Yesterday, I appeared in Bankruptcy Court for status conference on a Chapter 11 case. Right before my case was heard, there was a motion hearing in a Chapter 13 case, my factual synopsis is based on the judge’s ruling. The debtor in that case had filed in 2004. The debtor then sought leave to refinance real property, which in a Chapter 7 case is not proper as there is no need to get permission once discharge is granted. The debtor got permission to refinance and obtained a new mortgage and ground lease. He immediately thereafter started to unwind the deal.
Fast forward to 2008 and the debtor defaults. The mortgagee files foreclosure papers. Now comes the fun. The debtor starts numerous state court proceedings to save the property. He also starts filing in bankruptcy court. He filed a case, by power of attorney, for his mother, who co-owned the property. The debt on the property is more than $100,000 over the $1,080,000 or so that the bankruptcy code allows in a Chapter 13. Further, the case was filed on the eve of foreclosure sale. The Court threw the case out and dismissed THAT petition. Unperturbed, the debtor goes out, swearing he has a buyer and equity and all manner of things, and hires a very good bankruptcy lawyer to try again, filing a case on his own behalf. This time the case is filed the day of sale. An immediate motion to dismiss or lift stay is filed.
Debtor’s counsel, mortgagee’s counsel and the standing trustee appeared in court. The Mortgagee’s counsel made a strong argument that the filing was in bad faith and should not be in bankruptcy court. The repeat nature of filing, the timing, and the obvious goal of averting foreclosure were factors in favor of dismissal. Creditor’s counsel demanded dismissal and sanctions for all, including the brand new debtor’s counsel.
Debtor’s counsel recounted his efforts to determine if the case was a proper filing and to establish his client’s bona fides. The Court was unconvinced, especially when the Chapter 13 standing trustee stated that her position was that the case needed to be bounced. HELD: the case was a bad faith filing, and exceeded the jurisdicitional limits for a Chapter 13 case. The Court awarded sanctions against the Debtor personally, but NOT his counsel and ordered that the Debtor pay $1,000 in fees to the Trustee for her time. The Debtor was also barred for 180 days from filing another bankruptcy case.
So, what did we learn today? Bankruptcy is not a game. You cannot file case after case to stave off and hinder creditors with no good plan of reorganization under the reorganization chapters. Serial filings will, under 3rd circuit law, at least, run the risk of dismissal with prejudice. For me, this was a case where I watched and took notes on what cases not to take. Bankruptcy filings must be made in good faith. At my office, I listen to cases and stories of woe. If I think that the potential client is trying to pull a fast one on the system, I won’t do it. However, if there is a legitimate chance of successful reorganization, I’ll give it a shot. That’s what bankruptcy is about, giving a debtor a chance to start over. As this case showed, however, you only get so many bites at the apple.