of the district
courts in their consideration of bankruptcy appeals, 28 U.S.C. § 158(d). In general, “[f]inality in
the bankruptcy context is determined by a less rigid standard than that applicable to other
proceedings.” In re Chateaugay Corp., 922 F.2d 86, 90 (2d Cir. 1990). We have recognized,
however, that “even in cases where the underlying bankruptcy court decision is final and
appealable, the district court’s disposition may independently render the matter
nonappealable” if it remands for “significant further proceedings” in the bankruptcy court.
Prudential Lines, 59 F.3d at 331.
Here, there is no question that the bankruptcy court’s order denying Fogarty’s motion for
sanctions was a final order appealable to the district court. As to the finality of the district
court’s order, our court has not addressed in a precedential opinion whether a district court’s
order awarding sanctions and remanding for a determination of damages pursuant to
Section 362(k) requires “significant further proceedings” in the bankruptcy court. But see In re
DiPietro, No. 20-3629, 2022 WL 880485, at *1–2 (2d Cir. Mar. 25, 2022) (summary order)
(suggesting, in dicta, that a district court’s remand on a bankruptcy court’s contempt order did
not effect a final disposition for purposes of appellate jurisdiction). To the extent that this
unresolved issue creates any uncertainty about our appellate jurisdiction under Section 158(d),
we need not resolve it in this case because, “as we have repeatedly explained in different
statutory contexts, so long as we are satisfied that we have Article III jurisdiction, we have
discretion to decline to resolve difficult jurisdictional questions.” Miller v. Metro. Life Ins. Co., 979
F.3d 118, 123 (2d Cir. 2020); see Butcher v. Wendt, 975 F.3d 236, 242–44 (2d Cir. 2020) (detailing
our court’s practice of exercising hypothetical jurisdiction). Here, where there is no doubt that
we have Article III jurisdiction, where the statutory jurisdictional issue is novel and not
addressed by the parties, and where the merits turn on a straightforward textual analysis, we
will exercise our discretion to assume hypothetical jurisdiction and proceed to resolve the
appeal on the merits.
9
an error of law, and therefore exceeded the permissible bounds of its discretion. We
thus affirm the order of the district court.
I. Section 362’s automatic stay applies to the Sale
The Bankruptcy Code’s automatic stay provisions, set forth in Section 362,
“protect[] bankruptcy estates by restraining any formal or informal action or legal
proceeding that might dissipate estate assets or interfere with the trustee’s orderly
administration of the estate.” Picard, 762 F.3d at 207; see 3 Collier on Bankruptcy ¶ 362.03
(16th ed. 2022) (describing the automatic stay as “extremely broad in scope” and
“appl[ying] to almost any type of formal or informal action taken against the debtor or
the property of the [debtor’s] estate”). The automatic stay is “one of the fundamental
debtor protections provided by the bankruptcy laws, designed to relieve the financial
pressures that drove debtors into bankruptcy.” Eastern Refractories Co. v. Forty Eight
Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998). Because “the automatic stay is imposed
by Congressional mandate and not by court order,” no court action is needed for the
stay to become effective. In re Colonial Realty Co., 980 F.2d 125, 137 (2d Cir. 1992).
A. Under the plain text of Section 362, the Sale violated the automatic stay
It is undisputed that, under Section 362, Fogarty’s bankruptcy filing on April 13,
2018, triggered an automatic stay. And, as Bayview concedes, Fogarty’s possessory
interest as a tenant of the Property was part of her bankruptcy estate and protected by
the automatic stay. See In re 48th St. Steakhouse, Inc., 835 F.2d 427, 430 (2d Cir. 1987) (“[A]
mere possessory interest in real property, without any accompanying legal interest, is
sufficient to trigger the protection of the automatic stay.”). Instead, the parties’ dispute
concerns whether, properly applied, the automatic stay that was triggered by Fogarty’s
bankruptcy filing should have blocked the Sale.
10
To resolve this dispute, we look first to the plain text of Section 362. See
Springfield Hosp., Inc. v. Guzman, 28 F.4th 403, 418 (2d Cir. 2022). As relevant here, under
Section 362(a), the filing of a Chapter 7 bankruptcy petition “operates as a stay” of:
(1) the commencement or continuation, including the issuance or
employment of process, of a judicial, administrative, or other action
or proceeding against the debtor that was or could have been
commenced before the commencement of the case under this title, or
to recover a claim against the debtor that arose before the
commencement of the case under this title; [and]
(2) the enforcement, against the debtor or against property of the
estate, of a judgment obtained before the commencement of the case
under this title[.]
