Opinion
Bankruptcy No. 04-36506 SR.
March 31, 2005
OPINION
I. Introduction
Before the Court is Delaware County, the City of Chester, and Chester Upland School District's (collectively, "Movants") Expedited Motion to Dismiss Debtor's Bankruptcy Case with Prejudice and/or, in the Alternative, for Relief from the Automatic Stay ("Motion"). Pro se Debtor opposes the Motion. The Court held a hearing on this matter on February 11, 2005. For the reasons stated below, the Court will grant the Motion and will dismiss Debtor's case with prejudice. Further, the Court will bar Debtor from filing any future bankruptcy cases without express leave of Court.
Some confusion exists regarding Debtor's legal representation. On February 8, 2005 — the date originally scheduled for hearing — Jacquelyn Frazier-Lyde, Esquire appeared on Debtor's behalf to seek a continuance. Ms. Lyde indicated that she intended to enter her appearance on behalf of Debtor, and sought a continuance because Debtor was in Florida attending a funeral. Based on Ms. Lyde's request, the Court continued the hearing to February 11, 2005. On February 11, 2005, however, Debtor appeared pro se. Curiously, Ms. Lyde attended the February 11 hearing, but merely as a spectator in the courtroom.
II. Background
Debtor owns property located at 405 North Madison Street, Chester, Pennsylvania (the "Property") in one of southeastern Pennsylvania's most economically depressed localities. On December 13, 2004, on the eve of a scheduled tax sale where Movants sought to foreclose and recover over $190,000 in unpaid real estate taxes on the Property, Debtor commenced this bankruptcy case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code.
Accrued taxes owing on the Property now exceed $230,000.
This is Debtor's third bankruptcy filing in the past six years. This filing also represents the third attempt to stay foreclosure of this Property in the past two years with no payments to creditors. The previous two Chapter 13 bankruptcy cases were filed in 2003 by Janice D. Cottom-Myers ( see Docket Numbers 03-18179 (BF) and 03-36027 (BF)). Debtor is a successor-in-interest by title to Ms. Cottom-Myers. In fact, what the Court learned during this proceeding is that Debtor acquired the Property in 2002 from Joseph Frazier (to whom Ms. Cottom-Myers conveyed the Property in 1995) and therefore was the legal owner of the Property at the time Ms. Cottom-Myers filed her two bankruptcies. Cottom-Myers last paid taxes on the Property in 1993. Debtor has not made any tax payments since becoming the owner in 2002.
Debtor previously filed a Chapter 7 case on January 21, 1999 and a Chapter 13 case on June 10, 2003. Debtor conceded that she filed her case in 2003 for the sole purpose of thwarting foreclosure of the Property (Hearing Transcript dated February 11, 2005 (hereinafter "Tr. at ___") at 24). The court dismissed Debtor's Chapter 13 case on August 5, 2003 for failure to file required documents.
In both Cottom-Myers bankruptcy filings, Movants sought relief from the stay to foreclose on their liens on the Property. Following a hearing held on November 16, 2004 before the Honorable Bruce I. Fox, Judge Fox terminated the automatic stay and allowed Movants to proceed with a judicial tax sale of the Property. Just days before the automatic stay was lifted, however, Debtor filed the deeds documenting that she was the legal owner of the Property, thereby forcing a cancellation of the scheduled foreclosure sale. Shortly thereafter, Debtor filed the instant proceeding.
Not only was Debtor admittedly aware of the Cottom-Myers bankruptcy filings, she attended the above-mentioned November 16, 2004 hearing before Judge Fox. (Tr. at 20). At no time during that hearing, however, did Debtor or anyone else acknowledge that she held legal title to the Property.
Debtor waited until May 2003 to file with the City of Chester and until November 2004 to file with Delaware County.
Movants filed their Motion seeking dismissal or, alternatively, relief form the automatic stay on the grounds that the Property's transfer to Debtor and Debtor's subsequent bankruptcy filing have been made in bad faith. Movants argue that Debtor's bankruptcy filing is without a legitimate reorganizational purpose, and is a continuation of the fraud perpetrated by Debtor, her predecessor-in-title, Ms. Cottom-Myers, and Joseph Frazier.
For the reasons discussed below, the Court will grant the instant Motion.
III. Discussion
A. Legal Standard
There is an implicit requirement that all bankruptcy cases, including one filed under Chapter 11, be filed in good faith. See, e.g., In re Lilley, 91 F.3d 491 (3d Cir. 1996) (discussing section 1307(c), the chapter 13 equivalent of section 1112(b)); In re Brown, 951 F.2d 564, 572 (3d Cir. 1991). If a petition is filed in "bad faith," it may be dismissed for "cause" under 11 U.S.C. § 1112(b). See, e.g., Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989); In re Natural Land Corp., 825 F.2d 296 (11th Cir. 1987). Whether cause exists under § 1112(b) and, if so, whether dismissal is appropriate, are questions left to the sound discretion of the bankruptcy court. See, e.g., In re Mazzocone, 180 B.R. 782, 785 (E.D. Pa. 1995).
