Automatic Stay: Does Not Exist For Small Business Cases Dismissed And Refiled in Two Years (In re Abundant)

Normal activity cannot exist (photo by Marilyn Swanson)

By: Donald L Swanson

The automatic bankruptcy stay:

  • does not apply in a case in which the debtor— . . . (B) was a debtor in a small business case that was dismissed for any reason by an order that became final in the 2-year period” before the new case is filed.  § 362(n)(1)(B).

There is an exception when,

  • debtor proves “that the filing of the petition resulted from circumstances beyond the control of the debtor not foreseeable at the time the case then pending was filed”; and
  • it is likely that “the court will confirm a feasible plan, but not a liquidating plan, within a reasonable period of time.”  § 362(n)(2)(B).

These § 362(n) provisions are applied, under Subchapter V, by a recent opinion from the Southern Georgia Bankruptcy Court. [Fn. 1]  The Southern Georgia Court concludes:

  1. Debtor’s prior “small business case” was dismissed within two years before the new bankruptcy filing—which new filing elects Subchapter V;
  2. the exception identified in § 362(n)(2)(B) does not apply; and
  3. because of the bar in § 362(n)(1)(B), the automatic stay is not in effect in the new case to prevent foreclosure of Debtor’s real estate.

The New Case is Subchapter V

Debtor contends that, because its new case elects Subchapter V, the automatic stay bar in § 362(n)(1)(B) does not apply.

The Bankruptcy Court rejects this argument.  Here’s the Court’s rationale:

  • Prior to the February 19, 2020 effective date of Subchapter V, the Bankruptcy Code defined the term “small business case” as “a case filed under chapter 11 of this title in which the debtor is a small business debtor” (§ 101(51C));
  • “Small business debtor,” in turn, is defined in § 101(51D);
  • Subchapter V amends § 101(51C), so that “small business case” now means a case in which debtor is a small business debtor “and has not elected that subchapter V of chapter 11 of this title shall apply”;
  • Under the plain meaning of § 362(n)(1)(B), the automatic stay does not apply in a new case, when the debtor had a “small business case” dismissed within the prior two years—the statute plainly requires only that the prior case was a small business case, not the subsequent case;
  • Opinions applying the automatic stay bar in § 362(n)(1)(B) focus on whether the first bankruptcy case, not the second one, was a small business case; and
  • Debtor’s 2019 case qualifies as a small business case, so the Subchapter V nature of the 2020 case makes no difference—therefore, Debtor’s election to proceed under Subchapter V in the new case does not rescue it from the operation of § 362(n)(1)(B).

Dismissing a Subchapter V Case

Does § 362(n)(1)(B)’s bar of the automatic stay apply when a Subchapter V case is dismissed and then debtor files a new bankruptcy within two years?

Based upon the Court’s analysis above, the answer would be, “No.”  Here’s why:

  • § 362(n)(1)(B) applies only when the dismissed case is a “small business case”; and
  • § 101(51C) defines a “small business case” as one in which debtor is a small business debtor “and has not elected that subchapter V of chapter 11 of this title shall apply.”

Conclusion

The automatic stay bar in 11 U.S.C. § 362(n)(1)(B) can be a trap for the unwary. 

We’ve seen, for example, debtors dismiss an existing bankruptcy case for the sole purpose of refiling a Subchapter V case.  Surely, they carefully reviewed § 362(n) before doing so?! 

And what if a Subchapter V case is dismissed and debtor refiles within two years?  It will be interesting to see how the courts address this issue.

————————–

Footnote 1.  The opinion is in In re Abundant Life Worship Center of Hinesville, Georgia, Case No. 20-40959 in the Southern Georgia Bankruptcy Court (issued December 16, 2020, Doc. 104).

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