Oh, Won't You (362) Stay Just a Little Bit Longer? Part III

In last week's posts on termination and extension of the automatic stay under 362(c)(3) and (4), Part I discussed notice and procedure issues, and Part II discussed how one court in In re Charles, 334 B.R. 207, approached the burdens of proof for invoking the presumptive lack of good faith for purposes of 362(c)(3)(B). We also described how the Charles II decision, to evaluate "good faith," borrowed from existing law regarding the "totality of circumstances" considered in determining good faith on a motion to convert or dismiss a Chapter 13 case. This post will further discuss how courts are applying the "totality of the circumstances" test for good faith to motions to extend the stay.

Judge Isgur had another opportunity to apply his test in In re Collins, 335 B.R. 646 (Bankr. S.D. Tex. 12/27/05). In Collins, the debtor had filed one prior case in 1998, two cases in 2000, and one case in 2005 which was voluntarily dismissed without prejudice in October 2005. He then filed a new case in November 2005. His schedules indicated a slight decrease in monthly income and a slight inrease in monthly expenses since his last filing, with his debts remaining largely the same. Two of his creditors opposed the motion to extend the stay. Although no presumption arose under 362(c)(3)(C)(i)(I) or (II) (there was only one case dismissed in the past year, and it was dismissed voluntarily rather than as a result of any failure to comply with the obligations set forth in (II)), the debtor failed to meet his burden under (III). The debtor's financial affairs since his last case were largely unchanged, there were some inconsistencies in his schedules, and it was unlikely the debtor could propose a feasible plan based on accurate numbers.

The court somewhat ruefully noted the debtor's predicament. He worked two jobs, taking on as many part-time hours as he could. He supported three children as a single parent, without child support. He didn't make luxury purchases or live an extravagant lifestyle. His only major assets were his house and a car that was more than six years old. "Like so many debtors who have come before this Court, Mr. Collins has been honest to the best of his ability. ... Unfortunately for this Debtor, good faith under the Code is not based on one's lifestyle or family affairs. Being a good faith and a hard worker is not enough under s. 362(c)(3)(C)."

The Collins case highlights the importance of identifying the reason for the prior dismissal - it may or may not be grounds for invoking the presumption. This is also shown by In re Warneck, __ B.R. __, 2006 WL 62667 (Bankr. S.D.N.Y. 1/4/06). In Warneck, the debtor had filed Case #1 in October 2003, which was dismissed prior to confirmation; then filed Case #2 in August 2004, which was dismissed prior to confirmation in January 2005. The debtor then filed Case #3 in November 2005. Although the prior cases were dismissed due to the failure to make plan payments, they were dismissed prior to confirmation, and thus did not fall within the scope of 362(c)(3)(C)(i)(II)(cc) as a failure to perform the terms of a "plan confirmed by the court." Because there was only one prior dismissal in the past year and the debtor had submitted an affidavit evidencing a change in financial and personal affairs, no presumption arose. In the absence of a presumption or any objection by another party, Judge Morris held that "a request to extend the automatic stay should be liberally granted."

Other courts have taken a similar approach to the good faith question by looking to existing case law. In In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden also looked to the factors used by courts in evaluating a motion to dismiss or convert a Chapter 13 case under a "totality of the circumstances" approach, identifying as the relevant factors the nature of the debts; the timing of the filing; how the debts arose; the debtor's motivation; the effect on creditors; the debtor's treatment of creditors; and whether the debtor has been forthcoming. Judge Boulden indicates that 362(c)(3)(B) requires the court to view these issues from the creditors' perspective, since the statute dictates that the debtor must demonstrate good faith as to the creditors to be stayed. She finds this suggests that factors dealing with the effect on creditors may be more heavily weighed.

Looking at these considerations, Judge Boulden found in Montoya that subjective evidence of the debtor's honest intent was not enough to overcome the negative impact on creditors. The repeat filing only six days after dismissal of the prior case prevented creditors from taking any action to collect on their debts, and the debtor's repeat filings had allowed the debtor to continue to use depreciating collateral without any compensation to creditors (especially in light of the debtor's failure to make any payments under her prior plans). The stay extension was denied even though the debtor presented evidence of stable employment and a resolution of the medical problems that had prevented her from making payments under her earlier plan.

Curiously, while Judge Boulden found that the short period of time between the prior and current filing weighed against the debtor, another judge from the same district, applying pretty much the same factors, has found that a lengthy delay between filings might also weigh against the debtor. In In re Galanis, 334 B.R. 685 (Bankr. D. Utah 12/7/05), Judge Thurman adopted the same "good faith" test as was applied in Montoya. In Galanis, Judge Thurman held that the relevant factors for purposes of 362(c)(3)(B) are the timing of the filing, how the debts arose, the debtor's motive in filing, the effect on creditors, the reason for the prior dismissal, the likelihood of funding a Chapter 13 plan, and whether there are objections.

In applying these factors, the Galanis court noted that if a debtor delays a subsequent filing while having no intention to repay his debts, that would be evidence of bad faith (although a delay might have good explanations, such as medical issues). This creates an odd dichotomy with Montoya, which suggested that a filing shortly after a prior dismissal could also be evidence of bad faith. As to the other factors, though the Montoya analysis is comparable, looking to whether the debts were for necessities rather than luxury items, whether the debtor appears to be making a responsible effort to address his debts, whether the creditors' collateral is depreciating in value as a result of any delay, and whether the debtor has a significant likelihood of funding a plan.

Other courts following the same approach as Montoya and Galanis include In re Havner, __ B.R. __, 2006 WL 51214 (Bankr. M.D.N.C. 1/4/06); and In re Ball, __ B.R. __, 2006 WL 172273 (Bankr. M.D.N.C. 1/25/05). In re Mark, 2006 WL 164883 (Bankr. D. Md. 1/23/06) also borrows from existing case law evaluating good faith on a motion to dismiss a Chapter 11 case and for confirmation of a Chapter 13 plan.

Next, Part IV will discuss some of the complications created by the language used by Congress in 362(c)(3) and (c)(4), and how traditional principles of statutory construction suggest a much narrower reading of their scope than has been generally assumed.