(Updated August 14, 2006 – See Below)
As Bankruptcy Courts may have reached the point where they are entertaining individuals’ second petition filed under the BAPCPA, the distinction between dismissing or striking the petition will become more important for debtors and creditors. If the prior case was stricken, and deemed a nullity, the debtor may reap the benefits of the full automatic stay, as if a prior case had never been filed. The distinction also may alter the way creditors operate. In those jurisdictions that strike, and deem a nullity, petitions filed by an ineligible person, creditors may be inclined to make their own determination (at their own risk) as to eligibility and proceed to foreclose or collect if they do not see the counseling certificate on the docket. After all, if they play it safe and wait for the court or clerk to strike the petition, the same individual may file obtain a certificate and file a second petition, presumably with an entitlement to the full stay. Thus, the cautious secured creditor who awaits a judicial determination in the first case may be delayed an additional two or three months, or more, if the individual files a second case before the creditor can advertise and foreclose.
We have previously noted that Judge Bonapfel has held that petitions filed by a person ineligible to filed under §109(h) should be dismissed and not stricken. In re Ross, 338 B.R. 134, Case No. 05-86669 (Bankr. N.D. Ga. February 7, 2006). Other courts have subsequently analyzed and ruled on the issue. In re Seaman, 2006 Bankr. LEXIS 582 (Bankr E.D.N.Y. March 30, 2006)(following Ross, cases should be dismissed); In re Salazar, 2006 Bankr. S.D. Tex. March 29, 2006)(such cases should be stricken). The Court in Salazar, recognizing the uncertainty, certified its decision for direct appeal to the 5th Circuit pursuant to 28 U.S.C. §158(d)(2).
In his ABI BACPA Blog, David Rosendorf has an excellent post analyzing the issue and the recent opinions — You Say Strike It, I Say Dismiss It – What Happens When an Ineligible Debtor Files. David’s conclusion is —
So what’s the right answer? My two cents — remember that “syllogism” in Salazar which led to the conclusion that a filing of a petition by an ineligible debtor does not trigger the automatic stay? Here’s where I think the flaw is. Section 362 says that “a petition filed under section 301, 302 or 303” operates as a stay. But 301, 302 and 303 do not actually say that a petition may only be filed by an eligible debtor; rather, what they is that “a case is commenced” by the filing of a petition by an eligible debtor. Thus, the filing of a petition by an ineligible debtor can trigger the automatic stay under 362 (which refers to the filing of a petition, not to the commencement of a case), but that petition will not commence a “case” unless the petitioner is eligible. So the stay would be in effect temporarily pending determination of eligibility, but if the debtor is determined not to be eligible, then the petition would be dismissed (or stricken, if you prefer), and would not be regarded as a “previous case” for purposes of 362(c)(3) or (4). To the extent this presents an opportunity for abuse by debtors seeking to take advantage of the temporary stay, courts could remedy such abuse in the same ways they have dealt with serial filings before — through retroactive annulment of the stay, dismissals with prejudice, in rem stay relief orders, and so on. Would it work?
Further discussion may also be found at the Bankruptcy Litigation Blog.
Update – In In re Westover, 2006 Bankr. LEXIS 1418 (D. Vt. July 11, 2006), the issue was to strke or dismiss but it was the debtor who filed the motion based upon her failure to get counseling. The court followed the courts that held that dismissal was appropriate. Clearly, this is an example where the debtor could have used the first filing to stop a foreclosure then file a new case and get the benefit of the full stay for the second filing.