Judge Isgur Holds that the Automatic Stay Doesn't Apply to Ineligible Debtors Under BAPCPA Who Failed to Get Credit Counseling

Houston's Bankruptcy Judge Marvin Isgur again takes the forefront in interpreting BAPCPA's thorny provisions (as he did here, here, and here), this time issuing a controversial opinion on whether the automatic stay applies to ineligible debtors whose cases have been dismissed under BAPCPA for lack of credit counseling. In re Salazar, 2006 WL 827842 (Bankr. S.D. Tex., 3/29/06) (pdf).

Having previously dismissed the debtor's petition because the debtor failed to obtain credit counseling in advance of the filing of the petition, Judge Isgur was then asked to decide whether the automatic stay applied during the period between the time of the filing of the petition and the time the Court declares the debtor ineligible under BAPCPA's Code section 109(h).

What was at stake? A lot, for the debtor's friendly neighborhood subprime lender (Ameriquest Mortgage) had done what most lenders won't do without a court order; that is, proceed wilfully postpetition with a pending foreclosure sale without first obtaining relief from the automatic stay. Because actions in violation of the automatic stay are generally deemed void (not merely voidable), application of the automatic stay to the period between the ineligible debtor's filing and the close of the debtor's case would render the foreclosure a nullity. In dictum, Judge Jeffery A. Deller concluded just that in In re Tomco, 2006 WL 459347 (Bankr. W.D. Pa., 2/27/06) (pdf) (while disagreeing with Judge Cecelia G. Morris's dictum in In re Rios, 336 B.R. 177, 180 n.2 (Bankr. S.D.N.Y. 2005) (pdf) about BAPCPA's "less automatic" stay).

Judge Isgur, however, reached a contrary result. His ruling appears to be the first actual decision on the merits nationwide, and his conclusions couldn't have been clearer. He wrote:

[I]t is implausible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy's most powerful protection: the automatic stay. Both logic and the statute dictate that no automatic stay arises on the filing of a petition by an ineligible person�. [T]he relevant statutory language leaves no room for discretion. (Emphasis in original.)

This opinion won't win Judge Isgur much praise from those looking to judges to "subvert" (to use Professor Jean Braucher's framework discussed here) BAPCPA's less palatable provisions. But the result, he ruled, was dictated by applying simple logic to the answers reached on the following three questions:

(1) When does the stay takes effect under Code section 362?


(2) When is a petition filed under Code sections 301 and 302?

(3) Who may be a debtor under Code section 109?

Applying straight-forward, syllogistic logic, Judge Isgur essentially concluded that Congress had so tied his hands that there was nothing he could do to unwind the postpetition foreclosure sale of the hapless debtor's home. He wrote:

[W]hen read together, §§ 109(h), 302, and 362(a) establish that no stay can exist for debtors who fail to obtain the required credit counseling or qualify under an exception. The syllogism is as follows:


  • Individuals who have not received credit counseling and who do not qualify for a waiver are not eligible to be debtors under § 109.
  • Only eligible individuals may file a petition under § 302.
  • Without the filing of a petition under § 302, the automatic stay provisions set forth in § 362 are not invoked.

Judge Isgur could have finished there and moved on to another of the 11,000 cases on his docket, as the hard-nosed lobbyists who drafted BAPCPA and crammed it down everyone's throats intended, but Judge Isgur wasn't so easily shaken from his judicial roots and felt compelled to delve into the problematic practical implications of his ruling. He wrote:

The Court is aware that the practical implications of this ruling are problematic in determining whether a stay exists. It is true that an ineligible debtor is temporarily protected by a delay when a creditor chooses to wait for an eligibility determination before taking action that would otherwise violate a valid stay. Without question, there would be more certainty without the ambiguity that exists in the gap between filing and the eligibility determination. Creditors who act in the face of ambiguity may face repercussions if it is determined that they violated the automatic stay. The law contains both mechanisms to handle violations of a valid stay, and mechanisms to punish ineligible debtors who file to wrongfully seek shelter under the automatic stay provisions.


