Nondischargeability of Debt Not Per Se “Cause” for Lifting of Stay

Posted by NCBRC - September 30, 2013

The Eleventh Circuit vacated the district court’s finding that nondischargeability of a debt, standing alone, is “cause” to grant relief from stay under section 362(d)(1). Disciplinary Board of the Supreme Court of Pa. v. Feingold (In re Feingold), No. 12-13817 (Sept. 17, 2013). The debtor was a disbarred attorney who was ordered by the state court to pay approximately $45,000.00 representing the costs associated with his disciplinary proceedings and the court appointed conservator. On the same day the state court entered its judgment, the debtor filed for chapter 7 bankruptcy in Florida. The disciplinary board sought relief from stay under the “for cause” provision in section 362(d)(1).

The bankruptcy court found that the debt was compensatory and therefore dischargeable under section 523(a)(7). Based on this finding, the court found no cause to lift the stay. The District Court reversed, finding that the judgment represented a fine or penalty and was therefore nondischargeable under section 523(a)(7). It remanded to the bankruptcy court to enter an order lifting the stay on that basis.

On debtor’s appeal, the Eleventh Circuit looked at two issues: 1) whether the debt was dischargeable under section 523(a)(7), and 2) whether “cause” existed for lifting the stay. The court began by noting that under the reasoning set forth in Kelly v. Robinson, 479 U.S. 36 (1986), cost assessments in disciplinary proceedings such as the one before it, are generally deemed to be fines or penalties under section 523 because they are typically not based on victim restitution. The discretionary nature of the cost assessment under Pennsylvania disciplinary rules rendered it more related to punishment of the disciplined attorney than compensation to the victims of his wrongdoing. Thus, the court affirmed the district court finding that the debt was nondischargeable.

As to the lifting of the stay, however, the Eleventh Circuit found that the district court’s per se rule that nondischargeability constituted cause to lift the stay was in error and was contrary to the finding of a majority of courts. See, e.g., In re Mu’min, 374 B.R. 149 (Bankr. E.D. Pa. 2007); In re Daniels, 316 B.R. 342 (Bankr. D. Idaho 2004); In re Miller, 98 B.R. 110 (Bankr. N.D. Ga. 1989). Although the Code does not specify what constitutes “for cause” within the meaning of section 362(d)(1), section 362(b) enumerates the debts for which the stay does not apply. Allowing nondischargeability, in and of itself, to operate as an additional exception to the stay would render it unnecessary for Congress to have included specified nondischargeable debts, such as domestic support obligations, as not subject to the automatic stay. The court found that the lower court should have applied a totality of the circumstances test under which nondischargeability could be considered as one factor. This holding comports with that of most courts addressing the “for cause” provision of section 362(d)(1). See, e.g., In re Bogdanovich, 292 F.3d 104 (2d Cir. 2002) (12 factors to be considered in “for cause” assessment); In re Robbins, 964 F.2d 342 (4th Cir. 1992).The court vacated the district court’s order to lift the stay and remanded with instructions to the bankruptcy court to apply a “totality of circumstances” test, under which the nondischargeability of the debt would be a factor to be considered, to determine whether the automatic stay should have been lifted for “cause.”

Feingold opinion


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