Monday, November 14, 2005

Court Confronts Extension of Automatic Stay

The filing of a bankruptcy petition generally puts into effect an "automatic stay" which prevents creditors from pursuing further collection activities. Prior to the passage of BAPCPA, the stay usually would be in effect until the earliest of the closing or dismissal of the case, or the debtor receiving or being denied a discharge. A creditor typically would have to take affirmative action in order to have the stay lifted. BAPCPA made some dramatic changes to the automatic stay provisions. One of these is that if a person has been in a prior bankruptcy case within the previous year, the stay automatically terminates after 30 days unless the debtor (or another party in interest) obtains an order continuing the stay. 11 U.S.C. 362(c)(3). A Texas bankruptcy court has become the first to issue a published decision analyzing the mechanics of these new provisions. In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05).

In Charles, the debtor had filed a previous case which was voluntarily dismissed on July 6, 2005. He then filed a new case on October 31, 2005 (after the effective date of BAPCPA). Simultaneously with the new filing, the debtor filed an emergency motion to continue the automatic stay and a motion requesting an expedited hearing. The court first noted that if a debtor, like Mr. Charles, has been a debtor in a prior case pending within the preceding one year period, then the automatic stay created by the new filing is gone on the 30th day after the filing. However, 362(c)(3)(B) permits a debtor to file a motion to extend the stay. The court noted that the statute's only facial requirements are that (1) notice of the motion, and the hearing, are completed before the expiration of the 30 days; and (2) the debtor proves that the new filing is "in good faith as to the creditors to be stayed." The Charles court suggests this is not as simple as it may seem, however.

First, according to the court, the motion cannot simply seek extension of the stay generally, but must demonstrate, as to each creditor to be stayed, why the motion is appropriate as to that creditor. While Mr. Charles' motion gave adequate notice as to one particular creditor, it did not "set forth a reasoned basis to extend the stay as to any [other] creditor." Accordingly, while the court permitted the motion to go forward as to the one creditor, it required the debtor to replead allegations as to each creditor against whom he sought to impose a continued stay out of concern that "creditors be given abundantly fair warning that their right may be adversely affected." The Charles court expressed concern that creditors may be unfamiliar with the new provisions and that the relevant provisions in BAPCPA "are, at best, particularly difficult to parse and, at worst, virtually incoherent." (Some may find ironic the court's solicitude for creditors who were the primary force behind the amendments).

Second, the statute creates a rebuttable presumption that certain new cases are not filed in good faith, including cases filed by debtors who have had more than one case pending in the prior year, debtors whose cases were dismissed for failure to file or amend required documents without substantial excuse, failure to provide court-ordered adequate protection, or failure to perform the terms of a confirmed plan, or debtors who have not had a substantial change in their financial or personal affairs since the prior dismissal and there is no other reason to conclude the case will succeed. 11 U.S.C. 362(c)(3)(C). This presumption can be rebutted only be clear and convincing evidence, indicating to the Charles court that "Congress intended to direct the Court to conduct an early triage of refiled cases."

Third, the Charles court went beyond the articulated requirements of the new provisions to find that a court should extend the stay only if the movant can also demonstrate "sufficient equitable factors" to justify the exercise of such discretion (although it failed to articulate any such factors). Perhaps most curious, though, is that after suggesting a need to satisfy unspoken equitable considerations, the Charles court concludes by stating that if there is no timely objection to the debtor's motion to continue the stay, the motion may be granted without hearing.

The motion to extend the stay was set for a further hearing on November 18, 2005 and if we get more information as to its resolution you will see it here.


Anonymous said...

Does this mean that in order for the debtor to get an extension of the automatic stay, the motion must set forth a unique "reasoned basis" (as the Charles Court stated) to extend the stay as to each creditor, or can the debtor provide a broader rationale as to why the stay should continue as to all creditors ?

Frodnesor said...

Interesting question. Since the statutory presumption of bad faith filing applies to all creditors, it would seem that it could likewise be rebutted generally as well if there is a sufficient explanation. There's an unpublished case out of Utah that I'll be discussing soon that undertakes some further analysis of the factors to be evaluated on a motion to extend the automatic stay.

Anonymous said...

There are a bunch of cases out of Tennessee that are really limiting - if not crushing - the effect of 362(c)(3). Are you aware of these and do you agree with the decisions. To me, they are taking "with respect to" (and a sloppily drafted provision) far too liberally....

Frodnesor said...

I have a pile of about a half-dozen 362 cases that I was going to do an update on, but none of them are out of Tennessee. Just did a quick search and found a case called Johnson which came out about a week ago (and which I haven't read yet). If you're aware of others that have not yet been published (or which I've just not come across) I'd love for you to forward them. Thanks.