Opinion
Bankruptcy Nos. 04-31484DWS, 03-36593DWS.
December 8, 2004
MEMORANDUM OPINION
Before the Court is the (1) Motion of the Debtor to Reconsider Order Annulling the Automatic Stay in Bankruptcy No. 03-36593 (the "Debtor's Motion") and (2) the Motion of Chase Manhattan Mortgage Corporation ("Chase") for Relief from the Automatic Stay of Bankruptcy No. 04-31484 ("Relief Motion"). While the Debtor's Motion is characterized as a reconsideration motion, counsel has subsequently stipulated that reconsideration is appropriate due to a procedural defect in the entry of the annulment order entered by default. An evidentiary hearing was thus held on Chase's motion to annul the stay in Bankruptcy No. 03-36593 (the "Annulment Motion") to determine the appropriateness of annulment, and if annulment is warranted whether the automatic stay should be lifted in the present case to allow Chase to complete the exercise of its state law remedies. BACKGROUND
The original hearing was held on September 22, 2004 at which counsel appeared but no record was made. When I advised Debtor's counsel that the Debtor's Motion appeared to rely on factual averments, he and opposing counsel agreed, and I accepted, a record to be offered by stipulation. Such document, along with the Debtor's brief, was due on October 8, 2004 and Chase was offered the opportunity to file a responsive brief ten days thereafter. Neither the stipulation of facts nor Chase's brief were filed. The Debtor's brief was filed but was replete with unproven facts. However, the parties subsequently agreed that the record could be made at a further hearing, and one was scheduled by agreement for October 29th.
This is Debtor's fifth bankruptcy case, having been filed on August 24, 2004 by new counsel to attempt to undo the consequence of actions taken by the holder of the mortgage on Debtor's real estate located at 606 West Olney Avenue, Philadelphia, Pennsylvania (the "Premises"). A brief synopsis of the serial Chapter 13 cases, all filed on her behalf by Joseph Diorio, Esquire ("Diorio"), sets the backdrop for the circumstances the Debtor finds herself in with respect to the Premises.
Case no. 1, 01-32444, was filed on September 25, 2001 after of a writ of execution was filed in connection with a praecipe to enter a default judgment in foreclosure with respect to the Premises. The case was dismissed on March 22, 2002 because the Debtor failed to commence making timely payments to the Chapter 13 trustee as required by 11 U.S.C. § 1326. At the time of dismissal, Chase had a pending motion for relief. Exhibit M-3.
Chase began enforcement proceedings on February 26, 2001 when it filed its complaint in foreclosure. Exhibit M-2.
Case no. 2, 02-16116, was filed on April 26, 2002, one month after the dismissal of the prior case, and dismissed on October 4, 2002 because the Debtor had failed to make plan payments and the plan was not feasible. Chase had secured relief from stay by default in this case. Exhibit M-3.
Case no. 3, 02-37267, was filed on December 3, 2002, two months after the dismissal of the prior case, and served to stay a pending sheriff sale. Exhibit M-2. This case was dismissed on July 10, 2003 on a Trustee's motion. Exhibit M-3.
Case no. 4, 03-36593, was filed on November 11, 2003, the same day as the renewed sheriff's sale of the Premises which were in fact sold on that date. Chase filed an annulment motion (the "Prior Annulment Motion") to validate the sale that had contemporaneously occurred. While Debtor filed an answer, she did not appear at the hearing on the Prior Annulment Motion. In any event, the annulment order was not entered as the case was dismissed at the prior morning hearing on a motion of the Chapter 13 trustee for failure to file the documents required by Bankruptcy Rule 1007.
The actual order was not entered until the next day, January 9, 2004.
