Monday, February 13, 2006

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

Now that much of the dust is starting to settle over the credit-counseling certification requirements debtors must satisfy to be eligible to file, it's time to turn our attention to one of the other major issues confronted by debtors filing under the BAPCPA regime: the provisions for termination and extension of the 11 U.S.C. 362 automatic stay for debtors who have been involved in previous cases.

BAPCPA added two new sections to 362 dealing with the applicability of the stay to repeat filers. Although some judges have highlighted inconsistencies or errors in the statutory language (surprise!!), most courts recognize the general effect of the amendments to be as follows: (1) under new 362(c)(3), if a debtor has been the subject of one prior case dismissed within the year before the current bankruptcy filing, the automatic stay terminates after 30 days unless a motion to extend the stay has been granted; and (2) under new 362(c)(4), if a debtor has been the subject of two or more prior cases dismissed within the prior year, no stay goes into effect upon the filing and the debtor must move to have the stay take effect. The stay will be extended (or put into effect, as the case may be) only if the new filing is in good faith as to the creditors to be stayed, and the law creates specific presumptions as to when a filing is not in good faith which may only be overcome by clear and convincing evidence to the contrary.

The presumptive lack of good faith will exist if (1) more than one previous case was pending within the preceding one year; (2) a previous case was dismissed after the debtor's failure to (a) file or amend the petition or other documents required by the Code or the court without substantial excuse; (b) provide court-ordered adequate protection; or (c) perform the terms of a confirmed plan; or (3) there has been no substantial change in the debtor's financial or personal affairs since the last dismissal or any other reason to conclude that the current case will result in a chapter 7 discharge or a confirmed and fully performed chapter 11 or 13 plan. In addition, there is a presumptive lack of good faith as to a particular creditor who had obtained stay relief or had a stay relief motion pending as of the dismissal of a prior case.

Because there are several decisions that have already issued, I will be dividing this discussion up into several posts. This first post will deal with basic notice and procedure issues -- a bit dry, I know, but some courts have denied relief because the debtors failed to give adequate notice or to provide an adequate basis for relief in their requests. Part II will discuss the burdens of proof on the debtor and parties opposing the stay. Part III will further discuss courts' takes on the "good faith" standard, which is undefined in the amendments or elsewhere in the Bankruptcy Code. Part IV will look at some of the more difficult issues courts have already confronted in interpreting the provisions, and how some courts have followed principles of statutory construction to narrow their applicable scope.

The first reported decision confronting a motion to extend stay under 362(c)(3)(B) was issued by Judge Isgur of Texas (who is becoming quite a prolific author on BAPCPA issues, having already penned six published opinions). In In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05), the debtor, who had been involved in a previously dismissed case, filed a motion for extension simultaneously with the petition, together with a motion to expedite hearing. Absent specific local rules providing for expedited hearing, such a motion may well be necessary, because 362(c)(3)(B) specifies that the motion must be filed, and "notice and a hearing" on the motion must be completed within the 30-day period before the stay expires.

Although the debtor had timely requested a hearing, Judge Isgur was still concerned with the adequacy of notice in apprising affecting parties of the nature of the relief sought. In particular, Judge Isgur was concerned that the motion failed to set out a basis for extending the stay as to any creditor other than one mortgage holder. While 362(c)(3)(B) permits the stay to be extended "as to any or all creditors," the court held that a motion seeking relief as to all creditors must set forth sufficient allegations to state a basis for such relief, and to give all creditors notice of the issues to be addressed at the hearing.

In addition, Judge Isgur noted that this was the first motion of its kind filed in his court under the new Act. Particular because the relevant provisions are "at best, particularly difficult to parse and, at worst, virtually incoherent," he was concerned that creditors might be unfamiliar with them and must be given "abundantly fair warning" that their rights might be affected.

Finally, noting that the burden of proof for obtaining an extension is on the debtor, the court found that the statute's "only articulated requirement" is that the debtor prove that the filing of the later case is in good faith as to the creditors to be stayed. The structure of the statute provides a series of steps for applying certain presumptions in making this determination, though, which are explained in greater detail in a subsequent opinion (to be discussed in a later post). For purposes of the matter before him, Judge Isgur set the motion for hearing with respect to extending the stay against the mortgage-holder, and gave the debtor leave to amend to assert a basis as to other creditors. The Charles I decision also noted that absent a timely objection, the court might grant the motion without a hearing (as permitted for matters which require "notice and a hearing," in light of the definition for that phrase in 11 U.S.C. 102(1) which effectively interprets it as meaning notice and an opportunity for a hearing if requested by a party in interest).

