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Smith v. State Bureau of Revenue Services

United States District Court, D. Maine

May 16, 2018

LELAND S. SMITH, JR., Plaintiff-Appellant,
v.
STATE OF MAINE BUREAU OF REVENUE SERVICES, Defendant-Appellee.

          ORDER ON BANKRUPTCY APPEAL

          JOHN A. WOODCOCK, JR., UNITED STATES DISTRICT JUDGE

         A Chapter 13 debtor appeals the Bankruptcy Judge's order confirming that the automatic stay has terminated pursuant to 11 U.S.C. § 362(c)(3)(A) and, therefore, does not prohibit creditors from taking actions against property of the estate. This appeal raises a question that has divided courts concerning the proper statutory interpretation of the inelegant language of that provision. Under the majority view, subsection (c)(3)(A) terminates the automatic stay provisions blocking actions against the debtor or property of the debtor, but property of the estate remains protected by the automatic stay; under the minority view, subsection (c)(3)(A) terminates the automatic stay in its entirety. Although neither interpretation is entirely satisfactory, the Court affirms the decision of the Bankruptcy Court because the minority view is more convincing.

         I. BACKGROUND

         There are no factual disputes. In December 2014, the Debtor, Leland S. Smith, Jr., filed a petition under Chapter 13, but that petition was dismissed in November 2016 because he failed to make payments required by the confirmed Chapter 13 plan. On December 28, 2016, Mr. Smith filed a second Chapter 13 voluntary petition and a proposed plan. Voluntary Pet. for Individuals Filing for Bankr. (Bankr. ECF No. 1); Chapter 13 Plan (Bankr. ECF No. 3). On February 15, 2017, the state of Maine Bureau of Revenue Services (MRS) filed a claim for roughly $52, 000. Proof of Claim (Bankr. Claim No. 3-1). On March 22, 2017, the Bankruptcy Court confirmed Mr. Smith's Chapter 13 Plan. Order Confirming Chapter 13 Plan and Setting Deadlines for Certain Actions (Bankr. ECF No. 35).

         Meanwhile, at a hearing on February 16, 2017, MRS sought clarification under 11 U.S.C. § 362(j) of the extent to which the automatic stay had terminated. Min. Order (Bankr. ECF No. 19). In cases under Chapters 7, 11, and 13, § 362(c)(3)(A) terminates the automatic stay “with respect to the debtor” after thirty days if that debtor had a prior case pending within the preceding one-year period, which was then dismissed. Under § 362(c)(3)(B), any party in interest may move for a continuation of the automatic stay before the expiration of the thirty-day window, but no one did so here.

         After briefing and oral arguments, the Bankruptcy Court ruled in a thoughtful and thorough opinion on August 18, 2017, that the automatic stay had terminated and the phrase “with respect to the debtor” in 11 U.S.C. § 362(c)(3)(A) does not limit the scope of the termination by preserving the automatic stay for actions against property of the estate. Order Regarding Stay Termination Under 11 U.S.C. § 362(c) (Bankr. ECF No. 48); Notice of Appeal Attach. 2 (ECF No. 1) (Bankr. Ct. Order). This appeal followed on August 31, 2017. Notice of Appeal (Bankr. ECF No. 55); Notice of Appeal Attach. 4 Appellee Statement of Election to Proceed in District Court (ECF No. 1).

         Mr. Smith filed a brief on November 15, 2017. Br. for Appellant (ECF No. 6) (Smith Br.). On December 15, 2017, MRS filed its response. Br. for Appellee (ECF No. 8) (MRS Br.). On December 29, 2017, Mr. Smith filed his reply. Reply Br. for Appellant (ECF No. 9) (Smith Reply).

         II. LEGAL STANDARD

         “On intermediate appeal to a district court, a final order of the bankruptcy court is subject to the same familiar standards of review normally employed in direct appeals to the courts of appeals in civil cases generally.” In re LaRoche, 969 F.2d 1299, 1301 (1st Cir. 1992). “The district court accepts all bankruptcy court findings of fact unless ‘clearly erroneous, ' . . . but reviews rulings of law de novo.” Id. (citing Fed.R.Bankr.P. 8013, Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir.1988)); see also In re DN Assocs., 3 F.3d 512, 515 (1st Cir. 1993).