Nevertheless, the Court is unaware of any reason that precludes Congress from creating a level of uncertainty pending a final determination by the Court. One need not look far for examples of where Congress has determined that uncertainty--that produces a chosen outcome--is better than certainty that produces an undesirable outcome. Actions taken in violation of the automatic stay are sometimes void. Other times, the automatic stay is retroactively annulled in order to validate the conduct�. By allowing actions taken in violation of the stay to be annulled, Congress chose to allow those actions to be subject to uncertainty until a final decision is reached.

Finally, Judge Isgur analyzed the raging debate over whether the petition of an ineligible debtor under Code section 109(h) is being "stricken" or "dismissed," but pushed it aside as irrelevant based on Congress's clear intent in BAPCPA to deprive the protection of the automatic stay to debtors found ineligible under Code section 109(h) based on a lack of credit counseling. He wrote:

Regardless of what terminology is used -- strike, dismiss, etc. -- no stay arose if the petition did not satisfy §§ 301, 302 or 303.... Because the Court sees no distinction between "dismissing the petition" (as described in chapter 9) and "striking the petition" (as described in the order pending reconsideration), the Court declines to modify its order for any semantic reasoning.

Judge Isgur certified the decision for direct appeal to the Fifth Circuit, and a timely notice of appeal was filed on Friday, April 7. This would be a good time for those amici on both sides of the issue to weigh in, for the Fifth Circuit loves to argue about bankruptcy, and there's surely much to argue about here.

© Steve Jakubowski 2006

Written By:Jack Luce On April 12, 2006 11:35 AM

The issue of Debtor eligibility continues to be an important one, which the earlier Valdez case brought to light in an excellent fashion. For those unfamiliar with it, I provide an analysis that may be helpful:


§ 109(h) dismissals and § 362(c) - Strike Three or Foul Ball?

If a debtor's case is dismissed for failure to obtain prepetition credit counseling under new Code § 109(h), does this count as a "strike three" against the debtor in a subsequent case for purposes of terminating the automatic stay? This question is of paramount importance under BAPCPA's amendment to Code § 362(c), which provides for a termination of the automatic stay in subsequent cases. Specifically, new Code § 362(c)(3) terminates the automatic stay after 30 days in a subsequent case filed by a debtor whose prior case was dismissed within the past year. Likewise, if the debtor has had more than one case dismissed within the past year, new Code § 362(c)(4) nullifies the stay in its entirety. (Limited exceptions are available under both).

There have been a few dozen reported opinions involving debtors that failed to obtain prepetition credit counseling but requested waivers under either of the exemptions. In many instances, the courts, after carefully parsing the text of § 109(h), find the exemptions inapplicable and dismiss the case for failure to satisfy the new eligibility requirements. However, the earlier opinions have not focused on the logical conclusion that a dismissal based on ineligibility results in the attempted filing being void ab initio.

Nevertheless, at least one recent case has carefully considered the issue, holding that a § 109(h) dismissal on eligibility grounds does not count as a prior dismissal in a subsequent case for purposes of § 362(c). See In re Valdez, 335 B.R. 801 (Bkrtcy. S.D. Fla. 2005). In Valdez, a pro se individual filed a chapter 13 petition to prevent foreclosure on her home. She had not sought prepetition credit counseling because she was unaware of the requirement. Thus, the lack of an attempt to obtain credit counseling before filing precluded an exemption notwithstanding the exigency of the imminent foreclosure. The court had no choice but to dismiss her case because she was ineligible to be a debtor. In so doing, the court poignantly questioned "Is it the intent of Congress that poor, ignorant persons who do not know the law and cannot afford to obtain the advice of counsel are to be denied protection and assistance of the Bankruptcy Code which is available to more affluent and better educated persons?" Id. at 803. However, as part of the dismissal, the Court aptly took notice of the distinction between a dismissal due to ineligibility versus a dismissal due to nonperformance or bad faith, and found that the former is jurisdictional. As result, it did not count as a strike against the individual if, as expected, she were to refile. "Because the petition failed to provide [the individual] status as a debtor, the Court will not consider this a dismissed case in which the individual was the debtor, for purposes of denying the imposition of the automatic stay in a subsequently filed case pursuant to 11 U.S.C. § 362(c)(3) or (c)(4)." Id.

