In Part I, we layed out the basic framework of new 362(c)(3) and (c)(4) which restrict the applicability of the automatic stay to repeat filers, and discussed a few of the cases dealing with basic procedural issues under these new BAPCPA provisions. In this posting, we'll discuss the allocation of the burden of proof on motions to extend or impose the stay, and the test for determining "good faith" as required for such relief.
Judge Isgur of Texas has provided a helpful roadmap for wading through the 362(c)(3)(C) elements, and in particular, for determining when the presumptive lack of good faith arises, in the case of In re Charles, 334 B.R. 207 (Bankr. S.D. Tex. 11/30/05) (Charles II). Judge Isgur notes that the statute itself does not address what standard of proof applies in determining whether the presumption factors exist, and which party has the burden. Absent a statute or rule to the contrary, the burden of proof is typically by a preponderance of the evidence, which is the standard he uses unless another standard is indicated. In reviewing the different elements, the guiding principle applied in Charles II is that if a factor requires an affirmative determination, the burden of proof rests on the party alleging such conduct. Applying this test, the Charles II case breaks down the components of 362(c)(3)(C).
Starting with the elements of whether the rebuttable presumption of no good faith arises, Charles II holds that the standard for each of these is a preponderance standard, which is allocated between the movant and any opponent as follows:
(I) as to whether there was more than one previous case pending - the opponent;
(II) as to whether a prior case was dismissed for one of the "bad" reasons (failure to (aa) file or amend required documents, (bb) provide adequate protection, or (cc) perform a confirmed plan) - the opponent (if such a dismissal is proven, the burden of showing substantial excuse under (aa) falls on the debtor);
(III) as to the presence or absence of a substantial change in financial or personal affairs - the debtor (since the debtor would have superior access to such information);
(IV) as to a stay relief motion having been granted or pending in a prior case - the opponent.
If the rebuttable presumption of no good faith arises, the debtor bears the burden of demonstrating that the current filing is in good faith as to creditors to be stayed by clear and convincing evidence. If no rebuttable presumption arises, the debtor bears the burden of demonstrating good faith by a preponderance of the evidence.
As to whether the court should exercise its discretion to extend the stay (which remains a discretionary rather than mandatory act even if good faith is demonstrated), Charles II holds that the debtor bears the burden by a preponderance of the evidence.
One curiosity of the Charles II case's allocation of the burdens of proof is that it seems to suggest that a debtor need not make any affirmative showing in its motion to extend the stay as to the non-applicability of many of the presumption factors. If it is a creditor's burden to come forward and demonstrate that either 362(c)(3)(C)(i)(I) (multiple prior filings) or 362(c)(3)(C)(i)(II) (a "bad" prior dismissal) give rise to a presumption, then a debtor's motion might only have to generally allege that the new filing is in good faith and describe sufficiently changed circumstances to avoid a presumption arising from 362(c)(3)(C)(i)(III). The placement of this burden on the creditor is further suggested by the court's caution in its earlier decision, In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05) that extension motions might be decided without hearing if there is no timely filed objection.
It's worth noting that the elements for invoking the presumption are alternative and not cumulative - any one element will be enough to create the presumption. Thus, in In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden found that evidence of a debtor's changed financial circumstances was irrelevant if the presumption was triggered through another subsection, such as multiple prior dismissed cases or a prior dismissal for non-compliance with a confirmed plan. (Judge Boulden also noted a curiosity in the multiple repeat filer provisions that under BAPCPA, a debtor who has already had one case previously dismissed and who faces dismissal of a second case would be treated better if she files a new third case before Case #2 is dismissed - she would get the benefit of the 30-day stay in Case #3, while if Case #3 were not filed until after Case #2 is dismissed, no stay would go into effect upon the filing of Case #3. Why should this be? I have no good answer.)
Having laid out the burdens of proof, the Charles II court went on to evaluate what "good faith" means for purposes of 362(c)(3). Although the term is undefined in BAPCPA or in the pre-existing Code, there has been long-standing use of the term in related contexts -- in particular, in evaluating whether a Chapter 13 plan is proposed in good faith under 11 U.S.C. 1325, and in determining whether a Chapter 13 case should be converted or dismissed for lack of good faith under 11 U.S.C. 1307. In applying the "totality of the circumstances" test used in these contexts, Charles II identifies both an objective and a subjective component. Objective good faith requires a debtor to have a meaningful chance of success in the newly filed case, a standard he found relevant to 362(c)(3)(C) because of the apparent Congressional intent to limit the stay to only those repeat cases which have a likelihood of success, versus those repeat filings which are solely to hinder and delay creditors. In adopting 362(c)(3), Judge Isgur concludes that Congress "intended the Court to conduct an early triage of a case to determine if the case has a reasonable likelihood of success."
If the case meets this objective test, then the court considers the totality of the circumstances including (i) the nature of the debts (i.e., if they are for reasonable and necessary living expenses or if they arise from questionable conduct of the debtor); (ii) the nature of any collateral (i.e., if a creditor is secured by the debtor's homestead, sole source of transportation or other necessities) ; (iii) any eve of bankruptcy purchases; (iv) the debtor's conduct in the present case (i.e. attendance at required meetings, filing of documents and performance of debtor's other duties); (v) the reasons why the debtor wishes to extend the stay (i.e., to prevent the loss of an essential asset, versus to delay or harass a creditor); and (vi) any other relevant circumstances.
From this analysis the Charles II case proposes the following decision tree:
(1) Does the creditor to be stayed agree?
Yes - stay extended (but mere lack of response will not be considered a stipulation to a stay)
No -->
(2) Is case likely to result in a discharge? (objective test)
No - stay extension denied absent exceptional circumstances.
Yes -->
(3) Do other factors show good faith? (subjective test)
Consider totality of circumstances.
Applying this test, Judge Isgur found that the debtor had demonstrated that the totality of factors weighed in favor of a stay. Although the debtor had presented an "unconvincing" reason to extend the stay to all creditors (the diversion of attention and resources) rather than just one particular mortgage-holder, all the other identified factors weighed in the debtor's favor, especially since it was likely that the case would pay creditors at least as much as they would get in a Chapter 7 liquidation.
Next, Part III will discuss in further detail how courts have approached the "good faith" determination.
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