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Bankruptcy stay terminated for repeat filer'.

Byline: Pat Murphy

The 1st U.S. Circuit Court of Appeals has found that the automatic stay terminated with respect to a state tax collection action against property included in the bankruptcy estate of a debtor who filed his Chapter 13 case within a year of having another case dismissed.

The debtor argued that the stay terminated only as to actions against himself and property not included in his bankruptcy estate under the plain language of 11 U.S.C. 362(c)(3)(A), a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 addressing repeat filers.

But Judge Sandra L. Lynch, writing for a unanimous panel, concluded that such an interpretation was not supported by the legislative history of the statute.

"Based on the provision's text, the statutory context, and Congress's intent in enacting BAPCPA, we hold that 362(c)(3)(A) terminates the entire automatic stay as to actions against the debtor, the debtor's property, and property of the bankruptcy estate after thirty days for second-time filers," Lynch wrote in affirming a Bankruptcy Court order.

Lynch noted that the decision addressed an issue of first impression in the circuit courts, with lower federal courts divided on the issue.

The 34-page decision is In Re: Smith, Leland Jr., Lawyers Weekly No. 01-246-18. The full text of the ruling can be found here.

'Clarifies the playing field'

The debtor, Leland S. Smith Jr., is represented by Christopher J. Keach of Biddeford, Maine.

Although Keach argued to the 1st Circuit that the plain reading of 362(c)(3)(A) required a different result, he acknowledged that the decision brings clarity to the issue.

"It clarifies the playing field for everyone in the 1st Circuit in cases where 362(c)(3)(A) applies," Keach said.

As a result of the decision, Keach said, he expects it to become standard practice for attorneys in the 1st Circuit to file a motion to extend the automatic stay in conjunction with filing a new case for a client with another bankruptcy case pending within the previous year.

Worcester bankruptcy attorney Paul W. Carey agreed with the 1st Circuit's interpretation of 362(c)(3)(A).

"The statute was amended with BAPCPA in large part to address perceived abuses of the Bankruptcy Code," he said. "One of those perceived abuses was serial filings."

Carey said the statute strikes the right balance for all the parties in interest, noting that the statute permits a debtor to obtain a continuation of the stay by making a showing that the second filing was in good faith.

"This [decision] doesn't mean that a well-meaning debtor absolutely loses the stay for all purposes forever," he said.

Jack D. Pitts, a consumer-side bankruptcy attorney in Johnston, Rhode Island, said repeat filers generally are not acting in bad faith. An initial bankruptcy filing often goes awry simply because the debtor made the mistake of trying to handle that first case without an attorney, he said, adding that he has found judges to be receptive to motions to extend the automatic stay on behalf of a repeat filer.

"Quite frankly, in most of those cases there was no abuse, and the judges have found good faith and allowed the stay," he said.

Consumer-side bankruptcy attorney Christopher M. Brine of Worcester said at least there is now certainty "as to what needs to be done in a case to extend the stay. If you're concerned about extending the stay, you need to file the motion to extend the stay basically right when the case is filed."

Brine said he worries to what extent the 1st Circuit's decision affects bankruptcy cases that have already been filed.

"I can't imagine how many cases there are out there right now where it was assumed that the stay would apply to the bankruptcy estate," he said. "How should those cases be treated because the motion [to extend the stay] can't be filed anymore?"

Kevin J. Crosman, an assistant state attorney general for the state of Maine, represented the creditor in the case, the Maine Bureau of Revenue Services. Crosman's office did not respond to a request for comment.

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"[The ruling] clarifies the playing field for everyone in the 1st Circuit in cases where 362(c)(3)(A) applies."

Christopher J. Keach, lawyer for debtor

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Successive petitions

Under the Bankruptcy Code, the filing of a petition for bankruptcy typically stays collection actions against the debtor, the debtor's property, and property of the bankruptcy estate.

However, 362(c)(3)(A) provides a different outcome if a single or joint case of the debtor was pending within the preceding year but dismissed. In such a case, 362(c)(3)(A) provides the stay "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."

Section 362(c)(3)(B) authorizes a bankruptcy judge to extend the stay before the end of the 30-day period upon a showing by the debtor or a creditor that the filing of the second case is in "good faith."

In Smith, the debtor filed his first Chapter 13 case in August 2011. That case was dismissed in October 2014 based on the debtor's failure to make payments called for under his bankruptcy plan.

The debtor filed a second Chapter 13 petition in December 2014. Like his first case, the debtor's second case was dismissed in November 2016 for failure to make required payments.