11 U.S.C. § 362(a)(1)–(2). 12
Starting with Section 362(a)(1), we agree with Fogarty that the Sale represented a
“continuation . . . of a judicial, administrative, or other action or proceeding against the
debtor.” Id. § 362(a)(1). Fogarty was a named defendant in the Foreclosure Action.
Section 362(a)(1) provides that actions “against the debtor” or “to recover a claim
against the debtor” are subject to the automatic stay. Id. As we have explained, “[t]he
latter category”—to recover a claim against the debtor—“must encompass cases in
which the debtor is not a defendant; it would otherwise be totally duplicative of the
former category and pure surplusage.” Colonial Realty, 980 F.2d at 131. By contrast, the
former category—actions “against the debtor”—must encompass actions in which the
debtor is a named defendant, as Fogarty was in the Foreclosure Action. As a result, we
can only conclude that the Foreclosure Action was “against the debtor” and therefore
12 Section 362(a) operates as a stay in additional circumstances that the parties have not
raised in their briefing and that we need not address in this Opinion. See 11 U.S.C. § 362(a)(3)–
(8). The Code also specifies certain exceptions to the automatic stay. See id. § 362(b). These are
not at issue here.
11
covered by Section 362(a)(1). Cf. In re Comcoach Corp., 698 F.2d 571, 574 (2d Cir. 1983)
(“Until the debtor is named as a party-defendant the action does not affect the bankrupt
estate.”).
The Foreclosure Judgment entered against the LLC and Fogarty set forth the
terms and conditions of the Sale, and Fogarty remained a defendant in the Foreclosure
Action through the Sale, as the caption on the document entitled “Terms of Sale”
correctly reflects. It follows that the Sale amounted to the “continuation” of an action
against Fogarty that was commenced before her bankruptcy filing and was subject to
the automatic stay established by Section 362(a)(1). See In re Ebadi, 448 B.R. 308, 314
(Bankr. E.D.N.Y. 2011) (“Prior to the time Debtor commenced this case, LP had already
obtained a Foreclosure Judgment in which Debtor was a named defendant. LP
continued the Foreclosure Action by conducting the Foreclosure Sale. This constitutes
both a continuation of a judicial action against the debtor and a continuation of a
judicial action to recover a claim against the debtor, both violations of the plain
language of Section 362(a)(1) of the Code.”).
The same conclusion follows with respect to Section 362(a)(2). Because the
Foreclosure Judgment against the LLC and Fogarty was entered on February 14, 2018, it
was “obtained before the commencement of” Fogarty’s bankruptcy proceeding on April
13. 11 U.S.C. § 362(a)(2). The Sale “enforce[d]” a judgment “against the debtor,” id.,because, through the sale proceedings, the court-appointed referee sold the Property as
authorized by the Foreclosure Judgment, and that judgment bound both Fogarty and
the LLC as named defendants. Fogarty remained a defendant in that proceeding at least
through the Sale. The Sale therefore violated the plain terms of the stay imposed by
Section 362(a)(2).
Bayview has not identified any authority—and we are not aware of any—in
which a court has found that the automatic stay does not apply to a proceeding in which
12
the debtor is a named defendant. Such an interpretation would cut against the plain text
of Sections 362(a)(1) and (a)(2). As the Supreme Court instructs, “when the statute’s
language is plain, the sole function of the courts—at least where the disposition
required by the text is not absurd—is to enforce it according to its terms.” Hartford
Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000); see Conn. Nat. Bank
v. Germain, 503 U.S. 249, 254 (1992) (“When the words of a statute are unambiguous,
then . . . [the] judicial inquiry is complete.”). Here, that language demands a bright-line
rule that, so long as the debtor is a named party in a proceeding or action, the automatic
stay applies to the continuation of that proceeding, and to the enforcement of, a
judgment rendered in that proceeding.
B. Our interpretation does not implicate the canon against surplusage
Bayview resists this conclusion. It argues that we may not find that the Sale
represents both a “continuation” of the Foreclosure Action under Section 362(a)(1) and
“enforcement” of the Foreclosure Judgment under Section 362(a)(2), contending that
such an interpretation would render Section 362(a)(2) superfluous. We find this
argument unpersuasive.
