Certain “Nunc Pro Tunc” Relief May Still be Available in Bankruptcy

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Translating to “now for then,” nunc pro tunc orders grant backdated relief. Such orders are common in bankruptcy cases. For instance, bankruptcy courts often enter orders retroactively approving retention of professionals, and in certain cases even granting retroactive relief from the automatic stay.

In February 2020, the Supreme Court held in Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano that nunc pro tunc orders cannot be used to retroactively change what has transpired in a case. Nonetheless, two recent cases have held that certain nunc pro tunc relief is still available in bankruptcy.

The End of Nunc Pro Tunc?

In Acevedo, employees of the Catholic Church of Puerto Rico schools sued the Archdiocese in local court after it had terminated their pension plan. The Puerto Rico Supreme Court ultimately affirmed the trial court’s ruling, ordering the Archdiocese to re-fund the pension plan.

Before the trial court had entered its initial ruling, the Archdiocese removed the case to federal court in connection with a bankruptcy case filed by the Catholic school’s pension trust. The bankruptcy case was dismissed in March 2018, which divested the federal court of jurisdiction over the removed lawsuit. However, the federal court failed to remand the lawsuit back to the local court until August 2018. In the meantime, local court entered the order requiring the Archdiocese to re-fund the pension plan in March 2018. Despite its tardiness, the August 2018 remand order provided that the suit was remanded nunc pro tunc to March 2018, when the bankruptcy case had been dismissed.

Because the trial court’s order had been entered before the case had been remanded, the order was void for lack of jurisdiction. The Supreme Court held that the remand order’s nunc pro tunc relief was insufficient to cure this jurisdictional defect, reasoning that nunc pro tunc orders cannot be used to change a case’s record or confer jurisdiction where none existed.

Can Bankruptcy Courts Still Grant Nunc Pro Tunc Stay Relief?

The automatic stay of section 362 of the Bankruptcy Code generally enjoins creditors from seeking to recover their claims once a debtor files for bankruptcy. This includes staying lawsuits and foreclosures. Most courts view actions taken in violation of the stay as void or at least voidable.  Consequently, bankruptcy courts have occasionally granted creditors nunc pro tunc stay relief for their actions that would otherwise violate the stay.

Notwithstanding the Supreme Court’s holding in Acevedo, the Ninth Circuit BAP recently held in Merriman v. Fattorini that a court may still grant retroactive relief from the automatic stay. In Merriman, a creditor brought a wrongful death suit in state court against a Chapter 13 debtor and others. Upon learning of the debtor’s pending bankruptcy case, the creditor filed a motion to annul the automatic stay. The bankruptcy court granted the creditor’s motion, finding cause to retroactively lift the stay due to the creditor’s lack of knowledge of the bankruptcy case and the judicial economy of allowing the wrongful death case to be litigated in one forum.

The Ninth Circuit BAP affirmed the bankruptcy court’s ruling. The Ninth Circuit BAP noted that the wrongful death suit included only state law claims, and the debtor failed to identify any prejudice he would incur if the wrongful death suit proceeded in state court. Further, the Ninth Circuit BAP agreed that judicial economy would be served by permitting the wrongful death suit to be tried against the debtor and his co-defendants in one forum. Finally, the Ninth Circuit BAP stated that, if retroactive relief were not granted, the wrongful death claim could be barred by the statute of limitations.

In so ruling, the Ninth Circuit BAP distinguished Merriman from Acevedo, stating that Acevedo holds that “nunc pro tunc orders may not create jurisdiction where none exists,” but does not apply to a “bankruptcy court’s power to annul the automatic stay under § 362(d).” The Ninth Circuit BAP reasoned that the power granted to bankruptcy courts by Congress under section 362 to terminate, annul, modify, or condition the stay is distinct from the situation in Acevedo, where a court attempted to create jurisdiction where none had existed.

Another common scenario where nunc pro tunc orders are at issue in bankruptcy is when estate professionals seek approval of their employment. Following the Merriman decision, the Bankruptcy Court for the Eastern District of California held in In re Miller that — even if Acevedo prevents the court from approving professionals’ employment nunc pro tunc — the court could nonetheless “exercise[e] … its equitable discretion to compensate the professionals … for pre-employment services.” More specifically, Acevedo does not prohibit all retroactive relief. Rather, “Acevedo curtails only the inherent authority of federal courts to grant retroactive relief by nunc pro tunc orders which purport to create facts or rewrite history to support the retroactive relief granted.”

Notably, some bankruptcy courts are applying Acevedo and holding that allowing nunc pro tunc relief is not available. In particular, the Bankruptcy Court for the Eastern District of New York’s recent decision in In re Telles denied a request for nunc pro tunc relief from the automatic stay.

In In re Telles, a lender initiated a foreclosure action against a party that was not in bankruptcy. The debtor in bankruptcy resided at the property but held no interest in it at the time the foreclosure was commenced. The state court entered a judgment of foreclosure and scheduled a foreclosure sale. Two days before the sale was to occur, the non-debtor property owner deeded a 10% interest in the property to the debtor, and the debtor filed for Chapter 13 bankruptcy relief. Due to the bankruptcy, the foreclosure sale was canceled. The debtor’s first bankruptcy case was dismissed, and a second foreclosure sale was scheduled. Two days before the second foreclosure sale was to occur, the debtor filed for bankruptcy a second time.

While preparing for the second foreclosure sale, the mortgagee conducted a PACER search for the non-debtor property owner but inadvertently failed to conduct a similar search for the debtor. In doing such, the mortgagee was unaware of the debtor’s second bankruptcy filing, and the second foreclosure proceeded in January 2020. The lender was the successful bidder at the sale.

The lender subsequently filed a motion in the bankruptcy court seeking stay relief nunc pro tunc to the date of the foreclosure sale. Although pre-Acevedo case law would have supported the mortgagee’s motion, the bankruptcy court held that Acevedo changed the landscape for nunc pro tunc relief by definitively finding that such relief cannot be applied to cure jurisdictional defects. Finding that if it were to grant the mortgagee’s motion, its “ruling would be squarely at odds with Acevedo,” the bankruptcy court denied the lender’s motion and found that the foreclosure sale was void.

What’s Next?

As bankruptcy courts continue to interpret and apply Acevedo, it is possible more courts will find workarounds to allow for nunc pro tunc orders and backdated relief. Creditors and practitioners should keep an eye out for further rulings regarding nunc pro tunc relief from the automatic stay.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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