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In re Smith

United States Court of Appeals, First Circuit

December 12, 2018

IN RE: LELAND S. SMITH, JR., Debtor.
v.
STATE OF MAINE BUREAU OF REVENUE SERVICES, Appellee. LELAND S. SMITH, JR., Appellant,

          APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE [Hon. John A. Woodcock, Jr., U.S. District Judge]

          Christopher J. Keach, with whom James F. Molleur and Molleur Law Office were on brief, for appellant.

          David Yen and Tara Twomey on brief for National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys, amici curiae.

          Kevin J. Crosman, Assistant Attorney General, with whom Thomas F. Knowlton, Assistant Attorney General, was on brief, for appellee.

          Before Lynch, Stahl, and Barron, Circuit Judges.

          LYNCH, CIRCUIT JUDGE.

         Maine's Bureau of Revenue Services (MRS) has a claim for a tax debt owed by Leland Smith, a repeat Chapter 13 bankruptcy filer. In this appeal, MRS and Smith dispute the scope of the termination of the Bankruptcy Code's automatic stay for repeat filers like Smith who file a second petition for bankruptcy within a year of the dismissal of a prior bankruptcy case. See 11 U.S.C. § 362(c)(3)(A).

         The filing of a petition for bankruptcy stays collection actions against the debtor, the debtor's property, and property of the bankruptcy estate. See id. § 362(a). Yet § 362(c)(3)(A) provides that "if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed," id. § 362(c)(3), then this automatic stay "shall terminate with respect to the debtor on the 30th day after the filing" of a petition for bankruptcy, id. § 362(c)(3)(A) (emphasis added). Before the end of the thirty-day period, the bankruptcy court "may extend the stay" if the debtor or a creditor shows "that the filing of the [second] case is in good faith." Id. § 362(c)(3)(B).

         This case presents an important question, one of first impression in the courts of appeals: Does § 362(c)(3)(A) terminate the automatic stay as to actions against property of the bankruptcy estate? Courts have divided. Some have held that § 362(c)(3)(A) terminates the stay in its entirety, allowing actions against the debtor, the debtor's property, and property of the bankruptcy estate. Others have held that it terminates the stay only in part, allowing actions against the debtor and the debtor's property to go forward, but preserving the stay as to actions against estate property.

         On this close question, we hold that § 362(c)(3)(A) terminates the entire stay thirty days after the filing of a second petition. We note that this 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.

         Our holding that § 362(c)(3)(A) terminates the entire stay is based on the provision's text, its statutory context, and Congress's intent in enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and § 362(c)(3)(A). We first evaluate the parties' textual arguments and, finding that they do not resolve the issue, next consider the statutory context and congressional purpose. We ultimately decide that MRS's reading is the only one compatible with the text, seen in light of its context and purpose.

         We affirm the decision of the bankruptcy court, In re Smith, 573 B.R. 298 (Bankr. D. Me. 2017), which was also affirmed by the district court, Smith v. Me. Bureau of Revenue Servs., 590 B.R. 1 (D. Me. 2018).

         I.

         Leland Smith's first Chapter 13 case, filed in August 2011, was dismissed in October 2014 when Smith failed to make the payments required under his Chapter 13 bankruptcy plan.[1] Two months later, in December 2014, Smith filed another Chapter 13 petition. This was also dismissed, in November 2016, because Smith failed to make required payments. A month later, on December 28, 2016, Smith filed the Chapter 13 bankruptcy petition underlying this appeal. Smith's last two cases, which were both pending in the same one-year period, cause § 362(c)(3)(A) to apply.

         Smith's December 2016 petition identified two priority creditors -- the Internal Revenue Service and MRS. MRS has proven that Smith owed $51, 596.53 in state taxes, interest, and penalties. Smith also identified numerous general unsecured creditors with claims, including for unpaid credit card and medical bills. In total, Smith said he owed almost $200, 000.