When construing the Bankruptcy Code, or indeed any statutory scheme, we
must be mindful that “[t]he canon against surplusage is strongest when an
interpretation would render superfluous another part of the same statutory scheme.”
City of Chicago v. Fulton, 141 S. Ct. 585, 591 (2021). But our interpretations of the terms
“continuation” and “enforcement” does not render Section 362(a)(2) duplicative of
subsection (a)(1) or otherwise superfluous; rather, “every clause and word” of each of
the provisions retains meaning under our interpretation. Duncan v. Walker, 533 U.S. 167,
174 (2001).
13
To explain why, we offer a simple example. Consider a scenario in which a
creditor obtains a pre-petition judgment in Connecticut, and then, post-petition, seeks
to enforce the judgment in New York through a new proceeding. Under our
interpretation, the New York enforcement action would not constitute a
“continuation . . . of a judicial, administrative, or other action or proceeding against the
debtor,” so Section 362(a)(1) would not apply. But the hypothetical New York
enforcement action would nonetheless fall within the scope of Section 362(a)(2), and so
the automatic stay would apply under that provision.
As this example demonstrates, our interpretation does not implicate the canon
against surplusage because each subsection of the statute retains independent meaning.
To be sure, there may be circumstances in which Section 362’s subsections overlap and
both apply. An enforcement action may be a “continuation” of a proceeding in some
cases, such as this one, where enforcement takes place through the same proceeding
that produced the underlying judgment. But the potential for partial overlap does not,
on its own, render part of the statutory scheme wholly superfluous. And so, contrary to
Bayview’s objection, our interpretation is sound notwithstanding the canon Bayview
cites. See Fulton, 141 S. Ct. at 591. Indeed, a congressional desire for comprehensiveness
may lead the drafters of legislation to craft provisions that intentionally overlap to some
extent in an attempt to avoid any inadvertent gaps. That some overlap occurs on
occasion does not require either striking or ignoring the scheme. 13
13 In this vein, we note that the Bankruptcy Code offers no indication that Congress intended
the automatic stay provisions to be mutually exclusive. To the contrary, several provisions
appear, on their face, to create the potential for duplication in particular circumstances. For
example, Section 362(a)(6) stays “any act to collect, assess, or recover a claim against the debtor
that arose before the commencement of” the bankruptcy case. 11 U.S.C. § 362(a)(6). Similarly,
Section 362(a)(1) stays “the commencement or continuation, including the issuance or
employment of process, of a judicial, administrative, or other action or proceeding . . . to recover
14
C. Under Sections 362(a)(1) and (a)(2), Fogarty’s precise role in the
Foreclosure Action does not matter as long as she was a named defendant
Bayview argues that, even though Fogarty was a named defendant in the
Foreclosure Action, the nature of her involvement in the Action means that the
automatic stay did not apply to it or to the Sale. Specifically, Bayview presses the
view—adopted by the bankruptcy court—that the Foreclosure Action did not violate
the automatic stay since it was an in rem proceeding and Fogarty was named as a
defendant in the action only as an “interested party.” Bayview further advances the
position that the Sale did not “affect” Fogarty’s bankruptcy estate, and that, as a result,
the Sale could not have violated the automatic stay whether we look to Section 362(a)(1)
or (a)(2). Appellant’s Reply Br. at 4.
The argument is fundamentally flawed. Section 362(a) draws no textual
distinction between in rem and in personam proceedings in which the debtor is a named
party, nor does it inquire into why the debtor was named as a defendant in an action or
proceeding. Rather, under Section 362(a)’s plain text, any action or proceeding “against
the debtor” is stayed, regardless of whether the debtor was purportedly named as
merely an interested or nominal party or as some other kind of defendant. Cf. In re
Granite Partners, L.P., 194 B.R. 318, 335 (Bankr. S.D.N.Y. 1996) (rejecting the argument
that a debtor-defendant was “named only for completeness” because “[t]he Bankruptcy
Code does not recognize a ‘completeness’ exception to the automatic stay”).
a claim against the debtor that arose before the commencement of” the bankruptcy case. Id.§ 362(a)(1). Although these two provisions may naturally overlap in some circumstances, that
overlap likely reflects Congress’s well-understood intention for the automatic stay provisions to
apply broadly and to ensure that the provisions capture a very wide range of potential actions
against bankruptcy debtors and debtors’ estates. See, e.g., Picard, 762 F.3d at 207; In re Panayotoff,
140 B.R. 509, 511 (Bankr. D. Minn. 1992) (“The language of [Section 361(a)(1)] is about as clear as
one could reasonably want, and about as broad as Congress could have provided.”); 3 Collier on
Bankruptcy ¶ 362.03.
