Multiple Bankruptcy Filings: Try, Try, Try Again (… And Again… And Again)

United States v. Olayer (In re Olayer), 577 B.R. 464 (Bankr. W.D. Pa. 2017) –

After a debtor filed his fifth chapter 12 petition in 21 years, the Department of Agriculture Farm Service Agency (FSA) filed a motion for relief from the automatic stay so that it could proceed with a foreclosure sale of the debtor’s farm.

FSA sought relief under section 362(d)(4)(B) of the Bankruptcy Code, which provides relief to a creditor secured by real property if the court finds that filing a petition was “part of a scheme to delay, hinder, or defraud creditors that involves… multiple bankruptcy filings affecting such real property.” Alternatively, FSA contended that it was entitled to relief from the stay for “cause” under section 362(d)(1).

The debtor’s bankruptcy filings were as follows:

  • March 1996: The debtor filed his first petition for relief, which was dismissed four months later.
  • November 1996: The debtor filed his second petition, which was voluntarily dismissed in May 1997 after he failed to file a Chapter 12 plan.
  • April 2000: After FSA commenced foreclosure, the debtor filed his third petition to stay the foreclosure. In this case a reorganization plan was confirmed in August 2001. However, when a payment under the plan became overdue by 10 months, FSA obtained an order dismissing the case.
  • March 2010: FSA commenced another foreclosure in September 2007 and was awarded summary judgment for ~$210,000 plus interest. Following denial of the debtor’s appeal to the Third Circuit, FSA scheduled a foreclosure sale for March 2010. When the Third Circuit denied the debtor’s motion to stay the sale, he filed his fourth bankruptcy – again staying the foreclosure sale.
  • August 2017: The 2010 bankruptcy took nearly 7 years. As a condition of confirmation of the reorganization plan in the 2010 bankruptcy, the debtor was required to make three annual payments. After the debtor failed to make the required payments, FSA once again commenced foreclosure and scheduled a sale for August 2017, and the debtor once again filed bankruptcy to stay the FSA foreclosure sale.

In addition to the FSA default, the debtor had failed to pay property taxes since 2010, and the fifth bankruptcy also stayed a tax sale scheduled for September 2017. Further, FSA contended that there was no proof that the debtor had insured the property. The debtor did not respond to this contention or provide proof of insurance.

In considering the request for relief from the stay, the court emphasized that the “mere existence” of multiple filings does not by itself justify release. Instead, the filings must be part of a scheme to delay, hinder, or defraud creditors. Filing to stay a foreclosure may also be legitimate, although it indicates bad faith if the debtor files “without the ability or the intention to reorganize.” The court also suggested that relief may be warranted if there are serial filings in combination with a lack of payments, a “highly-questionable plan,” or a “tag team” approach to filings by a husband and wife (e.g. one files bankruptcy and the other files if the first case is dismissed).

As support for its request for relief, FSA cited a case in which the court found there was a scheme when a debtor had three failed cases, did not make payments under a stipulation in a fourth case and requested an extension of time to complete a plan and schedules in yet another case. The court commented that it might have granted FSA’s request if FSA had sought relief at the beginning of the debtor’s fourth case. At that point all the debtor could show was two cases that failed in less than six months, failure to make payments in the third, and nothing but 2 ½ years delay in the foreclosure process prior to filing the fourth petition.

However, when considered in light of the subsequent developments, the court concluded that the debtor’s conduct did not show the required scheme. Acknowledging that the fourth bankruptcy case lasted more than six years and involved 11 different reorganization plans, the “relentless pursuit of his solution stands in stark contrast” to the debtor in the cited case. Further, the balance owed FSA was almost 70% less than it was owed at the beginning of the fourth case.

Turning to the argument that FSA was entitled to relief for cause based on the debtor’s bad faith, the court noted that although the debtor timely filed a motion to extend deadlines for filing required documents, he completed the documents before the extended deadline and timely filed a plan. “Because in rem relief is extraordinary and imposes consequences beyond the contours of the present bankruptcy case, it is not to be taken lightly.” Considering the circumstances, the court concluded that FSA was not entitled to relief under section 362(d).

Further, if FSA was able to satisfy the initial burden of showing that it was entitled to relief for cause under section 362(d)(1), the burden would then shift to the debtor to show that FSA’s interest was adequately protected without relief from the automatic stay.

In assessing relief from the stay for cause, the court considered (1) prejudice if the stay was lifted, (2) balance of hardships between the parties, and (3) probable success on the merits if the stay was lifted. If a secured creditor has a slim and eroding equity cushion, that may be sufficient to establish cause. In addressing whether an equity cushion is sufficient to provide adequate protection, the court considers the size of the equity cushion, the rate at which it is eroding, whether periodic time payments are being made to mitigate the erosion, and if the property is to be sold, the likelihood of a reasonably prompt sale.

In this case there were several negative factors: The debtor did not produce evidence that the property was insured. And he failed to disclose the existence of an oil and gas lease or alleged royalty income in his bankruptcy schedules. The disclosure deficiencies remained uncorrected after the court brought them to the debtor’s attention. This brought the debtor’s candor and diligence under suspicion. Also, since the plan relied on payments from the lease and the royalties, that brought into question funding for the plan. Finally, the court was troubled by the debtor’s failure to make any payments under his stipulation agreement with FSA.

However, the property was valued at ~$247,000. Secured claims included the FSA claim of ~$66,000, and the tax Bureau claim of ~$29,000. The record also showed a first mortgage, but there was no information regarding its balance. Since FSA bore the burden of proof on the issue of equity in the property, the court did not attribute any amount to the first mortgage claim. Thus, the court found that the record showed ~$98,000 of debt secured by nonexempt property value of ~$223,000 – resulting in an equity cushion of around 66%. The court considered the size of the equity cushion sufficient adequate protection without anything else. Consequently, even if FSA had been able to show cause, the court would not have lifted the stay.

It is not entirely clear why a secured creditor should have to wait more than 21 years to get paid even with a substantial equity cushion. While the debtor apparently did make some progress in reorganizing in the context of the fourth 6+ year long bankruptcy, there were several indications that the debtor would ultimately fail. And the large equity cushion may have been illusory since it did not take into account the amount of debt owed under the first mortgage.

For those who are curious, within two months after the court entered its order denying FSB’s motion for relief from the stay, it entered an order dismissing the case in response to a motion from the IRS. The debtor did not give notice of the bankruptcy to the IRS. After the IRS learned of the case it filed a proof of claim. However, that was only an estimated amount since the debtor failed to file income tax returns for 2010 – 2016. The fact that the debtor was a chronic non-filer and failed to comply with a local rule requiring filing of all tax returns due and unfiled within 60 days of filing bankruptcy was sufficient cause to support dismissal.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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