         The bankruptcy court eventually confirmed a plan in Smith's December 2016 Chapter 13 case, under which Smith must pay the trustee $800 per month for 60 months.

         While this Chapter 13 plan was being considered, Smith and MRS disputed the scope of the automatic stay. Under § 362(a) of the Bankruptcy Code, Smith's December 2016 petition "operate[d] as a stay" of eight types of actions against Smith, Smith's property, and property of the bankruptcy estate. See 11 U.S.C. § 362(a). Neither Smith nor another "party in interest," like a creditor, had moved "for continuation of the automatic stay," as allowed under § 362(c)(3)(B). As a result, by January 27, 2017, thirty days after the filing of his December 2016 petition, some part of the stay had terminated under § 362(c)(3)(A), the provision we construe in this case.

         At a hearing in the bankruptcy court in February 2017, MRS moved for an order under § 362(j) "confirming" the extent to which the automatic stay had terminated. Id. § 362(j). MRS argued that § 362(c)(3)(A) had terminated the automatic stay in full on January 27. Smith argued in opposition that § 362(c)(3)(A) --specifically, the phrase "with respect to the debtor" -- meant that the stay terminated on January 27 only as to actions against the debtor and the debtor's property, not as to actions against the property of the bankruptcy estate.

         At the hearing, MRS explained that it had not yet taken any action to collect estate property and that it sought clarification because it "d[id]n't want to take the position that the automatic stay is not applicable, then only to have a lawsuit slapped on" if it later chose to do so. See id. § 362(k)(1) (allowing "an individual injured by any willful violation of a stay" to sue and "recover actual damages"). MRS explained at oral argument, for example, that it might later bring an action to collect estate property if Smith were to default on his plan payments.

         The bankruptcy court ruled that the automatic stay had terminated in full, including as to property of the estate. Smith, 573 B.R. at 299. As mentioned, the district court affirmed. Smith, 590 B.R. at 19.

         We directly examine the bankruptcy court's decision. See Irving Tanning Co. v. Kaplan, 876 F.3d 384, 389 (1st Cir. 2017). There are no disputes about the facts, so we proceed to reviewing the bankruptcy court's legal conclusion de novo. Id.

         II.

         We begin with a close look at the provision's text and the parties' textual arguments.

         A. Statutory Background

         The filing of a petition to begin a bankruptcy case under Chapters 7, 11, or 13 "operates as a stay" of certain actions in three categories: against the debtor, the debtor's property, and property of the bankruptcy estate. 11 U.S.C. § 362(a). More specifically, the filing of a petition stays:

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.

Id. § 362(a).

         The automatic stay is a "fundamental . . . protection[] provided by the bankruptcy laws." Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Prot., 474 U.S. 494, 503 (1986) (quoting S. Rep. No. 95-989, at 54 (1978); H.R. Rep. No. 95-595, at 340 (1977)). It serves several goals of bankruptcy. It offers debtors "breathing room" during the period of financial reshuffling. Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 975 (1st Cir. 1997). The stay also protects the debtor's assets from "disorderly, piecemeal dismemberment . . . outside the bankruptcy proceedings." Mann v. Chase Manhattan Mortg. Corp., 316 F.3d 1, 3 (1st Cir. 2003). And it "enabl[es] 'the bankruptcy court to centralize all disputes concerning property of the debtor's estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings.'" SEC v. Miller, 808 F.3d 623, 630 (2d Cir. 2015) (quoting U.S. Lines v. Am. S.S. Owners Mut. Prot. & Indem. Ass'n (In re U.S. Lines, Inc.), 197 F.3d 631, 640 (2d Cir. 1999)); see also Sunshine Dev., Inc. v. F.D.I.C., 33 F.3d 106, 114 (1st Cir. 1994) (same).

         Congress, concerned about abuses of the automatic stay, altered the stay's applicability to repeat-filing debtors like Smith in BAPCPA. Before BAPCPA, the automatic stay "remain[ed] in force" for all filers until specific judicial action lifted or modified it, or until the end of the bankruptcy ...


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