Michael Lemma and Luba Lemma

1
UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
EASTERN DISTRICT OF NEW YORK
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In re:
Case No. 08-72443-reg
MICHAEL LEMMA and LUBA LEMMA,
Chapter 13
Debtors.
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APPEARANCES:
Michael A. Kinzer
Attorney for Debtors and Catherine Lemma
384 West Main Street
Babylon, New York 11702
Allan B. Mendelsohn
Zavatsky Mendelsohn & Levy, LLP
Attorneys for Washington Mutual Bank, F.A.
P.O. Box 510
33 Queens Street
Syosset, New York 11791-0510
HON. ROBERT E. GROSSMAN, United States Bankruptcy Judge:
MEMORANDUM OPINION
Before the Court is a motion filed by Michael Lemma and Luba Lemma (“Debtors”)
seeking a determination that the scheduling of the foreclosure sale of their residence located in
Levittown, NY (the “Property”) by Washington Mutual Bank, F.A. (the “Bank”) violates the co-
debtor stay provision of section 1301(a) of the United States Bankruptcy Code because the Bank
never moved to terminate the co-debtor stay as to Catherine Lemma (“Co-obligor”) (the
“Motion”). The Bank, a secured creditor of Debtors, filed opposition to the motion.
After reviewing the parties’ submissions and considering the arguments presented at the
hearing on August 25, 2008, the Court granted the Motion. The following constitutes the
Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of
Bankruptcy Procedure.
I. 	JURISDICTION
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1The note and mortgage was executed in favor of Bank United which subsequently merged with
Washington Mutual Bank, F.A.
2
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(2) and
1334(b), and the Standing Order of Reference in effect in the Eastern District of New York.
II. 	FACTS AND PROCEDURAL HISTORY
On September 27, 1996, Debtors, along with Co-obligor and her late husband Joseph
Lemma executed a note and mortgage in favor of the Bank on the Property.1 Debtors defaulted
under the terms of the note and mortgage and the Bank commenced a foreclosure action in the
Supreme Court of the State of New York in February 2006. A judgment of foreclosure was
granted on February 26, 2007, against Debtors, Joseph Lemma, and Co-obligor.
On June 24, 2007, Michael Lemma filed a petition for relief under Chapter 13 of Title 11
of the United States Code (the “Bankruptcy Code”) which was dismissed on October 30, 2007.
Subsequently on November 19, 2007, Luba Lemma filed a petition for relief likewise under
Chapter 13 which was dismissed on February 21, 2008. Shortly thereafter, Debtors filed the
instant petition on May 12, 2008, for relief under Chapter 13 of the Bankruptcy Code. Because
of Debtors’ prior filings, which were pending within the preceding one year period of the instant
petition, the automatic stay of an action afforded under section 362(a) terminated thirty days
from the filing of the instant case pursuant to section 362(c)(3)(A). Seeking to extend the
automatic stay beyond its statutory expiration date, Debtors filed a motion pursuant to section
362(c)(3)(B) on May 20, 2008.
The Bank filed an Affirmation in Opposition to the Debtor’s motion to extend the
automatic stay on May 29, 2008, alleging that Debtors failed to provide clear and convincing
evidence that an extension of the automatic stay was warranted. The Bank did not seek relief
from the co-debtor stay.
The motion to continue the automatic stay pursuant to section 362(c)(3)(B) was heard
before this Court on June 2, 2008. This Court denied the motion by order dated June 16, 2008,
and the automatic stay under section 362(a) expired on June 12, 2008. Thereafter, the Bank
scheduled a foreclosure sale to take place on August 26, 2008. On August 19, 2008, Debtors
filed the Motion asserting that the Bank’s scheduling of the foreclosure sale violates the co-
debtor stay provision of section 1301(a) because the Bank never moved to terminate the co-
debtor stay.
III. 	DISCUSSION
The question before the Court is whether the co-debtor stay applicable to this case
pursuant to section 1301 of the Bankruptcy Code prevents the Bank from proceeding with a
foreclosure sale of the Property despite the fact that the automatic stay applicable to the Debtors
has been terminated by operation of section 362(c)(3)(A). Specifically, does section
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2I n addition to In re Ikeda, at least two other courts have relied on the legislative history of the “consumer debt”
provision. Nevertheless, the holdings of these courts are in accord with this Court’s conclusion that a mortgage loan
secured by a residence is a “consumer debt.” The first, In re Nenninger, 32 B.R. 624, 625-26 (Bankr. W.D. Wis.