To demonstrate good faith in filing a Chapter 11 bankruptcy petition, a debtor need not demonstrate with certainty that she will be able to confirm a plan of reorganization. Nevertheless, a repeat bankruptcy filer should show that there is some legitimate prospect of reorganization, recognizing that an earlier attempt was not successful. Without any such prospect, the second filing merely serves to delay the legitimate actions of secured creditors in recovering their collateral. A bankruptcy filing without a reorganization prospect is not in good faith. See, e.g., In re C-TC 9th Avenue Partnership, 113 F.3d 1304, 1310 (2d Cir. 1997) ("When it is clear that, from the date of filing, the debtor has no reasonable probability of emerging from the bankruptcy proceedings and no realistic chance of reorganizing, then the Chapter 11 petition may be frivolous."). Compare In re Clinton Centrifuge, Inc., 72 B.R. 900, 905 (Bankr. E.D. Pa. 1987) (When a debtor is motivated by plausible, legitimate reorganization (or liquidation) purposes and not solely or predominantly by the mere desire to prevent foreclosure or hinder creditors, bad faith is not present in a chapter 11 case.").
B. Bad Faith
The Court is very skeptical of the legitimacy of the Debtor's case. Movants are owed over $230,000 in tax liabilities. Debtor and her predecessors-in-interest have paid no taxes on the Property in the past twelve years. Instead, they have made transfer after transfer of title to the Property and filing after filing of bankruptcy in attempts to thwart a legitimate foreclosure of the Property. Debtor's sole purpose in filing the instant case is yet another attempt to stop a tax sale. Not only has Debtor not filed her case with any legitimate prospect of reorganization, her actions demonstrate abuse of the bankruptcy system.
Debtor admitted at the hearing that she has the financial ability to at least pay the current taxes but has not done so since 2002. (Tr. at 46). Debtor claimed that she attempted, after her bankruptcy case was filed, to make a payment of thirteen hundred dollars with the City of Chester but was turned away due to the bankruptcy filing. (Tr. at 39). The Court is unconvinced by Debtor's attempt to show good faith.
For example, Debtor has failed to comply with the most basic filing requirements. Debtor failed to file the required schedules until four days after a court order mandated their filing. She also failed to file operating reports until February 8 — just three days before the hearing on this Motion. Moreover, she failed to open a debtor-in-possession account until February 10 — just one day before the hearing. To date, she has put only one hundred dollars in that account.
Given that Debtor did eventually comply with the guidelines — albeit late — the United States Trustee has elected not to pursue its motion to dismiss based on failure to comply with filing guidelines. (Tr. at 11). As such, the Court deems the Trustee's motion moot.
In addition, the Court is troubled by Debtor's failure to protect the lien-holders' interest in the Property. Debtor has never maintained insurance on the Property. (Tr. at 22). Yet, in a transparent effort to show good faith, she offered into evidence an application for insurance with a proposed effective date of February 9, 2005 . (Ex. D-6). An application for insurance is not evidence that an insurance policy is in place. The Court finds Debtor's feeble attempt to demonstrate that she has provided protection to her creditors ineffective and self-serving.
Moreover, Movants and the Trustee raise legitimate concerns about under-valuation or under-insurance of the Property based on the insurance application submitted. Debtor represents on the application that the Property is valued at $80,000. ( See Ex. D-6). She claimed at the hearing, however, that the Property is worth over $1.3 million dollars. (Tr. at 42). If her claims concerning value prove true, then surely her procurement of a mere $80,000 worth of insurance on the property constitutes under-insurance. Debtor's lack of insurance, potential under-insurance, and growing arrears of tax payments put Movants at a great risk of loss of their collateral without any remedy.
At the hearing, Debtor proffered a separate theory under which the Property could be acquired by eminent domain and valued at over $1.3 million dollars.
