Court Opinion

ID: 9539255
Source: CourtListenerOpinion
Date Created: 2023-08-07 16:01:05.67005+00
Date Added: 2024-06-11T14:58:39.413008
License: Public Domain

HOWE, Associate Chief Justice
(dissenting in part):
I concur with the majority that the elder Creeches’ failure to make loan payments to First Security Bank (FSB) for eight months after filing bankruptcy constitutes a default for which the younger Creeches, as guarantors, are liable. I cannot agree, however, that no default has occurred visa-vis the elder Creeches because of that same failure. This anomalous result is attributed to the effect of section 349 of the Bankruptcy Code.
The problem with the majority holding as to the elder Creeches is that it misconstrues the impact of the automatic stay. 11 U.S.C. § 362. The facts of this case are somewhat unusual for a bankruptcy case in that the elder Creeches did not file for bankruptcy protection, as frequently occurs, to avoid imminent foreclosure against the farm due to default in payments under the loan. The Creeches were current in their payments when they filed bankruptcy. It was not until after filing that they became in arrears in their loan payments. *968The automatic stay is, as one commentator has noted, a “dramatic restraint” that occurs when a debtor files bankruptcy. Richard I. Aaron, Scope of the Automatic Stay — Section 362(a), in Bankruptcy Law Fundamentals § 5.01[1], at 5-3 (1992). However, the automatic stay “is not permanent relief. It continues in effect while the property remains a part of the estate unless there is a successful effort to have the stay lifted, unless the case is dismissed or until the debtor receives or is denied a discharge.” Id. at 5-1 (emphasis added).
It is as to the temporary nature of the automatic stay that the majority’s analysis breaks down. The majority would have the automatic stay forgive the Creeehes’ failure to make payments falling due while the stay was in effect. Were that the law, a motion for a lift of stay might be an exercise in futility. If a debtor in bankruptcy fails to make payments on a secured loan after filing bankruptcy, a creditor may move the bankruptcy court for a lift of the automatic stay so that it can proceed to foreclose against the property securing the loan. But under the majority’s analysis, the debtor would not be in default because he has filed bankruptcy. Therefore, there would be no reason to lift the stay.
FSB moved for dismissal of the Creech bankruptcy after the Creeehes defaulted post-petition. The motion was denied. However, a stipulation between the Creedl-es and FSB was subsequently entered into to permit the Creeehes one last chance to perform. As part of the stipulation, FSB demanded that any default of the Creeehes would entitle it to begin foreclosure proceedings in a state court without having to petition for the permission of the bankruptcy court. The bankruptcy court included the terms of the stipulation in the confirmation order.
When FSB claimed that the Creeehes had defaulted under the stipulation, it began foreclosure proceedings in May of 1988 in the state court below, although the chapter 12 bankruptcy continued. It is undisputed that FSB was entitled to this remedy in the event of default under the terms of the confirmation order and bankruptcy law. The majority’s position that the subsequent dismissal of the bankruptcy halted the foreclosure proceeding already begun has no basis in bankruptcy law. Nor does the majority cite any cases in support of that interpretation of the effect of the dismissal.
It is true that the trial court held that the stipulation and confirmation order were void, but that does not aid the Creeehes. The parties agree that with the stipulation and bankruptcy order out of the picture, their rights are to be determined under the 1986 loan agreements. There is no question but that the Creeehes are in default under those agreements, having missed eight monthly payments that fell due after they filed bankruptcy. The Creeehes seek to excuse those nonpayments because they assert that under the Bankruptcy Code, they could not make payments because such payments would have constituted “a post petition transfer of assets and use of such collateral without court authorization.” The Creeehes’ statement evidences a misunderstanding of the Bankruptcy Code, and in any case, the majority does not rely on that assertion. Instead, the majority employs section 349 to excuse the failure to make the eight payments and to move those missed payments apparently to the end of the loan. Neither the Creeehes nor FSB gives any such effect to section 349.
