The U.S. Court of Appeals for the First Circuit rules on termination of the automatic stay pursuant to Section 362 (c)(3)(A) of the Bankruptcy Code

January 10 , 2019

In a case of first impression addressing the issue of termination of the automatic stay of proceedings against a debtor in bankruptcy under section 362 (c)(3)(A) by a U.S. Court of Appeals, the First Circuit concluded that Section 363(c)(3)(A) terminates the entire stay thirty days after the filing of a second petition, as to the actions against the Debtor, the debtor's property, and property of the bankruptcy estate; when the debtor, or any party in interest, failed to successfully invoked the extension of the automatic stay permitted under section 363(c)(3)(B). In re Smith, Jr. 18-1573, (1st Cir., Dec. 12, 2018).

Maine's Bureau of Revenue Services (MRS) had a claim for a tax debt owed by Leland Smith, a repeat Chapter 13 bankruptcy filer. MRS and Smith disputed the scope of the termination of the Bankruptcy Code's automatic stay for repeat filers like Smith, who filed a second petition for bankruptcy within a year of the dismissal of a prior bankruptcy case. The bankruptcy court ruled that the automatic stay had terminated in full, including as to property of the estate. The district court affirmed. There was no dispute about the facts, so the Court of Appeals examined the bankruptcy court's legal conclusion de novo. The National Association of Consumer Bankruptcy Attorneys appeared as amici curiae.

Leland Smith's first Chapter 13 case, filed in August 2011, was dismissed in October 2014 when Smith failed to make the payments required under his Chapter 13 bankruptcy plan. Two months later, in December 2014, Smith filed another Chapter 13 petition. This was also dismissed, in November 2016, because Smith failed to make required payments. A month later, on December 28, 2016, Smith filed his third Chapter 13 bankruptcy petition. Smith's last two cases, which were both pending in the same one-year period, caused § 362(c)(3)(A) to apply. While the Chapter 13 plan was being considered, Smith and MRS disputed the scope of the automatic stay. Neither Smith nor another "party in interest," moved for the continuation of the automatic stay, as allowed under § 362(c)(3)(B). As a result, in January 27, 2017, thirty days after the filing of his December 2016 petition, some part of the stay had terminated under § 362(c)(3)(A). MRS moved for an order under § 362(j) confirming the extent to which the automatic stay had terminated. Id. § 362(j). MRS argued that § 362(c)(3)(A) had terminated the automatic stay in full on January 27, 2017. Smith argued in opposition that § 362(c)(3)(A) specifically, the phrase "with respect to the debtor," meant that the stay terminated on that date only as to actions against the debtor and the debtor's property, not as to actions against the property of the bankruptcy estate.

The Court of Appeals reasoned that the text of § 362(c)(3)(A), including the phrase "with respect to the debtor," does not on its own obviously support or foreclose either party's reading and turned to the statutory context and congressional purpose for further evidence. After analyzing the application of section 362(c)(3)(A) alongside section 362(c)(3)(B), which allows the request for extension of the automatic stay by the debtor or any party in interest, and the effect over the meaning of property of the estate and exempted property, the court concluded that the statute's words were not so clear and went on to analyze the Congressional intent. In summary, considering a U.S. House of Representatives Judiciary Committee report stating that the BAPCPA had provisions intended to deter serial and abusive bankruptcy filings, and the inclusion of 362 (c)(3)(A) to discourage filing for a benefit of triggering the automatic stay, rather than from some valid reason, the Court concluded that the purpose of the BAPCPA was best achieved by interpreting section 362 (c)(3)(A) to terminate the entire stay, including as to estate property.

The importance of this ruling is that it dissipates creditors' concerns of being sued for willful violation of the automatic stay if they start collection efforts against property of the estate after the expiration of the 30-day stay period granted by section 362(c)(3)(A), when no one has requested or succeeded in requesting an extension.

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