         III. THE PARTIES' POSITIONS

         A. Leland S. Smith, Jr.'s Brief

         Mr. Smith advocates for the interpretation adopted by the majority of courts to consider the scope of § 362(c)(3)(A)'s termination of the automatic stay, including the First Circuit Bankruptcy Appellate Panel (BAP). Smith Br. at 3 (citing In re Jumpp, 356 B.R. 789 (B.A.P. 1st Cir. 2006), In re Witkowski, 523 B.R. 291 (B.A.P. 1st Cir. 2014) (reaffirming Jumpp)). The majority view is that the words “with respect to the debtor” distinguish between the debtor and the debtor's non-estate property on the one hand, and the property of the estate on the other, such that the automatic stay only terminates with respect to the former, not the latter. Id. at 6. Mr. Smith argues against the minority view, which is that the words “with respect to the debtor” do not create a distinction between the debtor and the debtor's property on the one hand, and the property of the estate on the other, such that the automatic stay terminates with respect to all three categories. Id. at 7. Rather, many minority view courts interpret the phrase “with respect to the debtor” as drawing a distinction between the repeat-filing debtor and any non-repeat-filing spouse in a joint case. Id. Mr. Smith argues that the meaning of § 362(c)(3)(A) is plain, and thus any resort to legislative history is improper. Id. at 8-10. He points out that the numerous automatic stay provisions of § 362(a) draw distinctions between actions or acts against the debtor, property of the debtor, and property of the debtor's estate, invoking the principle that Congress knew how to refer to these different categories. Id. at 11-12. Mr. Smith contends that the minority view improperly adds the words “property of the estate” into the provision when they do not appear there, id. at 12, or else improperly reads the phrase “with respect to the debtor” out of the statute. Id. at 15-16. He also claims that the words “with respect to the debtor” only have meaning in joint cases under the minority view, but § 362(c)(3)(A) is written to apply to “a single or joint case.” Id. at 19.

         B. MRS's Brief

         MRS advocates for the minority view, which does not except actions against “property of the estate” from the termination of the automatic stay. MRS Br. at 6-7 (citing St. Anne's Credit Union v. Ackell, 490 B.R. 141 (D. Mass. 2013); In re Reswick, 446 B.R. 362 (9th Cir. BAP 2011)). The minority view does not interpret the text as drawing a distinction between the debtor and the debtor's property on the one hand and property of the estate on the other, rather MRS interprets the words “with respect to the debtor” as drawing a distinction between the serial-filer debtor and the non-serial-filer spouse. Id. MRS suggests that textual distinctions between jointly-filing spouses are common in the Bankruptcy Code. Id. at 16.

         MRS argues that it is the majority view, and not the minority, that reads extra words into the statute because it reads the phrase “with respect to the debtor” to also include the “debtor's non-estate property.” Id. at 8. MRS suggests that the majority view's conclusion that the phrase “with respect to the debtor” is meant to exclude certain property cannot be reconciled with § 362(c)(3)(A)'s reference to actions against “property securing [a] debt.” Id. at 11. MRS criticizes attempts by some majority view courts to use the definition of a “claim” under § 102(2) to import a property distinction to words only referring to the “debtor.” Id. at 13-14. MRS suggests that any textual differences between § 362(c)(3) and § 362(c)(4) are insignificant. Id. at 24-26.

         MRS places considerable weight on § 362(c)(3)(B) and § 362(c)(3)(C), which discuss the standard for establishing that a second petition is in good faith and thus eligible for an extension of the stay. Id. at 9-10. MRS argues that the majority view renders these lengthy provisions meaningless, because there will rarely be any need to file for an extension of the stay if property of the estate is exempted from termination, as most, if not all, of the important assets are property of the estate in most, if not all, cases Id. at 9-10, 15. MRS emphasizes that the majority view renders § 362(c)(3)(A) “devoid of practical effect” because everything of value to creditors constitutes property of the estate, and thus would remain protected after the thirty-day window. Id. at 17-18. MRS argues that the majority view's “toothless” interpretation violates the purpose of the statute, which is to curb abuse of the automatic stay by repeat-filers, and MRS presents a legislative history it believes supports its view of the statutory purposes. Id. at 18-22.

         C. Leland S. Smith, Jr.'s Reply Brief

         Mr. Smith highlights the facts that the phrase “with respect to the debtor” appears in § 362(c)(3)(A) but not in §362(c)(4)(A)(i), which negates the automatic stay entirely for debtors who had two prior pending cases in the preceding year. Smith Reply at 1-3. Mr. Smith also asserts that the minority view renders the phrase “with respect to the debtor” meaningless in cases like this one, where the debtor is a single filer in both the instant and prior case, because there is no non-repeat-filer-spouse for the phrase to distinguish. Id. at 4.

