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Plaintiffs’ Fraudulent Conveyance Complaint Against Chapter 13 Debtor Defendants Was Void Ab Initio Since It Was Filed in Violation of Automatic Bankruptcy Stay

Kochhar v. Bansal
No. 435 (Maryland Court of Special Appeals)
by Colleen K. O’Brien, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdcourts.gov/opinions/cosa/2015/0435s14.pdf

SUMMARY: Although Plaintiffs did not know of the Debtor Defendants Chapter 13 bankruptcy filing prior to filing civil Complaint against the Debtor Defendants, and although the Plaintiffs did not pursue the case while the automatic stay was in effect, and only pursued the Debtor Defendants after the automatic stay terminated, because the lawsuit was filed in violation of the automatic bankruptcy stay under 11 U.S.C. § 362(a), it was void ab initio. Since the bankruptcy court never ordered any relief to the Plaintiffs from the stay, the judgment obtained against the Debtor Defendants was null and void.

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In Kochhar v. Bansal, No. 435 (Maryland Court of Special Appeals, Feb. 27, 2015), the Court considered whether a civil Complaint filed against Chapter 13 Debtor Defendants while the automatic bankruptcy stay under 11 U.S.C. § 362(a) was in effect was void ab initio or merely voidable. The Court concluded that the lawsuit filed in violation of the stay was void ab initio, even though the Plaintiffs did not know of the bankruptcy filing at the time they filed their civil Complaint and did not take any action in violation of the stay after learning of it, and even though the debtors’ bankruptcy filing was ultimately dismissed shortly after filing due to the failure to complete required filings. Therefore, the default judgment entered in favor of the Plaintiffs and against the Debtor Defendants was null and void.

Factually, Defendants Baljit Kochhar (“Baljit”) and her daughter Sonia Kochhar (“Sonia”) filed Chapter 13 bankruptcy petitions on October 2, 2012 and October 5, 2012, respectively. Pursuant to 11 U.S.C. § 362(a), an automatic stay ensued since under the law, each bankruptcy petition “operate[d] as a stay, applicable to all entities, of (1) the commencement . . . of a judicial . . . action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy case].”

On October 9, 2012, and after the automatic stay was in effect, Plaintiffs, consisting of certain family members of the Bansal family, filed in the Circuit Court for Montgomery County a “Complaint to Avoid and Recover Fraudulent Conveyances” against Baljit and Sonia. At the time the Complaint was filed, the Plaintiffs did not know of Baljit and Sonia’s bankruptcy filing. The Plaintiffs alleged that each of them had extended a loan or loans to Baljit, that Baljit had defaulted on the loans, and that each of them then had obtained judgments against her. They further alleged that Baljit, with knowledge of the judgments against her in their favor and with the intent to avoid her obligations on those judgments, made three (3) conveyances of residential real property to Sonia for no consideration. The Plaintiffs asked the court to set aside the three (3) conveyances, permit the sheriff to levy on the properties to satisfy their judgments, order that the properties be retained to satisfy those debts, enter judgment against Baljit and Sonia for compensatory and punitive damages in an unspecified amount, and award attorneys’ fees.

On October 25, 2012, Sonia and Baljit filed suggestions of bankruptcy giving the dates of their bankruptcy filings and the case numbers. From then until December 6, 2012, there was no activity in the circuit court case. The Bansal family members did not serve Sonia or Baljit during this time period or take any other action in the case. Meanwhile, by order of the bankruptcy court entered on November 19, 2012, Sonia’s bankruptcy case was dismissed for “failure to complete required filings” and the automatic stay was terminated as to her case. One week later, on November 26, 2012, Baljit’s bankruptcy case was dismissed for the same reason and the automatic stay was terminated as to her case.

On December 7, 2012, the Plaintiffs filed in the circuit court a “Motion to Set Aside Bankruptcy Stay of Proceedings.” They attached copies of the two orders of the bankruptcy court dismissing the cases and terminating the automatic stay. The circuit court granted the motion on December 19, 2012. Baljit and Sonia were served on January 4, 2013. Sonia unsuccessfully moved to quash service. On May 1, 2013, Sonia filed a Motion to Dismiss, arguing that the circuit court case was a nullity at the time of filing because it was commenced in violation of the automatic stay, which had rendered the circuit court without jurisdiction to hear matters involving Debtor or the property of Debtor. She acknowledged that her bankruptcy case had since been dismissed and the automatic stay had been terminated, but argued that that did not cure the jurisdictional defect that existed at the time of the filing of the circuit court case. The Plaintiffs opposed the Motion to Dismiss and argued that actions taken in violation of the automatic stay are voidable, not void. They argued that under the facts of this case — where no action was taken in the circuit court until after the stay was terminated — there was no prejudice to Sonia (or Baljit) and dismissal was not required. The circuit court denied Sonia’s Motion to Dismiss and entered orders of default against Sonia and Baljit. The circuit court held an ex parte hearing on damages, found Defendants liable to Plaintiffs, ordered that all three (3) conveyances be “vacated and set aside” and entered judgment against Sonia and Baljit jointly and severally for $335 in costs and $15,362.50 in attorneys’ fees. Sonia appealed to the Court of Special Appeals, attacking the circuit court’s subject matter jurisdiction over the case. The Court of Special Appeals concluded that the circuit court lacked subject matter jurisdiction over the case, and reversed the judgment.

In the appeal, Defendant argued that because the circuit court action was filed when the automatic bankruptcy stay was in effect, that the action was void ab initio and had to be dismissed for lack of subject matter jurisdiction. Plaintiffs argued that under the circumstances of this case, where there is no allegation that the Plaintiffs willfully violated the stay by commencing the circuit court case and where no action was taken in the circuit court once the existence of the bankruptcy petitions became known and until the bankruptcy stay was terminated, equitable considerations support the circuit court’s decision to deny the motion to dismiss.

The intermediate appellate court observed that while the Fourth Circuit has not spoken on the issue, the prevailing view among the federal courts of appeal is that actions taken in violation of the automatic stay are void ab initio. Furthermore, this case was commenced when the automatic stay was in effect and was in violation of the stay. The overwhelming majority of state courts confronted with this scenario — the inadvertent filing of a civil action during the automatic stay - have held that the action is void and with no effect. In light of this authority, the Court concluded that the action against the Defendants was void ab initio. It did not make a difference to the Court that the case was stayed and only recommenced after the automatic stay was terminated. Absent relief from the bankruptcy court, the termination of the stay could not retroactively vest subject matter jurisdiction in the circuit court when the court lacked jurisdiction over the subject matter of the case when suit was filed. For instance, under 11 U.S.C. § 362(d), the bankruptcy court may annul a stay, which has the effect of negating its existence in its entirety, or may grant retroactive relief from the stay, however, no relief of any such kind was requested or ordered by the bankruptcy court in the bankruptcy cases that were pending before this suit was filed. Accordingly, the Court of Special Appeals reversed the judgment in favor of Plaintiffs and against the Debtor Defendants.