"In Rem" Stay Relief Orders Held Invalid

The United States Bankruptcy Appellate Panel of the U.S. Ninth Circuit Court of Appeals (BAP) issued a published decision on July 7, 2006 which holds that bankruptcy courts have no inherent power under 11 U.S.C. Section 105 to issue so-called "in rem" stay relief orders. Johnson v. TRE Holdings, ___ B.R. ___, 2006 wl 2065565 (9th Cir. BAP 2006). In many jurisdictions, including the Central District of California, mortgage lenders and loan servicers have experienced multiple or serial bankruptcy filings, often by individuals who acquire fractionalized ownership interests in the real property collateral for no consideration for the express purpose of thwarting a pending foreclosure and with no intention of reorganizing under the bankruptcy laws. To curtail these abuses, mortgage lenders and loan servicers frequently request stay relief orders that are binding against the real property (so-called "in rem" relief). This allows the mortgage lender to resume its foreclosure without having to seek additional stay relief orders each time another bankruptcy case is filed. Although some bankruptcy judges have refused to grant "in rem" relief, many other bankruptcy judges routinely grant such relief in proper cases. The recent BAP ruling, written by the Honorable Christopher Klein, United States Bankruptcy Judge in the United States Bankruptcy Court for the Eastern District of California, Sacramento Division, concludes that there is no statutory or other legal basis for the practice, casting doubt on the validity and enforceability of such orders throughout California. Creditors can no longer proceed with foreclosure sales in reliance upon "in rem" stay relief orders when a new bankruptcy petition is filed before the sale date. A new stay relief order must be obtained in each successively-filed bankruptcy case. Any sale held without a new stay relief order will be null, void and of no legal force or effect.