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A New Ruling by Florida’s Third District Court of Appeal Erases a 39-Year-Old Precedent, Changing the Way Bankruptcy Automatic Stays Apply

Occasionally, a case comes along that is important not because it merely illuminates a specific issue of law, but because it completely rewrites the state of the law in a particular jurisdiction or judicial circuit. When these changes in the state of binding case law happen in Chapter 11 bankruptcy law (as occurred earlier this year here in South Florida) they serve as just one more reminder of why it’s so beneficial to rely on a knowledgeable South Florida bankruptcy attorney who can offer you not just diligent advocacy but also a completely up-to-date understanding of the state of the law, and what changes in the law mean for you.

A January 2021 ruling by the Third Circuit Court of Appeal here in Miami made a very significant change in the law governing when the automatic stay created by Section 362 of the Bankruptcy Code does – and doesn’t – go into effect. Knowing when your case will (or won’t) be automatically stayed can, of course, be a massively important consideration when it comes to deciding whether or not to file for bankruptcy.

The origins of the underlying case began after a Minnesota-based lender obtained a $12 million judgment in 2015 against a medical diagnostic imaging company with its holding company based in South Florida.

Because that judgment came from outside Florida, the lender had to go the extra step of obtaining what is called a “domestication of judgment” here in Florida. (That gives your out-of-state judgment the power of a Florida court order and allows you to collect here.) The trial court in Miami-Dade County granted the lender its desired domestication.

In May 2020, the imaging company appealed that ruling. Five weeks later, and while that appeal was ongoing, the imaging company filed for voluntary Chapter 11 bankruptcy in Pennsylvania. The lender asked the Third Circuit court to issue a stay in the appeal case “pending further order of the Bankruptcy Court” in Pennsylvania.

The three-judge appellate panel rejected the request. The judges concluded that they were bound by precedent – specifically by the rule established in a 1982 case named Shop in the Grove, Ltd. v. Union Federal Savings & Loan Ass’n of Miami — to reject the stay request.

Later, the Third Circuit court held an en banc hearing, which means that all the Third Circuit judges participated in the decision. (An en banc appeals court can recede from prior precedent in ways that an appellate panel cannot.)

The 1982 decision had said that an appellate action launched by a debtor who later files for bankruptcy, such as the appeal the imaging company filed in the Third Circuit, does not implicate the automatic stay provision of the Bankruptcy Code. That court had reasoned that a debtor should not be allowed to use bankruptcy as a “shield” while using a separate appeal process as a “sword” against a creditor.

Giving the automatic stay broader application

The en banc court disagreed and threw out that rule. The court said that the bankruptcy law’s automatic stay provision applies to any appeal, regardless of whether the debtor was the appellant or the appellee, so long as the underlying proceeding was one taken against the debtor. This new rule is more in line with most other courts, including Florida’s Fourth Circuit Court of Appeal, which covers Broward County, Palm Beach County, and other parts of South Florida.

This new ruling is extremely important, as it has the potential to provide significant aid to future Chapter 11 debtors by expanding the breadth that Florida’s Third Circuit will give to the automatic stay provision of bankruptcy law.

When you are considering filing for Chapter 11 bankruptcy, make sure you have a legal team with an in-depth and up-to-date knowledge of both bankruptcy law and Florida law. Rely on the skilled South Florida Chapter 11 bankruptcy attorneys at Stok Kon + Braverman to be that sort of knowledgeable, powerful, and effective advocate for you as you navigate the process of Chapter 11 bankruptcy.

Contact us online or by calling (954) 237-1777 to schedule your consultation.

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