The Automatic Termination of the Automatic Stay: Not Ready for Prime Time

The Supreme Court denied a petition for certiorari presenting a circuit split on Section 362(c)(3)(A) and the following question:

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?

Eventually, the Supreme Court needs to resolve the split. Unfortunately, the case on certiorari was not a good vehicle, and the circuit courts have yet to explore the issue thoroughly.

The Split

In Rose v. Select Portfolio Servicing Inc., 945 F.3d 226 (5th Cir. Dec. 10, 2019), the Fifth Circuit created a circuit split by holding that Section 362(c)(3)(A) only terminates the automatic stay as to property of the debtor, but not as to property of the estate. To read ABI’s report, click here.

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

Section 362(c)(3)(A) is a drafting mess. It uses the phrase “with respect to” three times. It 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 subsection was one of the attempts at reform in the 2005 BAPCPA amendments. It was aimed at individuals who file bankruptcy repeatedly to forestall creditors.

In an individual’s bankruptcy, the debtor typically has little property, because almost everything is property of the estate at filing. Even exempt property (such as a home) is estate property until it is abandoned or the exemption is allowed.

Consequently, Section 362(c)(3)(A) means little reform if the stay only terminates as to the debtor’s own property. The majority of courts to rule on the question decided that the stay did not terminate automatically as to estate property, meaning that a mortgage lender could not foreclose 30 days after a repeat filing.

The Two Camps

The courts are split into two camps. Those finding that the stay terminated entirely were endeavoring to foster the intent of Congress. Courts that followed the language of the statute held that the stay ended only with respect to the debtor’s property.

The losing party in Rose filed a petition for certiorari in February. The respondent didn’t dignify the petition with opposition papers until the Supreme Court requested a response. Once the opposition was filed, the Court considered the petition at a conference on June 25 and denied the petition on the following Monday, June 29.

While the petition was pending, Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., wrote an opinion that may have helped persuade the Supreme Court to deny certiorari. In re Thu Thi Dao, 20-20742, 2020 BL 178217 (Bankr. E.D. Cal. May 11, 2020). To read ABI’s report, click here. Judge Klein’s opinion was generously cited and discussed in the respondent’s opposition to the certiorari petition.

Judge Klein’s opinion is the single best authority so far on the split. He copiously described how the broad automatic termination espoused by the First Circuit would wreak havoc in chapter 7 cases. He explained, for example, how the Section 341 meeting would not have been held before the stay terminates automatically in the First Circuit. Or, the debtor might not have filed schedules before the stay terminates.

Judge Klein is correct in saying that most opinions on the subject only examine the issue in the chapter 13 context. He explains how chapter 7 trustees and creditors generally would be harmed were the stay to terminate entirely.

For example, assume the debtor has a home with equity much larger than the homestead exemption. If the stay were to evaporate entirely, the secured lender could foreclose, nail down all the equity and leave other creditors out in the cold. Or, one creditor might attach unencumbered property, to the exclusion of other creditors.

In other words, the circuit courts have not fully developed the issues under Section 362(c)(3) in the chapter 7 context. Also, Rose was not an ideal vehicle for certiorari given the convoluted positions of the parties.

In other words, the issue needs to percolate further in the circuits before the justices tackle Section 362(c)(3). Who knows; the split might evaporate once the circuits recognize the effect of total stay termination in chapter 7 cases.

So far, only one bankruptcy case is on the Supreme Court’s argument calendar for the term to begin in October 2020. We refer to City of Chicago v. Fulton, 19-357 (Sup. Ct.), where the Court will decide whether the automatic stay requires a creditor to turn over repossessed property immediately after the debtor files bankruptcy. To read the ABI reports, click here and here.