Lack of Good Faith In Filing Bankruptcies to Prevent Foreclosure of a Home
Bankruptcy filings can be a useful tool in preventing foreclosures, but there are limits. The automatic stay that is imposed once bankruptcy is filed stops a trustee sale. However, three important things must be remembered. First, the automatic stay does not prevent the rescheduling of the trustee sale. A trustee sale must occur within 120 days of the original sale date or the entire process must be repeated. Thus, if the sale being postponed takes the next sale date outside the 120 day period, the debtor will have bought significant time. However, if the next sale date is not outside that time line, little will have been gained for the price of a bankruptcy. Second, a creditor may petition the court to lift the stay. A court is likely to lift the stay and allow the creditor to proceed with foreclosure if the debtor is not making payments, there are significant arrears, and the asset is declining in value. Such circumstances are frequent in cases of foreclosure and thus the automatic stay might not prevent the trustee sale for a significant period of time. Third, there are limits to the number of times a debtor may file (and dismiss shortly thereafter) a bankruptcy to prevent a trustee sale. We have seen debtors file as many as six bankruptcies to prevent a trustee sale. Such conduct allows a creditor to petition the court to lift the stay based on the assertion that the most recent filing is abusive, or is manipulative of the system. Filing and dismissing also raises another issue which is controversial within bankruptcy law at the moment. A bankruptcy must be filed in good faith. Bad faith exists if the filing of the bankruptcy was for a purpose not consistent with the Bankruptcy Code or policy even though the purpose may be otherwise lawful. In re Hageney, 62 Collier Bankr. Cas.2d 1845 (E.D. WA. 2009)(citing with approval In re Siegenberg, 2007 WL 6371956 (C.D. CA 2007). Bad faith filings may be a cause for dismissal in bankruptcy filings. In re Padilla, 222 F.3d 1184, 1191-93 (9th Cir. 2000); In re Hageney, 62 Collier Bankr. Cas.2d 1845. Debtors are required to file and propose a plan (in the case of a Ch. 13 filing) in good faith and not by any means forbidden by law. 11 USC ??? 1325 (a)(3), 1307(c), 707(b)(3)(A) Good faith is determined on a case by case basis looking at the totality of the circumstances. In re Marshall, 298 B.R. 670, 676 (C.D. Cal. 2003); In re Sylmar Plaza, 314 F.3d 1070, 1074-75 (9th Cir. 2002). In the case of a Chapter 13 filing, the Fourth Circuit provided a non-exhaustive list of some of the factors that courts may consider: (1) percentage of proposed repayment; (2) debtor's financial situation; (3) the period of time payment will be made; (4) debtor's employment history and prospects; (5) the nature and amount of unsecured claims; (6) debtor's past bankruptcy filings; (7) debtor's honesty in representing facts; (8) the nature of debtor's pre-petition conduct that gave rise to the case; (9) whether the debts would be dischargeable in a Chapter 7 proceeding, and; (10) any other unusual or exceptional problems the debtor faces. In re Bridges, 326 B.R. 345, 349-50 (D.S.C. 2005) (citing with approval Solomon v. Cosby, 67 F.3d 1128, 1134 (4th Cir. 1995)). In the case of a Chapter 20 filing, courts also consider additional factors: (1) the proximity in time of the Chapter 13 filing to the Chapter 7 filing; (2) whether the debtor has incurred some change in circumstances between the filings that suggests a second filing was appropriate and that the debtor will be able to comply with the terms of a Chapter 13 plan; (3) whether the two filings accomplish a result that is not permitted under either standing along, and; (4) whether the two filings treat creditors in a fundamentally fair and equitable manner or whether they are an attempt to manipulate the bankruptcy system or are an abuse of the purpose and spirit of the Bankruptcy Code. In re Bridges, 326 B.R. 350citing with approval In re Cushman, 217 B.R. 470, 477 (Bankr. E.D.Va.1998). A party with standing must timely file an objection to the bankruptcy for the court to consider whether it was not made in "good faith." In re Daniel Lavila, 425 B.R. 572 (E.D. Cal 2010). Debtors have the burden of proving by a preponderance of the evidence that the filing was in good faith and, in the case of Ch. 13, that the plan meets the confirmation requirements of ? 1325(a). In re Bridges, 326 B.R. at 350 (citing with approval In re Marett, 1996 WL 33340790 at *7 (Bankr. D.S.C. 1996)). The inquiry focuses on the debtor's conduct not the debtor's financial affairs. In re Hageney, 62 Collier Bankr. Cas. 2d 1845, (citing with approval In re Honkomp, 416 B.R. 647 (N.D. Iowa 2009)). Minor improprieties are not sufficient to constitute bad faith. In re Marshall, 298 B.R. at 679. Particularly relevant to the question at hand, courts have refused to find a bad faith filing where debtors file bankruptcy for purposes other than discharge. For example, in In re Marshall, 298 B.R. at 676, the court held, when confirming debtor's Chapter 11 plan, that a solvent debtor who filed to avoid posting a supersedeas bond in state court litigation did not do so in bad faith. Lack of good faith in filing has been found where multiple bankruptcy filings are used to prevent foreclosure or where it is used to frustrate other court proceedings. Bad faith filings have been found where a debtor filed multiple bankruptcies in order to avoid foreclosures. In re Byron Kinney, 51 B.R. 840 (C.D.Cal. 1985); WAMU v. Phillips, 2010 Slip Op. 32139(U) (Sup.Ct. Richmond Cnty. 2010); In re Smail, 129 B.R. 676, 678 (M.D. Fla. 1991). "Bad faith" is also found where bankruptcy is filed for the sole purpose of obstructing a civil case. In re Gootnick Family Trust, 308 Fed. Appx. 183, 184, (9th Cir. 2009). In that case, bankruptcy was filed for the sole purpose of delaying a state court trial. Similarly, in Esien v. Curry, 14 F.3d 469, 471 (9th Cir. 1994)(per curiam), the court found that bad faith existed where the debtor filed to frustrate state court action, as it multiplied proceedings "unreasonably and vexatiously." See also In re Nelson, 334 Fed. Appx. 65, 66 (9th Cir. 2009) (unpublished); In re Chinichian, 784 F.2d 1440, 1444-46 (9th Cir. 1986). Further, lack of good faith has been found where the debtor misrepresents claims in their petition, files incomplete schedules, manipulates the bankruptcy system to avoid a past waiver of discharge, or where a voidable transfer exists. In re Nelson, 334 Fed. Appx. at 66; In re Hageney, 62 Collier Bankr. Cas.2d 1845; In re Victor Caola, 422 B.R. 13 (D.N.J. 2010) (prepetition conveyance can be in bad faith); In re Daniel Lavila, 425 B.R. 572 (E.D. Cal 2010)(lack of good faith found where debtor "has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed a plan in inequitable manner"). In conclusion, a single bankruptcy filing made for the purposes of avoiding a trustee sale does not appear to constitute a bad faith filing. A lack of good faith has been found where the debtor has filed multiple times to avoid a trustee sale. Similarly, where a debtor filed to frustrate other court proceedings or intentionally submits inaccurate documents the filing has been held in bad faith. However, where bankruptcy is filed once and for purposes other than discharge per se, it has not been held to be in bad faith.