Notice and procedure issues were also addressed in In re Wilson, __ B.R. __, 2005 WL 3693206 (Bankr. E.D. Tenn. 12/5/05). The decision in Wilson deals with motions filed in three separate cases to extend the stay under 362(c)(3), as well as a motion to impose the stay in another case under 362(c)(4)(B). Although only one of the motions was opposed, the court discussed certain issues sua sponte to inform parties of the court's expectations for future motions.

Although the debtors served notice of the extension motions on all creditors, in certain cases they did not provide at least 20 days notice of the hearing, as required by the court's local rules. For these, the court rejected the motions to extend the stay on the basis that the notice was inadequate (leading me to wonder, why didn't the court simply reschedule the hearing to afford at least 20 days' notice?). Aside from the notice question, the court found the motions inadequate on their substance as well. Since a presumption of no good faith arose from the prior dismissed case, the court held that mere statements in a motion or brief carried no evidentiary weight, and that a motion for extension must be accompanied by an affidavit setting forth the facts relied on to rebut the presumption.

The court directed that the affidavit should set forth: (1) whether the extension is sought as to all creditor or a single creditor; (2) the case number, commencement and dismissal dates of prior cases; (3) the reasons under 362(c)(3)(C) that there would be a presumption of no good faith; (4) any change in the debtor's financial or personal affairs to support the contention that the case will successfully conclude with a discharge; and (5) any additional information the movant believes is significant. If the motion is opposed, the debtor may then choose to rest on the affidavit or offer testimony in support of the requested relief.

The motions before the court were deemed insufficient because they did not set forth the prior case numbers nor explanations of the prior dismissals. In rather draconian fashion, the court apparently refused to hear testimony offered by the debtors at hearing because of the inadequate notice to parties in interest and because the motions were "fatally defective" due to their insufficient allegations.

The Wilson court was similarly dismissive of the motion to impose the stay under 362(c)(4)(B). Under the court's local rules, hearings on such motions must be on at least 5 days' notice unless permission for a shorter time is given by the clerk, and notice must be by a method effecting immediate receipt (i.e., e-mail or facsimile). Although the debtor had given 6 days notice, he was held not to have complied with the rules because the notice's certificate of service did not evidence expedited service as required by the local rule. Moreover, the motion was also denied on its substance since it did not state with particularity the grounds relied upon nor provide any evidentiary proof.

Timing of notice was also the factor in In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 12/9/05). There, motions for extensions of the stay were denied due to insufficiency of notice. The court held that mailing the motion to creditors 5-8 days in advance of the hearing is not "reasonably calculated to apprise interested parties of the pendency of the motion and to afford them an opportunity to present their objections." Given the out-of-state location of most creditors, and the presumption that mail delivery would take 3-4 days, the court found the short notice was not reasonably likely to give sufficient opportunity for creditors to review the motion, evaluate the newly-effective statutory text, investigate the circumstances of the earlier filing, and prepare and file a formal response. The court held that mailing of notice at least 14 days, or actual delivery at least 10 days, in advance of the hearing (consistent with its local rules' general requirement) would be adequate notice.

Guidance is also provided by the decision in In re Phillips, __ B.R. __, 2006 WL 91311 (Bankr. E.D. Okla. 1/6/06). Like the Charles court, Judge Cornish of Oklahoma advises attorneys that if a motion to extend the stay is unopposed, the motion may be granted in certain circumstances without the necessity of a hearing. Those circumstances require proper notice and an opportunity to object provided to all affected creditors, and a motion which properly pleads all the elements under 362(c)(3) including rebutting a presumption of no good faith (if applicable) by clear and convincing evidence. Unlike Judge Stair in the Wilson case, though, the Phillips decision does not appear to require an affidavit to accompany the motion.

The lessons to be learned? Debtors better make sure that notice of a motion to extend, or impose, the stay, complies with applicable local rules or procedures as to timing of notice. Also, make sure that the motion addresses the relevant factors for whether the presumption applies, and if so the grounds for rebutting it (and in Judge Stair's court in Tennessee, at least, make sure it is accompanied by an affidavit). From the creditors' perspective, they should be aware that some courts may be prepared to grant extensions even without a hearing if no party has made a timely objection.

Next, Part II will discuss in more detail how the burdens of proof are being allocated on applicability of the early stay termination provisions, the presumption of no good faith, and overcoming that presumption.

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