3
362(c)(3)(A) limit the applicability of the co-debtor stay under section 1301 of the Bankruptcy
Code?
Section 1301, “Stay of Action Against Codebtor,” provides in pertinent part:
(a) 	[A]fter the order for relief under this chapter, a creditor may not act, or commence
or continue any civil action, to collect all or any part of a consumer debt of the
debtor from any individual that is liable on such debt with the debtor, or that
secured such debt.
11 U.S.C. § 1301(a).
Section 1301 applies to “codebtors” -individuals who are liable on certain debts with the
debtor or that secured such debt- and only to “consumer debts.” 11 U.S.C. § 1301(a). The Bank
does not dispute that Co-obligor is an individual who is liable on a debt with Debtors, and thus is
a co-debtor for the purposes of section 1301. However, the Bank disputes that the residential
mortgage is a “consumer debt.”
A. 	Consumer Debt
A “consumer debt” is a debt incurred by an individual “primarily for a personal, family,
or household purpose.” 11 U.S.C. § 101(8). Although there is no case law binding in this
Circuit, the majority of courts addressing the issue of consumer debt hold that a mortgage lien
secured by real property is a consumer debt. In re Kelly, 841 F.2d 908, 913 (9th Cir. 1988); In re
Davis, 378 B.R. 539, 546-47 (Bankr. N.D. Ohio 2007); In re Hall, 258 B.R. 45, 50 (Bankr. M.D.
Fla. 2001) (majority position is the better reasoned on the issue that purchase money mortgage
on debtor’s former residence is a consumer debt); In re Vianese, 192 B.R. 61 (Bankr. N.D.N.Y.
1996) (mortgage on debtors’ residence and home equity loan are debts incurred primarily for
personal purposes). In determining whether a debt falls within the statutory definition, these
courts look to whether the debt incurred serves a family or household purpose, In re Kelly, 841
F.2d at 913, or whether the debt was incurred with an eye toward profit, In re Booth, 858 F.2d
1051, 1055 (5th Cir. 1988). “It is difficult to conceive of any expenditure that serves a ‘family . .
. or household purpose’ more directly than does the purchase of a home and the making of
improvements thereon.” In re Kelly, 841 F.2d at 913.
The Bank relies on In re Ikeda, 37 B.R. 193 (Bankr. Haw. 1984) for the proposition that a
mortgage lien secured by real property is not a consumer debt. In In re Ikeda, the court
referenced the specific comments of senators that “[a] consumer debt does not include a debt to
any extent the debt is secured by real property” and concluded that the intent of Congress was
clear that “consumer debts” do not include liens secured by real property. Id. at 195 (citing 124
Cong. Rec. S17,406 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini)).2
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1983), while referencing the congressional statements, nevertheless maintained that the proper test for determining a
consumer debt is the purpose of the loan. The court concluded that a loan to purchase a commercial campground
could not be a consumer debt. The second case that referenced the provision’s legislative history, In Re Burgess, 22
B.R. 771 (Bankr. M.D. Tenn. 1982), held that a debt incurred to purchase property to be used as debtor’s home was
a “consumer debt.” The court specifically noted the legislative history and congressional remarks and concluded
that an unsecured obligation for the purchase of a home could be a consumer debt.
4
This Court concludes that a note secured by a mortgage lien on a personal residence is a
“consumer debt.” The Court declines to look beyond section 101(8), into its legislative history
to interpret its meaning, because the statute is unambiguous on its face. The only requirements
that the debt must meet under the statutory definition is that it is incurred by an individual and
primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8). There is no
language here that requires the debt to be an unsecured debt or one that is secured by something
other than real property. In fact, “debt” is defined by the Bankruptcy Code as liability on a
claim, 11 U.S.C. § 101(12), and “claim” is defined in pertinent part as a secured or unsecured
right to payment, 11 U.S.C. § 101(5). Where the statute’s language is plain, an inquiry into its
meaning ends with the language of the statute and the sole function of the court is to enforce it
according to its terms. United States v. Ron Pair Enters., 489 U.S. 235, 241 (1989); see In re
Kelly, 841 F.2d at 912 n.3 (maintaining that the explanatory comments of key legislators cannot
be utilized to expand the plain language of the Congressional statement which would be the only
authoritative indication of legislative intent); In re Gunderson, 76 B.R. 167, 168-69 (Bankr. Or.
