Florida Bar Journal

Dicing it Up: Does a Sliver of the Automatic Stay Remain for Repeat Debtors?

The automatic stay, which gives debtors a breathing spell from creditors, is one of the most “fundamental debtor protections” in bankruptcy.^[1] Offering broad protection for debtors, the automatic stay ordinarily springs into effect upon the filing of a bankruptcy petition. Because of perceived abuses of the bankruptcy process, however, Congress altered the automatic stay for repeat bankruptcy filers when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Now, for individual debtors who had a previous case pending within the preceding year, the automatic stay goes into effect for only 30 days.^[2] On the 30th day, if the debtor or a party in interest does not move to extend the stay, the stay shall “terminate with respect to the debtor.”^[3]

This phrase — “with respect to the debtor” — has caused a split among courts as to how it limits the termination of the automatic stay for a repeat bankruptcy filer under Bankruptcy Code §362(c)(3)(A). Some courts view that language as terminating the stay as to the debtor and property of the debtor — but not as to property of the estate.^[4] As one bankruptcy judge refers to it, a “sliver of the stay” remains to protect property of the bankruptcy estate.^[5] Other courts hold that the stay is terminated in its entirety, including as to property of the estate.^[6] Although the First Circuit has recently rejected the “majority” view and held that no “sliver of the stay” remains, the 11th Circuit has not yet addressed the issue. And bankruptcy courts within the 11th Circuit remain divided. This uncertainty over what, if any, automatic stay remains after termination has vast implications for violations of the automatic stay under §362(k)(1).^[7]

The Automatic Stay

In order to accomplish the orderly and even administration of a debtor’s estate, one of the central goals of bankruptcy, “[c]reditors’ collection efforts must be stopped quickly.”^[8] Stopping collection efforts gives a debtor a breathing spell from creditors, allowing the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.^[9] That breathing spell is accomplished by the automatic stay, which is set forth in Bankruptcy Code §362.

The automatic stay under Bankruptcy Code §362 provides for a broad stay that freezes all attempts to enforce or collect a debt against the debtor, property of the debtor, or property of the estate. More specifically, the automatic stay stays the commencement or continuation of all proceedings to recover a pre-petition claim against the debtor. Section 362 also operates to stay “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case,”^[10] as well as any acts “to obtain possession of property of the estate”^[11] or “to create, perfect, or enforce any lien against property of the estate,”^[12] among others. The protections of the automatic stay continue as to property of the estate until the property is no longer property of the estate; as to all other actions, the stay continues until earliest of the time the case is closed or dismissed or, in an individual case, until a discharge is granted or denied.^[13]

By its terms, the automatic stay ordinarily springs into effect upon the filing of a bankruptcy petition under §362(a). But there are exceptions for “serial filers” — debtors who have had one or more cases pending during the preceding year. If, at the time a bankruptcy case is filed, the debtor had two or more cases pending during the previous year, then no automatic stay goes into effect. If, at the time a case is filed, an individual debtor had one case pending during the previous year, then the automatic stay is imposed only for 30 days.

A debtor may request to extend the stay beyond the 30-day period, and a bankruptcy court may grant such a request only if the court finds that the current case was filed in good faith.^[14] In some cases, the later filing is presumed not to have been filed in good faith, although that presumption may be rebutted by clear and convincing evidence.^[15] A motion to extend the stay must be filed and completed within 30 days of the petition date.^[16] If no motion to extend the stay is filed, the stay terminates under Bankruptcy Code §362(c)(3)(A).

The language of §362(c)(3)(A) is where the controversy lies. Section 362(c)(3)(A) provides that when a debtor has had a previous case pending within the preceding year, then the automatic stay must terminate with respect to the debtor on the 30th day:

(3) if a single or joint case is filed by or against a 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 refiled under a chapter other than chapter 7 after dismissal under section 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[.]^[17]

The Majority View

A number of courts — often referred to as the majority — read the language “with respect to the debtor” to unambiguously terminate the automatic stay as to the debtor and property of the debtor — but not as to property of the estate. In other words, a sliver of the automatic stay remains after termination. The 10th Circuit Bankruptcy Appellate Panel’s decision in Holcomb v. Hardeman (In re Holcomb), 380 B.R. 813 (B.A.P. 10th Cir. 2008), is representative of this line of cases.^[18]

