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BAD FAITH BANKRUPTCY
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Bankruptcy Abuse Rarely Works…Because of the Gatekeepers. This is a 5-part series describing the roles of the five gatekeepers: the debtor’s counsel, the creditors and their attorneys, the United States Trustee’s Office (part of the Department of Justice), the bankruptcy courts, and the appellate courts.
By: Donald L Swanson
Over the years, I’ve heard lots of people say, “Bankruptcy abuse is a huge problem,” as a self-evident and undeniable proposition.
But here’s the thing. Debtors who try to abuse the bankruptcy system rarely get away with it. That’s because there are too many gatekeepers—and no debtor can fool them all!
The gatekeepers are debtor’s counsel, creditors and their attorneys, U.S. Trustees, bankruptcy courts, and appellate courts.
The Five Gatekeepers:
- The debtor’s attorney
- Creditors and their attorneys
- The United States Trustee (part of the Department of Justice)
- The Bankruptcy Courts
- The Appellate Courts
All of these gatekeepers take their responsibilities seriously. As a debtor’s attorney, I am committed to keeping my clients out of trouble. They are despirate to save their business, home, or secret savings. My job is to help them understand the consequences of trying to defeat the purpose of bankruptcy, which is “to provide the honest, but unfortunate debtor with an opportunity for a fresh start.” I will not compromise my professional responsibility to the court system in order to advice a potential debtor how to fool the gatekeepers. it is unethical for a debtor’s attorney not to advise my clients about proper pre-bankruptcy planning.
McDow v. Dudley, No. 10-1732 United States Fourth Circuit, 11/30/2011
In an appeal from a judgment of the district court dismissing an appeal to an order denying a motion to dismiss a debtor’s Chapter 7 bankruptcy case as abusive under 11 U.S.C. section 707(b) as interlocutory, judgment is reversed because a bankruptcy court’s order denying such a motion is immediately appealable to the district court.
US v. Mitchell, No. 07-3136 (U.S. 8th Circuit Court of Appeals, June 10, 2008)
Conviction upon defendant’s retrial for knowingly and fraudulently making a false statement under penalty of perjury in a bankruptcy case is affirmed where the circuit court declines to revisit a double jeopardy issue, and there was sufficient evidence to sustain his conviction.
IN RE: SILBERKRAUS, No. 01-56992 (9th Cir. July 10, 2003) The bankruptcy court did not abuse its discretion in finding a Chapter 11 filing to be frivolous, and imposing sanctions upon counsel for acting in bad faith in delaying state court litigation of a commercial dispute.
Murtaza v. Slaten (In re Murtaza) BAP No. CC-17-1153-SKuTa (9th Circuit, Apr 02,2018) Ruling: BAP for 9th Circuit affirmed judgment denying discharge entered by bankruptcy court (C.D. Cal.). Circumstantial evidence and inferences from debtor’s conduct established debtor’s actual fraudulent intent. Debtor made errors and omissions in schedules and SOFA knowingly and fraudulently by making them deliberately or consciously. Debtor was aware of creditors’ collection efforts and was also aware of interest in, and claim for, inheritance at time of execution of schedules and SOFA. Debtor’s explanations of “innocence” of errors were not credible.
In re Mangaoang, 9th Cir BAP, 8-13-19 Bankruptcy court (ND Cal.) denied chapter 13 debtor’s motion to extend automatic stay in her second chapter 13 case. Debtor appealed to BAP for 9th Circuit.Facts:Debtor filed chapter 13 case to stay foreclosure on home. Secured creditors and chapter 13 trustee opposed debtors proposed plans. Debtor’s unstable income was unable to fund a feasible plan. Bankruptcy court dismissed case. Creditors re-scheduled foreclosure.
Debtor filed second chapter 13 case on eve of foreclosure. Because second case was filed within one year of dismissal of prior case, the automatic stay was set to expire 30 days after filing. Debtor moved to extend stay. Secured creditor opposed, asserting presumption of bad faith, no change in income instability, and no feasible plan. Bankruptcy court denied extension of stay. Debtor timely appealed to BAP. While appeal was pending, secured creditor completed foreclosure sale. Bankruptcy court dismissed case five months later, while appeal was pending.