1987) (rejecting Ikeda’s review of legislative history and finding that the congressional
statements confuse rather than clarify statutory construction of the “consumer debt” definition).
Further, the Court does not find Ikeda determinative in this case because the Ikeda court
relied on In re Stein, 18 B.R. 768 (Bankr. S.D. Ohio, 1982) in support of its proposition. In re
Ikeda, 37 B.R. at 195. The court’s holding, however, in In re Stein was based on its finding that
a large portion of the debt that was secured by the real property encompassed obligations relating
directly to a family farm, which was operated for a business purpose and not for a personal
purpose. 18 B.R. at 769. Here, on the other hand, the debt was incurred solely for a personal
purpose, to purchase a residence. The Bank does not assert and has not presented any evidence
that Debtors were motivated by profit in incurring the debt. Finding no dispute that the loan was
incurred by Debtors and Co-obligor to purchase a home for the purpose of residing in it, the
Court finds that the debt falls within the definition of a “consumer debt.”
B. 	Effect of Section 362(c)(3)(A) on Section 1301
Having determined that section 1301 applies, the Court now considers whether the
statutory termination of the automatic stay as provided in section 362(c)(3)(A) has any limiting
effect on the co-debtor stay imposed by section 1301.
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3 Section 362(a) provides in pertinent part that a petition filed under Section 301, 302, or 303, operates as a stay,
applicable against all entities, of certain actions.
5
Section 362(c)(3)(A) of the Bankruptcy Code, which became effective pursuant to the
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), limits the automatic
stay provided under section 362(a) in certain cases. Section 362(c)(3) provides:
[I]f a single or joint case is filed by or against debtor who is an individual in a case under
chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the
preceding 1 year period but was dismissed, other than a case refiled under a chapter other
than chapter 7 after dismissal under section 707(b)-
A. 	The stay under subsection (a) with respect to any action taken with respect to a
debt or property securing such debt or with respect to any lease shall terminate
with respect to the debtor on the 30 th day after the filing of the later case.
11 U.S.C. § 362(c)(3)(A).
This new section 362(c)(3) provides for the termination of the automatic stay imposed by
section 362(a) unless a debtor brings on a motion to extend the automatic stay prior to the
thirtieth day after the filing date. In order to place this new section in the proper context, it is
useful to analyze it in relation to existing case law concerning the interplay between the
automatic stay imposed by section 362(a) and the section 1301 co-debtor stay. Prior to the
enactment of BAPCPA, courts consistently found that the co-debtor stay under section 1301 was
unrelated to the stay imposed by section 362(a). Morris v. Zabu Holding Inc. (In re Zabu), 385
B.R. 823, 829 n.6 (E.D. Va. 2008) (section 1301 and section 362 are independent provisions).
Section 362(a) provides that the filing of a petition in bankruptcy operates to stay certain
actions.3 The termination of the section 362(a) automatic stay upon relief sought by a creditor
under section 362(d), does not result in the termination of the section 1301 co-debtor stay. See
Harris v. Margaretten & Co., Inc. (In re Harris), 203 B.R. 46 (Bankr. E.D. Va. 1994), aff'd, 100
F.3d 950 (4th Cir. 1996) (a foreclosure sale scheduled post-petition was void in violation of the
co-debtor stay where the court had previously granted relief from the automatic stay under
section 362 but had not granted co-debtor relief); In re Prud'Homme, 161 B.R. 747 (Bankr.
E.D.N.Y 1993) (movant sought to lift the stay under section 362(d) as to the debtor and
separately under section 1301(c)(3) as to co-owner); In re Jones, 106 B.R. 33 (Bankr. W.D.N.Y.