15
Bayview relies principally on In re Ebadi to support its argument. But Ebadi does
not establish the rule that Bayview advances. Ebadi involved circumstances that bear
some similarity to those presented here. The debtor there owned a company that, in
turn, owned a property subject to a mortgage. See 448 B.R. at 312. The mortgagee
obtained a foreclosure judgment on the property; the judgment named both the debtor
and the debtor’s company. See id. The debtor petitioned for bankruptcy mere hours
before the foreclosure sale was set to occur. See id. It so notified the mortgagee bank, but
to no avail: the bank proceeded with the foreclosure sale. See id.The bankruptcy court first determined that the bank’s post-petition foreclosure
sale violated the automatic stay imposed by Section 362(a)(1). Consistent with our
interpretation of the Bankruptcy Code here, the bankruptcy court rested its decision on
the ground that the debtor was a named defendant in the foreclosure action. See id. at
313.
The bankruptcy court also found that the foreclosure sale violated the automatic
stay imposed by a separate provision—Section 362(a)(6)—because the debtor there was
a guarantor of the mortgage debt. Id. at 314–15. 14 It then rejected the mortgagee’s
argument that the foreclosure action was permissible despite the stay because it was an
in rem proceeding. In doing so, the court hazarded in passing that “[a]n in rem action
against property in which a debtor does not have an ownership interest would likely
not run afoul with [sic] the automatic stay,” since “such an action would likely be
governed by the principle that a creditor can generally pursue non-bankrupt obligors
freely.” Id. at 318. That principle did not apply in Ebadi, however, the court wrote,
because the debtor both was named as a defendant and guaranteed the mortgage debt.
14 As noted above, Fogarty is not a guarantor of the LLC’s debt, and Section 362(a)(6) is not
at issue here.
16
See id. The court further emphasized that the reason why the debtor was named in the
foreclosure action did not matter to the stay analysis; simply put, because the debtor had
been named, the foreclosing entity should have sought relief from the stay before
proceeding with the sale, or removed the debtor as a party in the foreclosure action. See
id. By failing to take either step, the foreclosing entity willfully violated the automatic
stay. See id. at 320.
The holding in Ebadi therefore lends no support to Bayview’s position in this
appeal.
Bayview’s contention that the Sale did not violate the stay on the ground that it
“did not impact [Fogarty’s] estate” also lands wide of the mark. Appellant’s Br. at 19.
We have long held that, even when the debtor is not a named party in an action, “[i]f
action taken against the non-bankrupt party would inevitably have an adverse impact
on property of the bankrupt estate, then such action should be barred by the automatic
stay.” 48th St. Steakhouse, 835 F.2d at 431; see Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282,
287 (2d Cir. 2003) (“The automatic stay can apply to non-debtors, but normally does so
only when a claim against the non-debtor will have an immediate adverse economic
consequence for the debtor’s estate.”). The application of the stay to actions against non-
debtors is limited, however, to actions with “an adverse impact on a debtor that occurs
by operation of law.” Picard, 762 F.3d at 208. The automatic stay does not bar “actions
taken against third parties that are only factually likely, as opposed to legally certain, to
impact estate property.” Id.
Bayview invokes these precedents in support of its proposition that any effect of
the Sale on Fogarty’s possessory interest in the Property was “far from a legal
certainty,” and therefore did not violate the stay. Appellant’s Br. at 19. But Bayview’s
reliance on these precedents is misplaced: each involved actions taken against or
ongoing proceedings against only third parties. In Picard, for example, the bankruptcy
17
trustee sought to block “the settlement of three lawsuits, none of which involved [the
debtors] as a party.” 762 F.3d at 202. In 48th Street Steakhouse, the debtor—a sublessor—
sought to prevent the landlord from taking an action against its sublessee (terminating
the sublessee’s leasehold). 835 F.2d at 429. And in Queenie, we stayed an appeal as it
related to the debtor and the debtor’s wholly owned corporation, but we allowed the
appeal to proceed as to those defendants who were exposed to separate liabilities on the
same judgment. 321 F.3d at 287–88 & n.4.
