Tuesday, February 21, 2006

Some Courts Read BAPCPA Stay Termination Provisions Narrowly (Oh, Won't You (362) Stay Just a Little Bit Longer? Part IV)

In Part I, Part II and Part III of our discussion of the new provisions for termination and extension of the automatic stay under 11 U.S.C. 362(c)(3) and (4), we reviewed procedural issues as well as the courts' interpretations of the "good faith" standard contained (but not defined) in the new statutes. In this post, we see what happens when courts have taken a close look at the language used by Congress in these new provisions. Curiously, when read carefully and interpreted using traditional principles of statutory construction, their scope may be much narrower than is generally assumed (and, likely, than was intended by the legislature).

A prime example of this is found in In re Paschal, __ B.R. __, 2006 WL 258298 (Bankr. E.D.N.C. 1/6/06). In response to a debtor's motion to extend the stay under 362(c)(3)(B), Judge Small first looked to answer the question: "to what extent does § 362(c)(3)(A) terminate the stay?" His answer was surprising, as he concluded that it only terminates as to formal proceedings commenced against the debtor prior to bankruptcy, and not generally as to all other matters covered by the automatic stay.

It was not so easy to get to that answer. Judge Small initially noted:

"In an Act in which head-scratching opportunities abound for both attorneys and judges alike, § 362(c)(3)(A) stands out. It uses the amorphous phrase 'with respect to' a total of four times in short order and raises questions about the meaning of the words 'action taken,' and 'to the debtor.' 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."
Before getting to the meat of Judge Small's holding, what is he talking about when he says that 362(c)(3)(A) if read literally would apply to virtually no cases at all? Well, read the language closely. 362(c)(3)(A) comes into play "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...". Under a literal reading, this would only apply to a filing of a case by an individual debtor who is already the subject of a pending case. Thus the statute would cause the stay to be terminated in a new case filed by someone who is already a debtor in a pending case, and who had another case dismissed within the past year. Judge Small concedes, however, that such circumstances are not likely to present themselves, and that such a literal reading would render the statute effectively meaningless. Following U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), the court determined that the plain meaning would not be conclusive where the literal application yields a result demonstrably at odds with the drafter's intentions. On this particular issue, then, it interpreted the statute as other courts have - that 362(c)(3)(A) is triggered if there is one previously dismissed filing in the past year (and not one previously dismissed plus one pending case in addition to the instant case).

The court did pay more attention, however, to the debtor's argument that the phrase "actions taken," as used in § 362(c)(3)(A), should be narrowly construed. Although the legislative history indicates that Congress intended for 362(c)(3)(A) to terminate all protections of the automatic stay, the debtor argued that the language actually chosen was significantly narrower. Judge Small noted that legislative history may be considered where a statute is ambiguous, but that it is not controlling, especially where the language of the statute, although ambiguous, contradicts the intention expressed in the legislative history.

With this as a starting point, Judge Small looked to what "actions taken" meant in the context of 362(c)(3)(A). He noted that if Congress intended for it to terminate all provisions of the automatic stay, it could have clearly said so as it did in 362(c)(4)(A)(i) (which says that for multiple repeat filers, "the stay under subsection (a) shall not go into effect upon the filing of the later case."). Applying standard principles of statutory construction, he noted that the use of a particular phrase in one section but not another "merehighlightsgts the fact that Congress knew how to include such a limitation when it wanted to," and generally supports a presumption that Congress acted intentionally and purposely in using the different language. Therefore, Judge Small found that the effect of 362(c)(3)(A) must not be as broad as that of 362(c)(4)(A)(i).

He also noted that the phrase "action taken", as used in 362(c)(3)(A), is different from the term "act" which is used in 362(c)(1) and 362(c)(2) (pre-amendment provisions describing when the stay of an "act against property of the estate" or "any other act" terminate). Again, traditional principles of statutory interpretation would indicate that the use of different terms in related statutes implies that different meanings were intended. Therefore, Judge Small concluded that "act" must mean something different from "action taken."

Judge Small looked to instances where the Code uses "act," and saw that they apply very broadly (for instance, in describing the extent of the stay under various provisions of 362(a)). The term "action" had a much narrower usage (i.e., in 362(a)(1) where it is used to refer to the commencement or continuation of a "judicial, administrative, or other action or proceeding," and in the 362(b) exceptions to the stay where it is used to refer to specific types of proceedings excluded from the stay). From this, he concluded that the term "action" means a formal action, such as a judicial, administrative, governmental, quasi-judicial or other "essentially formal activity or proceeding." Furthermore, since 362(c)(3)(A) refers to an "action taken," he concluded that this refers to an action in the past -- that is, one which had already been commenced prior to the filing of the debtor's bankruptcy petition.

