One of the greatest protections afforded to bankruptcy filers by the United States Bankruptcy Code is the protection of the automatic bankruptcy stay.2 Since the enactment of the bankruptcy code in 1978, the automatic stay has, for lack of a better word, automatically gone into effect upon filing of a bankruptcy petition and has immediately acted as a shield to the debtor from most types of litigation and collection activities. 3 By filing bankruptcy, financially distressed consumers routinely find protection from mortgage foreclosures, car repossessions, and collection actions of every kind. Moreover, the courts have made it abundantly clear that this protection is in effect as to all creditors immediately upon filing of the bankruptcy proceeding, regardless of whether or not the affected creditors have notice of the filing. Actions taken in violation of the automatic stay are invalid, and depending on the jurisdiction either void ab initio or at least voidable. In the 7th Circuit, actions taken in violation of the stay are void ab initio. Once in effect, the automatic stay generally continues until the completion of the case, unless otherwise ordered by the court or curtailed by statute.4
The creation and duration of the automatic stay remained fairly stable from the enactment of the Bankruptcy Code in 1978 until the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ["BACPA"] which went into effect in October, 2005. BACPA not only created some additional exceptions to the protections of the automatic stay, but also put into effect some rather severe limits on the imposition and duration of the automatic stay, particularly in serial filing situations. These amendments cause many bankruptcy professionals to wonder just how automatic the automatic stay really is under the new law.5 This article will explore some of the limitations on the automatic stay created by BAPCPA and some of the resulting litigation6.
No Automatic Stay for Ineligible Filers. BAPCPA amended section 362 to add a provision that the automatic stay will not affect any actions to enforce liens against real property (such as foreclosure), if the debtor is not eligible to file bankruptcy, or has been barred by court order from filing bankruptcy7. This provision is clearly intended to eliminate abuse by ineligible or abusive serial filers who have historically attempted to prevent foreclosure sales through "eve of sale" filings which they could not possibly complete. This provision is notable: it is unlike some of the other new stay limitation provisions in that it does not allow the debtor the opportunity to request that the court impose a stay notwithstanding the limitation.
In Rem Relief from Stay. Theoretically, any order granting relief from stay is an "in rem" order since the code’s stay relief provisions deal with adequate protection for an "interest in property" or an "act against property"8. However, when bankruptcy practitioners refer to "in rem" relief from stay, they generally refer to the new provisions of 11 USC 362(d)(4) which permit the court to enter orders which not only modify the stay in the pending bankruptcy proceeding, but prospectively prevent the stay in future cases from affecting action against that property.
Under the this new provision, in serial cases or tag-team filing situations where creditors can show evidence of a "scheme to delay, hinder, and defraud" the court can modify the stay in rem, and if the order is properly recorded no bankruptcy filed for a period of two years (by any person) will stay action against that property9.
The burden of proving a "scheme to delay, hinder and defraud" can, however, be very difficult to meet. See for example, In re Muhaimin, 343 BR 159 (Bankr. D.Md, 2006). In this opinion, the Maryland court considered three cases in which the debtor or co-debtor had filed serial cases to delay a foreclosure sale. The court held that while the movants failed to meet their prima facie case that the cases had been filed as part of a scheme "to defraud" the creditors. In that case the court found that the ‘intent to defraud’ required proving traditional fraud elements (1) that the debtor made representations; (2) that at the time the debtor knew the representations were false; (3) that the debtor made the representations with the intention and purpose of deceiving the creditor; (4) that the creditor relied on such representations, and (5) that the creditor sustained loss and damage as the proximate result of the representations having been made. Interestingly, although the court denied the relief sought under 11 USC 362(d)(4), the court did impose an in rem relief order pursuant to pre BACPA case authority [relying on In re Yimam, 214 BR 463 (Bankr. D. Md. 1997)].
Beyond the difficulty of meeting the burden of proof, creditors seeking relief under 11 USC 362(d)(4), need to consider the possible impact such an order might have post foreclosure. Arguably, such an order would survive a completed foreclosure action and cloud title at the foreclosure sale.