On January 22, 2004 after the dismissal of case number 4, Chase filed the Annulment Motion, and scheduled a hearing thereon on notice to Debtor who neither answered nor appeared. On February 24, 2004 the Order presently being challenged was entered based on the admitted averments contained in the Annulment Motion, including the fact that Chase became the owner of the Debtor's residential property on November 11, 2003 and that it did not have notice of the bankruptcy filing in which the stay was imposed. Chase no longer relies on this Order, advising the Court that it views the prior dismissal of case no. 4 to require the Annulment Motion to be reconsidered as requested by the Debtor.
Some seven months later, Debtor filed the instant case apparently responding to Chase's efforts to evict her from the Premises she no longer owns and asserts as grounds for relief the failure of her counsel in the four prior cases to properly advise her of what was occurring in her cases thereby precluding her from effectively defending herself. In support of her contention that Diorio did not properly counsel her, she presented the testimony of Christina Fultz ("Fultz"), a former legal assistant and office manager in Diorio's law office. She testified in detail about Diorio's mishandling of Debtor's cases. In particular, she noted his procrastination in filing the fourth petition on the eve of the sheriff sale after Debtor had contacted him some months before about her "changed circumstances." Fultz indicated that it was she who contacted Debtor to let her know that she had to make plan payments, and that ultimately she left Diorio's employ due to her compassion for his clients and the excessive responsibility she bore for their affairs. She noted that Diorio charges a comparatively modest fee for refiling and agrees to payment arrangements that limit the up front retainer a prospective debtor is required to post. This supports Debtor's explanation that her repeated retention of Diorio in four unsuccessful cases in which she contends he failed to counsel her properly was driven by fees. However, it is also apparent that Debtor was not actively involved in her cases and she acknowledges they failed because of insufficient financial resources. She has no knowledge of what she owes on the Chase mortgage although her Schedules indicate a secured obligation of $100,000 nor could she recall when she last made a mortgage payment when not in bankruptcy. Indeed she admits that she fell into arrears under the mortgage three months after it was obtained. She has no recollection of the state court judgment or its reassessment, but agreed that she is living in a property where she owes $20,000 more than the scheduled value of the Premises of $70,000.
While her original reliance on Federal Rule of Bankruptcy Procedure 9024, incorporating Fed.R.Civ.P. 60(b)(1) and (b)(6), has been rendered unnecessary by Chase's concession, the grounds for annulment are in large part the same.
On questioning by the Court, Fultz disclosed that she was discussing terms of reemployment with Diorio but it did not materialize.
She stated that he did not tell her to attend the Annulment Motion hearing but rather that everything was taken care of. As to the filing of her fourth case on the eve of a sheriff's sale, she explained that she had tried ten to fifteen times to get to Diorio before the sale date.
In the first case, no plan was confirmed and she could not explain why since she did not understand what a plan is. She didn't know why the case was dismissed although she acknowledged failing to make payments because she was laid off. In her first 2002 case, she got a new job but was laid off after the 90 day probation period concluded. She testified that she was without a job in her second 2002 case, filing the petition based on her belief that she would secure employment. When it was dismissed, she was working but not earning enough to make the Trustee payments.
Since the latest case was filed, she has made two payments of $1,000 to the Chapter 13 trustee under her plan. She uses the Premises as a day care center which had opened in April 2003 and therefore operated during her third and fourth bankruptcy cases. She asserts that the number of children enrolled have increased to seven although how many were enrolled during the prior cases was not elicited. Indeed no details were provided on the operation of the business. She reports monthly income of $3,900 consisting of gross day care revenue ($3,500) and support ($400). If she is evicted, the business will have to close.
Payments were made on September 8, 2004 and October 28, 2004. A current review of the Trustee's payment ledger indicates that she is $1,000 in arrears under her plan as no payment was made since the hearing on October 28, 2004.
Schedule J contemplates the attachment of a detailed statement of business expenses to support the $650 of expenses claimed. It was not provided. Schedule J also lists $200 per month for income taxes but nothing for business privilege or real estate taxes. The expense allocation for taxes seems unrealistically low.