Here, we need not resolve whether the Sale would have a “likely” or a “certain”
effect on Fogarty’s estate. The inescapable fact is that Fogarty was a named party in the
Foreclosure Action. And that fact subjected the Foreclosure Action to the automatic stay
regardless of its precise effects, equitable or legal, on her estate, unlike in Picard and 48th
Street Steakhouse. Fogarty remained a party to the Foreclosure Action when the Sale
occurred, and the Action was not stayed as to Fogarty while continuing against the
LLC, in contrast to the appeal in Queenie.
To be sure, if Fogarty had been dismissed from the case as a defendant before the
Sale occurred, then the situation would perhaps be closer to the scenario presented in
Queenie, and, as Fogarty appears to recognize, the Sale might not have violated the
automatic stay. See Ebadi, 448 B.R. at 316 (“The stay violation in this case is predicated
on [the foreclosing party’s] actions taken in furtherance of the Foreclosure Judgment
against, inter alia, Debtor himself. Had [the foreclosing party] dismissed Debtor from the
Foreclosure Action and removed Debtor from the Foreclosure Judgment prior to the
sale going forward, the case would likely have been sufficiently analogous to collecting
from a non-filing co-obligor such that [the foreclosing party] would likely not have been
stayed from collecting from [the mortgagor].”). But that dismissal did not occur. On the
circumstances presented here, where Fogarty remained a named defendant in the
Foreclosure Action, the Sale violated the automatic stay.
18
In short, we reject Bayview’s contention that, even if the debtor is a named party,
the precise contours of and reasons for the debtor’s status in an action or proceeding
affect whether the automatic stay imposed by Section 362(a)(1) or (a)(2) applies. Instead,
our holding effects a bright-line rule: if the debtor is a named party in a proceeding or
action, then the automatic stay imposed by those subsections applies to the continuation
of such a proceeding or action, under Section 362(a)(1), and to the enforcement of an
earlier judgment in that proceeding or action, under Section 362(a)(2). 15 Fogarty’s
bankruptcy filing triggered the automatic stay established by Section 362, and Bayview
violated that stay when it proceeded with the Sale.
Once the stay was in place, Bayview’s recourse, if it wanted to proceed with the
Sale, was to follow the Bankruptcy Code’s procedures for seeking relief in the
bankruptcy court. See 11 U.S.C. § 362(d). Bankruptcy courts may “take measures that
grant relief from the automatic stay, including ‘terminating, annulling, modifying, or
conditioning’ the stay,” and they “have the plastic powers to modify or condition an
automatic stay so as to fashion the appropriate scope of relief.” Eastern Refractories, 157
F.3d at 172 (quoting 11 U.S.C. § 362(d)). A party “is required to move for stay relief if it
wishes to enforce its rights against a Debtor protected by the United States Code and
the federal bankruptcy laws, and it cannot bypass [the bankruptcy court’s] jurisdiction
merely because in their opinion cause exists to lift the stay.” In re Dominguez, 312 B.R.
499, 507 (Bankr. S.D.N.Y. 2004).
Bayview did not seek and obtain relief from the stay. Instead, it simply
proceeded with the Sale, despite its knowledge of Fogarty’s bankruptcy filing and of
15 In light of this conclusion, we need not resolve the parties’ dispute regarding whether the
Sale affected Fogarty’s possessory interest in the Property under New York Real Property
Actions and Proceedings Law.
19
Fogarty’s intention to seek sanctions. Because Bayview willfully violated the automatic
stay, Fogarty is entitled to sanctions under Section 362(k). 16 In concluding otherwise, the
bankruptcy court relied on an error of law, and therefore exceeded the permissible
bounds of its discretion.
II. Bayview’s remaining arguments are unpersuasive
Bayview presses several additional arguments to counter our straightforward
textual interpretation, but its arguments are not convincing.
A. The ministerial act exception does not apply
Bayview submits that the Sale was merely a “ministerial act” and that,
accordingly, it could not have violated the automatic stay. Appellant’s Br. at 19. This
argument too is without merit.