Although this narrow reading might surprise anyone familiar with the legislative history of BAPCPA, Judge Small concluded that it was supported by well-established principles of statutory construction. Moreover, he found there were policy justifications as well: it would make sense that Congress would want to protect creditors who had invested time and money in initiating such an action, and terminate the stay as to them, while creditors who had not initiated such an action would know that the stay still applied to them. (What this policy argument fails to take into account, though, is that the principle would be inconsistent with the traditional bankruptcy policy of discouraging the "race to the courthouse"; indeed, it would clearly incentivize creditors to file actions against a potential debtor so as to obtain the benefit of stay termination in the event of a filing).

Since there was no evidence of any "action taken" against the debtor prior to the filing, the court found that 362(c)(3)(A) did not have any effect. Nonetheless, conceding that 362(c)(3)(A) is "a puzzler" and that other courts might hold differently, the court alternatively found cause to grant an extension of the stay and entered an order accordingly.

In Paschal, Judge Small noted but did not decide the effect of another ambiguity in 362(c)(3)(A): what does it mean when it says that the stay is terminated "with respect to the debtor"? In In re Johnson, __ B.R. __, 2006 WL 51210 (Bankr. W.D. Tenn. 1/9/06), Judge Boswell concludes that it means exactly what it says - the stay terminates only as to actions against the debtor, but not as to property of the estate.

The specific language at issue is in 362(c)(3)(A), which says that "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." Like Judge Small, Judge Boswell compared this to the language in 362(c)(1), which says that "the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate." Bankruptcy practitioners understand that the filing of a bankruptcy petition creates an estate, which is something different from the debtor. Thus, reading (c)(1) and (c)(3)(A) together, Judge Boswell concluded that (c)(3)(A) only terminates the stay as to property of the debtor, but not as to property of the estate.

He notes that under 11 U.S.C. 541, "property of the estate" includes all interests of the debtor in property as of the commencement of the case. In addition, under 11 U.S.C. 1306, in a Chapter 13 case it also includes all post-petition earnings and other property acquired post-petition. Under local procedures of the court, all "property of the estate" remains as such in a Chapter 13 case, and does not revest in the debtor, until the case is discharged or dismissed or the court orders otherwise. Since all such property is property of the estate, and since the stay as to such property is not terminated by virtue of 362(c)(3)(A), Judge Boswell concludes that any creditor seeking to foreclose or repossess property which is "property of the estate" must seek stay relief or risk violating the automatic stay.

Does this render 362(c)(3)(A) a nullity? Not necessarily. Even if limited to "property of the debtor," as distinguished from "property of the estate," it could still apply to property which is exempt but subject to a consensual lien. It could also apply upon confirmation of a Chapter 13. Although the Johnson court had local procedures which deferred revesting of property in the debtor, the general effect of confirmation under 11 U.S.C. 1327 is to revest property of the estate in the debtor upon confirmation. Arguably, applying the termination provisions to "property of the debtor" but not "property of the estate" could also be supported by policy considerations, in that its effect would be visited upon the repeat-filing debtor without necessarily prejudicing other creditors in their recovery from the bankruptcy estate.

Judge Morris of New York had a different spin on the same "with respect to the debtor" language in In re Parker, __ B.R. __, 2006 WL 65268 (Bankr. S.D.N.Y. 1/4/06). In Parker, the court was required to decide what happens to the stay in a joint case where one of the joint debtors has engaged in acts which would trigger 362(c)(3) or (4), but the other debtor has not. Mr. Parker had filed three prior bankruptcies, two of which had been pending in the past year (thereby triggering 362(c)(4)). His wife had been in two prior cases, however each was dismissed more than a year before the current filing, so neither 362(c)(3) nor (c)(4) were triggered as to her. Because Mr. Parker had been in two prior cases dismissed within the past year, a creditor moved for the entry of an order confirming that no stay was in effect pursuant to 362(c)(4).

362(c)(4) provides that if triggered, "the stay under [Section 362(a)] shall not go into effect upon the filing of the later case." Although the plain language would apply based on the conduct of one debtor, Judge Morris looked also to 362(c)(3), which says that for a single repeat filer the stay terminates only "with respect to the debtor." Although that language was not used in (c)(4), she still found that both sections "focus on, and apply to, the acts of a specific debtor rather than joint debtors in the aggregate." Accordingly, the court concluded that the application of both 362(c)(3) and (c)(4) must be analyzed separately as to each debtor in a joint case, and entered an order confirming that no stay was in effect as to Mr. Parker, but that the stay was in effect as to Mrs. Parker. The Parker decision does not specifically address whether termination of the stay "with respect to the debtor" covers property of the estate or not, as discussed in Johnson.

