Maine Bankruptcy Judge Rules That § 362(c)(3)(A) Automatically Terminates Automatic Stay

In the recent opinion of In re Smith, the Maine Bankruptcy Court (Fagone, J.) held that the termination of the automatic stay under 11 U.S.C. § 362(c)(3)(A) extends to the debtor, the debtor’s property, and property of the estate, disagreeing with the First Circuit Bankruptcy Appellate Panel.

The facts of the case are not complicated. In December 2014, Leland S. Smith, Jr., filed a voluntary petition under Chapter 13. In November 2016, Smith’s case was dismissed for failure to make plan payments. On December 28, 2016, Smith filed another voluntary petition under Chapter 13, putting Smith into the more restrictive gauntlet Congress crafted for repeat bankruptcy filers. Section 362(c)(3)(A) terminates the automatic stay after thirty days for debtors who file more than one case in a year unless a request is made to extend the stay.

Smith did not request an extension of the stay, perhaps relying on the First Circuit Bankruptcy Appellate Panel’s rulings, which agree with the majority rule that the § 362(c)(3)(A) stay termination relates only to the debtor and the debtor’s property, and not property of the estate. In other words, property that is owned by the debtor at the time of the bankruptcy filing was protected by the automatic stay and prevented creditors, even for repeat filers, from seeking to recover against a debtor’s prepetition assets.

Maine Revenue Services, apparently having some doubts as to the extent of the stay, sought an order from the bankruptcy court under § 362(j), confirming that the automatic stay had terminated so that it could pursue its collection efforts against the debtor for past due taxes. Smith opposed that relief, arguing that the court should follow the First Circuit BAP and majority rule.

However, after a survey of the case law on the issue, the bankruptcy court analyzed §362(c)(3)(A) in the context of the automatic stay provisions of the Bankruptcy Code, finding that the majority view focused on only a small part of the statute. The court also was persuaded by the reasoning of In re Daniel, 404 B.R. 318 (Bankr. N.D. Ill. 2009), because:

1. the subsection references subsection 362(a) in whole, not parts of it;
2.  the reference to “with respect to the debtor” in § 362(c)(3)(A) meshes with prior parts of § 362(c), which discuss the debtor in the context of single or joint cases; and
3.  the legislative history supports the minority view in that Congress was concerned about repeat filers interfering with creditors exercising their state court rights.

The court ultimately ruled that the automatic stay had terminated with respect to the debtor, the debtor’s property, and property of the estate.

Unless overturned on appeal, this ruling alters the landscape in Maine for creditors and debtors where the debtor is a repeat filer. Creditors now seem to have an advantage unless the debtor acts quickly to extend the automatic stay. Debtors and trustees will also have to be wary in such cases as a valuable protection of bankruptcy is eliminated for property of the estate, making the property vulnerable to attack by creditors.

Anthony Manhart is a Partner at Preti Flaherty and serves as Co-Chair of the Bankruptcy, Creditors' Rights and Restructuring Group. His practice focuses on bankruptcy and creditors' and debtors' rights, representation of Chapter 7 trustees and various parties in formal insolvency and collection proceedings and out-of-court workouts. He also serves on the Panel of Chapter 7 Trustees for the District of Maine.

Landlords Who Violate Bankruptcy Stay May be Ordered to Pay Emotional Distress Damages and Punitive Damages

Landlords should use caution in attempts to take possession of leased space once a tenant files bankruptcy.  Recently, in Lansaw v. Zokaites, the Third Circuit Court of Appeals upheld an order of the Bankruptcy Court for the Western District of Pennsylvania awarding of emotional distress damages and punitive damages against a landlord who violated the automatic stay. 

Under section 362(a) of the Bankruptcy Code, the filing of a bankruptcy petition operates as a stay against debt collection activities by creditors.  For violations of the stay, individual debtors can recover actual damages, including costs and attorneys’ fees, and punitive damages.  

In Lansaw v. Zokaites, the debtors operated a daycare in leased space.  The court found that the landlord violated the automatic stay on three separate occasions.

The first violation consisted of the landlord and his attorney visiting the daycare during business hours to take photographs of the debtors’ personal property.  During that visit, the landlord intimidated one of the debtors and backed her against a wall.

For the second violation, the landlord visited the daycare after business hours using his own key to enter and padlocked and chained the doors.  The landlord left an “interim standstill agreement” on the door, which provided that the landlord would remove the chains if the debtors agreed to certain conditions, including reaffirming the lease with the landlord.

For the third violation, the debtors had found a new property to lease but still had property in the old leasehold.  The landlord directed his attorney to send a letter to the debtors’ new landlord, demanding that the new landlord terminate a lease with the debtors, and stated that, if the new lease was not terminated, the landlord would file a complaint against the new landlord.  The landlord’s attorney also called the new landlord multiple times in an attempt to have the new lease terminated. 

For these violations of the automatic stay, the debtors were awarded $7,500 for emotional distress, $2,600 in legal fees, and $40,000 in punitive damages from the landlord. 

In the opinion, the Third Circuit Court of Appeals found that the bankruptcy code authorizes the award of emotional distress damages as a form of “actual damages,” and that the debtors presented sufficient evidence to support such a claim.  Additionally, the Court found that the debtors were properly awarded punitive damages. 

When a tenant files bankruptcy, a landlord should be extremely cautious in attempts to collect back rent, take possession of the property, or evict a tenant.  Lansaw v. Zokaites was an extreme case; however, violations of the automatic stay may arise from typical landlord activities, such as sending certain notices and applying a setoff against a security deposit.

Bodie B. Colwell practices as an associate with Preti Flaherty's Bankruptcy, Creditors’ Rights and Business Restructuring group from the Portland office. She focuses on supporting bankruptcy, insolvency, and creditors’ rights clients.