In re Swintek (9th Cir.) Section 108(c) applies to toll the expiration of an ORAP lien

The following is a case update analyzing a recent case of interest.

SUMMARY

In Daff v. Good (In re Swintek), 906 F.3d 1100 (9th Cir. 2018), the United States Court of Appeals for the Ninth Circuit held that Bankruptcy Code section 108(c) applies to afford a prepetition judgment creditor an additional 30 days after termination of the automatic stay of Bankruptcy Code section 362(a) to preserve a lien created prepetition under California law upon the service of an order for appearance and examination (an “ORAP”), which lien otherwise would have lapsed during the bankruptcy proceedings a year after its creation unless renewed by the California court. The court reasoned that preservation of the ORAP lien constituted the “commencing or continuing a civil action” within the meaning of Section 108(c). The opinion can be found here.

FACTS

In 2009, Karen Good bought two 2001 California Superior Court money judgments against Richard Swintek that she renewed in 2010. In June 2010, she obtained an ORAP to help her enforce the judgment. Under California Code of Civil Procedure (“CCP”) section 708.110(d), an ORAP that is personally and timely served on the judgment debtor creates a lien on the judgment debtor’s personal property. The lien is a so-called “secret” lien because there is no public filing required for its creation. The lien expires after one year unless extended by the court. The statute does not specify the procedure for obtaining an extension. Absent an extension, therefore, the lien against Swintek’s personal property would have expired in June 2011.

Swintek filed a chapter 7 case in August 2010. The automatic stay of Section 362(a) prevented Good from enforcing the lien. Though this point does not appear in the opinion, it also would have prevented her from seeking an extension of the lien from the California court without permission from the bankruptcy court. Good never sought an extension. With the chapter 7 case still pending, a dispute arose in the case between Good and the chapter 7 trustee in 2013 over whether the lien was still effective. The bankruptcy court ruled in favor of the trustee. However, on appeal by Good, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) reversed. The trustee appealed to the Ninth Circuit, which affirmed the BAP in a 2-1 opinion.

REASONING

Good argued that Section 108(c) tolled the sunset effect of CCP section 708.110(d) until 30 days after notice that the stay had terminated, which had not yet happened. Section 108(c) provides that, “if applicable nonbankruptcy law . . . fixes a period for commencing or continuing a civil action . . . [that] has not expired before the date of the filing of the petition, then such period does not expire . . . until 30 days after notice of the termination or expiration of the stay under section 362 . . . .” (emphasis added).

The trustee’s principal counter argument was that Section 108(c) does not apply because enforcing a judgment is not the “commencement or continuation of an action” and once a judgment has been entered, the “action” as such is concluded. To bolster his position, the trustee also relied on a related textual argument that focused on the contrast between the presence in Section 362(a)(2) of a stay of enforcement of a judgment or lien and in Section 362(a)(4) of a stay against the creation, perfection or enforcement of a lien, on the one hand, and in Section 362(a)(1) of a stay against the commencement or continuation of actions, on the other hand. The trustee contended that the fact that the three descriptions occur in separate subparagraphs of Section 362(a) indicates that they address distinct situations. Therefore, commencement or continuation of a civil action is a different concept from enforcement of judgments or activities concerning liens. Because only Section 362(a)(1) corresponds to the language of Section 108(c), the trustee reasoned that it follows that Section 108(c) does not encompass activities regarding the enforcement of judgments or the creation or enforcement of liens. The dissent agreed with the trustee. In addition to endorsing the trustee’s language-of-the-statutes-argument, the dissent also suggested without explanation that the “secret” nature of the ORAP lien, along with the fact that as such it was not created directly by a court order, was significant.

The court addressed the view that the differing language of Sections 362(a)(1), (a)(2) and (a)(4) resolves the issue by stating that the presence of the different formulations of activities does not mean that there is no overlap between them; they are not necessarily mutually exclusive. The court also relied on two earlier Ninth Circuit cases as supporting its conclusion: Spirtos v. Moreno (In re Spirtos), 221 F.3d 1079 (9th Cir. 2000) (holding Section 108(c) tolled the period to renew a judgment that would otherwise have expired during the bankruptcy), and Miner Corp. v. Hunters Run Ltd. P’ship (In re Hunters Run Ltd. P’ship), 875 F.2d 1425 (9th Cir. 1989) (holding that Section 108(c) applies if the automatic stay would prevent a creditor from enforcing a judgment). The court rejected the trustee’s attempt to read these decisions narrowly as underwriting the distinction between actions as contrasted with enforcement or liens.

AUTHOR’S COMMENTARY

The author thinks the decision is correct. The court’s observation that the descriptions in the three relevant subparagraphs of Section 362(a) are not necessarily mutually exclusive is a good starting point. At the very least, it makes the decision between the two interpretations of the meaning of these statutory variations a tossup. But the standoff ends there. Other considerations favor Swintek’s result. First, neither the trustee nor the dissent point to any jurisprudence that compels the conclusion that an action is over when judgment is entered such that anything that follows is neither the commencement nor the continuation of an action. Second, the trustee also does not offer any analysis of why it should matter whether the creditor is pursuing creation of a judgment or its enforcement (by a lien or otherwise) such that Congress should have distinguished the fate of the two in Section 108(c). There is no reason why a creditor should necessarily be deprived of an enforcement device he deployed prepetition any more than he should lose a prepetition judgment because he cannot renew it, as in Spirtos, due to the stay.

As for the dissent’s concern with an ORAP lien as a secret lien, why should the outcome be different if by statute the “secret” lien happens to last longer (say for ten years instead of one) than the bankruptcy case? Presumably, moreover, the creditor included the lien in her proof of claim (though the opinion does not indicate whether that happened), which under normal circumstances would have been filed before the lien expired; thus, the lien would not have been secret in the case. And in every case there is a powerful incentive for the creditor to file promptly and note the lien since an unasserted lien may not “ride through” a chapter 7 case. Finally, why should a creditor be forced to seek stay relief to renew its expiring ORAP lien? On that score, moreover, stay relief is not automatic; the creditor’s motion could fail (and if it could not, why put the creditor, the court and the debtor or estate to the cost and trouble?).

With all that said, perhaps the right solution that might have avoided the whole problem would have been for the creditor to re-perfect her lien by a notice under Section 546(b)(2), which allows timely postpetition perfection or continuation of a lien that relates back to a prepetition period simply by a notice.

These materials were written by Adam Lewis of Morrison & Foerster LLP in San Francisco (alewis@mofo.com). Editorial contributions were provided by Tom Phinney of Parkinson Phinney in Sacramento (tom@parkinsonphinney.com) and Kyra Andrassy of Smiley Wang-Ekvall, LLP, in Costa Mesa (kandrassy@swelawfirm.com).