DISCUSSION
A.
The discretion afforded a bankruptcy judge to grant relief from the automatic stay includes the authority to grant an annulment of the stay, thereby validating an act done in violation of the stay which would otherwise be deemed to be void ab initio. In re Siciliano, 13 F.3d 748, 751 (3d Cir. 1994). Clearly this action is only taken in exceptional circumstances. Kissinger v. Kissinger, 72 F.3d 107, 108 (9th Cir. 1995) (failure to obey stay caused by judge, not creditor and retrial would impose either a nonsensical result or impose a hardship due to cost).See also In re Blaylock, 301 B.R. 443 (Bankr. E.D. Pa. 2003).
The factors which, if present, will warrant annulling the stay were reviewed with their decisional authority in the bankruptcy court's decision in Siciliano on remand, 167 B.R. 999 (Bankr. E.D. Pa. 1994). They include whether the creditor had knowledge of the debtor's bankruptcy filing, whether the debtor is guilty of some inequitable conduct, such as abusive and/or repetitive bankruptcy filings, whether the debtor has encouraged the creditor to proceed notwithstanding the stay or only asserts the stay when it is unsuccessful in the outcome of an action it allowed to proceed, and whether the expenses of beginning anew with its enforcement remedy outweigh the benefit to anyone. Id. at 1007-09. In In re Stockwell, 262 B.R. 275 (Bankr. D. Vt. 2001), cited by Debtor, the court identifies these and several additional factors: whether there is equity in the property of the estate; whether the property is necessary for an effective reorganization; whether if grounds for relief existed and a motion, if filed, would likely have been granted prior to the automatic stay violation; if the creditor has detrimentally changed his position on the basis of the action taken. Id. at 281 (quoting In re Lett, 238 B.R. 167, 195 (Bankr. W.D. Mo. 1999)). None of these factors are dispositive alone, but require a weighing of the equities since the remedy is equitable in nature.
In the instant case, Chase was not given notice of the filing of a petition which occurred on the same day as the sheriff's sale of the Premises. It had proceeded notwithstanding the bankruptcy because the sheriff presumably likewise received no notice. The Debtor has used bankruptcy on four occasions to obstruct Chase from exercising its state law remedies to recover a loan in default almost since its inception. However, Debtor now argues that these failed bankruptcy cases should not be held against her because her lawyer was not competent. I reject that argument for two reasons. First, while Debtor attributes her bankruptcy failures to Diorio who, I concur, provided less than zealous representation, Debtor cannot delegate the personal responsibilities of a debtor in bankruptcy to counsel. She is required to ask questions and stay involved and if the answers are unclear or not forthcoming, to seek other representation. While Diorio may have been cheaper than other counsel, when she was poised to become evicted from the Premises, she found the funds to find a new lawyer. More significantly, in the end, it was Debtor, not Diorio, that failed to make the payments that ultimately doomed those cases. Moreover, as Diorio was supported by Fultz, a knowledgeable and concerned paraprofessional, Debtor was advised of the requirements to maintain her cases. Again it was lack of financial resources to fund her plans not inadequate counsel that precipitated the loss of the Premises. Second, while it is regrettable that the quality of the legal services provided to consumer debtors at times exacerbates a debtor's financial duress rather than ameliorates it, it is fundamentally unfair to transfer the burden of inadequate counsel to the opposing party. The notion that a recidivist debtor can resist relief by contending that a new and improved counsel is the change of circumstance that supports yet another opportunity to do what he has failed to do to date is untenable. Malpractice law, not bankruptcy law, is intended to address this issue.