1989) (creditor who had repossessed a vehicle violated the co-debtor stay under section 1301
even though the section 362(a) stay was not operational).
Just as the termination of the stay in section 362(a) will not terminate the co-debtor stay
imposed by section 1301, so too does the Court find that the new thirty-day automatic
termination of the stay applicable to Debtors pursuant to section 362(c)(3)(A) does not terminate
the co-debtor stay imposed by section 1301. There is no language in section 362(c)(3) that states
or implies that when the stay terminates automatically with respect to the debtor by reason of his
prior filings, the co-debtor stay terminates as well. Similarly, section 1301 sets forth the
instances when the co-debtor stay applies as well as exceptions to those instances; the
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6
termination of the automatic stay pursuant to section 362(c)(3) is not a listed or implied
exception.
The Bank relies in part on legislative history to support its argument that section 1301
was clearly not intended to provide relief to co-obligors in a situation where a debtor couple filed
three petitions between the two of them, each filed on the eve of a foreclosure sale. The Bank
asserts that the purpose of the co-debtor stay was to insure that the creditor could not demand
payment from the co-obligors while they were precluded from going forward against the debtor.
Accordingly, the Bank argues once the automatic stay was terminated, and a debtor no longer
had a right to cure the default, the purpose of the co-debtor stay is obviated.
First, the Court sees no need to resort to an analysis of the legislative history because the
statutory language of section 362(c)(3) is clear. See United Air Lines, Inc. v. McMann, 434 U.S.
192, 199 (1977) (legislative history, . . . by traditional canons of interpretation is irrelevant to an
unambiguous statute); accord Valentine v. Mobil Oil Corp., 789 F.2d 1388, 1391 (9th Cir. 1986).
In a similar case, King v. Wells Fargo Bank, N.A. (In re King), 362 B.R. 226 (Bankr. Md. 2007),
the court considered whether when section 362(c)(4) limits the stay of section 362(a) it also
limits the stay of section 1301. In that case, the debtor had two previous cases dismissed in the
year prior to her filing a petition. Accordingly, pursuant to section 362(c)(4)(A)(I) the stay
under section 362(a) did not go into effect at all. The court concluded that there was nothing in
section 1301 that limited the applicability of the co-debtor stay in cases where section 362(c)(4)
is applicable. Because the statute is clear on its face, the court declined to look at the statutory
intent - that the co-debtor stay is designed to protect a debtor by insulating him from indirect
pressures from his creditors exerted through his cosignor. The court noted that Collier on
Bankruptcy maintained that none of the new exceptions to section 362(a) affect the co-debtor
stay of section 1301 and that case law prior to the BAPCPA amendments routinely recognized
that the co-debtor stay of section 1301 and the automatic stay of section 362 were independent
provisions.
Second, there is evidence that Congress intended to keep the two protections
independent. One of the provisions Congress added under BAPCPA was section 365(p)(3). The
section provides that a lease is deemed rejected if a debtor lessee does not assume the lease in the
plan and that the stay under sections 362 and 1301 is automatically terminated. “The specific
reference in section 365(p)(3) to the termination of both the automatic stay of section 362 and
co-debtor stay of section 1301 further supports that Congress understood that the two stays are
separate and distinct.” In re King, 362 B.R. at 232.
The Bank contends that King is not controlling because it is distinguishable on the facts.
In King, the court found that the debtor’s third filing was done in good faith, and that it was
appropriate to impose the automatic stay. The Bank seizes on the court’s finding that the third
petition was not filed in bad faith and ignores the court’s analysis of section 1301 and its
conclusion that the co-debtor stay is separate and distinct from the automatic stay applicable to a
debtor. This Court is not persuaded that the finding by the King court that the debtor’s filing was
in good faith was a prerequisite for the finding that the section 1301 co-debtor stay applied. A
debtor’s good faith is pertinent in determining whether the automatic stay should be extended
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7
beyond thirty days under section 362(c)(3)(B). Good faith, however, has no bearing on the
analysis of whether the co-debtor stay of section 1301 is applicable.
