The following is a case update analyzing a recent decision of interest:
In In re Dao, __ B.R. __, No. 20-20742, 2020 Bankr. LEXIS 1260 (Bankr. E.D. Cal., May 11, 2020), Judge Christopher Klein published a decision joining the majority view that the termination of the automatic stay under Section 362(c)(3) is only with respect to the debtor and does not terminate as to estate property.
A copy of the decision is available here.
Section 362(c)(3) was added in 2005 by BAPCPA in response to a perception that some debtors were abusing the bankruptcy process by filing repeated cases to delay foreclosures. Under subsection (c)(3), if a debtor had a previous bankruptcy case dismissed within one year prior to filing a second bankruptcy case, the automatic stay in the second case terminates on the 30th day unless extended by the court. An inter-circuit and intra-district split of authority has arisen regarding whether the stay terminates only “with respect to the debtor” or whether the stay also terminates with respect to property of the estate.
The majority position is that property of the estate does not lose the protection of the stay in the second case. See Rose v. Select Portfolio Serv’g, Inc., 945 F.3d 226 (5th Cir. 2019), petition for cert. filed, (U.S. Feb. 20, 2020) (No. 19-1035); Rinard v. Positive Investments, Inc. (In re Rinard), 451 B.R. 12, 19-20 (Bankr. C.D. Cal. 2011) (Clarkson, J.) (stay does not terminate as to estate property, rejecting the reasoning of Reswick, infra). The minority position is that the stay also terminates as to estate property. See Smith v. Me. Bur. of Rev. Servs. (In re Smith), 910 F.3d 576 (1st Cir. 2018); In re Reswick, 446 B.R. 362 (9th Cir. BAP 2011) (stay as to estate also terminated).
In Dao, Judge Klein noted that Section 362(c)(1) provides that “Except as provided in subsections (d), (e), (f), and (h) of this section—(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate.” Notably absent from the list of exceptions to this rule is any reference to subsection (c)(3). In other words, Judge Klein found that the plain meaning of the statute compels the conclusion that “§ 362(c)(3) does not modify or affect § 362(c)(1)”—that the stay continues to protect property until it is no longer estate property.
Judge Klein also found that the language of Section 362(h) further supported his conclusion. Specifically, Section 362(h) (which is a listed exception in subsection (c)(1)) provides that “the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails” to timely file a statement of intention or take the action listed in such statement (emphasis added). Because subsection (h) (which also was added by BAPCPA) specifically provides that the stay terminates and that such property will no longer constitute property of the estate, the Dao decision cites this provision as strong support for the inference that Congress was aware of the distinction between the debtor and the estate and specifically chose in subsection (c)(3) not to terminate the protection of estate property.
“The majority (50+ cases), now led by the Fifth Circuit, says the stay does not terminate with respect to property of the estate. E.g., Rose v. Select Portfolio Serv’g, Inc., 945 F.3d 226 (5th Cir. 2019), petition for cert. filed, (U.S. Feb. 20, 2020) (No. 19-1035). The minority (20+ cases), led by the First Circuit, says the stay ceases to protect property of the estate. E.g., Smith v. Me. Bur. of Rev. Servs. (In re Smith), 910 F.3d 576 (1st Cir. 2018).” After conducting a thorough examination of the published decisions, Judge Klein commented that “[t]he controversy has arisen predominately in chapter 13 cases” and that “[i]t is puzzling that the debaters, particularly the minority, ignore the chapter 7 implications of their chapter 13 rulings regarding § 362(c)(3). From the chapter 7 perspective, inferentially extending stay termination to property of the estate amounts to throwing the baby out with the bath water.”
In Dao, a chapter 7 case was dismissed because the debtor failed to file schedules. The debtor filed a second case, thus triggering Section 362(c)(3). The chapter 7 trustee promptly filed a motion asking the court to clarify that (contrary to the holding in Reswick) the automatic stay did not terminate after 30 days as to property of the estate. The court granted the motion, leading to the published Dao decision.
The termination of the automatic stay under Section 362(c)(3) is a very important issue in chapter 7 cases, as well as chapter 13 cases. It is not uncommon for an unsuccessful chapter 13 case to be followed by a chapter 7 case. Consider a situation where a debtor has $1 million of equity in her residence. She files a chapter 13 case to try to reinstate her defaulted mortgage. After the payments prove impossible, the case is dismissed. The debtor then re-files under chapter 7 specifically wanting the trustee to sell her residence so that she will obtain her homestead exemption and have her non-dischargeable debts paid with the home’s equity. Given that the first meeting of creditors often does not occur until more than 30 days after commencement of the case, only the most diligent trustees will spot the issue and timely seek an extension of the stay. Moreover, as Judge Klein notes in Dao, the burden of extending the stay rests on the moving party by clear and convincing evidence. In chapter 7 cases, that puts the trustee in an almost impossible situation.
By holding that subsection (c)(1) is not modified by subsection (c)(3), chapter 7 estates and their creditors are not prejudiced by a quick termination of the stay. In the event there is no equity in property, a foreclosing creditor can still seek relief from stay. The Dao case is a must-read for any attorney advocating that the stay does not terminate with respect to estate property.
In Rose, which sided with the majority position, a petition for certiorari has been filed with the Supreme Court. The Court requested that respondent file a written response on June 4, 2020, which is an indication that certiorari may be granted. A response and a reply have been filed, and the petition is under consideration. Because BAPCPA was enacted almost 15 years ago, let’s all hope that certiorari is granted so that the meaning of subsection (c)(3) gets clarified once and for all.
These materials were prepared by Ed Hays of Marshack Hays LLP in Irvine (firstname.lastname@example.org), with editorial contributions from Tom Phinney of Parkinson Phinney in Sacramento (email@example.com).