The Debtor testified that she could not recall whether Chase or the sheriff were advised of the new filing. The parties agree that the sale was scheduled for 10:00 a.m. and the filing occurred at 10:15 a.m. Chase appears to concede that the actual sale of these Premises occurred after the petition was filed but apparently in too close a proximity for notice to have been provided. Debtor, who had sought a new filing from Diorio, some time before, supports her case with this evidence of his dilatory conduct. However, since he did succeed in filing prior to the sale and thus tainting the sale, I am not certain how this conduct prejudiced her. Had Diorio filed sooner, presumably Chase would have sought relief from stay to allow the sale to go forward, a motion likely to have been granted.
Attorneys, like Diorio here, who file repeated Chapter 13 cases to gain the benefit of the automatic stay for clients without the potential of a feasible reorganization plan may buy their clients some amount of time to retain their houses but at a price. Their clients are given at best false hope and at worst instilled with a lack of respect for the court system. They spend thousands of dollars on attorneys fees which could be better dedicated to finding a long term solution to their housing problem that they can afford.
Debtor cites In re Osborne, 379 F.3d 277 (5th Cir. 2004), for the proposition that relief from an ex parte order implementing a drop dead clause was warranted where counsel failed to act in a timely manner in proffering a valid defense to the certification of default that preceded the order. This case is plainly inapposite to the circumstances here as Osborne had clearly complied with her obligations to the mortgagee and the default was the sole consequence of counsel's failure to challenge the certification. Debtor here has never contended that she had a defense to the Annulment Motion had it been heard on January 8, 2004. Rather she contends that she is able today to do what she was unable to do during her four cases and seeks another opportunity to try.
Because I am not persuaded to ignore Debtor's bankruptcy history, I must consider then whether the likelihood of the Debtor having a successful reorganization is sufficiently significant to compel Chase to begin anew with its enforcement remedy should the latest attempt fail also. If the refusal to grant nunc pro tunc relief will likely result in Chase's need to repeat the foreclosure with its concomitant cost and delay, principles of equity dictate that I not do so. Where, as here, there have been multiple filings, the Debtor's burden to establish that there is a reasonable prospect of reorganization is heavier than if she were writing on a clean slate. See In re Legree, 285 B.R. 615, 620 (Bankr. E.D. Pa. 2002).
The evidence elicited by the Debtor does not persuade me to compel Chase to set aside its sheriff's sale in order to provide Debtor with a fifth opportunity to attempt to reorganize. Debtor's long history of bankruptcy protection mitigates against her being accorded any benefit of the doubt about her capability to fund a Chapter 13 plan that cures Chase's arrears. Debtor has been in default of her mortgage obligation almost since its inception in June 2000. Chase has been stayed by bankruptcy from the exercise of its state law remedies for over three years. It is clear that there is no equity in the Premises. While the Premises are necessary for the operation of the day care center upon which Debtor relies for her income, I am not persuaded that an effective reorganization can be based on her retention of the Premises. The fact that she made the two initial Trustee payments prior to the hearing in this case does not dictate otherwise in light of the failures to make payments in the prior cases. Id.
The Debtor would have me make that determination based on the situation today, not when the stay was violated or when the original annulment motion was filed. Chase does not challenge that analysis and thus I will accept the Debtor's premise in this case and view the Debtor's circumstances as presented today.
The day care center was opened in April 2003 during Debtor's third case which had been filed to stay a sheriff sale and was dismissed in July on a Trustee's motion for non-payment. She states that since then her business has increased to seven children with potential for more but provides no basis from which I can conclude that this change of circumstance means that she can now cure her mortgage arrears and stay current on the mortgage loan. She has provided no financial information indicating the past, present and projected business earnings. I do not know, for example, how many children were enrolled in 2003 when she could not generate sufficient revenue to pay the mortgage and Trustee, and whether the current seven children will generate sufficient revenue less costs to fund a Chapter 13 plan. Notably although Debtor made no mortgage payments to Chase since January or February 2004, she filed this case on August 24, 2004 with $100 of cash and $1,500 in her checking account. As Debtor's proposed plan payment of $1,000 is based on contemplated excess monthly disposable income of that amount, one would assume some accumulated savings at the time of the filing in excess of the amount reflected on her schedules. Yet that is not the case. Moreover, while it was demonstrated that Debtor was current with the Chapter 13 trustee at the time of this hearing, the Trustee's ledger posted on the internet, of which I take judicial notice, indicates no payment for this month. I recognize that this case has just begun and under other circumstances, the Court would allow the Debtor some opportunity to prove her ability to succeed. However, in case number 5 with the Premises sold, the Debtor is not entitled to that leeway. Weighing the factors outlined above, I conclude that annulment is warranted under these circumstances.
