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Continuing Automatic Stay Not Error; Company Implicitly Waived Sec. 362(e)(1)

Monday, July 15, 2013
By Diane Davis

A bankruptcy court did not err in continuing the automatic stay as to a financial services company because the company acted “inherently inconsistent with adherence to the time constraints” of Bankruptcy Code Section 362(e)(1), and its actions constituted an implicit waiver, the U.S. District Court for the District of New Jersey held June 12 (First Data Services LLC v. Kartzman (In re Arts Des Provinces de France Inc.), D.N.J., No. 2:12-cv-06574-DMC, 6/12/13).

Affirming the bankruptcy court's order and denying the appeal, Judge Dennis M. Cavanaugh concluded that the appellant financial services company implicitly waived its rights under Section 362(e)(1) by: “(1) cross-moving for a stay of relief and for allowance and payment of an administrative expense; and (2) failing to assert their rights under § 362(e)(1) by participating in discovery and failing to oppose a request for the adjournment of a motion for relief.”

By acting inconsistently with regard to an adherence to the time constraints of Section 362(e)(1), the appellant implicitly waived its rights under Section 362(e)(1), the court said. 

Merchant Agreements

Appellant FDS, a financial services company, processed credit card sales and provided other services and financial accommodations to debtor Arts Des Provinces De France Inc. The parties' relationship was based on merchant agreements that allowed FDS to fund a reserve to protect itself from obligations FDS may have to pay on behalf of the debtor to third parties, including those arising from fees, costs, expenses, and chargebacks. At the time the debtor filed its petition, FDS had a reserve of approximately $400,000. 

Chapter 7 Filing

On June 23, 2011, the debtor filed for Chapter 7 protection. Trustee Steven P. Kartzman filed a turnover motion seeking turnover of the reserve. In response, FDS filed a motion to lift stay objecting to the turnover motion and petitioned for relief from the stay so that FDS could assert its contractual rights under the merchant agreements between the parties.

After a series of consensual adjournments, a hearing was conducted and the bankruptcy court granted the trustee's petition for additional time for discovery, scheduled the final hearing, and ordered the parties to provide the court with a status report within 30 days.

Both parties participated in discovery. At the request of FDS, the bankruptcy court adjourned the final hearing scheduled for May 22, 2012, until July 18, 2012. 

Adjournment of Case

On July 6, 2012, the bankruptcy court granted the trustee's petition for a 60-day continuance of the final hearing. FDS objected to this adjournment on the grounds that FDS was entitled to have its motion to lift stay heard on July 18 under Section 362(e)(1). The parties disagreed as to whether FDS's objection to the 60-day continuance on July 6 was FDS's first instance of claiming relief under Section 362(e)(1).

FDS objected that the bankruptcy court did not make any findings and did not determine that the trustee had a reasonable likelihood of prevailing in its objection to FDS's motion to lift stay or that there were compelling circumstances justifying extension of the stay.

FDS also objected to a proposed order by the trustee, which provided that under Section 362(e)(1), the automatic stay as to FDS would remain in full force and effect pending the court's determination of FDS's cross motion.

The bankruptcy court entered the proposed order in the form submitted by the trustee's counsel, and FDS appealed to the district court. 

Implicit Waiver of Rights

Section 362(e)(1), the district court said, provides as follows:

“The court shall order such stay continued in effect pending the conclusion of the final hearing under subsection (d) of this section if there is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of such final hearing. If the hearing under this subsection is a preliminary hearing, then such final hearing shall be concluded not later than thirty days after the conclusion of such preliminary hearing, unless the 30-day period is extended with the consent of the parties in interest or for a specific time which the court finds is required by compelling circumstances.”

While apparent that the automatic stay exceeded the time constraints of Section 362(e)(1), the bankruptcy court did not err in continuing the automatic stay as to FDS because FDS acted “inherently inconsistent with adherence to the time constraints of § 362(e)(1); therefore, their actions constituted an implicit waiver of § 362(e)(1),” the court said, citing In re Wedgewood Realty Group, 878 F.2d 693 (3d Cir. 1989).

According to the court, FDS implicitly waived its rights under Section 362(e)(1) by: “(1) cross-moving for a stay of relief and for allowance and payment of an administrative expense; and (2) failing to assert their rights under Section 362(e)(1) by participating in discovery and failing to oppose a request for the adjournment of a motion for relief.” An implicit waiver occurs when the creditor acts inconsistent with the rights promised to him under Section 362(e)(1), the court explained, citing Wedgewood.

The conscious delay by FDS constitutes an implicit waiver of its rights under Section 362(e)(1), the court said. FDS's attempt to recover alternative measures signifies a conscious acknowledgement and disregard for the time constraints of Section 362(e)(1), according to the court. By seeking the allowance and payment of an administrative expense on top of the relief from the automatic stay, FDS delayed the possibility of the bankruptcy court enforcing the time constraints, the court said. 

Failure to Assert Statutory Rights 

FDS's participation in discovery is evident of its failure to assert its statutory rights under Section 362(e)(1), the court noted. According to the court, a creditor who participates in discovery that extends beyond the 30-day period of Section 362(e)(1) may implicitly waive his right to enforce the time constraints of Section 362(e)(1).

FDS also failed to assert the protection of Section 362(e)(1) by failing to oppose a request by the trustee for the adjournment of a motion for relief, the court noted. The bankruptcy court has recognized a failure to assert statutorily granted rights under Section 362(e)(1) an implicit waiver when a creditor agrees to or fails to oppose a hearing that is inconsistent with the 30-day period of Section 362(e)(1), the court said, citing Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306 (11th Cir. 1982). FDS consensually agreed to an adjournment of the Oct. 11 meeting, the court noted, which was scheduled within the 30-day time frame of Section 362(e)(1). By agreeing to an adjournment, FDS failed to assert the statutorily granted rights of Section 362(e)(1), the court said. Therefore, FDS cannot be considered to have asserted its rights under Section 362(e)(1) and implicitly waived the time constraints, the court concluded.

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