Judge Christopher Klein Takes Sides on a Circuit Spilt Coming to the Supreme Court

This summer, the Supreme Court will consider granting certiorari to resolve a circuit split under Section 362(c)(3)(A).

The question is this: If a petition by an individual under chapters 7, 11 or 13 has been dismissed within one year, does the stay terminate automatically 30 days after a new filing only as to property of the debtor or as to property of both the debtor and the estate? See Rose v. Select Portfolio Servicing Inc., 19-1035 (Sup. Ct.).

In the case before the Supreme Court, the Fifth Circuit took sides with the majority by holding that the stay only terminates automatically as to property of the debtor, but the stay remains in place as to property of the estate. Rose v. Select Portfolio Servicing Inc., 945 F.3d 226 (5th Cir. Dec. 10, 2019) (cert. pending). To read ABI’s report on Rose, click here.

Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., wrote an opinion on May 11 agreeing with the result in the Fifth Circuit. His opinion reads like an amicus brief urging the Court to grant certiorari and uphold the Fifth Circuit.

Judge Klein’s decision is the best analysis so far of the mistakes made by the minority, who see a total termination of the automatic stay 30 days after a repeat filing. He expertly explains why the result in the Fifth Circuit properly follows the plain meaning of Section 362(c)(3)(A) and comports with the principles and procedures underlying bankruptcy administration.

Although he sits in the Ninth Circuit, Judge Klein disagreed with a decision by the Ninth Circuit Bankruptcy Appellate Panel that held that the automatic stay terminates in 30 days as to both estate property and property of the debtor. See Reswick v. Reswick (In re Reswick), 446 B.R. 362 (B.A.P. 9th Cir. 2011).

The Facts in Judge Klein’s Case

The facts confronting Judge Klein underscore the pernicious results that would flow from ending the stay automatically as to both the debtor’s and the estate’s property. The pro se debtor’s first chapter 7 petition had been dismissed on January 31, 2020, for failure to file schedules. He filed again under chapter 7 on February 10, this time with schedules.

Having reason to believe that the debtor was concealing property, the chapter 7 trustee was worried that the automatic stay would terminate entirely within 30 days, allowing a few creditors to glom assets that rightly belong to all creditors.

So, the trustee filed a motion asking Judge Klein to rule, among other things, that the stay would not terminate as to estate property, whether it was disclosed or not. Judge Klein wrote a 29-page opinion explaining why Section 362(c)(3)(A) only terminates the stay as to the debtor’s property, if there is any.

Clumsy Drafting of Section 362(c)(3)

Section 362(c)(3)(A) is one of the most curiously drafted provisions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA. It uses the phrase “with respect to” three times.

If an individual’s case under chapters 7, 11 or 13 has been dismissed within one year, the subsection provides that the automatic stay in Section 362(a) terminates 30 days after the most recent filing “with respect to any action taken with respect to a debt or property securing such debt . . . with respect to the debtor . . . .” [Emphasis added.]

The Circuit Split and the ‘Cert’ Petition

In December 2018, the First Circuit adopted the position taken by the minority of lower courts by ruling that Section 362(c)(3)(A) terminates the automatic stay entirely, including property of the estate. Smith v. State of Maine Bureau of Revenue Services (In re Smith), 910 F.3d 576 (1st Cir. Dec. 12, 2018). To read ABI’s discussion of Smith, click here.

The circuit split arose when the Fifth Circuit took the contrary view in Rose by holding that the stay only ends automatically as to the debtor’s property. Represented by an attorney who clerked for Justice Anthony M. Kennedy, the loser in the Fifth Circuit filed a certiorari petition in February, highlighting the circuit split and the recurring importance of the issue.

The response to the certiorari petition is due June 4, meaning that the Supreme Court might not act on the petition before the end of the term. If there is no answer this term, the Court might pass on the petition at the so-called long conference in late September and issue a grant or denial of certiorari in early October. Because the government is the largest creditor in many bankruptcies, the Court might ask for the views of the U.S. Solicitor General, thus delaying action on the certiorari petition until early 2021.

Judge Klein’s Opinion

For anyone litigating an issue under Section 362(c)(3)(A), Judge Klein’s opinion is “must” reading. He says that the majority, more than 50 cases, follow the Fifth Circuit, while the First Circuit is in the minority, allied with over 20 lower court decisions.

Judge Klein defined the question as whether the reference in Section 362(c)(3)(A) to termination “with respect to the debtor” should be “construed implicitly to extend to the ‘estate’ . . . even though neither ‘estate’ nor ‘property of the estate’ appears in Section 362(c)(3).” In succinct, technical terms, Judge Klein held that “Section 362(c)(3) does not modify or affect Section 362(c)(1).”

According to Judge Klein, the majority sees no ambiguity in Section 362(c)(3) and follows the plain meaning of the statute. He describes the minority as finding the statute ambiguous, allowing them to infer an extension beyond the language of the statute “consistent with the Congressional purpose of thwarting bad-faith manipulations of bankruptcy.”

Judge Klein said that the minority’s “tunnel vision manifests itself by way of disregard of how Section 362(c)(3) applies in chapter 7.”

Judge Klein devotes the bulk of his opinion to explaining how the minority’s rule would have the practical effect of precluding a chapter 7 trustee from protecting estate property from the clutches of one or a few creditors. For instance, the stay would terminate before the Section 341 meeting and possibly before the debtor even files schedules. In other words, the stay would terminate before the trustee could find out if there was estate property to protect.

Likewise, the stay would terminate as to estate property that the debtor did not disclose. Absent Section 362(c)(3), the stay would remain as to undisclosed property, even after discharge.

Furthermore, the trustee would face an insurmountable burden in obtaining an extension of the stay because Section 362(c)(3)(B) requires a showing that the new case was “filed in good faith as to the creditors to be stayed.”

Among other things, Judge Klein points out how there is no good faith requirement imposed on a chapter 7 filing. And even if the debtor did not file in good faith, the debtor’s bad intentions should not bar a trustee from recovering property for the benefit of all creditors.

Judge Klein dissects the history surrounding the adoption of Section 362(c)(3) as part of BAPCPA. He points out that Section 362(h), also adopted in BAPCPA, refers to property of the estate and property of the debtor, thus showing that the omission of property of the estate in Section 362(c)(3) was no mistake.

In other words, the minority’s interpretation makes some sense when a debtor files repeatedly in chapter 13 but has pernicious results if the later filing is in chapter 7. Judge Klein argues that the result should be the same regardless of whether the filings were in chapter 13 or chapter 7.

Judge Klein said that the minority opinions “neither mention nor attempt to explain the asymmetry between Section 362(h) and Section 362(c)(3).” He went on to say that “none of the minority cases involve a chapter 7 trustee concerned about preserving stay protection for property of the estate.”

Judge Klein said it would have been “extraordinary for Congress to have eviscerated this fundamental protection for property of the estate without so much as an explanatory comment” in the legislative history. Later, he added that “Congress would not have intended such dramatic consequences without unambiguous explanation.”

Judge Klein’s opinion is chock full of other quotable quotes. For instance, he says that the minority’s “benign check on shifty chapter 13 debtors turns malignant” when the stay evaporates as to estate property that a chapter 7 trustee could otherwise liquidate for the benefit of all creditors. He speaks of the “absurdity of extending Section 362(c)(3) to property of the estate” and the minority’s “zero analysis of how the chapter 7 trustee fits in.”