The “ministerial act” exception represents an exceedingly narrow category of
actions that avoid the automatic stay. As we have explained, “mere ministerial acts
performed by the clerk following the completion of the judicial function” are not “the
continuation of a judicial proceeding within the meaning of section 362(a)(1).” Rexnord
Holdings, Inc. v. Bidermann, 21 F.3d 522, 528 (2d Cir. 1994). An example of this type of
action would be the “entry of a judgment on the court docket” by a court clerk. Id.Similarly, “the delivery of the deed” to a property that has already been sold in
foreclosure is properly treated as a “ministerial act” for automatic stay purposes, In re
Rodgers, 333 F.3d 64, 69 (2d Cir. 2003), as is the “issuance of the writ of possession after
Bayview does not challenge the district court’s holding that Bayview’s knowledge of
16
Fogarty’s bankruptcy petition means that it willfully violated the automatic stay. See In re Weber,
719 F.3d 72, 82 (2d Cir. 2013) (“A creditor willfully violates section 362 when it knows of the
filing of the petition (and hence of the automatic stay), and has the general intent simply to
perform the act found to violate section 362; no specific intent to violate section 362 is
necessary.”), abrogated on other grounds by Fulton, 141 S. Ct. 585.
20
strict foreclosure,” In re Canney, 284 F.3d 362, 375 (2d Cir. 2002). In each of these
examples, we deemed the act “ministerial” and not barred by the stay because the
action with material legal effect had already been reduced to judgment; all that
remained to do were minor administrative tasks flowing directly from the judgment.
See In re Soares, 107 F.3d 969, 974 (1st Cir. 1997) (“A ministerial act is one that is
essentially clerical in nature.”).
By contrast, under our precedents, a foreclosure sale is not a ministerial act
because it affects ownership and possessory interests and requires the exercise of
discretion (by the referee in particular). See Rodgers, 333 F.3d at 69. For example, in
Fogarty’s case, her LLC possessed an ownership interest in the Property before the Sale;
after the Sale, it did not. Likewise, the Foreclosure Judgment stated that the court
“ORDERED, ADJUDGED and DECREED, that the purchaser or purchasers of such
foreclosure sale be let into possession on production of the referee’s deed or deeds.”
App’x at 129. Thus, a third-party purchaser gained ownership and possessory rights
through the Sale.
Accordingly, we reject Bayview’s ministerial act argument.
B. Bayview was entitled to seek relief from the stay
As noted above, if Bayview wanted to proceed with the Sale after Fogarty filed
her bankruptcy petition, its proper course of action was to seek and obtain relief from
the automatic stay pursuant to Section 362(d). That provision empowers the bankruptcy
21
court to grant relief from a stay “[o]n request of a party in interest and after notice and a
hearing.” 17 11 U.S.C. § 362(d).
Bayview responds that this path was illusory: it would not have been allowed to
seek relief from the stay, it says, reasoning that it was not Fogarty’s direct creditor and
therefore, under our 1983 decision in In re Comcoach, it would not be considered a
qualifying “party in interest” under Section 362(d).
The proper context for Bayview to have pressed this argument was in the
bankruptcy court upon requesting relief from the stay, and before proceeding with the
Sale. 18 Instead, it went forward with the Sale based on its unilateral (and erroneous)
understanding that the stay did not apply to the Sale and that, even if the stay did
apply, it was not entitled to seek relief. Bayview’s apparent misunderstanding of the
law cannot now excuse its failure to seek relief. Nonetheless, because we fault Bayview
for not seeking and obtaining such relief, and in light of some confusion associated with
our decision in Comcoach, 19 we address Bayview’s argument and explain why it
misunderstands our precedent.
17 Section 362(d) provides, as relevant here:
On request of a party in interest and after notice and a hearing, the court
shall grant relief from the 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[.]
11 U.S.C. § 362(d)(1).
18 Not only did Bayview fail to seek relief from the bankruptcy court, but Bayview did not
cite Comcoach or assert an inability to seek relief in its response to Fogarty’s counsel before the
Sale, its briefing before the bankruptcy court or the district court, or its opening brief on appeal.
19See, e.g., 3 Collier on Bankruptcy ¶ 362.07 n.8 (observing that “[l]ower courts in the Second
Circuit have struggled with Comcoach, and have given a narrow reading, tailored to its facts”).
