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Serial Bankruptcy Filers Eventually Get the Ax

 Filing multiple Chapter 13 bankruptcy cases to stop foreclosure [1]Written by Craig D. Robins, Esq.
 
 
Some debtors like bankruptcy so much, they come back for more, and more, and even more. . .  sometimes using multiple bankruptcy filings to delay foreclosure proceedings for years.  But when is enough, enough?
  

What Can Mortgagees and the Bankruptcy Court Do in Situations Involving Extreme Serial Filings?

In the past three months, Judge Alan S. Trust, sitting in the Central Islip Bankruptcy Court on Long Island, addressed this issue in several cases.  The most recent one caught my eye based on the incredible number of related bankruptcy filings, as well as the unbelievable amount of time the debtors were able to thwart the system and delay foreclosure.

Serial Filings in Bankruptcy Cases

Some debtors file successive Chapter 13 petitions because each time they file, they get the benefit of the stay, which stops a foreclosure proceeding dead in its tracks.
 
Technically, Bankruptcy Code section 109(e) prohibits a debtor from refiling another case for 180 days, if the prior case was dismissed because the debtor neglected to make necessary payments or maintain other debtor responsibilities.

However the bankruptcy court has become rather liberal in permitting debtors to engage in repeated filings and will typically give the debtor the benefit of the doubt as long as the debtor can demonstrate a change of circumstances.

Nevertheless, some debtors clearly take advantage of the system, and by their sheer audacity (and desperation), give bankruptcy a bad name for those who file in good faith.  The vast majority of bad faith serial filings are done by pro se debtors.

Any experienced bankruptcy attorney knows that judges will not hesitate to sanction counsel for filing a case in bad faith.  The law is very clear that a case cannot be filed for the sole purpose of delay, without any good faith intent to follow through with a Chapter 13 plan.
 

Bankruptcy Amendment Act Made Serial Filings More Difficult

 
When Congress overhauled the bankruptcy laws in 2005 (BAPCPA), it imposed several new provisions designed to stop the problem of bad faith serial filers.  I wrote about some of these changes in my Suffolk Lawyer column in November 2005:  Consumer Bankruptcy Debtors Face New Limitations for Repeat Filings [2].
 
In particular, there are new exceptions to the automatic stay.  For example, if a debtor had one pending bankruptcy case in the preceding year, then the automatic stay only lasts 30 days, effectively shifting the burden to the debtor to make an application to extend the stay.  If there was more than one filing in the prior year, then the debtor is not entitled to any automatic stay at the time of filing.
 
Even with these provisions, debtors soon learned to game the system.  After one spouse’s bankruptcy was dismissed, the other spouse would then file, and then this “tag team” filing approach would go on for years.  Although this conduct was nothing new, Congress addressed this problem too, with an “in rem” provision in BAPCPA.
         
Debtors Filed 10 Cases to Delay Foreclosure
 
On December 21, 2009, Judge Trust issued companion decisions in two separate, but related cases, outlining the excessive measures taken by two Long Island debtors who filed a total of ten bankruptcy petitions over a 12-year period to stop foreclosure on their jointly-owned home.  In re Janet Blair (Case No. 09-76150-ast) and In re Allen Gary Smith (Case No. 09-77562-ast).
 
The decision was precipitated by a motion brought by the mortgagee, seeking “in rem” relief against the premises.  Most of these filings were Chapter 13 cases filed over a four-year period between 2005 and 2009.  Almost all of them were filed on the eve of a scheduled foreclosure sale.
 
In Rem” Relief in Bankruptcy Proceedings Stops Foreclosure Delaying Tactics
 
In rem” relief is when the bankruptcy court grants an order indicating that a particular piece of property will not be affected by any future bankruptcy stays, effectively eliminating any benefit of the “tag-team” filing approach.  “In rem” originates from the Latin phrase for a lawsuit directed against property, rather than a person.
 
In the Blair / Smith cases, the judge immediately lifted the stay and subsequently granted in rem relief, stating that the serial filings were evidence of the debtors’ bad faith, and also evidence of the fact that the debtors were abusing the bankruptcy process for several years.
 
Statutory Authority for In Rem Relief.  In his decision, Judge Trust, delivered a well-written and detailed analysis behind the statutory authority providing for in rem relief.  In doing so, the judge essentially reiterated his holding in a two-month-old similar decision, which has since been published.  In re Montalvo (416 B.R. 381).
 
One of BAPCPA’s amendments was the addition of Section 362(d)(4) which provides the statutory authority to grant in rem relief.  Pursuant to Section 362(d)(4), the Court can grant in rem relief from the stay as to a mortagee’s interest in the property, such that any and all future filings by any person or entity with an interest in the property will not operate as an automatic stay against the owner and its successors and/or assigns for a period of two years after the date of the entry of such an order.
 
To obtain this relief, the mortgagee bears the burden of showing that the various petitions filed by debtors are part of a scheme to hinder, delay and defraud the mortgagee.
 
A key issue in such cases is whether the court can infer an intent to hinder, delay and defraud creditors when it appears that there have been multiple, strategically timed bankruptcy filings.  Judge Trust took the established view that holds that the mere timing and filing of several bankruptcy cases is an adequate basis from which a court can draw a permissible inference.
  
However, Judge Trust also observed that the debtors demonstrated no intent to make the bankruptcy work.  They did not make plan payments, show up in court, or provide the trustee with required documents.
 

Standard of Proof in In Rem Litigation

 
Judge Robert E. Grossman also addressed this issue just over a year ago, and wrote about the standard of proof necessary to obtain in rem relief.  In re Lemma (394 B.B. 315 (Bank.E.D.N.Y. 2008).
 
In that case, which involved a third Chapter 13 filing (with debtor representation by my friend, Babylon bankruptcy attorney Michael A. Kinzer), the judge concluded that the mortgagee was not entitled to in rem relief (and not even entitled to dismiss the case).
  
The reason why Judge Grossman denied the mortgagee’s application was because the mortgagee, as the party seeking in rem relief, had the burden of proving that the current filing was part of a scheme; that the scheme involved the transfer of real property, or multiple bankruptcy filings; and that the object of the scheme was to hinder, delay and defraud the mortgagee.
 
The mortgagee in that case was unable to provide the court with any evidence  other than the fact that the debtors filed three petitions.
 
Thus, multiple filings, alone, are not adequate to find intent to hinder, delay and defraud.
 
 
About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., [3]is a regular columnist for the Suffolk Lawyer [4], the official publication of the Suffolk County Bar Association [5]in New York. This article appeared in the January 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Patchogue, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island [6], please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com [6].
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