Putting With a Pitching Wedge: Indiscriminating Termination of the Automatic Stay

• Publication year: 2022

Putting With a Pitching Wedge: Indiscriminating Termination of the Automatic Stay

Lawrence Ponoroff

PUTTING WITH A PITCHING WEDGE: INDISCRIMINATING TERMINATION OF THE AUTOMATIC STAY

Lawrence Ponoroff^*

Abstract

The serial filing of chapter 13 cases solely for the purpose of frustrating and delaying foreclosure or other legitimate collection efforts, and with no serious intent to reorganize, has long been perceived as an abuse of the bankruptcy system requiring a fulsome response. In 2005 Congress seized on a solution involving withdrawal or withholding of the automatic stay. Since it is the existence of the stay that most prompts abusive filings, the solution seemed appropriate. It was not for a variety of reasons examined in this article, but most notably because not all serial filings are abusive, and the stay serves to implement multiple bankruptcy policies, implicating the interests of participants in the system other than the debtor. Thus, this article contends that the new paragraphs added to section 362(c) in 2005 are overly broad, out of kilter with the structure of other stay termination provisions, and as likely as not to produce more mischief than they prevent. Moreover, the article asserts that there currently are better, more narrowly tailored, tools available to the courts to address bad faith serial filings that neither run the risk of depriving deserving debtors of bankruptcy relief and that do not prejudice the interests of other creditors in the case. Building on these tools, this article constructs an alternative approach to stay modification in the case of repeat filings that distinguishes the differing considerations at work in rehabilitation versus liquidation cases, and that contemplates a more meaningful role for bankruptcy courts to exercise experienced judgment in balancing the equities in individual cases in a fashion that a mechanical, self-executing statutory approach can never replicate.

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Table of Contents

Introduction.............................................................................................226

I. The Automatic Stay......................................................................232

A. In General................................................................................. 232
B. Termination of the Stay Before 2005 ........................................ 234
C. Termination of the Stay After 2005........................................... 235

II. Assessing the Advisability of Withholding the Stay as a Solution to Abusive Filings........................................................243

A. Overbreadth .............................................................................. 243
B. Dismissal vs. Termination/Denial ............................................ 248
C. Denial of Discharge or (maybe even) Dischargeability ........... 252
D. In Personam vs. In Rem Claims ................................................ 256

III. The Stay as the Wrong Tool for the Job..................................260
IV. A Proposed Solution.....................................................................264

A. The Concept .............................................................................. 264

1. Chapter 7............................................................................ 265
2. Reorganization Cases......................................................... 267

B. Critiques of the Concept........................................................... 272

Conclusion.................................................................................................275

Introduction

To a man with a hammer, everything looks like a nail.¹

The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") of 2005² was the most comprehensive set of amendments to the Bankruptcy Reform Act of 1978.³ With more than just cause, BAPCPA has received its share of criticism, and not simply because of its openly pro-creditor

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bias,⁴ but more pointedly due to what an astonishingly poor example of legislative draftsmanship it represents.⁵

One of many instances of this wretched butchering of English language and syntax can be found in the two new provisions that BAPCPA added to Section 362(c) regarding the circumstances under which the automatic stay will be be deemed to terminate other than on request of a party in interest.⁶ Both provisions

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are directed at the perceived abuse of serial filings interposed merely for purposes of delay and vexation.⁷ First, Section 362(c)(3)(A) provides for automatic termination of the stay with respect to the debtor on the thirtieth day after filing "if a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding [one]-year period but was dismissed."⁸ Second, Section 362(c)(4)(A) addresses the even higher tier of frequent filers: a debtor who had two or more single or joint cases pending within the previous year and that were dismissed.⁹ In that circumstance, subsection (c)(4)(A) provides that "the stay under subsection (a) shall not go into effect upon the filing of the later case."¹⁰

A bevy of case law and legal commentary, and now a split in the circuits,¹¹ has developed over whether there is a distinction between Sections 362(c)(3) and (c)(4) based not only the number of cases pending against the debtor in the preceding one-year period, but also on the scope of the resulting consequence in relation to the stay upon satisfaction of the conditions triggering the respective provisions.¹² Specifically, a majority of courts hold that the language in

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subsection (c)(3)(A) "with respect to the debtor," which does not appear in subsection (c)(4), means that the automatic stay terminates after thirty days only with respect to property of the debtor, not property of the estate.¹³ By contrast, a not trifling minority of cases consider the language of subsection (c)(3) to be ambiguous and, based on a variety policy and practical considerations,¹⁴ conclude that the stay is lifted as to the property of the estate as well as the property of the debtor.¹⁵

The question is an interesting one that has considerable implications for bankruptcy practice and outcomes.¹⁶ In all likelihood, the matter will eventually

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need to be resolved by the Supreme Court, particularly if the circuit split deepens.¹⁷ My personal view is that the minority probably has the better argument that the stay simply cannot be definitively resolved under the convoluted language of the statue itself.¹⁸ However, my attention in this article in relation to the automatic termination of the stay is directed to what is a different and, I believe, more fundamental issue than the proper interpretation of the language "with respect to the debtor." Specifically, I would contend Congress not only failed to express its intention with anything approaching what might be termed clarity, but that in choosing to use the automatic stay and its nondiscriminating discontinuation (or nonimposition) as a vehicle to police abusive serial filings, Congress also commandeered the wrong concept altogether and created unnecessary conceptual confusion between termination of the stay under Section 362(c) and relief from stay under Section 362(d).

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Logically, the outcome that should have followed whatever it is that Congress wished to discourage was selective relief from stay or dismissal of the bad faith case, depending on the egregiousness of the conduct.¹⁹ All-encompassing lifting or non-implementation of the stay does not terminate the case; rather, like a chicken without a head, the case proceeds without benefit of the most important structural element in any bankruptcy proceeding. Indeed, because of the criticality of the stay, dismissal may well follow, but it is not ordained. This raises the prospect, particularly in chapter 7, that discharge may yet be entered, and the discharge injunction would go into effect.²⁰ That scenario in turn creates the incongruous, and somewhat batty, possibility that any unsecured creditor might initially pursue collection activity quite lawfully in the absence of the stay by virtue of Sections 362(c)(3)(A) or (c)(4)(A), only to later find itself suddenly in violation of Section 524(a)(2) for engaging in the very same conduct.²¹

In nearly every other instance where the Code contemplates the lifting of the stay, the action relates to a particular creditor and/or claim—not a blanket elimination of the shield of the stay altogether.²² When Congress believes that certain actions or omissions warrant such all-encompassing relief, the technique used, including in other parts of BAPCPA,²³ is dismissal.²⁴ Failing that approach in this context, to avoid nonsensical results, I propose that subsections (c)(3) and (c)(4) of Section 362 either be rewritten in toto or abrogated entirely and that other provisions of the Code addressed at policing bad faith filings be tweaked modestly to assure the legitimate concerns underlying the adoption of Sections

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362(c)(3) and (c)(4) are adequately addressed. Either way, any solution entailing stay modification or annulment should be limited to particular claims and/or in rem actions against property of the debtor and the estate in non-liquidation cases, and even then, only after an expedited opportunity for judicial assessment of the debtor's good faith in light of all of the facts and circumstances surrounding the case.

In support of this contention, Part I of this Article examines in broad sweeping terms the scope of the stay and the various provisions relating to termination or relief from the stay both before and after enactment of BAPCPA. Next, Part II focuses on the ineffectiveness of a global lifting of the stay as a satisfactory response to the problems associated with serial filing. In this part, I also examine other approaches to...