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