In the fourth case, which commenced on November 11, 2003, the day the Premises were sold, the Debtor made payments to Chase and the Trustee in January and/or February 2004. While Debtor's counsel attempted to lead the Debtor to state that her failure to make payments to the Trustee and Chase was caused by Diorio's misguidance, she testified that she ceased making payments because she knew she was to be evicted.
B.
Having found that annulment of the stay should be granted and thus the sheriff's sale validated, it follows that Debtor no longer has an ownership interest in the Premises. Chase seeks relief from stay in this case to exercise its state law remedy of eviction. It is generally held that where the sole interest a debtor holds in a property is one of possession, stay relief is warranted. See, e.g., In re Liggett, 118 B.R. 213, 218 (Bankr. S.D.N.Y. 1990) ("Even if bare occupancy were deemed to be an equitable interest in the [property], and thus property within the meaning of Code § 541, it would not assist the Debtor because that interest is so tenuous as to represent merely a scintilla of an interest insufficient to warrant the continued protection of the automatic stay."); Matter of R.R.S., Inc., 7 B.R. 870, 873 (Bankr. M.D. Fla. 1980) ("[T]he automatic stay provision of § 362 of the Bankruptcy Code does protect the debtor's naked right of possession of the premises, but for a very limited time only."). I find no reason not to apply that rule here.
I am however mindful that Debtor uses the Premises as a day care center and that there are seven children who are enrolled. To allow Chase to evict the Debtor would precipitously close the center and be harmful to the innocent families who would have no placement for their children. Presumably the parents are employed and without care for their children, would miss work. Their income and possibly their jobs could be adversely affected. It is in the interests of justice to condition the stay relief to accommodate these interests. Accordingly I will order that Chase take no action to evict Debtor from the Premises until February 1, 2005 provided that Debtor pays to Chase $767.00 (the regular mortgage payment) for December 2004 and January 2005. The first payment shall be made within five (5) days of entry of this Order and the second payment by January 10, 2005. If this case is dismissed for any reason, the Trustee shall pay to Chase such amount that is owed and unpaid under this Order before returning any funds to the Debtor.
An Order consistent with this Memorandum Opinion shall be entered.
ORDER
AND NOW, this 8th day of December 2004, upon consideration of (1) Motion of the Chase Manhattan Mortgage Corporation ("Chase") to Annul the Automatic Stay in Bankruptcy No. 03-36593 (the "Annulment Motion") and (2) Chase's Motion of for Relief from the Automatic Stay of Bankruptcy No. 04-31484 ("Relief Motion"), after notice and evidentiary hearing, and for the reasons stated in the foregoing Memorandum Opinion;
As noted in the foregoing Memorandum Opinion, the Debtor's Motion is moot as Chase has agreed to reconsideration of the Annulment Motion.
It is hereby ORDERED that:
1. The Annulment Motion is GRANTED.
2. The Relief Motion is GRANTED provided that Chase may take no action to evict Debtor until February 1, 2005 provided that Debtor makes the following payments to Chase: (a) by December 16, 2004, the amount of $767; (b) by January 10, 2005, the amount of $767.
3. If this bankruptcy case is dismissed for any reason without payment by the Debtor of the foregoing, the Chapter 13 trustee is directed to pay to Chase any amount that is owed and unpaid on the date of dismissal before returning any funds to Debtor.