The result in Valdez is supported by the plain, unambiguous language of § 362(c)(3) which applies only where a prior "case of the debtor was pending within the preceding 1-year period." In other words, if an individual was not eligible to be a debtor in the first place, how can one argue soundly that the unsuccessful attempt to become a debtor should count as a prior "case pending" for purposes of terminating the automatic stay upon re-filing?

Perhaps an argument can be made that the dismissal should count as a prior case because the illegitimate debtor received the benefit of the automatic stay during the short-lived duration of the case. However, this argument appears to ring hollow because the automatic imposition of the stay occurs by operation of law in all voluntary cases upon filing of the petition. See 11 U.S.C. §§ 301(a), 362(a). Thus, if a railroad or bank were to file a voluntary chapter 7 petition, it would enjoy the benefits of the stay for a brief period until the case were dismissed for ineligibility under § 109(b). Ironically, even Donald Duck could file a petition and enjoy a very brief automatic stay until the Court discovered his ineligibility. Would anyone dare argue that Donald actually had been a debtor in a pending case?

Thus, as courts are expressing discomfort at the harsh result obtained by interpreting the plain, unambiguous meaning of § 109(h), they should take solace in utilizing the same standards of statutory construction to conclude, as the Valdez court did, that the plain, unambiguous meaning of § 362(c) renders it inapplicable to jurisdictional dismissals under § 109(h). In other words (and to borrow from baseball parlance), a 109(h) dismissal is not a "strike three" under the new automatic stay provisions - at worst, it's nothing more than a "foul ball."

Written By:Karen Kline On May 12, 2006 11:07 AM

I just cited a series of cases in the state district court, New Mexico, on Tuesday and the judge questioned whether the stay made serving of the Amended Complaint void, or voidable. I said the cases said Void. But he disregarded that, so I'm wondering if indeed it is still true.

Here's the newspaper account of what happened in court:
http://www.freenewmexican.com/news/43548.html

I have a question, do you know the name off-hand of that case that talks about the stay... it has the same name as the man who was early on involved in the Timothy McVeigh case, but not Terry Nichols. I think the name starts with F and sounds French.

Written By:Jean Braucher On June 2, 2006 6:04 PM

You refer to my comments at a recent symposium concerning "subtle subversion" in certain judicial opinions, but my idea is not about subversion of the Code but subversion of creditor designs to have pointless, burdensome requirements keep honest but unfortunate debtors from having access to bankruptcy, designs that were not expressed in statutory language in many instances but which are now appearing as legal arguments.
On the issue of the debtor who files without counseling, it is important to keep in mind that Section 109(h) is silent about the remedy for this curable ineligibility; to avoid unintended (by Congress) consequences, courts could permit the debtor who filed without counseling to get it and then permit filing of another, amended petition post counseling, while dismissing the initial petition. (If the counseling made the debtor decide not to seek bankruptcy relief, the court, on the debtor's motion, could strike the case for ineligibility.) There is a new reference in the 2005 Act to amending the petition, in 11 U.S.C. § 362(c)(3)(C)(i)(II)(aa), indicating congressional intent to permit filing of amended petitions. The advantage of allowing a debtor to file a new, amended petition in a case, after getting counseling, is that the debtor would not need to file a new case, with a new filing fee; also, the amended petition approach does not risk triggering § 362(c)(3)-(4) concerning cases filed within a year after dismissal. The legislative history in the House Judiciary Committee Report indicates that the congressional purpose of the counseling requirement was consumer protection to inform consumers, not creating barriers to bankruptcy access. If creditors had the latter design in backing section 109(h), yes, courts should subvert it.

Written By:James Dixon On July 12, 2006 1:38 PM

Under 362(c)(3), THE language "pending within the preceding 1 year period". The question is when does the preceding 1 year period start? If the law was effective on October 17, 2005 are any filings earlier in 2005 considered pending under the new statue?

[Ed Response: Yes, if they were pending within the year preceding the next filing].