The Dangers of Relying on the Automatic Termination of the Stay Revisited in Indiana

The Dangers of Relying on the Automatic Termination of the Stay Revisited in Indiana
by Tom Canary

When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed in 2005 one of the provisions heralded was the automatic termination of the stay imposed by 11 U.S.C. §362 in certain conditions.  One of those conditions involved repeat filings.  However, a close reading of the statute calls into question the scope of the remedy.

11 U.S.C. §362(c)(3)(A) states if an individual files a Chapter 7, 11 or 13 case and within the previous year had a case that was dismissed[1], the automatic stay will terminate after 30 days.  A party in interest (usually the debtor or possibly the trustee) may file a motion to continue the stay, which hearing must be concluded within this 30 day period, provided the debtor can show the new filing is in good faith as to the creditors to be stayed.

Easy, right?  As with many things in the law, you need to read the “fine print”.  11 U.S.C. §362(c)(3)(A) says the stay will terminate after 30 days “with respect to the debtor…”  So, does this mean the automatic termination of the stay is applicable to property of the estate, to property of the debtor or only actions against the debtor?  Recall that upon the filing of either a Chapter 7 or 13 petition, property of the debtor becomes property of the estate.  Many commentators opined about this distinction upon the passing of BAPCPA, noting this specificity of this wording and comparing it to 11 U.S.C. §362(c)(4)(A) [two or more bankruptcy filings in the past year] where the stay does not go into effect; there is no limiting language in this provision.

There is a split between the courts on this issue, the most current of which is of note to KWA clients in Indiana.  Judge Kent Lindquist in the Northern District of Indiana, Hammond Division held that the stay does not automatically terminate as to property of the estate.  This decision was upheld on appeal by the U.S. District Court Judge Damon R. Leichty in the case of First Financial Bank v Lawrence Allen Clark, Cause No. 2:18-cv-390 DRL, 2021 U.S. Dist. LEXIS 52129 decided March 19, 2021.  The facts are straightforward

Lawrence Clark (“Clark”) filed a Chapter 13 petition on June 28, 2018 after the dismissal of a prior Chapter 13 proceeding on May 3, 2018.  The prior case was dismissed because Clark did not comply with the provisions of the confirmed plan.  Clark did not file a motion to continue the stay as provided in 11 U.S.C. §362(c)(3)(B).

First Financial Bank (“FFB”) had a debt secured by a mortgage on real property belonging to Clark.  FFB moved for a “comfort order” under 11 U.S.C. §362(j) to confirm the absence of the stay [smart move – does not violate the stay and sets the matter for appeal].  The bankruptcy court granted the motion, but only as to Clark individually and Clark’s property.  The request as to the real property, which became property of the estate upon the filing of the new petition, was denied.  This appeal followed.

The bankruptcy and district courts discuss the split of authority on the scope of the termination of the stay under 11 U.S.C. §362(c)(3)(A).  The majority view, adopted by the bankruptcy and district courts, holds “the statute unambiguously terminates the stay solely as to the debtor and his property, without applying the termination to the property of the bankruptcy estate.”  Clark at *3.  This is the position taken by the 5th Circuit, 10th Circuit Bankruptcy Appellate Panel and multiple bankruptcy courts.  The minority view “is that the statute is ambiguous and that its purpose and legislative history counsel terminating the stay in its entirety.  Clark at *4.  This is the position espoused by the 1st Circuit Court of Appeals, 9th Circuit Bankruptcy Appellate Panel and multiple bankruptcy courts.

The bankruptcy and district courts chose the majority view, opining the language of the text is unambiguous (see the discussion at the beginning of this article).  Those courts further observed that a circuit split, in and of itself, does not create an ambiguity.  Nor would those courts look to legislative history to create an ambiguity where the language of the statute is clear, focusing on the “with respect to the debtor” phrase in the statute.

The courts also noted that 11 U.S.C. §362(c)(3)(A) makes reference to 11 U.S.C. §362(a) which in turn lists three categories of action that are protected by the automatic stay:  (1) actions against the debtor, (2) actions against the debtor’s property and (2) action against property of the estate. Clark, at *5-6.  Since 11 U.S.C. §362(c)(3)(A) uses the language “with respect to the debtor” that is the scope of the automatic termination of the stay for repeat filers – actions against the debtor or property of the debtor.  As the district court noted, the creditor could always file a motion to terminate the stay under 11 U.S.C. §362(d).

If the matter is appealed to the Seventh Circuit, this could widen the split of authority, making the issue ripe for a decision by the U.S. Supreme Court.

The parsing of language in the Bankruptcy Code is not confined to this provision.  Other provisions of the Bankruptcy Code amended by BAPCPA have caused similar concerns. Case in point:  11 U.S.C. §521(a)(6).  Again, when BAPCPA was announced, many thought this would allow more rapid termination of the stay.  However the provision is applicable as to personal property which a creditor has an allowed secured claim for the purchase price.  To have and allowed claim, a proof of claim must be filed.  In no asset Chapter 7 cases, the initial notice from the courts say claims are not necessary.  Additionally, the section applies to purchase money loans only (“claim for the purchase price”).

What is the moral of the story?  Automatic terminations of the stay will be strictly construed by the courts and their scopes limited.  The filing of a motion to terminate the stay is cheap insurance and a decidedly better position than defending an adversary proceeding for violating the stay.

Fortunately our clients have a ready solution:  call us! – (216) 771-6500 and ask for Tom Canary or Cindy Jeffrey.  You may also email us at [email protected].  We remain appreciative for your bankruptcy work in OH, KY, IN and WV and always are ready to speak with you about expanding that relationship.  Stay safe – stay well.

[1] Other than a Chapter 7 case dismissed for abuse – see 11 U.S.C. §707(b)