Summary of a Recent
Judicial
Development in
Bankruptcy
Co-debtor Not Protected by Automatic Stay
Patrick RobertsNational AgLaw Center Graduate Assistant
Summary of Decision
In In re William Michael Laufenbergi, No. KS-04-053, 2004 Bankr. LEXIS 1826 (B.A.P. 10th Cir. Nov. 30, 2004), the Bankruptcy Appellate Panel of the Tenth Circuit determined that a co-debtor, as a third party, was not protected by the filing of an automatic stay.
Background
Debtor William Laufenberg obtained a loan from Metropolitan Life Insurance, which was secured by a mortgage on land owned by the Debtor and land owned by the Debtor's relatives (hereinafter Co-debtors). See id. at *3-4. The Debtor failed to pay, and Metropolitan moved to foreclose the property secured by the mortgage. See id. at *5. Thereafter, the Debtor sought relief under Chapter 12. See id. at *5. Metropolitan moved to have the automatic stay lifted on the mortgaged property. See id. During the pendency of that motion, the Debtor amended his reorganization plan. See id. at *6. The amended plan proposed to sell the Co-debtors property and waived any objection to Metropolitan's motion to lift the automatic stay pertaining to that property. See id. at *6-7. In ruling on the motion, the bankruptcy court granted Metropolitan's requested relief from the automatic stay and determined that the Co-debtors' property was not subject to the automatic stay and that the Co-debtors were not entitled to the remedy of marshalling. See id. at *9. Metropolitan was therefore able to proceed in state court to foreclose against Co-debtors' property. See id. The Co-debtors appealed. See id.
Analysis and Holdings
The appellate panel found that the bankruptcy court did not abuse its discretion. See id. at *13-14. In so finding, the panel determined that the automatic stay provisions protected only the Debtor and the bankruptcy estate. See id at 14. The automatic stay did not protect the Co-debtors as third parties. See id. The panel explained that in granting the requested relief, the bankruptcy court merely acknowledged the Debtor's right to surrender property that he deemed unnecessary for reorganization. See id. Lastly, the panel determined that the equitable doctrine of marshalling did not apply because Metropolitan was the only creditor involved in this transaction. See id. at *14-15. The panel explained that in order for the doctrine of marshalling to apply there must be two creditors with a common debtor or two funds belonging to debtors from which a debt could be satisfied. See id.
The case was decided on November 30, 2004; this summary was posted Dec. 2, 2005.