A doctor (the “doctor debtor”) and his medical practice (the “practice debtor”), of which the doctor was the sole member, filed for a total of three bankruptcies. The doctor debtor had a loan with the creditor that was secured by the property in which the medical practice operated its clinic (the “property”). The doctor debtor filed first for chapter 11 bankruptcy (“bankruptcy 1”). The creditor filed a motion for abandonment and termination of the automatic stay under 11 U.S.C. § 362, which the bankruptcy court granted, ordering the property abandoned from the estate, terminating the automatic stay, and allowing the creditor to foreclose on the property. However, before the creditor could foreclose on the property, the practice debtor filed for chapter 11 bankruptcy (“the second bankruptcy”). The creditor again moved for termination of the automatic stay in the second bankruptcy, which motion the bankruptcy court also granted, and also ordered the practice debtor to pay adequate protection payments to the creditor. The practice debtor defaulted on the ordered payments, and the property was abandoned from the second bankruptcy estate as well. The doctor debtor then filed a second individual Chapter 11 bankruptcy, which was later converted to a Chapter 7 case (the “third bankruptcy”). The creditor did not move for relief in this case and instead filed a proof of claim based on the loan with the doctor debtor that had granted the creditor a lien on the property. The creditor and the doctor debtor’s counsel also agreed that the automatic stay had been terminated in the third bankruptcy because thirty days had passed since the filing of the third bankruptcy. The provider debtor filed a notice of intent to abandon the property and moved out. The creditor foreclosed on the property. The doctor debtor received a discharge in the third bankruptcy, and over a year later, filed a motion claiming the creditor had violated the automatic stay under § 362(k), arguing the foreclosure had been a willful violation of the stay. The creditor then filed a motion for annulment of the stay and maintained that the foreclosure had been lawful. The bankruptcy court denied the doctor debtor’s motion and stated the debtor had “not shown why annulment should be denied.” The debtor appealed, but the district court affirmed the bankruptcy court’s decision. The debtor appealed again, arguing that the district court erred when it (1) failed to determine if the creditor’s automatic stay violation was willful; (2) “affirmed the [b]ankruptcy [c]ourt's retroactive annulment of the automatic stay”; (3) incorrectly interpreted and applied § 362; (4) failed to address the propriety of the foreclosure process used by the creditor, including the procedural and substantive fairness; and (5) “failed to adequately consider equitable principles in the decision to annul the stay and validate the foreclosure."
In Okorie v. Lentz (In re Okorie), No. 24-60377, 2025 WL 603890, 2025 U.S. App. LEXIS 4374 (5th Cir. Feb. 25, 2025) (opinion not yet released for publication), the Fifth Circuit affirmed the district court’s ruling and found that “the bankruptcy court did not exceed its discretion by concluding that annulment of the automatic stay… was justified.” The Fifth Circuit relied on two avenues in which the bankruptcy court could grant relief from the automatic stay by annulment: (1) for cause and (2) “if (A) the debtor does not have an equity in such property” and “(B) such property is not necessary to an effective reorganization.” 11 U.S.C. § 362(d)(1)-(2). First, the Fifth Circuit found that “the bankruptcy court properly elected to annul the stay under § 362(d)(1) for cause.” The court explained that “cause” for lifting stay exists when there is a “lack of adequate protection of an interest in property of such party in interest.” 11 U.S.C. § 362(d)(1). It then noted that in the practice bankruptcy case, the bankruptcy court had recognized a lack of adequate protection, and the practice debtor had failed to make adequate protection payments as ordered by the bankruptcy court there. Additionally, the doctor debtor had failed to deny that adequate protection was lacking, instead arguing it was not required. The Fifth Circuit found the debtor’s argument “unavailing.” Second, the Fifth Circuit found that the bankruptcy court acted properly in finding that relief from stay was warranted under § 362(d)(2) because the debtor did not have equity in the property and the property was not necessary for an effective reorganization. The court explained that a debtor “lacks equity in [ ] property” when “the creditor is undersecured.” United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375 (1988). Further, “it is the burden of the debtor to establish that the collateral at issue is ‘necessary to an effective reorganization’” after it is established that a creditor is undersecured. Id. The Fifth Circuit found that the bankruptcy court correctly concluded that the creditor was an “undersecured creditor” because the debtor had pledged the property as collateral, resulting in the property having “little or no equity for the benefit of the estate.” This shifted the burden to the debtor to show why “the [ ] property was necessary for effective reorganization,” which the debtor had failed to show. The debtor attempted to argue “that the bankruptcy court was required to engage in an analysis of equitable principles—separate from the court's inquiry under § 362(d)—when assessing whether annulment of the stay was merited.” In short, the Fifth Circuit found none of the arguments made by the debtor for an equitable analysis convincing and affirmed the district court’s ruling.
By Olivia Lewis, [email protected]
Edited By Jace Brown, [email protected]
Edited By Kristin Meurer, [email protected]
Edited By Hayden Mariott, [email protected]