         Mr. Smith claims the minority view's interpretation is inconsistent with other provisions in the Bankruptcy Code which refer to the debtor's spouse because they show that Congress knew how to draw that distinction by using the word “spouse” and it chose not to do so in § 362(c)(3)(A). Id. at 8. Mr. Smith also chides the minority view for frequently relying on legislative history, because it is inappropriate to rely on legislative history when the plain meaning of the text is clear. Id. at 9-10.

         IV. THE DECISION OF THE BANKRUPTCY JUDGE

         The Bankruptcy Judge framed the question of statutory interpretation:

Section 362(c)(3) sits between two ends of a spectrum. At one end of this spectrum, the stay is automatic. The stay springs into effect upon the filing of a petition, and the Court has no role in its creation. See 11 U.S.C. § 362(a). This occurs when an individual files her first petition under title 11. At the other end of the spectrum, the stay is not created automatically and does not go into effect on the filing of a petition. This occurs when an individual becomes a debtor in any type of title 11 case if that individual had two or more “single or joint cases” dismissed within the previous year. See 11 U.S.C. § 362(c)(4)(A). When section 362(c)(4) is triggered, the Court can impose a stay, see 11 U.S.C. § 362(c)(4)(B), but the stay does not arise automatically. The dispute in this contested matter arises out of the need to determine exactly where, on this spectrum, section 362(c)(3) resides.

Bankr. Ct. Order at 9. The Bankruptcy Judge reviewed the competing interpretations of §362(c)(3)(A), id. at 4-5, and concluded that, after the thirty-day window, the automatic stay “ceases to protect the repeat-filing debtor and all of that debtor's property, including property of the debtor's estate.” Id. at 1.

         The Bankruptcy Judge thought that the words “the stay under subsection (a)” indicated that the stay extended to all of the types of acts covered by the stay, meaning that termination of the stay “would seem to leave no part of the stay in place.” Id. at 6. The Bankruptcy Judge also said the minority view, which creates a distinction between the debtor and the debtor's spouse, was consistent with the opening phrase of § 362(c)(3)(A), which refers to single or joint cases. Id. at 6-7.

         The Bankruptcy Judge also looked to the legislative history. Id. at 7-8. The disputed language traces back to the National Bankruptcy Review Commission in the mid-1990's. Id. The Bankruptcy Judge concluded that the legislative history showed that Congress was concerned about the problem of successive bankruptcy filings interfering with foreclosures and sought to remedy that problem by terminating the stay after thirty days for repeat-filers. Id. The Bankruptcy Judge critiqued the majority view for ignoring “the statute's manifest purpose.” Id. According to the Bankruptcy Judge, it is unlikely that Congress intended to insulate the property of the estate after thirty days “given that the practical effect of terminating the stay on day thirty only as to the debtor and the debtor's property would be negligible at best.” Id. at 10-11.

         The Bankruptcy Judge also cited the statutory presumption that a repeat-petition was not filed in good faith but gives parties in interest the opportunity to rebut that presumption by clear and convincing evidence. Id. at 12-13. Under the majority view, the automatic stay would continue to insulate property of the estate after thirty days, even in those cases where the debtor moved to extend the stay and a bankruptcy court determined that the debtor failed to rebut the presumption that the filing was in bad faith. Id. “It makes little sense to conclude that Congress meant to protect most, if not all, of a debtor's property - by virtue of its status as property of the estate - in a case that was, at least presumptively, not filed in good faith.” Id. at 13-14.

         For those reasons, the Bankruptcy Judge concluded that the automatic stay terminated in its entirety, meaning that MRS was “no longer stayed, under section 362(a), from continuing the exercise of its rights and remedies against Mr. Smith or his property, even if such property is part of his bankruptcy estate.” Id. at 14.

         V. DISCUSSION

         A. The Automatic Stay Provisions

         Section 362 of the Bankruptcy Code contains what is known as the automatic stay. 11 U.S.C. § 362(a). However, the automatic stay is affected in cases where a debtor has filed one or more cases within the year of the latest filing that were dismissed:

Except as provided in subsections (d), (e), (f) and (h) of this section-
. . .
(3) 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 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b)-
(A) the stay under subsection (a) 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 ...

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