Looking to In re Jones, 339 B.R. 360, 364 (Bankr. E.D.N.C. 2006), the Holcomb court reasoned that the context of other provisions under §362(a) confirms that the stay is terminated only as to the debtor and property of the debtor — but not property of the estate — because each paragraph of subsection (a) differentiates between acts against the debtor, property of the debtor, and property of the estate.^[19] For instance, §362(a)(1) stays actions or proceedings “against the debtor”; §362(a)(2) stays enforcement of a judgment “against the debtor or against property of the estate”; and §362(a)(3) stays “any act to obtain possession of property of the estate or of property from the estate.”^[20] Under the majority view, this differentiation indicates Congress’ intent to exclude a reference to “property of the estate” from §362(c)(3)(A), thereby preserving the stay as to property of the estate. And so, reading “with respect to the debtor” to terminate the stay as to debtor and property of the debtor is wholly consistent with the other provisions of §362(a).

What is more, the majority points to other provisions within §362 to confirm this interpretation. Take §362(c)(4)(A)(i), for example. Section 362(c)(4)(A)(i), like §362(c)(3)(A), was added by the 2005 BAPCPA amendment. But it contains distinctly different language. Section 362(c)(4)(A)(i), which applies to individual debtors who had two or more cases pending within the previous year, provides that “the stay under subsection (a) shall not go into effect upon the filing of the later case[.]”^[21]

The majority view reasons that because Congress included particular language in §362(c)(4)(A)(i) that the stay “shall not go into effect” — rather than “with respect to the debtor” — it is presumed that Congress made that distinction intentionally and purposefully.^[22] Indeed, “Congress could have removed the [s]tay in its entirety, as it did under §362(c)(4), by simply deleting the phrase ‘with respect to the debtor.’”^[23] Yet Congress did not. By including the language “with respect to the debtor,” Congress, the majority concludes, chose to penalize previous filers differently based on the number of prior bankruptcy cases pending and dismissed within a certain period of time.^[24]

The Minority View

Contrary to the “majority” of courts, other courts have found the phrase “with respect to the debtor” ambiguous. So they look to the other provisions of §362(c)(3) to analyze the phrase in context. The court in In re Reswick, 446 B.R. 362, 367 (B.A.P. 9th Cir. 2011), for instance, highlights this view.

In Reswick, the Ninth Circuit Bankruptcy Appellate Panel began its analysis by considering the language of §362(c)(3) itself, as well as the “specific context in which that language was used, and the broader context of the statute as a whole.”^[25] In so doing, the panel found that although the language “with respect to the debtor” may appear unambiguous in isolation, it is necessary, consistent with the principles of statutory construction, to read it in context with §362(c)(3) to give full weight to the statute as a whole. Because §362(c)(3) begins with “[i]f a single or joint case is filed,” the Reswick court reasons that the phrase “with respect to the debtor” merely distinguishes between a debtor who has filed more than one case and the spouse in a joint case. The Reswick panel concluded that the language specifies to whom the automatic stay terminates, not, as the majority view suggests, to which property the automatic stay terminates.^[26]

First Circuit Rejects Majority View

As a matter of first impression in the courts of appeals, the First Circuit Court of Appeals in In re Smith, No. 18-1573, 2018 WL 6520887, at *1 (1st Cir. Dec. 12, 2018), held that under §362(c)(3)(A), the entire automatic stay terminates as to actions against the debtor, the debtor’s property, and property of the bankruptcy estate. In other words, no “sliver of the stay” remains for a serial filer. The First Circuit’s holding is based on textual interpretation, statutory context, and Congress’ intent in enacting BAPCPA.^[27]

Much like the facts before the other courts that have considered this issue, the facts before the court of appeals are familiar. At the time he filed for bankruptcy, the debtor had a bankruptcy case pending within the previous one-year period that had been dismissed.^[28] The automatic stay under §362(c)(3)(A) was, therefore, only in effect for 30 days. Neither the debtor nor any party in interest moved to extend the automatic stay under §362(c)(3)(B).^[29] So after the 30 days had run, creditor moved under §362(j) to confirm that the automatic stay was not in effect, and the bankruptcy court held that the stay terminated in its entirety.