Serial Filing Rules Regarding the Imposition and Duration of the Stay. Among the most controversial and highly litigated limits on the automatic stay created by BAPCPA are the provisions of 11 USC 363(c)(3) and 363(c)(4). These provisions are intended to prevent serial, abusive filing situations10. In the past, debtors were able to file successive filings without the ability or intention of successfully reorganizing or achieving a "fresh start"11. Failed cases would be dismissed and abusive debtors would simply file new cases equally likely to fail in order to achieve a delay in state court proceeds, judicial sales, or repossessions. The provisions of 363(c)(3) and 363(c)(4) were intended to prevent this abuse. Which provision applies in a particular repeat filing is determined by the number of cases the filing debtor has had dismissed within the last year.
One Prior Dismissal. If the debtor in a case has been the debtor in one prior case dismissed within the last 365 days (for any reason other than a finding under 707(b) that the debtor should be in a Chapter 13 rather than a 7), the automatic stay in the current case will go into effect immediately upon filing of the petition, but absent further court order will last only until 30 days. This thirty day period provides debtors acting in good faith with a real chance at successfully completing their bankruptcy a grace period during which they can move the court to extend the automatic stay on notice and motion. To prevail on such a motion, the movant must show that the current case is filed in good faith12.
Under the provisions of 11 USC 363(c)(3), the court can only entertain the motion to extend the stay if it is filed within the first thirty days of the case. Further, the hearing on the motion must be conducted within thirty days13. Most courts have strictly enforced the timing provisions of this section. One court even found that when the scheduled hearing on a motion to extend the stay was delayed due to court closure upon the unexpected declaration of a national day of mourning for President Ford, the deadline had to be strictly enforced14.
More than One Prior Dismissal. If the debtor in a case has been the debtor in two or more prior cases dismissed within the last 365 days (for any reason other than a finding under 707(b) that the debtor should be in a Chapter 13 rather than a 7), the automatic stay will not go into effect at all upon filing of the bankruptcy petition. Instead, if the debtor wishes to attain the protection of the stay, the debtor must bring a motion to impose the stay15. Much like a motion to extend the thirty day stay, a motion to impose a stay must be filed within thirty days. It is interesting to note, however, that unlike a hearing on a motion to extend the thirty day stay, a hearing on a motion to impose a stay need not be held within thirty days.
Grounds for Motions to Extend or Impose the Stay: Assuming a motion to extend or impose the automatic stay is brought and the hearing is held timely, the movant must show "good faith" as to the affected creditors in order to prevail on the motion16. Most courts have applied the relevant standards in their own circuits for making determinations of good faith – usually some variation of the "Totality of Circumstances Test". In the 7th Circuit, the biggest factor typically considered in making good faith determinations has been whether or not there is a "change in circumstances" since the failure of the prior case, which would make the current case more likely to succeed. Some of the salient good faith cases decided in the 7th, at least under the old law, include: In the Matter of Kenneth W. Smith, 848 F.2d 813 (7th Cir. 1988); In the Matter of Love, 957 F.2d 1350 (7th Cir.1992), and In re Edward Smith, 286 F.3d 461 (7th Cir. 2002).
Exceptions to the Stay Limitations of 11 USC 363(c)(3) and 363(c)(4). Joint Filing Exception- Several judges have carved out an exception in the case of joint filers. Basically, the courts have found that in situations where the current case is a joint filing by spouses, and the prior case(s) was filed by only one of the spouses, the serial filing stay rules apply only to the previously filing spouse17. For example: Mr. Debtor files bankruptcy on 1/1/05. That bankruptcy is dismissed on 5/3/06. On 5/10/06, Mr. and Mrs. Debtor file a joint petition. Under 362(c)3, the stay will automatically terminate after 30 days if there was a dismissal within the prior year. Several courts have determined, however, that this stay termination applies only to Mr. Debtor, the debtor in the prior case, and not to Mrs. Debtor, the co-debtor in this case.
