Automatic Termination of the Stay upon Second Filing under 362(c)(3) Are Two Strikes an Out

Journal Issue

Apr 2006

Column Name

Consumer Corner

Citation

ABI Journal, Vol. XXV, No. 3, p. 12, April 2006

Bankruptcy Code

1201

1301

Topic Tags

Automatic Stay

Practice and Procedure

Journal HTML Content

Three strikes and yer out!"1 That
quintessential American idiom is now codified in the Bankruptcy Code
with the enactment of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA). Should a debtor file a third petition
for relief after two previously dismissed cases within a 12-month
period, he's out; the all-important creditor stay is not automatically
effective upon the third filing.2 Congress apparently
wants to call a two-strike foul ball an out as well.3 Code
§362 (c)(3) ostensibly terminates the automatic stay on the 30th
day after the filing of a second petition for relief within 12 months
of an earlier dismissed case, requiring the debtor to justify a
continuation of that stay. Many courts, however, in beginning to
construe §362(c)(3), are letting two-strike debtors stay in the
batter's box. The operative provisions of 11 U.S.C. §362(c)(3)
read (emphasis added): <blockquote> <blockquote> (c) Except as
provided... <blockquote> <blockquote> (3) if a
single or joint case is filed by or against debtor who is an
individual in a case under chapter 7, 11 or 13, and if a single or
joint case of the debtor was pending within the preceding one-year
period but was dismissed, other than [a case refilled upon a
finding of abuse under §707(b)]— (A) 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. </blockquote>

</blockquote> </blockquote></blockquote>Sections 362(c)(3)(B) and
(C) go on to explain what the debtor or other party in interest
(e.g., a trustee or junior lienholder who thinks there is
equity in property) must do in order to continue the stay beyond the 30
days. Moreover, the court must determine, within those 30
days,4 whether or not the stay should continue. This has
led debtors' counsel to file, simultaneously with the second petition
for relief, motions to extend the stay and for expedited hearings on
the issue. The focus of the leadoff cases, In re
Charles5 and In re Montoya,6 was
mainly procedural and actually expanded that strike zone for the
unwary debtor. Reading §362(c)(3)(C)(i), the courts, given the
statutory presumption that the second case is not filed in good faith,
required the debtor to prove, by clear and convincing evidence as to
each creditor stayed (not just creditors generally), why the stay
should be extended. The Charles debtor also had to give notice
to all creditors, not just the main target of the stay (i.e., a
foreclosing creditor). The debtor's new obligation to prove a
substantial change in circumstances by clear and convincing evidence
acts, according to the Charles court, as a salutary "triage
of refiled cases." The Charles court even required, without
specific statutory authority, a debtor to prove "sufficient
equitable factors" to justify exercise of judicial discretion to
continue the stay. While the Montoya court refused to extend
the stay because the debtor failed to sustain his burden of proof, the

Charles court directed the debtor to amend the motion and noted
that if no one objected, the stay would be extended without further
hearing. While courts are likely to be liberal about
extensions,7 the debtor must prove his case to the
requisite standard. Failure to sustain that burden, even when the
motion to extend is uncontested by a creditor, can result in denial of
the extension.8 For debtors' counsel, the messages are: (1)
give notice of the motion to all creditors and (2) be as specific as
possible about changed circumstances, particularly as to creditors
who, in the prior dismissed action, had filed a motion for relief from
stay.9 Procedural correctness is imperative to an extension
of the stay before the court will address the merits of the
case.10 If Congress is modifying the strike count with the
stay-limitation provisions, courts will configure the strike-zone
dimensions. First of all, neither §362 (c)(3) nor §362(c)(4)
make any mention of either §§1201 or 1301.11

Thus, even after the third bankruptcy, if there is a nonfiling
co-obligor on the debt, the creditor must seek relief by motion before
acting. Any resolution of the prior case other than dismissal does not
trigger this automatic termination provision.12 A few
courts are giving debtors a helping hand by ruling that the failure to
complete credit counseling under §109(h)(1) requires the court to
"strike the petition for relief" rather than order a
"dismissal of the case" that would trigger the §362(c)(3)
termination provisions.13 A prior case is only
"pending" until it is dismissed, even if officially
"closed" within the 12-month period.14 Courts are
finding that in a joint case, the application of the stay limitation
provision needs to be analyzed separately as to each debtor. The
statute has the stay terminate with regard to the "debtor,"
not "joint debtors," so the stay may be extended for a
spouse with no prior filings, but not for the spouse with prior
filings.15 Some courts are now critically examining the
exact wording of this automatic-termination-of-stay provision and
finding themselves longing for the simplicity of the Tax Code. Courts
have noted that Congress well knows how to terminate the stay or prevent
the stay from being imposed; as is most simply stated in
§362(c)(4)(A)(i): "[T]he stay under subsection (a) shall not
go into effect upon the filing of the later case." But
§362(c)(3)(A) does not simply read: "The stay under
subsection (a) automatically terminates on the 30th day after the
filing of the petition for relief unless debtor does...." The
difference in language between subsections (c)(3) and (c)(4) must mean
that Congress intended that while the stay never goes into effect upon
the third filing, a second filing only limits the ambit of the
automatic stay. Just how limited is the rub? In re
Paschal16 held that §362(c) (3)(A) terminates the
stay only as to "actions taken" by a creditor prior to the
filing of the later bankruptcy petition. Section 362(a), on the other
hand, stays, inter alia, all "acts" by a creditor.
Hence, use of the word "actions," a subset of the more
expansive word "acts," evidences the legislative directive
to restrict the automatic termination of the stay to instances where a
formal "proceeding," as contemplated in Code
§362(a)(1), was pending prior to the filing of the later case. If a
creditor had already filed suit, then the stay, unless extended by the
debtor, would terminate 30 days after the petition date. If no
"action" had been taken, with perhaps only "acts"
performed, then the stay remains uninterrupted until the creditor gets
it lifted. In Paschal, no "action" had yet been taken
by a creditor. Hence, the court held that the stay did not
automatically terminate and, gratuitously going a bit further, noted
that if the debtor needed a stay extension, it was being granted.