Perhaps most distressing, however, is the litany of inconsistencies, omissions and misstatements by Debtor that were revealed at the hearing. Debtor's schedules are riddled with errors and omissions. For example, Debtor failed to report a Federal Credit Union account or a 1999 Ford Explorer on her schedules. (Tr. at 47-48; 50-51). She also failed to report the secured lienholder of the Ford Explorer that is owed $6,000. (Tr. at 47-48; 50-51). Instead, Debtor listed a BMW that she claims is no longer in running condition and that is apparently housed in Florida. (Tr. at 35). Debtor attached to her schedules an insurance policy not for the BMW but for the Ford Explorer. That policy identified Debtor as the named insured but with a postal office address in Greensboro, Florida. After waffling over whether she owned the vehicle ("I do have an Explorer, but the Explorer belongs to my son — well, it belongs to me, but. . . . And the vehicle belongs to him.") (Tr. at 21), Debtor conceded that the Ford Explorer should have been reported on her schedules. (Tr. at 36). She also testified that she used a Florida address on the insurance policy because her son was attending school in Florida, but then acknowledged that her son is neither listed as an insured nor a Florida resident. (Tr. at 49, 51).
In addition to the above, Debtor represented on a residential loan application that the original cost of the Property was $100,000. (Tr. at 26-27). That information is contradicted by the deed showing that the Property was conveyed to her for the sum of one dollar. (Ex. M-1). Similarly, Debtor listed the value of the Property in her schedules at $600,000 but, as discussed above, testified that she believes it is worth over $1.3 million. (Tr. at 42). Finally, Debtor listed two student loan amounts of $161,000 and $8,100 on her schedules, but later stated that the full consolidated amount totals $161,000, and that the schedules need to be amended. (Tr. at 41).
Faced with all of the above — including Debtor's absolute failure to take the bankruptcy filing requirements seriously, protect the collateral at issue, and repeated contradictions at the hearing — the Court is convinced that Debtor is proceeding in bad faith. Accordingly, the Court will grant Movant's Motion and dismiss the case.
C. Lack of Viability
Even if the Court were to find Debtor's filing in good faith, it would grant Movants' Motion on the additional grounds that Debtor cannot propose a viable reorganization plan. Although the operating statements lack detail, they indicate a net monthly income of $1,100. The Court sees no viable way that Debtor can submit a workable repayment plan based on that net income. Her debts include tax arrearages of over $230,000 in addition to current annual tax payments of over $9,700 (Tr. at 27), past due payments to the IRS of $300 per month (Tr. at 28), an automobile payment of $340 per month (Tr. at 47), insurance payments of $411 per month (Tr. at 35), and student loan payments of $100 per month (with a payoff amount of $161,000) (Tr. at 31), all totaling over $1,950 per month. Moreover, Debtor further envisions repayment of a new mortgage amount of $1,750 per month (Tr. at 27) that theoretically would be used to pay off the tax arrearages. Debtor's proposed "plan" is little more than replacing old debt with new and calling it a reorganization. Based on the evidence, the Court sees no viable way that Debtor can submit a workable reorganization plan.
Despite submitting operating reports just days prior to the hearing and under penalty of perjury, Debtor claims that the $1,100 net income figure was inaccurate and that the reports need to be amended. (Tr. at 28-30).
Debtor's prediction that the Property is worth significant value and will ultimately allow her to eliminate her debts is by no means a legitimate reason to allow this case to continue. Debtor obviously believes that, if she can stall foreclosure long enough until a sale of the Property occurs, she will have the funds to pay her debts. That is not a justified use of the bankruptcy process, and in fact further evidences Debtor's abuse of the system.
In sum, based on the totality of the circumstances, the Court finds dismissal of this case is warranted. Debtor and her predecessors have filed three separate bankruptcy cases in efforts to thwart the tax sale of this Property. Debtor has made no credible effort to pay the tax monies owed or to adequately protect the collateral. Clearly, her sole intent in filing the instant case was to stop the foreclosure sale, not to reorganize. The Court finds the Debtor's filing of this case an exceedingly obvious abuse of the bankruptcy system.
IV. Conclusion
For the reasons stated above, the Court will grant the Motion and dismiss Debtor's case with prejudice. Further, the Court will bar Debtor from filing any future petition in bankruptcy court absent express written approval of this Court.
The Court's decision to dismiss the case makes Movant's alternative request for relief from the stay moot.
An appropriate order follows.
ORDER
AND NOW, upon consideration of Delaware County, the City of Chester, and Chester Upland School District's Expedited Motion to Dismiss the Debtor's Bankruptcy Case with Prejudice and/or, in the Alternative, for Relief from the Automatic Stay ("Motion"), and opposition thereto, and after a hearing held thereon on February 11, 2005, it is hereby:
ORDERED, that for the reasons stated in the accompanying Opinion, the Motion is GRANTED;
IT IS FURTHER ORDERED that this case is hereby DISMISSED WITH PREJUDICE, under 11 U.S.C. § 1112(b) for cause, and that Debtor is BARRED from filing any future bankruptcy case absent express written leave of this Court.