Nuisance Abatement and Bankruptcy

By Steven R. Orr

As the recession persists, increasing numbers of property owners are seeking the protection of the United States Bankruptcy Court. Once they initiate bankruptcy proceedings, the "automatic stay" applies and most claims against debtors become governed by the Bankruptcy Code. Absent relief from the automatic stay, such claims are then generally handled through the bankruptcy process under the supervision of the United States Bankruptcy Court. The Bankruptcy Court may treat any action taken in violation of the automatic stay as void, and may impose sanctions or contempt proceedings against the violator.

The Impact on Local Communities

Property owned by debtors, as might be expected, is frequently the subject of nuisance concerns. Residents living around a bankrupt golf course may complain about dead grass, overgrown weeds, and general deterioration. Residents adjacent to an uncompleted subdivision may be concerned about dust, vandalism or transients occupying unfinished structures. A homeowner who has initiated a personal bankruptcy to avoid a lender foreclosure may lack funds to maintain the property, and that property then becomes a nuisance in the neighborhood. In these instances, a city may wish to take actions to enforce applicable property maintenance rules, including inspecting the property, seeking injunctive relief from the state court, and abating nuisances, but avoid inadvertently violating the automatic stay provisions of the Bankruptcy Court.

Code Enforcement Against Bankrupt Property Owners

There is an important exception to the automatic stay of bankruptcy for code enforcement and nuisance abatement efforts by local agencies. 11 United States Code, Section 362(b)(4), exempts proceedings by governmental units to enforce their police or regulatory powers from the Bankruptcy Code's automatic stay provisions. In this context, police and regulatory power refers to the enforcement of laws that affect the health, welfare, morals, and safety. Courts have found nuisance abatement actions to fall within this exception, and local agencies are generally not subject to the automatic stay when they seek to enforce health and safety rules on a debtor's property.

The more challenging aspect of code enforcement in the context of bankruptcy relates to cost recovery. Outside bankruptcy, cost recovery efforts typically focus on creating and enforcing a lien against the property which may be foreclosed upon absent payment. In bankruptcy, however, cost recovery claims are subject to the Bankruptcy Code, and require the local agency to be careful in obtaining the necessary approvals before it records a lien against property owned by the debtor, or before it demands payment from the debtor. Other creditors may resist allowing a local agency's claim, or seek to place that claim behind those of existing creditors.

It is thus important for local agencies to be familiar with cost recovery options available in the bankruptcy process and to undertake code enforcement activities in a manner that does not run afoul of the Bankruptcy Code.

FOR ADVICE FROM RW&G ON NUISANCE ABATEMENT AND CODE ENFORCEMENT ISSUES, PLEASE CONTACT STEVEN R. ORR OR ANY OF THE ATTORNEYS IN THE FIRM'S LITIGATION DEPARTMENT

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