In re Johnson17 will caution the creditor who meets
the Paschal criterion of having started a pre-petition action
from assuming the stay will automatically terminate after 30 days. In
Johnson, there was a pre-petition foreclosure action. But the
court looked elsewhere in the statute for guidance. First, the
Johnson court determined that the stay limitation applies only
to "debts" and, with use of the restrictive modifier
"with respect to the debtor" describing "property
securing such debt" and "leases," only to
"property of the debtor."18 The court readily
finds that "property of the debtor" differs from
"property of the estate" as defined in Code
§§541(a), 1115, 1206 and 1306(a).19 Regardless of
whether the Johnson analysis is syntactically correct, it is
painfully obvious that the expression "property of the
estate," in which a trustee has an interest apart from that of the
debtor, is nowhere to be found in §362(c)(3). On the other hand,
§362(a) clearly applies the stay to property of the estate. So,
it is argued, if §362(c)(3) neither references property of the
estate nor presents an unmodified termination of the §362(a) stay
as does §362(c)(4) [third filing], the two-strike automatic
termination therefore applies to less than the full extent of the
§362(a) automatic stay. Under the Johnson analysis, some
vestige of the automatic stay protecting property of the estate will
remain in almost all cases, thus requiring the creditor to move for
lift stay before acting or taking action. Together, the Johnson

and Paschal rationales, if upheld, might effectively eviscerate
the automatic-termination provision. Still, a statute cannot be
construed so as to render it meaningless and a nullity. See United
States v. Ron Pair Enterprises Inc., 489 U.S. 235, 109 U.S.Ct.
1026, 1031 (1989). Courts are, should be and will remain reluctant to
obliterate the provision, and already rely instead on the clear
legislative concept of having the debtor justify continuation of the
stay. Congress has not helped itself, though. In Paschal, the
court went to some length to save §362(c)(3) from complete
oblivion if given a truly literal meaning, seemingly requiring a third
filing while ostensibly applying to second filings: "Taken
together, the section [362(c)(3)] applies only to individuals who have
had three cases pending in one calendar year—one case that has
been dismissed, one case that is still pending when the petition at
issue is filed, and the new [third] case that is before the court for
determination."20 Perhaps being able to continue
"actions" against an interest of the debtor that is not
"property of the estate" gives §362(c)(3) enough
meaning to keep it from being a nullity, but that cannot be what was
intended. The entire mechanism set forth in §362(c)(3)(B) and (C),
with its heavy burden of proof now shifted to the debtor, further
evidences the congressional intent. Legislative comments clearly
indicate that the entire force of the stay was to be terminated. The
House Report BAPCPA (2005) is very clear: "[This enactment]
amends §362(c) of the Bankruptcy Code to terminate the automatic
stay within 30 days in a chapter 7, 11 or 13 case filed by or against a
individual if such individual was a debtor in a previously dismissed
case pending within the preceding one-year period." One can only
marvel at the transformation from the lucidity of the commentary to
the perplexity of the statute. Interestingly, practitioners—as
evidenced by the court decisions and by the practice of filing motions
to extend and requests for expedited hearings—know what Congress
wanted to do. Very simply, a debtor who refiles within 12 months of a
dismissed case has 30 days to justify continuation of the stay. We get
it. Congress' own enacted words, however, confuse the process. The
burden-of-proof language, §362(c)(3)(B) and (C), is certainly
workable, if not exact. Courts are obligated to, and do, enforce those
provisions, even in difficult cases.21 It is the language
describing the circumstances under which those subsections apply that
is so byzantine and perhaps self-defeating. Repeating "with
respect to" four times in a 45-word phrase, §362(c)(3)(A),
like so much of BAPCPA, is an embarrassment of lazy and impressively
inarticulate drafting. Unless the provision is legislatively clarified
or until there is appellate guidance, one can sense the schadenfreude
of debtors, now strict constructionists of a law they decried,
watching creditors play with ouija boards to divine the law they
themselves so badly wanted enacted. Debtors' counsel, in order to
protect whatever trace there may be of debtor's interests that is not
property of the estate, and until comfortable with precedent, will
continue to seek an extension of the stay and request an expedited
hearing. Even if not the panacea Congress may have hoped,
§362(c)(3) is acting to triage refiled cases. Creditors, on the
other hand, are well advised not to presume that the stay terminates,
so automatically they should file appropriate motions before doing
anything to enforce a claim.22 Moreover, creditors are
likely to want a written order establishing relief 23 because
the local sheriff will demand it before taking enforcement action.

