Are debtors getting another attempt to extend or impose the Automatic Stay in cases where there is no Automatic Stay in effect?
Pursuant to 11 U.S.C. §362(c)(3), the automatic stay shall terminate on the 30th day after the filing of the later case of a single or joint case of the debtor that was pending within the preceding one-year period but was dismissed other than a Chapter 7 dismissal under Section 707(b). If the debtor failed to file a motion to extend the stay, the stay shall terminate with respect to the debtor on the 30th day after the filing of the later case.
Pursuant to 11 U.S.C. §362(c)(4), no automatic stay is in effect since the filing of the bankruptcy case where the debtor had 2 or more bankruptcy cases within the previous year that were dismissed. If the debtor fails to file a motion to impose the stay in cases where there have been two dismissals within the last 365 days, no stay is in effect. Creditors are not bound by the automatic stay and they can proceed with collection and/or foreclosure proceedings.
The purpose of Sections 362 (c) (3) and (4) was to discourage bad faith repeat filings. It was able to accomplish this by limiting the effect of the Automatic Stay.
However, what happens when the debtor fails to file the motion to extend or impose the automatic stay, but the debtor provides for treatment for a creditor and said debt in the Chapter 13 plan, especially in Districts where the confirmed Chapter 13 plan controls.
This situation most often occurs with respect to mortgage companies where the debtor is in default under the terms of the note and mortgage. Even though the stay is not in effect or the stay has not been extended, the debtor still provides language in the Chapter 13 plan for the cure of pre-petition mortgage payments and provides to maintain the post-petition mortgage payments. Creditors, most often a mortgage company, will be bound by the terms of the confirmed plan even though there is no stay at case filing pursuant to §362(c)(4) or after 30 days pursuant to § 362(c)(3).
There is little case law addressing this issue. However, the case law on point seems to support imposition of the automatic stay through the binding effects of the confirmation order.
The debtor in In re Dyer had filed a prior case that was dismissed and the automatic stay terminated in their second case by operation of 11 U.S.C. 362(c)(3). In re Dyer, 489 B.R. 637 (6th Cir.BAP, 2013). The bankruptcy court denied confirmation of the debtors’ plan for lack of an automatic stay. However, the appellate court vacated the denial of confirmation ruling as follows “that there is no per se requirement for confirmation that the debtors obtain an extension of the automatic stay[.]” Id.
When creditors have an order confirming the absence of the automatic stay, “[i]f a debtor is able to propose and confirm a Chapter 13 plan before a foreclosure sale takes place, the secured creditor may be bound thereby, regardless of whether the stay has terminated. “In re Murphy, 346 B.R. 79 (Bkrtcy. S.D.N.Y., 2006).
Was it legislative intent to give debtors another chance to have the automatic stay bind creditors by a confirmed plan?
In 1994, Congress formed the National Bankruptcy Review Commission to address abusive filings by debtors. In part, the Commission reported to Congress as follows:
Some debtors file for Chapter 13 ... on the eve of a foreclosure or eviction for the sole purpose of delaying the state legal process. When the threat passes, they dismiss their cases, only to file again when the mortgagee or landlord brings another legal action to seize control of the property. The ability to file repeatedly for Chapter 13 relief increases a debtor’s leverage in negotiations with creditors. NAT’L BANKR. REVIEW COMM’N, BANKRUPTCY: THE NEXT TWENTY YEARS, 1, 281 n.731–32 (October 20, 1997)
In 1998, the House Judiciary Committee released a report which included Section 121 "Discouraging Bad Faith Repeat filings." This section remedied the problem with the termination of the Stay in certain situations. However, there is little evidence of legislative intent when the issue described in this article arises.
What option(s) does the mortgage company have?
When there is no stay in effect, the presumption of bad faith has not been rebutted by the debtor. The mortgage company can file an objection to a plan on that basis even if the plan otherwise properly provides for their claim. In order to confirm a plan, 11 U.S.C. Section 1325(a)(3) requires the plan to be proposed in good faith, and 11 U.S.C. Section 1325(a)(7) requires that the action of the debtor in filing the petition was in good faith.
At confirmation, the court would essentially hold a hearing on "bad faith" that should have been held at the hearing on the Motion to Extend or Impose the Stay. The debtor has to rebut the presumption of "bad faith" if the motion to extend or Impose stay is contested. This can usually be accomplished by the debtor showing a positive change in circumstances. Mortgage companies can also file a motion to Dismiss the debtor's case upon the same grounds. However, courts look at more than just the failure to file a motion to extend or impose the stay by the debtor in determining "bad faith."
Mortgage companies may still proceed with foreclosure prior to the plan being confirmed as there is no stay in effect. However, if the plan is confirmed prior to the mortgage company being able to complete the foreclosure sale on the subject property, then the mortgage company is bound by the terms of the confirmed plan and can no longer proceed with their state court remedies. Pursuant to Section 1324, the confirmation hearing may be held no earlier than 20 days and not later than 45 days after the date of the meeting of creditors under Section 341(a). This provides a very small window of time for mortgage companies to complete their state court actions.
Several unanswered questions arise pre- and post-confirmation of the debtor’s chapter 13 plan. In pre-confirmation scenarios, mortgage companies seem to have two options where the debtor provides for the creditor in the plan even though no stay is in effect: 1) file an objection to confirmation of the plan based upon "bad faith" of the debtor, or 2) proceed with foreclosure action and attempt to sell the property prior to confirmation of the plan. It may just be a race to the foreclosure sale for mortgage companies before the plan is confirmed. In post-confirmation scenarios, what happens when the Debtor is in default under the terms of the confirmed plan? Can the mortgage company simply proceed or is it necessary to file a motion to dismiss and/or motion for relief?
This issue raises more questions than answers. Only future rulings will dictate how the parties may proceed.