The following is a case update analyzing a case of recent interest.
This note discusses Merriman v. Fattorini (In re Merriman), 616 B.R. 381 (BAP 9th Cir. July 13, 2020) and the effect of the Supreme Court decision in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020) (per curiam) on the bankruptcy court’s power to annul the automatic stay. In Acevedo, the Supreme Court ruled that nunc pro tunc orders cannot confer jurisdiction on a court where there was none previously.
In Merriman, the Ninth Circuit Bankruptcy Appellate Panel held that the Acevedo prohibition does not reach orders annulling the automatic stay. The BAP reasoned that Section 362(d) does not expressly limit jurisdiction like the controlling statute in Acevedo. Instead, Congress intended Section 362(d) to serve as a flexible tool to balance the equities and aid in the bankruptcy process. Acevedo does not prohibit retroactive relief from the automatic stay in the Ninth Circuit.
Debtor Shawne Merriman filed a chapter 13 bankruptcy petition in November 2018. Creditors Ferdinand and Deann Fattorini (“Creditors”) did not receive notice of the bankruptcy case. In July 2019, the Creditors filed a wrongful death lawsuit against the debtor in state court in violation of the automatic stay. The complaint was filed shortly before the state statute of limitations would have otherwise run. Upon learning of the debtor’s bankruptcy case, the Creditors filed a motion seeking annulment of the automatic stay retroactive to the date of the filing of the complaint. The Creditors needed retroactive relief since the statute of limitations had run by then. The debtor opposed the motion, saying that it “was not supported by sufficient evidence and did not demonstrate that ’cause’ existed to lift the stay pursuant to § 362(d)(1) in light of the relevant factors.” The court considered the evidence and granted the motion, annulling the stay as requested. Neither party argued Acevedo in their briefs as it had been decided after the briefing was completed. Neither party discussed the case at oral argument.
The BAP affirmed the bankruptcy court ruling, considering (1) whether the bankruptcy court applied the correct standard, (2) whether the bankruptcy court made sufficient findings to order relief from the stay, and (3) whether the Supreme Court’s decision in Acevedo precluded a bankruptcy court from ordering retroactive relief from the stay.
With regard to the legal standard, the debtor argued that the bankruptcy court should have made an express finding on each and every one of the Curtis and Fjeldsted factors. The BAP rejected the debtor’s argument and noted that a bankruptcy court need not undertake “a mechanistic application of [the] factors,” but rather “such factors may be considered as an aid.” The BAP further found that the bankruptcy court made sufficient findings to grant relief, saying “[t]he bankruptcy court’s findings are sparse, but the record supports its ruling.”
The BAP then considered the Acevedo ruling and whether the Supreme Court ruling now prohibits retroactive relief from the stay under Section 362(d), at least under these facts where the effect of the relief is to seemingly bestow jurisdiction on the state court.
The Acevedo action was initiated by a complaint filed in state court for improper termination of pension benefits. Shortly thereafter, the Roman Catholic Church (the “Church”) filed a chapter 11 bankruptcy case and removed the pension action to federal court. Subsequently, the Church dismissed the chapter 11 bankruptcy case. However, before the district court remanded the pension action back to state court, the state court entered several orders. Approximately five months later, the district court remanded the lawsuit to state court retroactive to the date of the bankruptcy case dismissal, for the express purpose of validating the orders entered in the interim. The Supreme Court granted the church’s writ of certiorari for reasons unrelated to whether the nunc pro tunc order was invalid.
The Supreme Court did not reach the merits of the appeal. Instead, it found the retroactive remand order to be invalid on its face. In light of governing statutory authority directing that upon removal, a “state court shall proceed no further unless and until the case is remanded,” the Supreme Court found the remand order attempted to confer jurisdiction where none existed. 28 U.S.C. § 1446(d). Therefore, the orders entered by the state court prior to remand were entered when the state court lacked jurisdiction and were invalid despite the nunc pro tunc order. The Supreme Court stated:
Federal courts may issue nunc pro tunc orders . . . to reflect the reality of what has already occurred. Such a decree presupposes a decree allowed, or ordered, but not entered, through inadvertence of the court.
Put colorfully, nunc pro tunc orders are not some Orwellian vehicle for revisionist history—creating facts that never occurred in fact. Put plainly, the court cannot make the record what it is not. 140 S. Ct. at 700-01
The BAP distinguished Merriman with Acevedo by looking at the language of Section 362(d). It stated that it does “not interpret Acevedo as pertaining to the bankruptcy court’s power to annul the automatic stay” because Section 362(d) does not purport to deprive jurisdiction. Instead, it is a “flexible…tool…to preserve and balance the rights of the parties.” Further, “Congress’ decision to deploy four verbs to describe the various ways in which a bankruptcy court may grant relief from the stay” indicates that a bankruptcy court has “broad authority to modify the stay to maximize its value” including retroactive annulment.
Accordingly, the BAP found that a retroactive annulment of the automatic stay is valid even where it appears to give jurisdiction to a state court where there is none otherwise. Indeed, it is not the “Orwellian vehicle for revisionist history — creating facts that never occurred in fact” invalidated by Acevedo. Acevedo, 140 S. Ct. at 700-01.
It appears that the BAP correctly decided Merriman. Although a bankruptcy court obtains jurisdiction over estate assets upon the filing of a bankruptcy petition, Section 362(d) does not modify, transfer, or otherwise affect jurisdiction. The BAP correctly recognized that the shape and reach of the stay must remain flexible for purposes of equity and estate administration.
In fact, a holding to the contrary would appear catastrophic to at minimum Section 362(d), if not to bankruptcy practice as we know it. If the BAP found that the automatic stay determined and deprived jurisdiction, then stay relief would appear no longer viable. Given that district courts have original and exclusive jurisdiction over bankruptcy cases, would this mean that upon the filing of a bankruptcy petition, district courts now also have original and exclusive jurisdiction of all matters arising in, arising under, or related to a bankruptcy case?
Even with a practice grounded in debtor representation, I am satisfied with Merriman and the predictability it provides.
These materials were written by Todd Turoci of the Turoci Bankruptcy Firm in Los Angeles (firstname.lastname@example.org). Editorial contributions were provided by M. Jonathan Hayes of Resnik Hayes Moradi LLP in Los Angeles (email@example.com).