On Dec. 28, 2016, the debtor filed the bankruptcy case under review by the 1st Circuit. Neither the debtor nor any other party in interest in that Chapter 13 case moved for continuation of the automatic stay pursuant to 362(c)(3)(B).

The debtor's petition listed the IRS and the Maine Bureau of Revenue Services as priority creditors, with the debtor claiming he owed almost $200,000 for medical bills, credit cards and taxes. The state ultimately would show that the debtor owed $51,597 in state taxes, interest and penalties.

However, the state and the debtor disputed the scope of the automatic stay in the debtor's case. The state argued that 362(c)(3)(A) terminated the automatic stay in full on Jan. 27, 2017, which was 30 days after the filing of the debtor's latest bankruptcy petition.

The debtor argued that, because 362(c)(3)(A) specifically employs the words "with respect to the debtor," the stay terminated on Jan. 27 only with respect to actions against the debtor and the debtor's property not with respect to actions against the property of the bankruptcy estate.

A bankruptcy judge in Maine ruled that the automatic stay terminated in full.

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"This [decision] doesn't mean that a well-meaning debtor absolutely loses the stay for all purposes forever."

Paul W. Carey, Worcester

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Tax collection action may proceed

In addressing the debtor's appeal, Judge Lynch explained that Congress added 362(c)(3)(A) when it enacted BAPCPA to address abuses of the automatic stay by certain repeat filers.

The judge further explained that since its enactment, the majority of federal courts that have addressed the issue have concluded that 362(c)(3)(A) terminates the stay to permit actions against the debtor and the debtor's property, but not with respect to actions against the bankruptcy estate.

Lynch noted that the 1st Circuit Bankruptcy Appellate Panel has twice endorsed the majority view, once in a 2006 Massachusetts case, Jumpp v. Chase Home Finance, and a second time in a 2014 Rhode Island bankruptcy, Witkowski v. Knight.

On the other hand, Lynch cited a 2013 decision by a U.S. District Court judge in Massachusetts, St. Anne's Credit Union v. Ackell, as supportive of the minority rule.

Lynch recognized that the text of 362(c)(3)(A) "does not lend itself to one clear reading." Accordingly, the judge rejected the debtor's "plain meaning" argument that the statute unambiguously limits the scope of the stay's termination.

On that issue, Lynch pointed out there was a "flaw" in the debtor's argument that it was plain and unambiguous that the phrase in 362(c)(3)(A) "with respect to the debtor" necessarily required the conclusion that the stay terminates for actions against the debtor and the debtor's property, but not for actions against the bankruptcy estate.

"A primary obstacle to Smith's reading is that the phrase 'with respect to the debtor' would most naturally be read to terminate the stay only for actions against the debtor, and not, as he reads it, for actions against both the debtor and the debtor's property," the judge wrote. "Yet no court has read the provision that way."

Finding no "plain meaning" in the statute, the panel felt it necessary to turn to statutory context and congressional intent to interpret 362(c)(3)(A). The panel's analysis on those issues led it to conclude the better rule was the minority position that 362(c)(3)(A) terminates the entire stay.

In examining statutory context, Lynch said that the minority rule better fit the BAPCPA provision governing extensions of the automatic stay for second-time filers, 362(c)(3)(B).

"Section 362(c)(3)(B) reflects an attempt by Congress to ensure that certain second-time filers who meet an enhanced burden have an escape route from the termination of the entire automatic stay, including as to actions against estate property," she wrote.

The legislative history of BAPCPA evinced a congressional intent that 362(c)(3)(A) operates to terminate the entire automatic stay in the absence of a successful 362(c)(3)(B) petition for continuation of the stay, the panel found.

"The provision was designed to 'Discourag[e] Bankruptcy Abuse,' and in particular, to 'Discourag[e] Bad Faith Repeat Filings' that is, filing for the benefit of triggering the automatic stay, rather than for some valid reason," Lynch wrote. "This purpose is best achieved by interpreting 362(c)(3)(A) to terminate the entire stay, including as to estate property. The portion of the stay that is most valuable to a bankruptcy petitioner, just as to a creditor, is the portion that protects estate property."

In Re: Smith, Leland Jr.

THE ISSUE: Did the automatic stay terminate with respect to a state tax collection action against the property included in the bankruptcy estate of a debtor who filed his Chapter 13 case within a year of having another case dismissed?

DECISION: Yes (1st U.S. Circuit Court of Appeals)

LAWYERS: Christopher J. Keach of Molleur Law Office, Biddeford, Maine (debtor)

Kevin J. Crosman of the Maine Attorney General's Office (creditor)

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Author:Murphy, Pat
Publication:Massachusetts Lawyers Weekly
Date:Dec 27, 2018
Words:1787
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