Co-Debtor Stay Exception: In addition to the automatic stay of 11 USC 362(a), the bankruptcy code provides for a separate, co-debtor stay under 11 USC 1301 in Chapter 13 cases. Instead of protecting the debtor or property of the estate, this stay protects the debtor’s co-obligors. Since the new automatic stay provisions of BAPCPA described above all reference the automatic stay of 11 USC 362(a), there is a very strong argument that even if the automatic stay terminates or never goes into effect, the co-debtor stay will still be in effect in a Chapter 13 and must be modified in order for a creditor to proceed.
"Exception" if prior case is discharged: Both 11 USC 363(c)(3) and 363(c)(4) specify that the prior cases must have been dismissed in the 365 days prior to the filing of the current case for the automatic stay limitations to apply. However, in at least one case, concerned about the possibility that the limitation might be extended to situations in which the prior case was discharged, one debtor’s attorney asked for a court determination of the applicability. The court rejected this extension of the law finding that "By its terms, Section 362(c)(3)(B) is only applicable if the case which was pending during the 1–year period prior to the filing of the current case was dismissed". In re Lovelace, 2007 Bankr. LEXIS 119 (Bankr. W.D.Mo. 2007).
Two Automatic Stays? Protection of the Debtor vs. Protection of Estate Property. Pursuant to 11 U.S.C. 362(a), the stay protects both the debtor and the property of the estate. For purposes of the issue discussed in the remainder of this article, it might be fruitful to imagine the stay as two separate stays – one protecting the debtor and one protecting property of the estate. Some of the language used by the drafters of 11 USC 363(c)(3) and 363(c)(4) has caused a great deal of controversy and in many cases dramatically reduced the impact of the first of these provisions. If one examines the language of 11 USC 363(c)(3)(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 thirtieth (30th) day after the filing of the later case", he discovers that the 30 day stay limitation includes the language "with respect to the debtor" . No similar limitation appears in 11 U.S.C. 363(c)(4). This has caused many courts to see a distinction between the limitation of 11 USC 363(c)(3) as it applies to the stay protecting the debtor and the stay protecting property of the bankruptcy estate. These courts have found that the stay terminates after thirty days only as to the debtor, but does not terminate as to property of the bankruptcy estate18.
These opinions are based on a reading of the phrase "with respect to the debtor" in the statute. Basically, the courts point to the inclusion of the phrase "with respect to the debtor" in 11 USC 363(c)(3) and the exclusion of this language in 11 U.S.C. 363(c)(4) as evidence that Congress by its choice of language clearly limited the effect of the thirty day limit on stay duration in certain cases to apply only to the debtor(s) individually and not to apply to property of the estate. Since these courts feel the language is unambiguous, they do not look at the intent of the provision or its drafters. Some of these courts have gone a little further and argued a basis for this distinction – that congress purposely limited the stay termination to debtors so that in the event that the case was a Chapter 7 or converted to a Chapter 7, the trustee would be under a duty to administer assets of the estate19.
Although courts holding that the stay terminates only as to the debtor and not as to the property of the estate are in the majority, several courts have disagreed with this position finding that the stay terminates in its entirety20. There has only been one published opinion on this issue in the Northern District. On February 22, 2007, Judge Schmetterer came down on the side of the minority, finding that the stay terminates completely as of thirty days after the filing of the petition. In re Sandra D. Curry, 362 B.R. 394 (Bankr. N.D.IL, 2007) Judge Schmetterer found that 11 USC 363(c)(3) was far from clear and ambiguous and cited numerous opinions which so found21. Absent a plain and unambiguous meaning, the court can look beyond the express language of the statute. Judge Schmetterer interpreted this "limiting" language very differently than the majority reasoning:
The remaining language, "with respect to the debtor" does two things: (1) it makes the stay protection end as to debtor and debtor’s property (in addition to the ending of stay protection against secured property of the estate caused by earlier provisions) and (2) it defines the debtor affected by this provision. "Thus, in a joint case ‘a debtor’ may not necessarily mean both debtors if one debtor did not have a case dismissed within the year prior to the current petition date." In re Jupiter, 344 B.R. 754, 760 (Bankr. D.S.C. 2006) (citations omitted). So even if the stay fully terminates, the automatic stay would continue with respect to a joint debtor who is not affected by § 362(c)(3) or (c)(4). Using that interpretation, all the statutory language is seen to have meaning.
