Impact of bankruptcies on California eviction actions

Article co-authored by our friend well familiarized with bankruptcy law, attorney Mark J. Romeo. A special thanks to our friends at the San Francisco Small Property Owners Association Institute for raising awareness on this and other important topics germane to our community.

It seems that not too much time goes by without hearing the apocalyptic prediction of an “eviction tsunami.” Others have preferred to use the term "eviction cliff" as if landlords are lining up to escort tenants down a steep slope. 

We have often said that these alarmist terms coined by tenants’ advocates and their allies amount to fear-mongering, but we won’t relitigate our case here. Instead, we pose the question of whether there will be a tsunami of bankruptcies that could push landlords down a cliff. 

The quiet before the storm? 

As California keeps marching steadily toward a post-pandemic future, another COVID-related crisis looms - a debt and bankruptcy disaster when renters have to face the music by addressing a stockpile of debt that has accrued during the pandemic. 

 According to this MarketWatch article, bankruptcies have been on the decline, but don't let the numbers fool you. In a joint study by Brigham Young University and MIT Sloan School of Management, an interesting revelation is that people wait an average of 22 months after their first 90-day past-due notice to file for bankruptcy. In other words, consumers with hefty debt loads haven't felt the heat just yet, but it is warming up and it will reach a boiling point.

Bornstein Law has said that despite preferential treatment to tenants, one good thing the government did in response to the pandemic was pump a lot of liquidity into the economy. These stabilization efforts have kept households afloat but as the crisis dissipates, funds will dry up and creditors will be less lenient. Naturally, renters will seek the shelter of bankruptcy. 

It is rare for bankruptcies to occur without a trigger.

Normally, people hold off until the last minute and some calamitous event precipitates the bankruptcy filing. Think of wage garnishment, foreclosure, or repossession of a vehicle. And yes, the threat of eviction. With moratoriums on eviction for nonpayment of rent soon to expire, we would fully expect that renters will attempt to avail the bankruptcy code to stay in their homes longer. 

From our hard-won experience, a great number of tenants will wait until a Writ of Possession is issued. This authorizes the Sheriff to remove the occupants from the premises and is also a moment of reality for the tenants, motivating some to file bankruptcy as a last-ditch effort.

As a sidebar, sheriffs have been slow to enforce writs during the pandemic, if at all, but enforcement is picking up. We remind landlords that a writ expires after six months and the process must be started all over again, at additional cost, time, and paperwork if there was no enforcement within that six months.

How the sequence of events will play out

Let’s assume that the landlord has prevailed in an unlawful detainer action. Let’s also say the tenant files for bankruptcy while the eviction lawsuit is pending. In this case, the tenant is generally entitled to an “automatic stay,” to take effect immediately. This is a court order that bars the landlord from commencing or moving forward with an eviction action. Sheriffs at this point are put on pause and the tenant remains implanted.

For the time being.

"When a tenant files bankruptcy, the first impulse of landlords is to get animated, raise hell. But this reaction will be at the landlord’s peril. The key is to be patient, say nothing to the tenant, and let attorneys do their jobs."

Act two: the landlord, through his or her attorney, requests relief from an automatic stay in order to continue with the unlawful detainer action. There are some procedural requirements and the motion must be supported by admissible evidence, but this is relatively easy to obtain with proper counsel. 

We hasten to say that a relief from the automatic stay will generally be granted if the landlord has obtained issuance of a writ of possession prior to the tenant filing a bankruptcy case. The federal appeals court for the Ninth Circuit where California is located—has held that once a judgment and writ of possession has issued, the “tenant is “completely divested of all legal and possessory rights that …should be protected by the automatic stay.” (In re Perl 811 F3d 1120, 1130). The landlord still has to make the motion, but this legal authority reduces the burden drastically. The standard form of a bankruptcy petition in fact requires the debtor to disclose if their residence is subject to an unlawful detainer judgment and there are procedures on that disclosure that may require notice and payment to the landlord. 

Landlords and property managers should also know that there are other theories for eviction 

These include any number of “at fault” evictions such as unauthorized pets or subletting, nuisances, criminal activity, the refusal of a tenant to grant the landlord authorized entry into the premises, and so forth. Depending on the severity of the transgression, the tenant can cure the violation or when there are egregious instances of behavior that pose a threat to public health and safety, Bornstein Law can swiftly get court intervention to remove bad actors. 

Likewise, other “no-fault” evictions can proceed. For example, an owner or a close relative wants to move into the rental unit for their personal use, the landlord wants to permanently remove units from the rental market, and other methods to transition the tenant out of the dwelling, although these methods are highly regulated and come with myriad statutory obligations that go beyond the scope of this article.

Not a free pass moving forward

 Tenants filing bankruptcy still owe current rent. The bankruptcy code divides claims into pre-petition and post-petition claims. The automatic stay applied to the prosecution of pre-petition claims. In an over-simplified example, if a tenant owes 4,500 for three months' rent before he or she files the petition, and then accrues another $3,000 in unpaid rent after the case is commenced, enforcement of the post-petition rental obligation is not barred by the automatic stay. Let’s compartmentalize rent debt that became due during certain time periods and what the tenant is obligated to pay to remain in the rental unit. 

 Landlords should also know that there are protections built into place to shield rental property owners from serial abusers of the bankruptcy court. For example: 

» If the tenant files for bankruptcy within a year of having an active prior bankruptcy case dismissed, the automatic stay will automatically terminate without any further action after 30 days. 

» Should the tenant filing for bankruptcy have two or more active bankruptcy cases dismissed within the past year, there is no automatic stay.

In actual practice, Sheriff’s departments and state courts generally still want a “comfort order” from the Bankruptcy Court before proceeding.

We are encouraged that there are checks and balances in place to weed out any renters attempting to game the system and, oftentimes with the assistance of tenants’ attorneys, erect clever smoke and mirrors to repeatedly delay the landlord’s lawful ability to recover possession of the rental unit. 

 These tactics are even more unseemly when the tenant has retained free legal representation and the landlord is forced to pay legal fees to defend against them. 

 Bankruptcy has seemingly lost the stigma it once had. 

 Since the great recession, bankruptcy has lost much of its stigma since so many ordinary homeowners were caught in the wave of devaluation of real estate. Among large and small businesses, it is considered a prudent way to regroup, buy time, and come back again. For rental property owners who are looking to get cash flowing again, bankruptcy need not be an impediment to taking charge of properties. 

 You are still king of your castle.