The 3-6-2 Double Play

When a debtor commences a bankruptcy case by filing a bankruptcy petition, the Bankruptcy Code imposes what’s called the “automatic stay.” 11 U.S.C. § 362. The automatic stay is one of the most important and valuable tools available to debtors in their pursuit of their fresh start. Matter of Johns-Manville Corp., 26 B.R. 405, 410 (Bankr. S.D.N.Y. 1983), aff’d sub nom. In re Johns-Manville Corp., 40 B.R. 219 (S.D.N.Y. 1984) (citing S.Rep. No. 95–989, 95th Cong., 2d Sess. 54–55 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5840–41)(“The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.”). The automatic stay’s purpose is to ensure that the status quo is maintained and that all rights to property can be properly accounted for before they are administered through the Bankruptcy Court. See, In re Gold & Honey, Ltd., 410 B.R. 357, 369 (Bankr. E.D.N.Y. 2009) (“The automatic stay is designed to effect an immediate freeze of the status quo at the outset . . . .”). The automatic stay will generally remain in effect “until the case is closed or dismissed, or a discharge is granted or denied.” In re Moffitt, 408 B.R. 249 (Bankr. E.D. Ark. 2009) (citing 11 U.S.C. 362(h)). Actions taken in violation of the automatic stay are void. In re 48th St. Steakhouse, Inc., 61 B.R. 182 (Bankr. S.D.N.Y. 1986), aff’d, 77 B.R. 409 (S.D.N.Y. 1987), aff’d, 835 F.2d 427 (2d Cir. 1987).

The nation’s courts have long held that automatic stay takes effect at the precise moment the debtor commences their bankruptcy case by filing a bankruptcy petition. E.g., In re McLouth, 268 B.R. 244, 247 (D. Mont. 2001) (rejecting the so-called “unified day” rule because “Congress intended for the automatic stay to take effect as of the moment of filing, rather than as of the date of filing. To read the rule as [the debtor] argues presents an opportunity for mischief that the law does not recognize but the unified day rule would.” (emphasis in original)). In other words, the filing of a bankruptcy petition on Monday afternoon, for example, does not retroactively extend the automatic stay to enforcement or collections action against property of the debtor that took place earlier that Monday. Of course, one of the key takeaways here is that if, for example, we see a potential client after a foreclosure sale is conducted, i.e., after the property is sold at auction, even if it’s only just a few minutes afterwards, we cannot offer the client the advantages of the automatic stay to undo, invalidate or remedy the sale of the property in question—so if your home is in foreclosure and you want to try to save it, you must come and speak to the expert bankruptcy attorneys in our office us as soon as possible!

Now that we have some idea about the power and the protection afforded by the Automatic stay, and some of its nuances, it should be no surprise to you, dear reader, that lawmakers, creditors, and other interested parties became concerned about a phenomenon known as “serial filing.”

Congress perceived that a few debtors were abusing the bankruptcy system by filing multiple cases, each of which invoked the automatic stay under § 362(a). A debtor would file a case and the creditors would be stymied by the imposition of the automatic stay. The case would not be prosecuted to a conclusion but would be dismissed. After dismissal, when the creditor began to enforce its rights, the debtor would file another case. The automatic stay would again arise and the creditors would be stymied once again.

Section 362(c)(3)(A) provides that if the debtor had one case pending that was dismissed within one year prior to the filing of the second case, the automatic stay will terminate 30 days after the filing of the second case unless a party in interest requests that the automatic stay be continued in effect. The other provision, § 362(c)(4)(A)(i), addresses the situation where two or more cases were pending and dismissed in the one-year period preceding the filing of the third or subsequent case. In this instance, the automatic stay does not come into effect on the filing of a third or subsequent case. 11 U.S.C. § 362(c)(4)(A)(i). This is different from the provision concerning debtors who have had only one case pending and dismissed within the prior one-year period. In those cases, the § 362(a) stay arises automatically, but terminates at the end of 30 days if no action is taken to continue it.

In re Atari, 406 B.R. 715, 716 (Bankr. E.D. Va. 2008) (“The process could repeat itself. In enacting the Bankruptcy Abuse Prevention and Consumer Protection Act, Pub.L. No. 109–8, 119 Stat. 23, in 2005, Congress sought to prevent this type of abuse by modifying the provisions relating to the automatic stay,” citing 11 U.S.C. § 362(c)(3) & (c)(4)).

