Automatic Termination of the Stay upon Second Filing under 362(c)(3) Are Two Strikes an Out
Congress apparently wants to call a two-strike foul ball an out as well.3 Code §362 (c)(3) ostensibly terminates the automatic stay on the 30th day after the filing of a second petition for relief within 12 months of an earlier dismissed case, requiring the debtor to justify a continuation of that stay. Many courts, however, in beginning to construe §362(c)(3), are letting two-strike debtors stay in the batter's box.
The operative provisions of 11 U.S.C. §362(c)(3) read (emphasis added):
(c) Except as provided...
(3) if a single or joint case is filed by or against debtor who is an individual in a case under chapter 7, 11 or 13, and if a single or joint case of the debtor was pending within the preceding one-year period but was dismissed, other than [a case refilled upon a finding of abuse under §707(b)]— (A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case.
Sections 362(c)(3)(B) and (C) go on to explain what the debtor or other party in interest (e.g., a trustee or junior lienholder who thinks there is equity in property) must do in order to continue the stay beyond the 30 days. Moreover, the court must determine, within those 30 days,4 whether or not the stay should continue. This has led debtors' counsel to file, simultaneously with the second petition for relief, motions to extend the stay and for expedited hearings on the issue.
The focus of the leadoff cases, In re Charles5 and In re Montoya,6 was mainly procedural and actually expanded that strike zone for the unwary debtor. Reading §362(c)(3)(C)(i), the courts, given the statutory presumption that the second case is not filed in good faith, required the debtor to prove, by clear and convincing evidence as to each creditor stayed (not just creditors generally), why the stay should be extended. The Charles debtor also had to give notice to all creditors, not just the main target of the stay (i.e., a foreclosing creditor). The debtor's new obligation to prove a substantial change in circumstances by clear and convincing evidence acts, according to the Charles court, as a salutary "triage of refiled cases." The Charles court even required, without specific statutory authority, a debtor to prove "sufficient equitable factors" to justify exercise of judicial discretion to continue the stay. While the Montoya court refused to extend the stay because the debtor failed to sustain his burden of proof, the Charles court directed the debtor to amend the motion and noted that if no one objected, the stay would be extended without further hearing. While courts are likely to be liberal about extensions,7 the debtor must prove his case to the requisite standard. Failure to sustain that burden, even when the motion to extend is uncontested by a creditor, can result in denial of the extension.8 For debtors' counsel, the messages are: (1) give notice of the motion to all creditors and (2) be as specific as possible about changed circumstances, particularly as to creditors who, in the prior dismissed action, had filed a motion for relief from stay.9 Procedural correctness is imperative to an extension of the stay before the court will address the merits of the case.10
If Congress is modifying the strike count with the stay-limitation provisions, courts will configure the strike-zone dimensions. First of all, neither §362 (c)(3) nor §362(c)(4) make any mention of either §§1201 or 1301.11 Thus, even after the third bankruptcy, if there is a nonfiling co-obligor on the debt, the creditor must seek relief by motion before acting. Any resolution of the prior case other than dismissal does not trigger this automatic termination provision.12 A few courts are giving debtors a helping hand by ruling that the failure to complete credit counseling under §109(h)(1) requires the court to "strike the petition for relief" rather than order a "dismissal of the case" that would trigger the §362(c)(3) termination provisions.13 A prior case is only "pending" until it is dismissed, even if officially "closed" within the 12-month period.14 Courts are finding that in a joint case, the application of the stay limitation provision needs to be analyzed separately as to each debtor. The statute has the stay terminate with regard to the "debtor," not "joint debtors," so the stay may be extended for a spouse with no prior filings, but not for the spouse with prior filings.15
Some courts are now critically examining the exact wording of this automatic-termination-of-stay provision and finding themselves longing for the simplicity of the Tax Code. Courts have noted that Congress well knows how to terminate the stay or prevent the stay from being imposed; as is most simply stated in §362(c)(4)(A)(i): "[T]he stay under subsection (a) shall not go into effect upon the filing of the later case." But §362(c)(3)(A) does not simply read: "The stay under subsection (a) automatically terminates on the 30th day after the filing of the petition for relief unless debtor does...." The difference in language between subsections (c)(3) and (c)(4) must mean that Congress intended that while the stay never goes into effect upon the third filing, a second filing only limits the ambit of the automatic stay. Just how limited is the rub?
