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Serial Filings That Block a Creditor: Better Not to Obtain More Relief Than You Need

In re Ross, 838 F.3d 779 (3rd Cir. 2017) –

A debtor filed bankruptcy to block a foreclosure. When he sought to voluntarily dismiss the case, the bankruptcy court granted the request but also enjoined him from filing at any time in the indefinite future. The order was appealed first to the district court and then to the Third Circuit.

After the debtor and his wife fell behind in their mortgage payments, the mortgagee filed a foreclosure action, obtained a default judgment and then scheduled a sheriff’s sale. The day before the sale, the debtor filed a bankruptcy petition, which triggered the automatic stay and blocked the sale. This bankruptcy case was dismissed after the debtor failed to make scheduled payments.

The mortgagee rescheduled the sale, and the debtor filed another bankruptcy petition on the day of the rescheduled sale. The bankruptcy court granted the mortgagee relief from the automatic stay, and the sale was yet again rescheduled. This time, the debtor’s wife filed bankruptcy to delay the sale. The wife’s case was soon dismissed for failure to obtain required prepetition credit counseling.

In the meantime, the mortgagee filed a motion in the debtor’s second case to either convert from a chapter 13 to a chapter 7 case or dismiss the case based on bad faith. After the bankruptcy court denied the debtor’s motion to postpone a hearing on the mortgagee’s motion, the day before the hearing the debtor sought to dismiss his case.

The court proceeded with the hearing on the mortgagee’s motion notwithstanding the debtor’s failure to appear. The mortgagee expressed a preference for converting the case, but if the court chose to dismiss the case asked the court to enter either (1) an injunction “barring future filings [of both debtor and his wife] for 180 days” or (2) an injunction “barring the use of the automatic stay in any future filings by either one of them.”

The bankruptcy court expressed concerns that the debtor’s wife did not receive due process because she was not given notice of the hearing and suggested that the mortgagee file a separate request for an injunction the against the wife. Accordingly, following the hearing the court issued an order it did not address the wife but did dismiss the debtor’s case “with prejudice,” and provide that “the Debtor is not permitted to file another bankruptcy case without express permission from this Court.”

As suggested by the court, the mortgagee filed a new request in the bankruptcy case of the debtor’s wife asking for the same two alternatives it requested in the debtor’s case (180-day bar or blanket relief from the automatic stay). In response, the bankruptcy court enjoined the debtor’s wife from filing bankruptcy for 180 days and decreed that the automatic stay would not prevent the mortgagee from enforcing its mortgage foreclosure judgment. The mortgagee did not ask for, and the bankruptcy court did not grant, the broader indefinite injunctive relief granted against the debtor.

During the appeal process, the mortgagee completed the sheriff’s sale. However, the state court undid the sale because the debtors did not receive proper notice in the state action. Ultimately the parties entered into a near-global settlement involving the debtors’ promise to make payments in exchange for abandonment of the foreclosure.

The only remaining issue was the indefinite injunction against subsequent bankruptcy filings by the debtor – which remained in effect. On appeal the debtor argued (1) the bankruptcy court could not impose a filing injunction when the debtor moved for voluntary dismissal as a matter of right, and (2) alternatively the bankruptcy court abused its discretion.

In response to the first argument, the Third Circuit found that the bankruptcy court had authority under the general statutory authority in section 105(a) of the Bankruptcy Code and through its inherent power to sanction “abusive litigation practices.” Although these equitable powers are not without limit, this case did not involve a conflict with “specific,” “explicit,” or “express” terms of the Bankruptcy Code.

While noting a split in authority about whether the right to dismissal is absolute (as opposed to being subject to a bad faith exception), the court concluded that even if the bankruptcy court was required to dismiss the case, it could still include a filing injunction with the dismissal order. The court also addressed various details of the debtor’s arguments and ultimately concluded the bankruptcy court had authority to issue if filing injunction.

However, the court still found the filing injunction “problematic” given the circumstances of the case. Orders may not be “arbitrary or irrational,” and on appeal the court gave less deference to decisions unaccompanied by reasoning. “Although we may affirm the judgment of the lower court for any reason supported by the record, … we are not obligated to search the record for reasons to affirm and may vacate or remand if the lower court declined to provide reasoning supporting its decision.”

Elements that the court found troubling were:

  • The injunction went beyond what the mortgagee requested. Although the mortgagee only asked for 180 days, the court enjoined the debtor’s bankruptcy filings for the indefinite future.

  • The injunction against the debtor was harsher than the injunction against the debtor’s wife even though there was no indication that the two were not similarly situated. In the wife’s case, the bankruptcy court also limited its injunction to what the mortgagee requested.

  • Section 109(g) of the Bankruptcy Code was “persuasive authority” that a 180-day restriction may have been sufficient. That section imposes a 180-day filing restriction on debtors who have (1) willfully failed to abide by court orders or to appear or (2) requested and received a dismissal prior to a ruling on a request for relief from the automatic stay. Noting that this did not apply to the debtor, the court commented that if 180 days was often sufficient for these bad faith debtors, then the court felt that this period may have been sufficient for the debtor.

Given these considerations in combination with the failure of the bankruptcy court to explain its reasoning, the Third Circuit concluded that the bankruptcy court abused its discretion.

If any one of these factors had not been present, or if the Bankruptcy Court had provided oral or written reasoning describing a legitimate rationale for the broad nature of its filing injunction, then perhaps we would have arrived at a different result, because even broad filing restrictions are common and often justified. … Nevertheless, a broad filing injunction is an “extreme remed[y]” that “should be narrowly tailored and sparingly used.”

The court seemed ambivalent. On the one hand, perhaps it found the debtor more sympathetic than the typical serial filer, and on the other hand, the bankruptcy court could be viewed as overreacting to the debtor’s conduct. In any event, providing a foundation to justify sanctions is always a good idea.

Vicki R Harding, Esq.

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