So if a potential client visits our office and has one dismissed bankruptcy case under his belt within the last one-year period, what do we tell them? We tell them that we need know more about their financial and personal affairs as they existed then (when they commenced the previous bankruptcy case) and compare them to where they are holding now (as they sit in our conference room). See, In re Forletta, 397 B.R. 242 (Bankr. E.D.N.Y. 2008). We engage in this kind of dialogue because we need to put forth to the Bankruptcy Judge a clear and convincing set of facts and circumstances. Id. We must successfully rebut the statutory presumption that the subsequent bankruptcy case was not filed in good faith, i.e., that they are not a “serial” filer. 11 U.S.C 362(c)(3)(C). The presumption of bad faith will prevail if we fail to demonstrate that there has been a substantial change in the debtor’s financial or personal affairs since the dismissal of the previous bankruptcy case. 11 U.S.C 362(c)(3)(C)(III).

The presumption is one of the absence of good faith. It arises from the absence of a substantial change in the debtor’s financial circumstances. If it is shown that there was no substantial change in a debtor’s financial affairs since the prior filing, the presumption arises that the present case was not filed in good faith. While other factors may affect the ultimate determination of the presence or absence of good faith.

In re Sawyer, No. 07-13021-RGM, 2007 WL 4125411, at *2 (Bankr. E.D. Va. Nov. 20, 2007).

Bankruptcy Judges may apply a three-pronged test when deciding whether the debtor has demonstrated a substantial change to rebut the presumption of bad faith. E.g., In re Thornes, 386 B.R. 903, 909 (Bankr. S.D. Ga. 2007) They may carefully examine whether there is demonstration (1) of a substantial change in Debtor’s financial condition since the prior case;(2) that the change will result in a case which can be fully performed; and (3) that the change will result in a case which can be confirmed. Id.

There are many kinds of changes in scenario that could demonstrate to the satisfaction of the Bankruptcy Court that there has been a substantial change in the financial or personal affairs of the debtor and that would warrant a judicial finding that the presumption of bad faith has been successfully rebutted.

For example, let’s say the debtor filed the previous bankruptcy case when they were unemployed, and their bankruptcy case was dismissed because they failed to submit a Chapter 13 Plan that was feasible due to their apparent inability to make the payments called for under the Chapter 13 Plan that they proposed. And less than one year later, when the debtor filed the subsequent bankruptcy case, the debtor was newly employed, or the debtor submitted an affidavit by a family member or a friend wherein the family member attested to their intention to contribute a substantial sum to the debtor on an ongoing basis for the duration of the proposed Chapter 13 Plan. The debtor can now show income and the ability to make the payments called for by the Chapter 13 Plan and to afford to carry on their day-to-day lives. E.g., In re Chapman, No. 08-01230-8-RDD, 2008 WL 873641 (Bankr. E.D.N.C. Mar. 27, 2008); In re Warneck, 336 B.R. 181 (Bankr. S.D.N.Y. 2006).

The United States Bankruptcy Court for the Eastern District of New York has held that the presumption of bad faith was successfully rebutted by a substantial change where the debtor submitted an affidavit attesting to that fact that, after the previous bankruptcy case was dismissed, she had reconciled with her boyfriend, the father of one of her children, and is now receiving from him approximately $4,000 every month, which she would apply towards funding her Chapter 13 Plan. In re Forletta, supra; see also, In re Castaneda, 342 B.R. 90, 95 (Bankr. S.D. Cal. 2006) (After failing to make Chapter 13 Plan payments because she had lost her daughter’s income, the debtor’s son agreed to contribute $500 per month to fund the debtor’s plan, which prompted the Bankruptcy Court to find the presumption was successfully rebutted because “[t]he additional income substantially improves Debtor’s personal and financial affairs ‘since the dismissal’ of her Prior Case”).

Another viable example, at the time the debtor filed previous bankruptcy case, the debtor, who was also a homeowner, had intended on obtaining re-financing or a modification of the mortgage loan on which they were delinquent, and their bankruptcy case was dismissed because they failed to a Chapter 13 Plan that could be confirmed because they could not show enough income or assets to cover the payments scheduled under the proposed Chapter 13 Plan and the payments due under a prospective modified mortgage loan. And when the subsequent bankruptcy case was filed only a few short months later the debtor has instead taken steps to sell the house and has designated the proceeds of the sale, provided there is enough equity in the home, to fund the Chapter 13 Plan and pay timely unsecured claims in full.