In re Paschal16 held that §362(c) (3)(A) terminates the stay only as to "actions taken" by a creditor prior to the filing of the later bankruptcy petition. Section 362(a), on the other hand, stays, inter alia, all "acts" by a creditor. Hence, use of the word "actions," a subset of the more expansive word "acts," evidences the legislative directive to restrict the automatic termination of the stay to instances where a formal "proceeding," as contemplated in Code §362(a)(1), was pending prior to the filing of the later case. If a creditor had already filed suit, then the stay, unless extended by the debtor, would terminate 30 days after the petition date. If no "action" had been taken, with perhaps only "acts" performed, then the stay remains uninterrupted until the creditor gets it lifted. In Paschal, no "action" had yet been taken by a creditor. Hence, the court held that the stay did not automatically terminate and, gratuitously going a bit further, noted that if the debtor needed a stay extension, it was being granted.
In re Johnson17 will caution the creditor who meets the Paschal criterion of having started a pre-petition action from assuming the stay will automatically terminate after 30 days. In Johnson, there was a pre-petition foreclosure action. But the court looked elsewhere in the statute for guidance. First, the Johnson court determined that the stay limitation applies only to "debts" and, with use of the restrictive modifier "with respect to the debtor" describing "property securing such debt" and "leases," only to "property of the debtor."18 The court readily finds that "property of the debtor" differs from "property of the estate" as defined in Code §§541(a), 1115, 1206 and 1306(a).19 Regardless of whether the Johnson analysis is syntactically correct, it is painfully obvious that the expression "property of the estate," in which a trustee has an interest apart from that of the debtor, is nowhere to be found in §362(c)(3). On the other hand, §362(a) clearly applies the stay to property of the estate. So, it is argued, if §362(c)(3) neither references property of the estate nor presents an unmodified termination of the §362(a) stay as does §362(c)(4) [third filing], the two-strike automatic termination therefore applies to less than the full extent of the §362(a) automatic stay. Under the Johnson analysis, some vestige of the automatic stay protecting property of the estate will remain in almost all cases, thus requiring the creditor to move for lift stay before acting or taking action. Together, the Johnson and Paschal rationales, if upheld, might effectively eviscerate the automatic-termination provision.
Still, a statute cannot be construed so as to render it meaningless and a nullity. See United States v. Ron Pair Enterprises Inc., 489 U.S. 235, 109 U.S.Ct. 1026, 1031 (1989). Courts are, should be and will remain reluctant to obliterate the provision, and already rely instead on the clear legislative concept of having the debtor justify continuation of the stay. Congress has not helped itself, though. In Paschal, the court went to some length to save §362(c)(3) from complete oblivion if given a truly literal meaning, seemingly requiring a third filing while ostensibly applying to second filings: "Taken together, the section [362(c)(3)] applies only to individuals who have had three cases pending in one calendar year—one case that has been dismissed, one case that is still pending when the petition at issue is filed, and the new [third] case that is before the court for determination."20
Perhaps being able to continue "actions" against an interest of the debtor that is not "property of the estate" gives §362(c)(3) enough meaning to keep it from being a nullity, but that cannot be what was intended. The entire mechanism set forth in §362(c)(3)(B) and (C), with its heavy burden of proof now shifted to the debtor, further evidences the congressional intent. Legislative comments clearly indicate that the entire force of the stay was to be terminated. The House Report BAPCPA (2005) is very clear: "[This enactment] amends §362(c) of the Bankruptcy Code to terminate the automatic stay within 30 days in a chapter 7, 11 or 13 case filed by or against a individual if such individual was a debtor in a previously dismissed case pending within the preceding one-year period." One can only marvel at the transformation from the lucidity of the commentary to the perplexity of the statute.
Interestingly, practitioners—as evidenced by the court decisions and by the practice of filing motions to extend and requests for expedited hearings—know what Congress wanted to do. Very simply, a debtor who refiles within 12 months of a dismissed case has 30 days to justify continuation of the stay. We get it. Congress' own enacted words, however, confuse the process. The burden-of-proof language, §362(c)(3)(B) and (C), is certainly workable, if not exact. Courts are obligated to, and do, enforce those provisions, even in difficult cases.21 It is the language describing the circumstances under which those subsections apply that is so byzantine and perhaps self-defeating. Repeating "with respect to" four times in a 45-word phrase, §362(c)(3)(A), like so much of BAPCPA, is an embarrassment of lazy and impressively inarticulate drafting. Unless the provision is legislatively clarified or until there is appellate guidance, one can sense the schadenfreude of debtors, now strict constructionists of a law they decried, watching creditors play with ouija boards to divine the law they themselves so badly wanted enacted.