In re Curry, 362 B.R. 394, 400-401 (Bankr. N.D. Ill. 2007)
There is currently no controlling authority governing this issue in the 7th Circuit, and that situation may remain for some time as most experienced debtor’s attorneys bring motions to extend the automatic stay within thirty days. If these motions are granted, the issue does not come into play. Even when the issue comes into play, the odds may be against a final resolution. In one recent Chapter 13 proceeding in the Northern District of Illinois, Judge Wedoff had indicated that he would write an opinion on the issue, but during the briefing schedule, the case was dismissed on motion of the trustee and the issue became moot22. With no controlling authority on this issue, the prudent practitioner will seek confirmation of the existence or absence of the automatic stay before proceeding with state court remedies.
Motions to Confirm That No Stay is in Effect. Perhaps foreseeing the potential conflict or confusion, BACPA’s amendments included a provision allowing parties to seek a court determination as to whether or not the stay was actually in effect. Pursuant to either 11 USC 362(j) or 11 USC 362(c)(4)(A)(ii), the court has authority on motion of a party in interest, to enter an order confirming that no stay is in effect or that the stay has been terminated. In fact, the language requires the court to do so in cases where the stay is not in effect or no longer in effect. With respect to cases where the stay never goes into effect and the request is brought under 11 USC 362(c)(4)(A)(ii), the court is required to enter an order confirming the absence of the stay "promptly".
Conclusion. The incredible protections historically provided by the stay provisions of 11 USC 362(a) have been somewhat diluted by the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The stay is no longer automatic in every case, has a shorter duration in many cases, and may not stay quite as many types of activity. The exact scope and effect of this dilution is still uncertain in many respects and the subject of much litigation even though the Act went into effect two years ago. Attorneys for both debtors and creditors need to be aware of the changes to the law and the potential interpretations and ramification of these changes in order to protect their clients and themselves.
1 From the Song, "Stay" written by Maurice Williams, originally performed by Maurice Williams and the Zodiacs, Platinum Records, 1960.
2 11 USC 362
3 Some specific exceptions to this general protection can be found in 11 USC 362(b).
4 11 USC 362(d) lays out the procedure under which a creditor can seek "relief from the automatic stay" and the basic grounds for such motions. A detailed discussion of motions for relief from stay and the basis for obtaining that relief are beyond the intended cope of this article, however.
5 See, for example, The Not-So-Automatic Stay: Legislative Changes to the Automatic Stay in a Case Filed by or against an Individual Debtor, by Lisa A. Napoli in The American Bankruptcy Law Journal, Summer, 2005, 79 Am. Bankr. L.J. 749.
6 Another excellent source, especially for those practicing in the Northern District of Illinois is Judge Eugene R. Wedoff’s article The Automatic Stay and Serial Filings: How the Courts Have Interpreted §§362(c)(3) and (4), Consumer Bankr. Comm. Newsletter (Am. Bankr. Inst., Alexandria, Va.), June 2006. Available on line at http://abiworld.net/newsletter/consumerbank/vol4num4
7 11 USC 362(b)(21)
8 11 USC 362 (d)
9 See In re McCray, 342 B.R. 668 (Bankr DC 2006).
10 For a good discussion of the "serial filing phenomenon", see Judge Squires’ opinion in In re Standfield, 152 B.R. 528, 535 (Bankr. N.D. Ill. 1993). "Serial filings occur because of the persistence of debtors and the limits of the text of 11 U.S.C. §§ 109(g) and 349, and the interpretive judicial and legislative gloss thereon. The main effect of a serial filing is to achieve a continuing reimposition of the automatic stay, with attendant delay in the exercise of creditors’ rights and remedies. In re McKissie, 103 Bankr. 189, 191 (Bankr. N.D. Ill. 1989). One incidental effect displayed here is the circumvention of the bankruptcy appellate process. McKissie, was a Chapter "26" (two successive Chapter 13 cases — the second of which was filed hours after dismissal of the first), thus distinguishable from the facts of this matter. The McKissie approach mandating close judicial scrutiny of serial filings has been followed. See In re Huerta, 137 Bankr. 356 (Bankr. C.D. Cal. 1992); In re Earl, 140 Bankr. 728 (Bankr. N.D. Ind. 1992); In re Jones, 105 Bankr. 1007 (N.D. Ala. 1989). Huerta and Earl collect many of the relevant cases on the serial filing problems.