C. 	Retroactive Relief from the Co-Debtor Stay
As part of its opposition to the Motion, the Bank, alternatively, requests the affirmative
relief of nunc pro tunc annulment of the section 1301 stay. The co-debtor stay may be
terminated upon a showing that: the debtor does not propose to pay the amount owed under the
plan; the nondebtor party actually received the consideration for the claim held by the creditor;
or that the creditor's interest would be irreparably harmed by the stay. 11 U.S.C. § 1301(c). A
motion under section 1301 must not only make a showing on one of these elements for relief, it
must also be made in compliance with the procedural rules on at least 10 days’ notice to affected
parties. See E.D.N.Y. LBR 9006-1. The Bank has failed to satisfy either its substantive or
procedural burdens. On June 2, 2008, when this Court first considered the issue of the automatic
stay pursuant to Debtors’ motion to extend the automatic stay beyond thirty days, the Bank,
while objecting to such an extension in relation to Debtors, did not seek to terminate the stay in
relation to Co-obligor under section 1301(c). To the extent the Bank argues now pursuant to
section 1301(c)(1) that Catherine Lemma is an individual who actually received the
consideration, the Bank must still seek relief from the stay by motion. See In re Jones, 106 B.R.
at 35; In re Francis, 15 B.R. 998, 1000 (Bankr. E.D.N.Y. 1981) (section 1301 itself does not
include in subsection (a)'s list of express exceptions from the stay the situation where “the debtor
was really the co-debtor,” but instead provides in subsection (c) that the court shall grant relief in
such a circumstance).
Putting aside the procedural infirmities of the Bank’s request, the Court declines to
retroactively terminate the co-debtor stay imposed by section 1301 in order to permit the Bank to
move forward with the foreclosure sale. Generally, a court may annul a stay retroactively under
limited circumstances. In re King, 362 B.R. at 234; In re Harris, 203 B.R. at 50. Some courts
have noted that annulment of the co-debtor stay is appropriate only in extreme circumstances,
while others have stated that “annulment may be allowed in a unique situation to balance the
equities between the parties.” In re Harris, 203 B.R. at 50; see In re Morris, 385 B.R. at 829-30
(the weight of the case law support the use of the balancing of the equities test); In re Myers, 491
F.3d 120, 129 (3d Cir. 2007) (noting that “[e]ven those cases that have subscribed to a narrow
conception of the power to retroactively annul the stay have affirmed that balancing the equities
is the appropriate test”).
In In re Morris, the bankruptcy court initially set aside a foreclosure sale because the
creditor failed to obtain relief from the co-debtor stay even though it was granted relief from the
stay as to the debtor. 385 B.R. at 827. Upon reconsideration and after balancing the equities, the
bankruptcy court retroactively granted relief from the co-debtor stay, which validated the
foreclosure sale. Id. at 827-28. On appeal, the court found that balancing the equities was
required. Id. at 831. The court affirmed the bankruptcy court’s annulling the co-debtor because
the buyer at the sale was an innocent third party without knowledge of the co-debtor violation,
the debtor failed to make plan payments, and the debtor waited until four months after the
violation of the co-debtor stay before seeking recourse. Id. Here, Debtors immediately contacted
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8
the Bank upon learning that the Bank scheduled a foreclosure sale and sought recourse from the
court. In addition, while the Bank already took steps toward the sale, the Court does not find
that the equities tip in the Bank’s favor because the sale has not yet taken place, there is no buyer
who would be unjustly harmed, and the Bank was well aware of the fact that there was a co-
obligor on the debt due the Bank.
V. 	CONCLUSION
Based on the foregoing, this Court holds that a mortgage loan secured by real property
that is the Debtors’ residence is a “consumer debt” and thus section 1301 is applicable to Co-
obligor. The co-debtor stay provided for by section 1301 is not terminated by the statutory
termination of the stay applicable to debtors pursuant to section 362(c)(3)(A). Since the co-
debtor stay is in effect and the Bank has not sought relief from the stay, the Bank’s scheduling of
a foreclosure sale on the Property is a violation of that stay.
An Order in accordance with this Memorandum Opinion was entered on August 25,
2008.
Dated: September 9, 2008 	/s/ Robert E. Grossman
Central Islip, New York 	Robert E. Grossman
United States Bankruptcy Judge
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