22
In Comcoach, Roslyn Savings Bank initiated foreclosure proceedings against its
mortgagor. 698 F.2d at 572. Comcoach was the tenant in possession of the mortgaged
premises, but was “neither named as a party-defendant nor served with process” in the
foreclosure action. Id.Comcoach filed for bankruptcy. Roslyn then brought a federal court action
seeking relief under Section 362(d) that would “enable it to name Comcoach as a party-
defendant in the pending state foreclosure action.” Id. at 573. We concluded that Roslyn
was not entitled to seek relief from the stay because it was not a “party in interest” in
the bankruptcy proceeding under Section 362(d). Id.Crucial to our conclusion was the fact that, contrary to Roslyn’s argument, the
state foreclosure action was not subject to the stay triggered by Comcoach’s bankruptcy
filing: Comcoach was not named as a defendant in that action. Id. at 574. “Until the
debtor is named as a party-defendant,” we explained, “the action does not affect the
bankrupt estate.” Id. Roslyn had no direct claim against Comcoach, the debtor in the
relevant bankruptcy proceeding. Instead, Comcoach had a claim against the mortgagor,
which in turn had rights against Comcoach as Comcoach’s landlord. See id. at 572.
Roslyn’s rights against Comcoach were therefore entirely derivative of the mortgagor’s
rights. As a result, we concluded that that Roslyn was not a “party in interest” and
could not invoke the bankruptcy court’s jurisdiction under Section 362(d) to seek relief
from the stay. Id. at 574. Furthermore, we highlighted that Roslyn would not be left
remediless: it could seek appointment of a receiver in the (pending and unstayed) state
court action, and the receiver could then step into the shoes of the mortgagor and
enforce the mortgagor’s rights against Comcoach. Id. at 574–75.
Comcoach is therefore inapposite here. Unlike the debtor in Comcoach, Fogarty
was a named party defendant in the state foreclosure proceeding; for the reasons
detailed above, the automatic stay applied to the Foreclosure Action. In light of its
23
position as an opposing party to Fogarty in the Foreclosure Action that was subject to
the stay, Bayview is no mere “stranger” to Fogarty’s bankruptcy proceeding. Id. at 574. 20
Comcoach also includes language which, if divorced from its rightful context in
the opinion, could be misunderstood to limit who may seek relief from a stay as a
“party in interest” to “either a creditor or a debtor” for the purposes of Section 362(d).
Id. at 573. But the context is crucial, as courts “have long recognized that the meaning of
the term [‘party in interest’] must be determined on an ad hoc basis.” In re Teligent, Inc.,
640 F.3d 53, 60 (2d Cir. 2011). Comcoach should not be understood to preclude a party
subject to a Section 362 stay from seeking relief from the stay in the bankruptcy court. 21
20 Comcoach is further inapposite in that Bayview would have no recourse if it were not able
to seek relief from the stay as a party in interest since the Foreclosure Action is stayed, whereas
Roslyn retained a pathway to seek relief under our disposition in Comcoach.
21 Indeed, numerous courts have construed this language from Comcoach narrowly in an
effort to avoid a “mechanical application” that would “creat[e] ‘an anomalous situation where a
party is subject to the automatic stay but is unable to seek relief even if damage may result from
its continuance.’” In re Brown Transp. Truckload, Inc., 118 B.R. 889, 893 (Bankr. N.D. Ga. 1990)
(quoting 2 Collier on Bankruptcy ¶ 362.07 (15th ed. 1990)). For example, in In re Village Rathskeller,
Inc., the court found that Comcoach did not control because “Comcoach was driven by two facts
which are not present here, first, that the mortgagee was not stayed from foreclosing because
the debtor was not a party to the action and, second, that the mortgagee had an available
remedy to seek payment of rent from the debtor, appointment of a receiver in the unstayed
foreclosure action.” 147 B.R. 665, 669 (Bankr. S.D.N.Y. 1992).
Likewise, shortly after Comcoach was decided, a district court held that “[s]ince if [the
appellant] cannot seek relief from the stay no one can do so on its behalf, we would be reluctant
to deny [the appellant] standing as a party in interest unless compelled by the Comcoach
decision to do so . . . . [W]e feel no such compulsion.” In re Johns-Manville Corp., 31 B.R. 965, 972
(S.D.N.Y. 1983). Various courts outside this circuit have also distinguished or criticized the
relevant language from Comcoach. See, e.g., In re Bushnell, 469 B.R. 306, 309 (B.A.P. 8th Cir. 2012);
In re Horton, 595 B.R. 1, 4 (Bankr. D.D.C. 2019); In re Sweports, Ltd., 476 B.R. 540, 543–44 (Bankr.