And consider again the hypothetical debtor from the previous example; let’s say that instead of taking steps to sell the home in order to fund the Chapter 13 Plan with the proceeds therefrom, the debtor demonstrates to the Bankruptcy Court that they are going generate income by renting a portion of the house to good-paying tenants, and apply the rental income towards the funding of the Chapter 13 Plan.

Another aspect to be mindful of is when to file a motion to extend the automatic stay. If you mess this part up, the substantial changes won’t get you where you need to be. In a 2009 case called, In re Chambers, No. 1-09-40201-DEM, 2009 WL 367614 (Bankr. E.D.N.Y. Feb. 13, 2009), the United States Bankruptcy Court for the Eastern District of New York denied the debtor’s motion for an order extending the automatic stay because the debtor failed to provide appropriate notice. In this case, because a case was filed during the one-year period following a previous case was dismissed, the debtor’s automatic stay was set to expire 30 after the subsequent bankruptcy petition was filed. The debtor, proceeding without the assistance of counsel, moved for an extension of the Automatic stay on the 29^th day of the 30-day stay period. In the motion, the debtor failed to include the number and identities of the creditors to be stayed and did not enter a date and time for the hearing of the motion. And as you might expect, due to the fact that the motion to extend the automatic stay was filed at the very last minute, the motion for extension was not opposed by any creditor or interested party. Notwithstanding the fact that no hearing date and time was selected by the debtor, The Bankruptcy Court denied the motion the very next day, on day 30, and the debtor’s automatic stay was allowed to expire. The Bankruptcy Court noted that “[n]o creditor has had the opportunity to review the application, evaluate its options and respond . . . .” The Bankruptcy Court made it a point to underline the would-be consequences of granting the extension: it would essentially open the floodgates to “serial” debtors employing this same strategy of calculated delay when they endeavor to file motions to extend the Automatic stay.

Interestingly enough, a 2015 case called In re Hale, 535 B.R. 520, 527 (Bankr. E.D.N.Y. 2015), is emblematic of a divide among the nation’s courts in connection with whether the provision that terminates the automatic stay 30 days after a subsequent bankruptcy case is filed within one year after the previous bankruptcy case applies only to property of the debtor or to both property of the debtor and property of the bankruptcy estate.

You might ask, what is a bankruptcy estate? Without going into too much detail, when a bankruptcy case is commenced, a fictitious entity called the bankruptcy estate is formed and into it go all legal and/or equitable interests of the debtor in property (subject to certain exemptions) at the time of the filing of the bankruptcy petition. In re Sprint Mortg. Bankers Corp., 164 B.R. 224, 227–228 (Bankr. E.D.N.Y. 1994), aff’d, 177 B.R. 4 (E.D.N.Y. 1995) (citing 11 U.S.C. 541). Since the bankruptcy estate is so all-encompassing, a decision on whether the automatic stay is not terminated after 30 days as to property of the bankruptcy estate, and whether the automatic stay is terminated after 30 days as to property of debtor only, is truly consequential.

After denying the debtor’s motion to extend the automatic stay because it was not filed and ruled upon within the 30-day period, Unites States Bankruptcy Judge Louis A. Scarcella, sitting in the Eastern District of New York did leave some hope for debtors who find themselves with an expired automatic stay. He held that the provision of the Bankruptcy Code that terminates the Automatic stay after 30 days only to property of the debtor, and that it does not apply to property of the Bankruptcy Estate. “To find otherwise would require the Court to ignore the plain text of the statute.” In re Hale, supra, at 527 (Bankr. E.D.N.Y. 2015).

In 2018, the United State Court of Appeals for the First Circuit, whose rulings are persuasive but not binding on federal courts in the State of New York (which are within the boundaries of the Second Circuit), was the first federal appellate court to decide the apparent divide among the courts. The First Circuit held that the automatic stay expires in connection with both property of the debtor and property of the estate. In re Smith, 910 F.3d 576 (1st Cir. 2018). The First Circuit noted that the termination of the automatic stay as to all property, be it of the debtor or of the bankruptcy estate, 30 days after a subsequent case is filed within one year of a previous case “only occurs if the procedure for extending the stay, in which the debtor or a creditor has the burden of demonstrating good faith, has not been successfully invoked.” Id. at 578 (1st Cir. 2018).

 If you have read this far, my best guess is that you must either be very interested in the bankruptcy law’s automatic stay provision or that you are in somewhat dire need of debt resolution. If you are in the latter camp, please do not hesitate to contact our office at 631-271-3737 right away! We have offices all over New York City and Long Island, and our expert bankruptcy lawyers and other legal staff are waiting to hear from you and help you achieve the fresh start you deserve!