If Parker were a 362(c)(3) case, this result might be easier to reconcile with the other cases discussed above - similar to Johnson, it would be consistent with the conclusion that 362(c)(3) applies only "with respect to the debtor," and thus would not apply to property of the estate (or to separate property of the other spouse). The difficult part is the conclusion that 362(c)(4) has the same effect, even though it uses different language and clearly states that the stay "shall not go into effect" (without limitation as to a particular debtor). The opinion refers to no principle of statutory construction that would justify interpreting one section as having the same effect as another even though they use different language. Indeed, the use of different language is exactly what supports the conclusion in Johnson that terminating the stay "with respect to the debtor" means something different than saying that no stay comes into effect.

It may seem equitable not to "punish" one spouse in a joint case with termination of the stay based on the prior filings of the other spouse. But it's not clear that such a distinction is supported by the statute. It should be noted that 362(c)(4) specifically refers to either a "single or joint case" in describing both the prior filings and the current filing which trigger its applicability. It would hardly be surprising that Congress did not intend to permit a serial filer to avoid the impact of (c)(4) by filing multiple unsuccessful cases individually, and then once they are dismissed, file a joint case with his or her spouse and still have the benefit of the stay.

One final twist is presented in In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 12/12/05). In this case, the debtor had been in a prior case dismissed within the past year, and filed a motion to impose or extend the stay on the 30th day after filing the new petition (oops!). Not surprisingly, the court was unable to ensure notice of the motion and conduct a hearing before the expiration of the 30 days as required by 362(c)(3)(B). As a result, the automatic stay terminated by operation of law and no relief was available under (c)(3)(B). Nonetheless, the court considered whether relief was still available under 362(c)(4). Unlike (c)(3)(B), (c)(4)(B) only requires that the motion is filed within the first 30 days, but does not require that it be heard within that time.

Thus the question for the court was whether a (c)(4)(B) motion to impose the stay was only available to multiple repeat filers (for whom no stay goes into effect by virtue of (c)(4)(A)), or whether it could be used by a single repeat filer for whom the stay terminates after 30 days under (c)(3)(A). Although a natural reading of (c)(4)(B) would seem to indicate that it applies only to a multiple-repeat filer subject to (c)(4)(A), the court found that it was also available to a single repeat filer faced with the peculiar situations of the debtor in this case.

The reason for this conclusion was that if the (c)(4)(B) motion to impose the stay was only available to multiple repeat filers, then most of (c)(4)(D)(i) (describing the circumstances when there will be a presumptive lack of good faith on a motion to impose the stay) would be completely superfluous. 362(c)(4)(D)(i) describes three disjunctive factors which will give rise to a presumptive lack of good faith. The first of these, though, is that the debtor must be a multiple repeat filer within the past year. In other words, every debtor who triggers the provisions of 362(c)(4)(A) that prevent the stay from going into effect would also trigger the presumptive lack of good faith under 362(c)(4)(D)(i)(I). If (c)(4)(D) only applied to multiple repeat filers, then, it would never be necessary to consider the two other factors.

Judge Isgur noted that this would render superfluous an entire section comprised of 278 words and multiple paragraphs -- coincidentally, he noted, the same exact length as Abraham Lincoln's Gettysburg Address: "Although the meaning of this subsection cannot be compared to the importance of the Gettysburg Address, the Court presumes that Congress did not codify words of comparable length with no meaning whatsoever."

Since the two other factors in (c)(4)(D) had to serve some purpose, Judge Isgur concluded that they could be relevant if a single repeat filer sought relief under that provision - such as the debtor currently before him, who regretfully waited until the 30th day to seek relief and as a result was disqualified from getting an extension of the stay under (c)(3)(B). To hold otherwise would lead to the incongruous result that a single-repeat filer who waited until the 30th day to seek an extension would be unable to seek imposition of the stay in his present case, but could simply dismiss that case and file a new one and then get a hearing in the new case.

If nothing else, these cases demonstrate that Congress' sloppy drafting may provide some opportunities for creative lawyering. If BAPCPA is to be taken at its word, there may well be instances where it accomplishes far less than what its supporters expected.


David Yen said...

Parker was a Chapter 13 case. A question lurking in the weeds is what would have happened if they had filed separately. Would the co-debtor stay in her case protect him?

David Yen

David Rosendorf said...

That is a great question. All of the stay termination provisions specifically refer to the stay under 362, and don't mention 1301. It doesn't look like 362(c)(3) or (4) have any effect on the 1301 co-debtor stay (although this only applies to joint debts, no?)