Opinion
Case No. 03-12657-RGM
August 11, 2003
MEMORANDUM OPINION
This case is before the court on the consent order submitted by the parties that conditions the automatic stay upon the sale of the debtor's home. The submitted order contained a provision that would have granted in rem relief from the automatic stay if this case were to be dismissed and a new one filed. The reason given for the requested in rem relief was the multiple filings by the debtor.
The court's records reflect that this is the third filing by the debtor. The first was a joint chapter 7 case filed on September 10, 1998, Case No. 98-16675-SSM. It was closed on January 12, 1999. The second petition was filed only by the debtor, Case No. 03-11299-RGM. It was filed under chapter 13 on March 19, 2003 and voluntarily dismissed by the debtor on April 15, 2003. This is the third case. It was filed on June 4, 2003 as a chapter 13 case.
The debtor scheduled his home on Schedule A. It reflects a fair market value of $835,000 with a total indebtedness of $531,043. Schedule D reflects that the indebtedness consists of two liens, the first in favor of Wells Fargo, the movant, in the amount of $403,043 and the second in favor of Fairbanks Capital Corp. in the amount of $128,000. Fairbanks filed a proof of claim asserting a total of $173,884.86 which includes a pre-petition arrears of $15,266.61, a seven-months arrears. Two unsecured creditors are scheduled on Schedule F, totaling $68,500 and one additional undersecured creditor on Schedule D.
The debtor filed a motion on July 6, 2003 for authority to sell the real property. (There is, apparently, no contract.) The motion recites that the creditors scheduled as unsecured creditors on Schedule F — James Redden and John and Pat Fagnani — hold judgment liens against the property. The creditors filed proofs of claims that reflect judgments were entered. However, the Redden proof of claim reflects that the suit and the judgment were only against the debtor and not against his spouse. The Fagnani proof of claim does not reflect whether it was a joint judgment. It was granted by the Fauquier County General District Court. The real property is situate in Fairfax County. It is unclear, even if it is a joint judgment, whether it has been properly docketed in Fairfax County. Whether these creditors are secured or — more likely — unsecured, their rights are clearly affected by the proposed relief from stay order. They have not been served — and are not required to be served — with the motion for relief from the automatic stay or the proposed consent order. The chapter 13 trustee who is charged with protecting their interests was served and consented to the proposed order.
Schedules I and J reflect that the debtor has no net disposable income with which to fund a traditional chapter 13 plan and insufficient income to meet his regular monthly expenses. Schedule I reflects no income for his wife. Question 1 of the Statement of Financial Affairs states that the debtor's 2001 income was $90,000; that his 2002 income was $45,000; and that his income, year-to-date, for 2003 was $7,000. The income for 2003 appears to have been for a five-month period.
In rem relief in the event of a future filing is available in appropriate circumstances. Those circumstances generally require two elements — bad faith or abuse of the bankruptcy system and harm to the secured creditor if in rem relief is denied that exceeds the harm to the unsecured creditors and other parties in interest if in rem relief is granted. Here, neither element is present.
The first filing was in 1998, four and a half years before the second filing. If there was a default in the first deed of trust at that time, the movant had ample opportunity to assert its remedies. The present default commenced, according to Wells Fargo's motion, with the June 2002 payment. A foreclosure sale was scheduled for March 26, 2003 but was cancelled because the second petition was filed on March 19, 2003. There is no allegation that the second filing was in any way connected with the first filing or that it was part of a scheme or plan that permitted the debtor to accomplish indirectly that which he could not accomplish directly. In these circumstances, the first filing cannot be considered part of the "serial" filing of which the movant complains.
The deed of trust was dated December 20, 1991, a date well before the first bankruptcy petition.
In Virginia, a sale under a deed of trust can typically be accomplished within 30 days after the notice of sale is first published. Sales are non-judicial sales. No prior state court action is necessary.
The debtor requested that the second case be dismissed under § 1307(b) on April 15, 2003. This case, the third, was filed on June 4, 2003. There is no explanation in the record for the dismissal of the second case or the filing of this case. They must be considered related. Both the first and the second trusts were in default at the time of the second filing. The defaults continued until the third filing. There are no new creditors or other change in circumstances between the second and third filings reflected on the schedules or statement of affairs. No one appears to have detrimentally changed his position in reliance on the dismissal. No preference period appears to have expired during the hiatus between the two cases. No unfair advantage appears to have been obtained.
