Civil litigators know that the impending bankruptcy of an opponent is bad news for any lawsuit that’s ongoing or in the works: Bankruptcy operates as an automatic stay of any state-court litigation against the debtor until the bankruptcy gets resolved. Oddly, however, the precise effect of such a stay was an open question in Maryland up until last month. With Kochhar v. Bansal, Md. Ct. Spec. App., Sept. Term 2014, No. 435 (Feb. 27, 2015), the state now joins the majority of other jurisdictions in deeming any and all proceedings and filings after a bankruptcy stay as void, and not merely voidable.
In Kochhar, after Baljit Kochhar and her daughter Sonia filed bankruptcy petitions, four members of the Bansal family – who previously obtained judgments against Baljit for defaulted loans – filed a lawsuit in the Circuit Court for Montgomery County against them, alleging that Baljit had fraudulently conveyed property to Sonia to avoid the judgments. The next month, the Kochhars’ bankruptcy case was dismissed and the automatic stay was lifted. Sonia thereafter moved to dismiss the circuit court case on the grounds that, because of the bankruptcy stay, it was a nullity at the time it was filed. An order of default was entered against Baljit.
The Bansals opposed, arguing that the filing of the complaint during the bankruptcy stay was merely voidable, and could be pursued now that the stay had been lifted and no further action had occurred in the case during the stay period. The court denied the motion and later entered default against Sonia as well. Based on the defaults, the court found that the conveyances had been fraudulent, set them aside, and entered judgment against the Kochhars jointly and severally for more than $15,000 in attorneys’ fees.
Sonia appealed, contending again that the entire circuit court case was void at the time it was filed. Turns out, this issue has come up fairly regularly before in a number of jurisdictions elsewhere, so it was up to the Court of Special Appeals to pick a side – void (the majority view, including in federal courts, and the view taken by the U.S. Bankruptcy Court for the District of Maryland), or voidable (the minority view). The Court of Special Appeals first tried to glean the answer from the Court of Appeals’ decision in Klass v. Klass, 377 MD. 13, 22 (2003), a divorce matter in which a default judgment was entered against the husband after he had filed for bankruptcy.
There, the Court of Appeals found that – in accord with the prevailing treatment by federal bankruptcy courts – a divorce case involves some exceptions to an automatic stay, including fixing alimony and child support, awarding attorneys’ fees to the wife and the guardian ad litem, dissolving the marriage, and establishing custody and visitation. However, the Court held, the monetary award, reduction of the award to judgment, entry of an order directing payments to the wife, and giving the wife use and possession of the couple’s car were all subject to the stay and improperly based upon unanswered discovery requests that, because of the stay, were also void when they were propounded. The Court of Special Appeals believed this consistent with the majority view that the state court loses jurisdiction over the property of a debtor when the petition is filed, meaning that (absent some exception) any later proceedings are void ab initio.
As applied to the Bansals’ complaint, the bankruptcy stay took away the circuit court’s jurisdiction, making the filing of the lawsuit a nullity at the time it was brought. The lift of the stay didn’t permit the Bansals to resume litigating the complaint, because the complaint was never legally operable in the first place. (Note, however, that a bankruptcy court can also annul a stay rather than terminate it, which has the effect of making all of the bankruptcy proceedings a nullity, such that the stay would have never been effective in the first place. That didn’t happen here; if it had, the Bansals could have picked up their litigation because the stay would have been treated as if it hadn’t actually occurred.) In the end, Kochhar highlights just another reason why civil litigators are wise to keep themselves informed as to when adverse or liable parties sink too close to financial rock bottom.
For further information, please contact Chris Mincher at cmincher@silvermanthompson.com or at (410) 385-2225.
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