What are the consequences of dismissing or the dismissal of a bankruptcy and then filing a new case?
Take a look at 109(g) and (h).
Good article on 109(g) and chapter 13.
Series of bankruptcy and state-court litigation to delay the foreclosure of their residence.
In re Erickson, BAP ww-22-1186-GFB (9th Cir, 4/13/23) Chapter 13 debtor John Earl Erickson (“Debtor”) appeals the bankruptcy court’s order dismissing his case with a two-year bar to refiling. Debtor argues the court erred as a matter of law by denying confirmation of his chapter 13 plan because he was attempting a cure under § 1322(b)(2), not a prohibited modification. He maintains the court violated his right to due process by relying on an additional basis for dismissal, without notice, and erred by finding bad faith to dismiss the case with a two-year bar. The bankruptcy court correctly applied the law, and its factual finding of bad faith is well supported by the record. We AFFIRM
Series of bankruptcy and state-court litigation to delay the foreclosure of their residence.
In re Erickson, BAP ww-22-1186-GFB (9th Cir, 4/13/23) Chapter 13 debtor John Earl Erickson (“Debtor”) appeals the bankruptcy court’s order dismissing his case with a two-year bar to refiling. Debtor argues the court erred as a matter of law by denying confirmation of his chapter 13 plan because he was attempting a cure under § 1322(b)(2), not a prohibited modification. He maintains the court violated his right to due process by relying on an additional basis for dismissal, without notice, and erred by finding bad faith to dismiss the case with a two-year bar. The bankruptcy court correctly applied the law, and its factual finding of bad faith is well supported by the record. We AFFIRM
In re Dennis Baham BAP No. NV-20-1081-TaBG, Bk. No. 2:19-bk-15039-ABL (9/30/20, original case Nevada) After years of default, mediation, and state court litigation, Debtor filed a chapter 13 bankruptcy the day before a scheduled foreclosure on his home. On the foreclosing creditor’s motion, the bankruptcy court dismissed the case under § 1307(c) as a bad faith filing and separately awarded the creditor its fees and costs incurred as a result of the bad faith filing as a sanction. Baham appealed only the sanctions order. We AFFIRM.
In re Jimenez, Bk 2:19-bk-12271-VZ, BAP CC-19-1177 & 1186 (March 3, 2020) First, chapter 13 debtor Javier Jimenez challenges an order dismissing his bankruptcy case (the “Dismissal Order”). But he failed to promptly propose a confirmable plan, produce documents to the chapter 13 trustee, and otherwise to perform his debtor duties. We see no error in the dismissal and, therefore, we AFFIRM the Dismissal Order. He also challenges an order (the “Stay Relief Order”) granting appellee ARCPE 1, LLP (“ARCPE”) § 362(d)(1) and (d)(4) relief from the automatic stay to foreclose on his residence located in Los Angeles, California (the “Property”). Given our affirmance of case dismissal, we DISMISS the §362(d)(1) stay relief appeal as MOOT; we cannot reimpose the stay in a dismissed case.
But the appeal of the § 362(d)(4) stay relief is not moot. Because in rem relief may impact future cases, we can grant effective relief on appeal. And ARCPE did not support its § 364(d)(4) stay relief request with evidence or argument beyond reference to three bankruptcies filed over the last decade and the unadorned assertion that this constitutes the inappropriate scheme required for in rem relief. The record adds no additional supportive evidence. And the bankruptcy court made no findings supporting this relief beyond a reference to the three cases and the conclusion that this evidenced the statutorily required scheme. As the mere filing of three bankruptcies over a 10-year period does not unfailingly equate to a scheme to delay, hinder, or defraud creditors, we REVERSE the Stay Relief Order
to the extent it grants § 362(d)(4) relief.
