Circuit Split Emerges Regarding the Duration of Automatic Stay for Serial Bankruptcy Filings
When Congress amended the Bankruptcy Code in 2005, it intended to curb serial filings by debtors that were made to stay mortgage foreclosures. One amendment added Bankruptcy Code § 362(c)(3).
Section 362(c)(3) provides that if an individual debtor had filed a bankruptcy case that was dismissed within one year before the second case was filed, then the automatic stay of actions against the debtor, or with respect to property securing a debt, terminates “with respect to the debtor” 30 days after the second case’s filing date, unless the court extends the stay before the 30-day period expires.
Since the enactment of Section 362(c)(3), courts are divided over whether the phrase “with respect to the debtor” means that the automatic stay will only terminate as to the debtor and any property of the debtor that is not part of the bankruptcy estate (such as exempt property), or whether the automatic stay will terminate as to all property, including property of the bankruptcy estate.
Most courts have ruled that Section 362(c)(3) does not terminate the stay as to property of the bankruptcy estate. Therefore, under this majority rule, a lender will be required to obtain relief from the stay to foreclose a lien on property of the bankruptcy estate, even though the stay was terminated under Section 362(c)(3) as to actions against the debtor and any property not within the bankruptcy estate.
The latest court to adopt the majority rule is the U.S. Court of Appeals for the Fifth Circuit in Rose v. Select Portfolio Servicing, Inc. The Fifth Circuit’s decision has created a circuit split. In an earlier decision, the U.S. Court of Appeals for the First Circuit, in In re Smith, adopted the minority rule, holding that the automatic stay terminated as to all property under Section 362(c)(3).
Practice Pointer: The U.S. Supreme Court and the U.S. Court of Appeals for the Fourth Circuit have not ruled on the issue. However, the Maryland Bankruptcy Court has adopted the majority rule. Unless the Maryland Bankruptcy Court is reversed, mortgage holders in Maryland would be well-advised to obtain relief from the stay before foreclosing a lien on property of the bankruptcy estate, even if the debtor previously filed a bankruptcy case that was dismissed within one year prior to the filing of a second case.
Please contact Lawrence D. Coppel for any questions concerning this topic.