The order dismissing the case was entered on April 17, 2003 and the case was closed on April 29, 2003.
Redden obtained his judgment by an order entered on March 24, 2003, five days after the filing of the second petition. Had the second petition not been dismissed, the judgment may have been void. If a valid lien were created by the judgment, it could have been avoided as a violation of the automatic stay or as an unauthorized post-petition transfer in the second case. In this case, those remedies are not available, but the judgment lien, if any, may not be a preference since the debtor is apparently solvent. In any event, it does not appear that a lien arose as a result of the judgment.
Wells Fargo may have been harmed by the delay occasioned by the dismissal and refiling. The harm is the increase in the pre-petition delinquency that must be paid through the chapter 13 plan. This amounts to three additional monthly payments. However, the delay occasioned by the dismissal and refiling is not excessive. Nor is the harm to Wells Fargo significant, in light of the chapter 13 plan that has been proposed and equity cushion in the property. Pursuant to the consent order with Wells Fargo, the property is to be sold by October 15, 2003 and settled by November 15, 2003. Wells Fargo is owed about $403,043 but has a first lien on real property with a value of $835,000. The real estate market is strong and the deadlines for the sale and the closing are reasonable. It is unlikely that Wells Fargo will suffer a loss.
The harm to the other creditors — whether secured or unsecured — may be significant. A premature foreclosure by Wells Fargo will jeopardize Fairbanks' position. While the property should sell at foreclosure for an amount sufficient to pay Fairbanks in full, the only assurance of this is for Fairbanks to be prepared to buy the property at the foreclosure sale. Redden and the Fagnanis are placed in greater jeopardy. They are scheduled as unsecured creditors in — relative to Wells Fargo — modest amounts. It is questionable whether they would be able to protect their rights by bidding at a foreclosure sale. Such a tactic would require an investment of over $580,000 to protect judgments of $54,238 and $15,561, respectively. That is an unreasonable burden and, in any event, only one can be the successful bidder. In weighing the harm to Wells Fargo and the other creditors, the balance rests most heavily on the other creditors.
This is one scenario that a second trustholder must have contemplated when it took a second trust position. While in this case Fairbanks should be able to adequately protect its own interests, the exercise could involve substantial sums. It may have to advance over $400,000 to protect its current balance of about $178,000 plus incur the expenses of selling the property. While this is a "bargained for" position, an orderly liquidation in bankruptcy can avoid unnecessary expenses and economic waste, a result that benefits all the parties.
The debtor is not eligible for another chapter 7 discharge until September 10, 2004 so the unsecured creditors do retain the ability, at least until then, to pursue the debtor. Whether that collection activity would be fruitful is not clear. The Fagnanis obtained their judgment on October 23, 2002. It is not yet satisfied. The Redden judgment is more recent.
In these circumstances, the creditors are better served if the automatic stay is available if the debtor dismisses this case and files yet another. Granting in rem relief for the benefit of Wells Fargo alone defeats their rights and their ability to recover their debts. The harm to Wells Fargo in denying in rem relief is exceeded by the harm to the other creditors if in rem relief is granted. Other remedies would be available and would be more appropriate in the event of a dismissal followed by a fourth filing and the court would be inclined to grant immediate, perhaps even ex parte, relief. One such remedy would be an immediate conversion to chapter 7 so that the control of the case and the property is removed from the debtor.
While the debtor filed a previous chapter 7 case within 6 years and would be ineligible for a chapter 7 discharge in any case filed before September 10, 2004, he remains an eligible chapter 7 debtor. Cf. 11 U.S.C. § 109(b) and 11 U.S.C. § 727(a)(8).
In this case the record does not reflect any bad faith or an abuse of the bankruptcy system on the part of the debtor and the balance of the harms in granting in rem relief weighs in favor of the creditor body, not the secured creditor. The request for in rem relief, even though it was agreed to by the debtor and the chapter 13 trustee will be denied.
While the court generally defers to the sound business judgment of a debtor in possession or a trustee, the record is devoid of any basis for supporting their exercise of it in this regard in this case. See § 1306(b).