9th Cir. BAP affirmed bankruptcy court (CD California) order dismissing chapter 13 case based on serial filer’s bad faith attempts to hinder and delay secured creditor’s foreclosure on residence. Although bankruptcy court did not explicitly identify basis for dismissal, record strongly supported dismissal under § 1307(c)(1): “unreasonable delay by the debtor that is prejudicial to creditors” and “debtor’s unjustified failure to expeditiously accomplish any task required either to propose or confirm a chapter 13 plan.”
What is ‘dismissal with prejudice’? Dismissed with prejudice means that a bankruptcy has been dismissed based on merits of the case after a judgement has been issued. When a case is dismissed with prejudice, the plaintiff is not allowed to another bankruptcy at a later date. This is a very serious step and stops the debtor from ever filing another bankruptcy. Why would that happen? It usually happens because the debtor has failed multiple bankruptcies and not completed any, failed to comply with court orders, failed to appear at hearings, failed to follow the trustee’s instructions, plus much more. This type of abuse of the legal system slows down the court’s, the trustees’ and lawyers’ ability to help others and demonstrates the debtor’s willful failure to follow the laws and rules.
When is Enough, Enough? Pro Se Dismissed with Extended Prejudice (and Violates Bar)
In re Parson, 2021 WL 4483124 (September 20, 2021) When do the facts justify a long bar to refiling over the 180-day period in § 109(g)? Chapter 13 Standing Trustee Thomas D. Powers, Northern District of Texas (Dallas Division) did just that. Judge Michelle V. Larson’s opinion provides a thorough overview of the legal standards for dismissing with prejudice for bad faith under 11 U.S.C. §§ 105 and 1307(c) applying those to the facts provided by the Trustee and a mortgage creditor.
The Irony of Filing a Motion to Dismiss with Prejudice, by Daryl J. Smith, Senior Staff Attorney to Sylvia Ford Brown, Chapter 13 Standing Trustee (Memphis, TN). The NACTT Academy
Cases and Notes:
11 U.S.C. § 105 – Power of Court. Section 105 gives Bankruptcy Courts broad equitable powers to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code or prevent an abuse of process, and to address instances of bad-faith specifically, serial filings (see United States v. Boulware, 604 F.3d 832 (4th Cir. 2010); Dempsey v. Carter, No. 07-1042, 2007 WL 2478674 (7th Cir. 2007) (unpublished); In re Ellsworth, 455 B.R. 904, 921-22 (B.A.P. 9th Cir. 2011); In re Cusano, 431 B.R. 726, 735-37 (B.A.P. 6th Cir. 2010); In re Marshall, 407 B.R. 359, 363 (B.A.P. 8th Cir. 2009); and In re Gonzalez-Ruiz, 341 B.R. 371, 386 (B.A.P. 1st Cir. 2006))
11 U.S.C. § 109 – Who may be a debtor. In re Tomlin, 105 F.3d 933 (4th Cir. 1997) (holding that the Bankruptcy Code provides a bankruptcy court with authority both to bar subsequent discharge of existing debt and to bar successive petitions under Section 109(g)).
11 U.S.C. § 349 – Effect of dismissal. “Our court of appeals has recognized that …§ 349(a) gives a bankruptcy judge discretion to ‘order otherwise’ for cause and to dismiss a petition with prejudice; this discretion may be exercised either to prohibit the filing of a petition within a set time, or it may preclude the debtor from receiving a discharge in bankruptcy of debts in existence when the case is dismissed.” In re Weaver, 222 B.R. 521, 522 (Bankr. E.D. Va. 1998) (citing In re Tomlin, 105 F.3d 933, 937 (4th Cir. 1997)).
11 U.S.C. § 1307 – Conversion or dismissal. According to 11 U.S.C. §1307(c), the Court can dismiss a Chapter 13 case for cause. Courts have held that where the debtor files the petition in bad faith, cause for dismissal exists. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S. Ct. 1105, 1107 (2007); In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992); In re Sawyer, Case No. 07-10252-SSM, 2007 WL 1725627 (Bankr. E.D. Va. June 13, 2007).
