Case
Kochhar v. Bansal, ____A.3d ______; 2015 WL 848166 (Md. Spec. App. February 27, 2015) –In a case of first impression in Maryland, the Court of Special Appeals recently held that an action filed during a bankruptcy stay is void ab initio, not voidable. During the pendency of a bankruptcy stay, a Court is without subject matter jurisdiction to hear the action, regardless of whether or not the party initiating the action had knowledge of the bankruptcy.
Factual Summary
Baljit Kochhar borrowed money from several members of the Bansal family and defaulted on the loans, for which judgments were entered against her. Subsequent to the entry of the judgments against her, Baljit Kochhar transferred three residential real properties to her daughter, Sonia Kochhar. Unbeknownst to the Bansal family, Baljit Kochhar filed bankruptcy on October 2, 2012 and Sonia Kochhar filed bankruptcy on October 5, 2012. The Bansal family filed suit against the Kochhars in the Circuit Court for Montgomery County on October 9, 2012 alleging fraudulent transfers of the three residential properties and requested that the Court permit a Sheriff’s levy on the properties, order that the properties be retained to satisfy the judgments against Baljit Kochhar, award attorney’s fees, and enter judgment against the Kochhars for compensatory and punitive damages. The Kochhars filed notices of the bankruptcies on October 25, 2012. Sonia Kochhar’s bankruptcy was dismissed on November 19, 2012, and Baljit Kochhar’s bankruptcy was dismissed one week later for failure to compete the required filings. The Circuit Court action proceeded thereafter with Sonia Kochhar filing a motion to dismiss arguing that the Court lacked jurisdiction to hear the action filed by the Bansal family since the action had been filed during the time period when the bankruptcy stay was in effect. That motion was denied, and defaults were entered against the Kochhars. Following an ex parte hearing, the Court entered judgment against the Kochhars, which was timely appealed by Sonia Kochhar.
Holding
In a matter of first impression, the Court of Special Appeals held that an action commenced in a State Court in Maryland in violation of a bankruptcy automatic stay is void ab initio. In doing so, the Court of Special Appeal followed the vast majority of courts which have found that any action commenced in violation of the automatic stay is void ab initio. A stay commences automatically upon the filing of a bankruptcy, and halts any and all collection efforts. The bankruptcy court is then vested with exclusive jurisdiction over the property in the bankruptcy estate , thus depriving a state court of subject mater jurisdiction. There was no dispute that the action filed by the Bansal family was in violation of the automatic bankruptcy stay. Since the action was filed in violation of the stay, the Court was without subject matter jurisdiction and the action was void ab initio.
Practice Pointers
In Maryland, an action filed in violation of a bankruptcy stay is void ab initio for lack of subject matter jurisdiction. A termination of the stay alone cannot vest the state court with subject matter jurisdiction retroactively. There may, however, be a means to rescue an action filed in violation of the automatic stay. A bankruptcy court may annul a stay or may grant retroactive relief from a stay upon a motion of a party who finds itself in such a situation.