11 The Bankruptcy Code was enacted to allow insolvent debtors an opportunity for a "fresh start". Grogan v. Garner, 498 U.S. 279, 112 L. Ed. 2d 755, 111 S. Ct. 654 (1991).
12 11 USC 363(c)(3)
13 See for example: In re Collins, 334 B.R. 655 (Bankr. D.MN. 2006); In re Cartledge, 2006 Bankr. Lexis 210 (Bankr. D.SC, 2006); In re Ziolkowski, 338 BR 543 (Bankr. D.Ct. 2006); In re Thomas, 2006 Bankr. LEXIS 147 (Bankr. E.D.MI, 2006), or In re Moon, 339 B.R. 668 (Bankr. N.D.OH. 2006).
14 In re Douglas C. Wilke, case number 06-26904 (Bankr. E.D.Wis., 2007). The 30 day stay pursuant to 11 U.S.C.S. § 362(c)(3)(A) expired on 1/3/07. The debtor’s motion to extend the stay was scheduled to be heard on 1/2/07. However, 1/2/07 was designated a national day of mourning upon the death of former President Ford. Over the protest of debtor’s attorney, the bankruptcy court clerk rescheduled the hearing for 1/4/07 as the judge was not sitting on 1/3/07. Court ruled that because the hearing was not held within 30 days, the stay could not be extended. Debtor’s attorney should have asked for another judge to hear the case on 1/3/07 on an emergency basis.
15 11 USC 363(c)(4)
16 11 USC 363(c)(3)(B) and 11 USC 363(c)(4)(B)
17 See for example: In re Parker, 336 B.R.
678 (Bankr. S.D.N.Y. 2006).
18 See, for example, In re Holcomb, 380 B.R. 813 (B.A.P. 10th Cir. 2008); In re Jumpp, 356 B.R. 789 (B.A.P. 1st Cir. 2006); In re Stanford, 373 B.R. 890 (Bankr. E.D. Ark. 2007); In re Tubman, 364 B.R. 574 (Bankr. D. Md. 2007); In re McFeeley, 362 B.R. 121 (Bankr. D. Vt. 2007); In re Gillcrese, 346 B.R. 373 (Bankr. W.D. Pa. 2006); In re Moon, 339 B.R. 668 (Bankr. N.D. Ohio 2006); In re Jones, 339 B.R. 360 (Bankr. E.D.N.C. 2006).
19 See, for example: In re Jones, 339 B.R. 360 at 364 (Bankr. E.D.N.C. 2006).
20 See, for example: In re Jupiter, 344 B.R. 754, (Bankr. D.S.C. 2006); In re Curry, 362 B.R. 394, (Bankr. N.D.IL 2006); and the subsequently overturned In re Jumpp, 344 B.R. 21, 23 (Bankr. D. Mass. 2006)
21 See, In re Curry, 362 B.R. 394, 397 (Bankr. N.D. Ill. 2007): "Many opinions have grappled with interpreting this provision. See In re Paschal, 337 B.R. 274, 277 (Bankr. E.D.N.C. 2006) ("The language of the statute is susceptible to conflicting interpretations, and if read literally, would apply to virtually no cases at all. In sum, it’s a puzzler."); In re Baldassaro, 2006 BNH 7, 338 B.R. 178, 182 (Bankr. N.D.H. 2006) ("[T]he Court notes that the language in new § 362(c)(3) is very poorly written."); In re Charles, 332 B.R. 538, 541 (Bankr. S.D. Tex. 2005) ("The Court notes that the relevant provisions in the Act are, at best, particularly difficult to parse and, at worst, virtually incoherent.").
22 See, In Re Wanda Burns, Northern District of Illinois case number 08 B 17734.
Mr. Maley attended Loyola University of Chicago College of Arts and Sciences (BA 1990) and Loyola University School of Law (JD 1992). He is a Supervising Attorney at Codilis & Associates, P.C.