Part 2: Multiple Bankruptcy Filings

By Benjamin R. Levinson, Esq.
Law Office of Benjamin R. Levinson

In the last issue of Points of Interest I discussed a few common questions I often field from lenders and brokers over my many years representing private lenders in borrower bankruptcy filings. This article will cover additional questions that arise when borrowers file multiple, successive bankruptcies.

Multiple Filings by Debtor, Transfers of Property, and Fraudulent Junior Deeds of Trust Continue to Abound Today

At least a few CMA members have had to deal with debtors who file multiple bankruptcy cases for the purpose of slowing down the foreclosure process. Others have dealt with transfers of a partial interest in real property with the new interest holder filing a bankruptcy to slow down the foreclosure process. Even others have dealt with bogus junior deed of trust encumbrances where the new junior lender files a bankruptcy, again to slow down the foreclosure process.

During my 39 years of practice in all four California bankruptcy districts, these machinations have persisted. The Bankruptcy Code amendments of 2005 (Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA) have slowed down multiple filings to some extent, but not fully.

A Second Bankruptcy Filing Within a Calendar Year

In general terms, under the Bankruptcy Code, when an individual who files a Chapter 7, 11, or 13 case that was pending within the preceding year and dismissed files a second case, the stay as to the debtor terminates 30 days after the second filing.11 U.S.C. § 362(c)(3). However, there are holes in the statute that cause additional work for lender bankruptcy attorneys.


The statute only applies when the same individual files two or more cases, not one by a husband and then one by the wife or other family member. The statute does not apply to entities (such as LLC’s) that file multiple cases. The statute does not apply to individuals that file multiple Chapter 12 cases (a special section of the Bankruptcy Code that affects farmers or fishermen).

Even worse, the language of § 362(c)(3) specifically provides that the stay “as to the debtor” terminates and makes no mention of the stay as to property of the estate. The automatic stay in bankruptcy has two parts; the stay to prohibit acts of collection against the debtor and the stay to prohibit acts of collection against property of the bankruptcy estate. The stay must be terminated as to both parts to allow a lender to proceed with any foreclosure.

Although the purported intention of §362(c)(3) was to reduce multiple serial bankruptcy filings, the majority of bankruptcy courts still interpret § 362(c)(3) to terminate the stay as to the debtor only, based on the plain language of the statute. As a result, a lender would still be required to obtain relief from stay as to the property of the estate, making the statute somewhat worthless.

Bankruptcy courts following the minority view, hold that the stay is terminated in its entirety (against the debtor and against property of the estate) 30 days after the second bankruptcy is filed. You should consult your bankruptcy counsel to determine whether a judge that is hearing the second bankruptcy case follows the majority or minority view.

The trend of the law is to follow the majority view that the stay only terminates as to the debtor 30 days after the second bankruptcy is filed. Many of the judges in the Eastern District and Central District follow the majority view. All of the judges in the Northern District appear to follow the minority view. However, a judge may change its position as they become more experienced on the bench and so you must have bankruptcy counsel check recent opinions for the judge hearing your bankruptcy to determine their point of view.

In the situation of two serial bankruptcy filings, the debtor has the right to file a motion to extend the stay beyond 30 days. The motion must be noticed, heard, and decided within 30 days of the filing of the bankruptcy. The burden is on the debtor
to show by clear and convincing evidence that the second filing was in good faith, and that there is a substantial change in
the circumstances of the debtor’s financial affairs that will provide evidence that a plan can be completed.

Often, the first case is filed pro se and then dismissed because the debtor fails to file required bankruptcy documents. Then the debtor obtains legal counsel and files a second case. That sole factor is generally not enough to warrant the extension of the stay. The debtor is supposed to show by clear and convincing evidence that since the dismissal of the first case, the debtor’s financial circumstances have changed. Sometimes, the debtor claims there is a decision to sell the real property in the second case compared to the first case where the debtor sought to cure the arrearages of the loan. Depending on the judge, that may be enough of a change for the judge to grant the motion to extend the stay.

Do not assume that the motion to extend the stay will be routinely granted. Opposing a motion to extend may be beneficial to the lender client for a variety of reasons, including whether the judge follows the minority view or majority view. If the judge follows the minority view and you defeat the motion to extend the stay, then the stay in its entirety is terminated and you may proceed to foreclosure. If the judge follows the majority view, then even if you defeat the motion, you would still have to obtain relief from stay against property of the estate. In that case, you may not want to incur the time and expense of opposing the motion to extend the stay, even though the attorney fees for the opposition and other matters in the bankruptcy are recoverable if you are an oversecured creditor.


A Third Bankruptcy Filing Within a Calendar Year

When an individual who files two or more Chapter 7, 11, or 13 cases that were pending within the preceding year and dismissed files a third case, there is no stay when the bankruptcy is filed. 11 U.S.C. § 362(c)(4). A lender can simply ignore the filing and proceed with its foreclosure sale of the real property. The same caveats apply as above; the statute only applies when the same individual files three or more cases with the first two dismissed and does not apply to multiple Chapter 12 cases. Sometimes, a title company is hesitant to foreclose even when it is clear there is no stay. In that case or if a lender is unsure for other reasons, the lender may seek an order that there is no stay in place by motion. 11 U.S.C. § 362(c)(4)(A)(ii) and 11 U.S.C. § 362(j)

This motion may also be brought after just a second filing but winning that motion is dependent on whether the judge follows the minority view or the majority view set forth above.

In the situation with a third case filed within a year, a debtor may file a motion to impose the stay within 30 days of bankruptcy filing (but not necessarily heard within that time). The debtor must show by clear and convincing evidence that its circumstances have changed and there may be a presumption of bad faith if one or more of the prior dismissals was due to the failure to make payments or amend documents without substantial excuse.

I have rarely seen these motions brought and have never seen one of them granted without the consent of the lender creditor or without the failure for any creditor to object to the motion. Even if a motion to impose the stay is granted, the stay is only prospective from the time the Order is entered. Actions that take place prior to that time, such as a foreclosure, should
not be actionable as a violation of the stay.

Even if there is no stay, it is important for the lender to foreclose prior to any plan being confirmed in the bankruptcy. Even if there is no stay, a debtor can continue forward with its bankruptcy and seek to confirm a Chapter 11 or 13 plan. If a debtor confirms a plan prior to your foreclosure and that plan calls for treatment of your loan in a certain way, then your loan will be bound by the terms of the confirmed plan. A confirmed plan may end up stopping your foreclosure even without the stay in place beforehand.
Thus, until the foreclosure takes place, a lender’s bankruptcy counsel must continue to monitor the case and object to any plan, even if no stay is in place.

Conclusion

Multiple borrower bankruptcy filings can be among the most frustrating experiences for private lenders. Critical takeaways are for lenders to not delay when their borrowers file bankruptcy and retain competent bankruptcy counsel quickly to make sure your interests are protected. Do not ignore the bankruptcy filing at the outset because there are strict deadlines for filing claims, filing objections, and other issues that must be dealt with related to rental income and the stay. Proper legal representation is the best protection for private lenders when borrowers file bankruptcy.

Benjamin R. Levinson has been representing private mortgage lenders, foreclosure trustees, and receivers in State Courts and all Bankruptcy Courts in California since 1985. His practice emphasizes representation of secured and unsecured creditors in bankruptcy; defending lenders, foreclosure trustees and third-party purchasers in foreclosure-related litigation; lender and receiver representation in state court receivership actions, and lender representation in judicial foreclosure and enforcement of guaranties.