Connecticut District Court and Bankruptcy Court Differ on Extent to Which the Automatic Stay Automatically Terminates Upon Second Bankruptcy Filing

by Pullman & Comley, LLC

Under §362(c)(3)(A), when a debtor files a second bankruptcy case within one year after the first case, the automatic stay in the second case will automatically terminate “with respect to the debtor” on the 30th day of the case unless, within that 30 day period, the debtor files a motion to extend the stay and the bankruptcy court grants it.  The District Court ruled this past April in Chekroun v. Weil (Weil), No. 3:12-cv-462 (D.Conn. April 29, 2013) that §362(c)(3)(A) terminates just with respect to the debtor, but not with respect to property that remains property of the estate.  Thus, under this decision, acts against property that has not been abandoned by the estate as of the 30th day of the case will remain subject to the automatic stay notwithstanding §362(c)(3)(A).

In Weil, the debtor filed a motion to extend the stay after a second bankruptcy case was filed in order to stay the completion of a foreclosure action against certain of his real property.  However, the Bankruptcy Court (Shiff, J.) did not hold a hearing on the motion until months later, at which time it was granted.

The secured creditor appealed on the ground that by the time the hearing was held, the stay had already expired by operation of § 362(c)(3)(A).  Although the district court agreed that the stay terminated, it was pyrrhic victory for the secured creditor because the court read § 362(c)(3)(A) literally to provide that the stay terminates just “with respect to the debtor,” not with respect to property that remains property of the estate.  Because the secured creditor’s mortgage foreclosure action pertained to property that was still property of the estate, the court held that the automatic stay of acts against that property, specifically the property against which the secured creditor held a mortgage, did not automatically terminate under § 362(c)(3)(A).  Under these circumstances, it described the bankruptcy court’s untimely order extending the stay as “ineffective,” but then explained that “as a practical matter, . . . [it was] also largely unnecessary and legally harmless.”

The district court’s reading of § 362(c)(3)(A) essentially renders the limited 30-day stay meaningless for all secured creditors since, as a practical matter, their collateral will remain property of the estate until abandoned, which is not likely to occur until well after the 30-day period expires.

In the recent decision of In re Wilson 2014 WL 183210 (Bankr. D. Conn. Jan. 15, 2014), the Bankruptcy Court (Dabrowski, J.) disagreed with the holding in Weil and instead concurred in and adopted the reasoning of the 9th Circuit Bankruptcy Appellate Panel in In re Resnick, 446 B.R. 362 (9th Cir. BAP 2011), which found that §362(c)(3)(A) terminated the automatic stay in its entirety on the 30th day after the petition date unless the stay was extended by the bankruptcy court within the 30-day period.

In Wilson, the debtor had filed three previous bankruptcy proceedings in order to stay foreclosure proceedings against his real property.  A fourth case was filed on May 16, 2013 and on May 22, the debtor filed a motion to extend the stay which was denied on June 13, 2013.

Nevertheless, the secured creditor filed a motion for relief from stay in response to the debtor’s assertion that, as a result of the Weil decision, 362(c)(3)(A) terminated the automatic stay only with respect to the debtor and not with respect to property of the estate.  Relying on the Resnick decision, the bankruptcy court concluded that in light of the denial of the debtor’s motion to extend it, the automatic stay terminated in its entirety on June 15, 2013 by operation of §362(c)(3)(A).  In accordance with this determination, the bankruptcy court found that the motion for relief from stay was unnecessary, as the secured creditor had been, since June 15, 2013, free to commence, continue and prosecute to judgment the pending foreclosure action.In rendering his decision, the bankruptcy court acknowledged that the majority of the courts to address this issue conclude that §362(c)(3)(A) terminates the automatic stay only with respect to the debtor and not with respect to the property that remains property of the estate.  The decision is a clear victory for secured creditors who will now have a greater chance of not being held hostage in the bankruptcies of serial filers.

An interesting side issue that went unmentioned in Wilson is whether the bankruptcy court, as a unit of the district court, was bound to follow Judge Underhill’s decision in Weil  even though the bankruptcy court disagreed with it.  Although there is a split of authority nationally as to whether the decision of a single district court judge in a multi-judge district is binding on a bankruptcy court in the same district, Judge Dabrowski has ruled on two previous occasions that the bankruptcy court is not so bound.  See In re Koper, 284 B.R. 747, 755 (Bankr. D. Conn. 2002); In re Carrozella & Richardson, 255 B.R. 267, 272 (Bankr. D. Conn. 2000).

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Pullman & Comley, LLC

Pullman & Comley, LLC on:

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