One more gratuitous thought: Suppose a creditor files a motion for
relief. Can it demand that the debtor, now in the second case, prove
by clear and convincing evidence that the stay should remain in place?
I would think not. Section 362(c)(3) is specific as to the burdens of
proof to extend the stay. Although adding §521(a)(6) [failure to
timely redeem, assume or reaffirm] as additional grounds for granting
stay relief, there is nothing in BAPCPA to suggest that it modified
prior law and practice about the burdens of proof to obtain relief
from the stay under an unamended §362(d) (1) and (2) and
§362(g). The corollary is that the creditor is not estopped from
seeking relief under §362(d) even if the stay is extended,
perhaps even concurrently with the debtor's motion to extend. The
automatic termination of stay was to be one of a number of ways BAPCPA
was to provide a gust of fresh air to cleanse away bankruptcy abuse. We
all know what happens when "the air is shattered by the force of
Casey's blow."24 So, debtors, no need for a mighty
swing; you only need to make contact, not hit a home run. <blockquote>
<blockquote>  </blockquote></blockquote><hr><h3>Footnotes</h3>1
Official Rules of Major League Baseball 6.05(b). 2 11 U.S.C.
§362(c)(4). 3 Seemingly in violation of Official Rules of
Major League Baseball 2.00 "Strike (c)." 4 The
hearing must be "completed" within 30 days or the extension
will be denied. In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex.
2005). 5 332 B.R. 538 (Bankr. S.D. Tex. 2005) (motion for
expedited hearing) and 334 B.R. 207 (Bankr. S.D. Tex.) (extension
granted); See, also, In re Ball, –
B.R.–, 2006 WL 172273 (Bankr. M.D.N.C.); In re Collins,
334 B.R. 655 (Bankr. D. Minn. 2005). 6 333 B.R. 449 (Bankr. D.
Utah 2005) (third filing, but second in 12 months; debtor failed to
sustain the burden of proving the latest filing was in good faith).

7 In re Warneck, – B.R.–, 2006 WL 62667
(Bankr. S.D.N.Y.). 8 In re Havner, 336 B.R. 95 (Bankr.
M.D.N.C. 2006); In re Kurtzahn, – B.R. –, 2006 WL
278571 (Bank. D. Minn.). 9 §362(c)(3)(C)(ii); In re
Mark, – B.R. –, 2006 WL 164883 (Bankr. M.D. Md.)
(describes what the "clear and convincing" burden requires).
10 See, e.g., In re Thomas, – B.R.
–, 2006 WL 278544 (Bankr. E.D. Mich.). 11 Interestingly,
fisherman and farmers get a free pass on the second filing, as
§362(c)(3) does not apply to chapter 12 filings. 12 Both
cases have to be dismissed for the "no stay" of
§362(c)(4); the statute speaks in the plural. 13 In In
re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 2005), the rationale is
that §109(h)(1) makes completion of counseling an essential
qualification of being a "debtor." Accordingly, if the
individual fails to achieve that status, then the "petition for
relief" never becomes a "case" that can be
"dismissed." Accord, In re Valdez, 335 B.R. 801
(Bankr. S.D. Fla. 2005), and In re Rios, – B.R. –
2005 WL 3462728 (Bankr. S.D.N.Y. 2005). 14 In re Moore,
– B.R. –, 2005 WL 3732748 (Bankr. E.D.N.C.) 15 In
re Warneck, supra; In re Parker, – B.R. –,
2006 WL 62568 (Bankr. S.D.N.Y.). Note that §362(c)(4) does not
have the "with regard to the debtor" limitation on the stay
restriction in third cases. 16 2006 WL 258298 (Bankr. E.D.N.C.
Jan. 6, 2006). 17 335 B.R. 805 (Bankr. W.D. Tenn.). 18 335
B.R. at 806-807. 19 Section 541(b) outlines what would be
property of the debtor but not property of the estate. 20
– B.R. –, 2006 WL 258298. 21 See, e.g.,

In re Kurtzahn, supra. 22 In re Ozenne,
– B.R. –, 2006 WL 237019 (9th Cir. BAP) (good-faith belief
that stay not violated is not a defense to a finding of
"willful" violation of the stay). 23 See
§362(j) for order confirming no stay is in place. Compare
§362(c)(4)(A)(ii) (allowing for an order that no stay is in effect)
with §362(d)(4) for the recordable in rem order as to real
estate. 24 Thayer, Ernest L., Casey at the Bat.

Journal Authors

Howard Gershman

Journal Date

Saturday, April 1, 2006 - 12:00

Bankruptcy Rule

2006

362

none