Debtors' counsel, in order to protect whatever trace there may be of debtor's interests that is not property of the estate, and until comfortable with precedent, will continue to seek an extension of the stay and request an expedited hearing. Even if not the panacea Congress may have hoped, §362(c)(3) is acting to triage refiled cases. Creditors, on the other hand, are well advised not to presume that the stay terminates, so automatically they should file appropriate motions before doing anything to enforce a claim.22 Moreover, creditors are likely to want a written order establishing relief 23 because the local sheriff will demand it before taking enforcement action.
One more gratuitous thought: Suppose a creditor files a motion for relief. Can it demand that the debtor, now in the second case, prove by clear and convincing evidence that the stay should remain in place? I would think not. Section 362(c)(3) is specific as to the burdens of proof to extend the stay. Although adding §521(a)(6) [failure to timely redeem, assume or reaffirm] as additional grounds for granting stay relief, there is nothing in BAPCPA to suggest that it modified prior law and practice about the burdens of proof to obtain relief from the stay under an unamended §362(d) (1) and (2) and §362(g). The corollary is that the creditor is not estopped from seeking relief under §362(d) even if the stay is extended, perhaps even concurrently with the debtor's motion to extend.
The automatic termination of stay was to be one of a number of ways BAPCPA was to provide a gust of fresh air to cleanse away bankruptcy abuse. We all know what happens when "the air is shattered by the force of Casey's blow."24 So, debtors, no need for a mighty swing; you only need to make contact, not hit a home run.
1 Official Rules of Major League Baseball 6.05(b).
2 11 U.S.C. §362(c)(4).
3 Seemingly in violation of Official Rules of Major League Baseball 2.00 "Strike (c)."
4 The hearing must be "completed" within 30 days or the extension will be denied. In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 2005).
5 332 B.R. 538 (Bankr. S.D. Tex. 2005) (motion for expedited hearing) and 334 B.R. 207 (Bankr. S.D. Tex.) (extension granted); See, also, In re Ball, – B.R.–, 2006 WL 172273 (Bankr. M.D.N.C.); In re Collins, 334 B.R. 655 (Bankr. D. Minn. 2005).
6 333 B.R. 449 (Bankr. D. Utah 2005) (third filing, but second in 12 months; debtor failed to sustain the burden of proving the latest filing was in good faith).
7 In re Warneck, – B.R.–, 2006 WL 62667 (Bankr. S.D.N.Y.).
8 In re Havner, 336 B.R. 95 (Bankr. M.D.N.C. 2006); In re Kurtzahn, – B.R. –, 2006 WL 278571 (Bank. D. Minn.).
9 §362(c)(3)(C)(ii); In re Mark, – B.R. –, 2006 WL 164883 (Bankr. M.D. Md.) (describes what the "clear and convincing" burden requires).
10 See, e.g., In re Thomas, – B.R. –, 2006 WL 278544 (Bankr. E.D. Mich.).
11 Interestingly, fisherman and farmers get a free pass on the second filing, as §362(c)(3) does not apply to chapter 12 filings.
12 Both cases have to be dismissed for the "no stay" of §362(c)(4); the statute speaks in the plural.
13 In In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 2005), the rationale is that §109(h)(1) makes completion of counseling an essential qualification of being a "debtor." Accordingly, if the individual fails to achieve that status, then the "petition for relief" never becomes a "case" that can be "dismissed." Accord, In re Valdez, 335 B.R. 801 (Bankr. S.D. Fla. 2005), and In re Rios, – B.R. – 2005 WL 3462728 (Bankr. S.D.N.Y. 2005).
14 In re Moore, – B.R. –, 2005 WL 3732748 (Bankr. E.D.N.C.)
15 In re Warneck, supra; In re Parker, – B.R. –, 2006 WL 62568 (Bankr. S.D.N.Y.). Note that §362(c)(4) does not have the "with regard to the debtor" limitation on the stay restriction in third cases.
16 2006 WL 258298 (Bankr. E.D.N.C. Jan. 6, 2006).
17 335 B.R. 805 (Bankr. W.D. Tenn.).
18 335 B.R. at 806-807.
19 Section 541(b) outlines what would be property of the debtor but not property of the estate.
20 – B.R. –, 2006 WL 258298.
21 See, e.g., In re Kurtzahn, supra.
22 In re Ozenne, – B.R. –, 2006 WL 237019 (9th Cir. BAP) (good-faith belief that stay not violated is not a defense to a finding of "willful" violation of the stay).
23 See §362(j) for order confirming no stay is in place. Compare §362(c)(4)(A)(ii) (allowing for an order that no stay is in effect) with §362(d)(4) for the recordable in rem order as to real estate.
24 Thayer, Ernest L., Casey at the Bat.