N.D. Ill. 2012); In re Woodberry, 383 B.R. 373, 379 (Bankr. D.S.C. 2008); In re Schlupp, No. 05-
16879DWS, 2005 WL 2483209, at *4 (Bankr. E.D. Pa. Sept. 2, 2005). These decisions underscore
why Bayview could have and should have sought relief from the stay in the bankruptcy court,
rather than rely on its view that it would not have been allowed to do so.
24
Rather, the governing principle to be drawn from Comcoach is that, “[t]o the extent that
the rights of a party in interest are asserted, those rights must be asserted by the party in
interest, not someone else.” In re Refco Inc., 505 F.3d 109, 117 (2d Cir. 2007). Here, unlike
the mortgagee in Comcoach, Bayview seeks to assert its own rights as a party in interest.
We are therefore confident that, as a direct adversary of the debtor in an action that was
subject to the automatic stay, Bayview would have qualified as a party in interest under
Section 362(d). It could have—and should have—sought relief from the automatic stay
before proceeding with the Sale.
C. Bayview’s appeal to equity is unavailing
Finally, in its challenge to the sanctions order, Bayview cites the bankruptcy
court’s obligation to reach equitable solutions as supportive of that court’s denial of
sanctions. We should let the bankruptcy court’s decision stand, it submits, on the
grounds that there is “no compelling interest in applying the automatic stay to a
foreclosure sale of property owned by the LLC,” Appellant’s Br. at 18, and that
enforcing the stay in the circumstances presented here “serves no purpose under the
Bankruptcy Code,” Appellant’s Reply Br. at 5.
This argument is misguided. To be sure, it is well established that bankruptcy
courts “are courts of equity and apply the principles and rules of equity jurisprudence.”
Young v. United States, 535 U.S. 43, 50 (2002); see also United States v. Energy Res. Co., 495
U.S. 545, 549 (1990) (“[B]ankruptcy courts, as courts of equity, have broad authority to
modify creditor-debtor relationships.”). But equitable principles do not allow
bankruptcy courts—or this court—to contradict the plain text of the automatic stay
provisions that Congress enacted. See Lamie v. U.S. Trustee, 540 U.S. 526, 538 (2004)
(“Our unwillingness to soften the import of Congress’ chosen words even if we believe
the words lead to a harsh outcome is longstanding. It results from deference to the
supremacy of the Legislature, as well as recognition that Congressmen typically vote on
25
the language of a bill.”). Section 362(a) does not incorporate as a consideration whether
applying the automatic stay serves a compelling interest or purpose in particular
circumstances. Instead, as we have described, it sets a bright-line rule that represents
“one of the fundamental debtor protections provided by the bankruptcy laws, designed
to relieve the financial pressures that drove debtors into bankruptcy.” Eastern
Refractories, 157 F.3d at 172.
We recognize that our holding may be viewed as formalistic. The form, sequence,
and timing of the events that occurred here give the reasonable impression that,
although her Chapter 7 petition may well have been filed in good faith, Fogarty sought
to avoid the already long-delayed effect of the LLC’s default on her possessory interest
in the Property with her last-minute filing, risking inconvenience and disruption to the
court-ordered Sale. But courts and parties alike must respect and follow the procedures
that Congress set forth in the Bankruptcy Code. To the extent that the effects of the
automatic stay effects may be inequitable, Congress has provided a means of
addressing that concern through Section 362(d)’s provision for relief from the stay. See
id. (Section 362(d) provides bankruptcy courts with “plastic powers to modify or
condition an automatic stay so as to fashion the appropriate scope of relief.”). Here,
Bayview did not avail itself of that means. Accordingly, we must conclude that Bayview
violated the automatic stay when it proceeded with the Sale after Fogarty filed her
bankruptcy petition.
CONCLUSION
We have considered all of Bayview’s remaining arguments and find in them no
basis for reversal. For the reasons set forth above, the July 1, 2020 order of the district
court is AFFIRMED and the case is REMANDED for further proceedings consistent
with this Opinion.
26