Section 349 is a narrow provision interpreted by the courts to apply only to unwind those unique bankruptcy protections specifically referred to: “[T]he courts have refused to extend the reinstatement effect of Section 349(b) beyond its expressly enumerated provisions.” 2 Lawrence P. King et al., Collier on Bankruptcy § 349-11 (15th ed. 1993); see Norton v. Hoxie State Bank, 61 B.R. 258, 260 (Bankr.D.Kan.1989) (“Section 349(b)(2) affects only the specific actions delineated in that subsection.”). In his oral arguments in this case, the Creedl-es’ attorney conceded that in response to questions posed by Justice Zimmerman:
JUSTICE ZIMMERMAN: [Section] 349 says when you dismiss [a case] you unwrap the bankruptcy. My question *969is aren’t there any cases about that effect?
THE CREECHES’ ATTORNEY: There isn’t much law with respect to section 349. Primarily when you see a case concerning 349, it’s a concern about some property that was transferred during bankruptcy or a lien that was avoided through the bankruptcy process and where that property should go afterwards. It deals primarily with property rights, but it also says that the bankruptcy should be undone.... I don’t think you can take a literal interpretation of section 349 that would require that you ignore everything that happened in connection with the bankruptcy.... Section 349 does not instruct the court to ignore that the bankruptcy happened.
As was stated in oral arguments, section 349 generally refers to revesting property of the estate which was brought into the estate by one of the exotic and artificial bankruptcy provisions, such as section 547, “preferential transfers,” in the parties which held it prior to the bankruptcy. For example, it is not unknown for a debtor prior to filing bankruptcy to divest himself or herself of property so that it would be out of the reach of creditors, i.e., so that it would not become “property of the estate” upon filing bankruptcy. See In re Kaiser, 32 B.R. 701 (Bankr.D.C. 1983) (court held that property transferred to wife of debtor on eve of bankruptcy was nevertheless property of the estate). Another example of a preferential transfer is the preference of one creditor over the others by paying one debt in full before filing bankruptcy. Bankruptcy provides a remedy for this kind of bad faith behavior by empowering the trustee to recoup the property into the property of the estate. The rationale behind the Code’s granting such powers to a trustee is that whether property which could potentially be property of the estate is used to pay a single creditor or simply hidden from the reach of creditors, such action results in a diminution of the property of the estate and thus an inequitable distribution to creditors during bankruptcy. Upon dismissal of a bankruptcy, which is essentially a failure of the bankruptcy, the trustee’s actions are “unwound.” The property goes back to whomever the debtor transferred it to prior to bankruptcy, and the debtor is no longer protected against creditors pursuing their contractual remedies.
The majority cites no cases to support the use of section 349 in the manner it proposes. In re Nash, 765 F.2d 1410, 1413 (9th Cir.1985), the only case cited by the majority purportedly supporting its holding, is a chapter 13 case that deals with the issue of the disposition of funds held by a trustee upon dismissal of a bankruptcy. Neither party in this case argued on appeal that section 349 controls; in fact, both attorneys attempted to make clear in oral arguments that section 349 was not controlling:
JUSTICE ZIMMERMAN: It seems to me that 349 kinda governs here, doesn’t it? Is that not the case?
FSB’S ATTORNEY: I don't think 349 governs.
Justice Zimmerman posed a similar question to the attorney for the Creeches:
JUSTICE ZIMMERMAN: 349 says you unravel it.
THE CREECHES’ ATTORNEY: 349 deals with respect to property rights. It doesn’t require again that you ignore what happened.... We submit that section 349 answered the question with respect to which agreements were enforceable_ [The issue of whether the original documents or the stipulation governs is not before us.] Section 349 really is not controlling law on the issues before the court today....
JUSTICE ZIMMERMAN: [Under section 349, the debtor’s property is] just like it was the day before bankruptcy....
THE CREECHES’ ATTORNEY: But [the trial court] also recognized reality. We’re not travelling in time here, going back to some date. Things happened.
I would reverse the trial court decision as to both the elder and younger Creeches *970and remand this case for further proceedings consistent with this opinion.
STEWART, J., concurs in the dissenting opinion of Associate Chief Justice HOWE.