The First Circuit began its discussion by concluding that the language of §362(c)(3)(A) does not lend itself to one clear reading. The court rejected the idea that “with respect to the debtor” signals that the stay terminates as to debtor and debtor’s property.^[30] The court reasoned that a strict reading of that phrase means that the stay terminates as to actions against the debtor alone — not against the debtor and the debtor’s property.^[31]

But no court has read that phrase to mean that it terminates only as to actions against the debtor.^[32] Rather, all courts within the majority conclude that “with respect to the debtor” encompasses actions against debtor and debtor’s property, which is inconsistent with the plain meaning of “with respect to the debtor.”^[33]

To get around that, the debtor pointed to the fact that subsection (c)(3)(A) refers to “action taken with respect to a debt or property securing such debt.” The debtor contended that the reference to “property securing such debt” provides the basis for terminating the stay with respect to the debtor and the debtor’s property. But the First Circuit rejected that argument.^[34] Because the phrase “securing such debt” does not distinguish between property of the estate and property of the debtor, it cannot be the basis for terminating the stay as property of the debtor but not property of the estate. In other words, that argument is self-defeating.

After concluding that the plain language of §362(c)(3)(A) did not support the majority view, the First Circuit next considered the argument that other provisions of §362(a) demonstrate Congress’ intent to distinguish between acts against “property of the debtor,” “property of the estate,” and acts “against the debtor.” Again, the court found this argument unpersuasive because §362(c)(3)(A) does not appear to adopt the same framework as §362(a) since the “with respect to” language is not present in subsection (a).^[35]

The First Circuit also found the statutory construction cannons unhelpful. For one thing, the cannon that provides that courts must enforce a statute’s language “at least where the disposition required by the text is not absurd”^[36] cannot apply because the court found the language subject to more than one interpretation. The logic of the maxim “expressio unius est exclusio alterius”^[37] (the expression of one thing is the exclusion of the other) similarly does not lead to the correct interpretation because the expression “with respect to the debtor” would then be interpreted to mean that only actions against the debtor would be stayed.

Because the statutory cannons were unhelpful in reading §362(c)(3)(A), the First Circuit next considered the statutory context. Section 362(c)(3)(B) allows a debtor or party in interest to move to extend the automatic stay upon a showing of good faith and requires courts to have a hearing on such a request before the 30 days expires. The First Circuit reasoned that §362(c)(3)(B) “reflects an attempt by Congress to ensure that certain second-time filers who meet an enhanced burden have an escape route from the termination of the entire automatic stay, including as to actions against estate property.”^[38] After considering other provisions of the Bankruptcy Code, the court found that reading §362(c)(3)(A) to terminate the stay in its entirety is in line with the statutory context.

Last, the First Circuit considered the congressional intent and held that interpreting §362(c)(3)(A) to terminate the entire stay best achieved the purpose of BAPCPA’s reforms. The First Circuit considered that §362(c)(3)(A) was enacted as a part of the consumer bankruptcy reforms in BAPCPA, which was “‘intended to deter serial and abusive bankruptcy filings.’”^[39] The First Circuit held that the purpose of deterring bad-faith filings is accomplished by interpreting §362(c)(3)(A) to terminate the entire stay, including as to estate property, finding property of the estate to be the most valuable protection of them all.^[40]

The First Circuit Court of Appeals does not believe that a sliver of the stay remains after termination, and other circuit courts of appeal may be weighing in soon as well. In re Wade, 592 B.R. 672, 676 (Bankr. N.D. Ill. 2018), is pending review before the Seventh Circuit Court of Appeals. While In re Smith is certainly a step forward in resolving the dispute of whether a sliver of the stay remains for repeat bankruptcy debtors, bankruptcy courts within the 11th Circuit are still divided. To be sure, no matter what area of law you practice, the automatic stay can be implicated, and property of the estate can be subject to a dispute. The takeaway is before you go after property of the estate of a repeat bankruptcy filer, file a motion under §363(j). Who knows? Your motion may be the catalyst for the issue to be resolved right here in Florida.

This column is submitted on behalf of the Business Law Section, Michael B. Chesal, chair, and Paige Greenlee, editor.