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The Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) just published an opinion clarifying the effect of the automatic stay on property abandoned by a bankruptcy trustee back to the corporate debtor.  The case arose in the Central District of California, In re Gasprom, Inc., 2013 DJDAR 14399.  The corporation, Gasprom, Inc., filed a Chapter 11 petition in February, 2012, but the case was converted to a Chapter 7 within about a month.  In June 2012,  the Chapter 7 Trustee filed a notice of intent to abandon the only significant asset, a non-operational gas station.  The holder of the first deed of trust (“Fateh”),  supported the proposed abandonment and alleged that the obligation secured by the Deed of Trust exceeded $1 million.  Fateh further asserted that if the court authorized the abandonment, it would effectively terminate the automatic stay which would enable Fateh to proceed with the pending foreclosure sale against the gas station.  The Debtor opposed the abandonment and requested a continuance of the hearing, but the court denied the Debtor’s  requests.

The court signed and entered the Trustee’s abandonment order which was silent regarding the automatic stay.  Later that same day, Fateh’s affiliate and successor in interest under the Deed of Trust proceeded with the  foreclosure on the gas station.  Just over two weeks later the case was closed.

In September 2012 the Debtor moved to reopen its bankruptcy case so that it could set aside  the foreclosure sale and commence contempt proceedings against Fateh and others for violation of the automatic stay.  On December 4,  2012, the bankruptcy court issued an order reopening the case.  The bankruptcy court stated that upon entry of the abandonment order, the automatic stay no longer enjoined Fateh’s foreclosure.  Alternatively, the court ruled that it was prepared to annul the automatic stay to the extent necessary to “validate the foreclosure” and it  would sua sponte grant relief from the stay retroactively and nunc pro tunc.  In a separate written order the court denied the anticipated motion to set aside the foreclosure and denied the anticipated motion for contempt and sanctions.

The Debtor appealed the Bankruptcy Court’s order.  The most significant issue decided by the BAP  was whether the bankruptcy court erred in the December ruling that the foreclosure sale did not violate the automatic stay.

In disagreeing with the bankruptcy court’s ruling, the BAP stated that the abandonment order  terminated only one aspect of the automatic stay which protected the gas station as “property of the estate.”  Upon abandonment the gas station reverted back to the debtor, Gasprom.  The significant distinction made by the BAP is that while the aspect of the stay protecting property of the estate no longer applied, the abandonment did not by operation of law terminate the aspect of the stay which protected “property of the debtor.”

Absent a ruling by the court granting relief from stay under §362(d) so as to permit foreclosure to occur, §362(a)(5) continued to protect the Gas Station from foreclosure, at least until the bankruptcy court closed Gasprom’s bankruptcy case… See §362(c)(2).”

The takeaway from this case is clear. While the bankruptcy case is open, secured lenders and creditors must get relief from the automatic stay to proceed with their available remedies, i.e. foreclosure (judicial and non-judicial). Abandonment of an asset, that is collateral for a debt, does not make if fair game for the secured creditors while the bankruptcy case remains open.