Opinion
Bankruptcy No. 03-33604.
November 8, 2006
MEMORANDUM
Former chapter 13 debtor Bryant Lee has filed a motion seeking leave to file another chapter 13 bankruptcy case. As will be discussed, Mr. Lee had previously signed a consent decree in the above-captioned 2003 case, barring him from further bankruptcy filings without obtaining court approval. He now seeks permission to file a seventh chapter 13 petition since 1994.
Court records revealed two more filings than the four of which EMC's counsel, the trustee's counsel and Mr. Lee's counsel were aware.
After an evidentiary hearing on this motion, EMC Mortgage Corp. opposed Mr. Lee's request. This secured creditor has scheduled a sheriff sale of Mr. Lee's residence, located at 85 Bartram Avenue, Lansdowne, Pennsylvania, and desires to go forward with that sale. The chapter 13 trustee, who entered into the aforementioned consent decree with Mr. Lee, neither opposes nor supports the requested relief. Other than opining that the issue is a close one, the trustee (through his counsel) expressed no position on the motion.
I now summarize the relevant facts.
I.
On September 15, 2003, Bryant and Juanita Lee filed a joint voluntary petition in bankruptcy under chapter 13. This was their sixth joint chapter 13 petition.
I take judicial notice, under Fed.R.Evid. 201 (incorporated into bankruptcy cases by Fed.R.Bankr.P. 9017), of the docket entries in all of the cases filed by Mr. Lee.See, e.g., In re American Rehab Physical Therapy, Inc., 2006 WL 1997431, at *18 (Bankr. E.D. Pa. 2006); In re Senior Cottages of America, LLC., 320 B.R. 895, 903 (Bankr. D. Minn. 2005); In re Townsville, 268 B.R. 95, 99 n. 3 (Bankr. E.D. Pa. 2001); see generally In re Indian Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995). I shall also take judicial notice of the allegations in various pleadings filed with this court, although not for the truth of the allegations. See In re Indian Palms Associates, Ltd., 61 F.3d at 205.
Their first case was filed on June 17, 1994 under chapter 13, docketed at Bankr. No. 94-13915. On February 2, 1995, their amended chapter 13 plan was confirmed. On March 19, 1996, this case was dismissed upon motion of the chapter 13 trustee, probably due to the debtors' failure to tender all required plan payments.
Their second case was filed on April 7, 1997, docketed at Bankr. No. 971-4158. During that second case, the debtors filed an objection to EMC's proof of claim, which objection was noted as settled on the court docket. On March 31, 1998, their amended chapter 13 plan was approved. Shortly thereafter, EMC filed a motion to terminate the bankruptcy stay, which motion was granted by default on June 2, 1998. On July 28, 1998, the chapter 13 trustee's motion to dismiss the case was again granted (probably due to non-payment).
Their third case was filed a few months later on October 8, 1998, docketed at Bankr. No. 98-32955, and was dismissed on motion of the chapter 13 trustee, without obtaining confirmation of a chapter 13 plan, on June 8, 1999. Their fourth case began on October 11, 2000, docketed at Bankr. No. 00-32650, and was dismissed on May 30, 2001, also at the behest of the chapter 13 trustee. During this fourth case, Bryant Lee, Juanita Lee and EMC had entered into a stipulation settling EMC's motion to dismiss their bankruptcy case.
Their fifth case commenced on January 4, 2002, docketed at Bankr. No. 021-0151. Again EMC sought to dismiss that bankruptcy case, and again the parties settled that motion. In this fifth chapter 13 case, the debtors were able to confirm a chapter 13 plan. However, the trustee later requested dismissal due to the debtors' failure to tender all required plan payments. EMC also filed a pleading stating that the debtors were delinquent under the terms of the settlement agreement with EMC. This chapter 13 case was dismissed on June 4, 2003.
As noted earlier, the sixth chapter 13 case filed by Juanita and Bryant Lee began on September 15, 2003. On November 4, 2003, the debtors filed an adversary proceeding seeking to bifurcate the claim held by EMC into secured and unsecured components, pursuant to 11 U.S.C. § 506, asserting that the amount of EMC's claim exceeded the value of its collateral: the Lees' residence.See generally In re Hammond, 27 F.3d 52 (3d Cir. 1994). EMC then filed a motion to dismiss this latest chapter 13 case, alleging that it was not filed in good faith; the creditor also opposed confirmation of the debtors' proposed chapter 13 plan. The chapter 13 trustee then filed his own motion to dismiss this case, later amended, also asserting that the debtors' 2003 case was not filed in good faith.
The trustee's motion was ultimately settled by consent order signed by the trustee and Juanita and Bryant Lee. This consent order, approved by the court on January 18, 2005, essentially provided that the trustee would withdraw his request to dismiss and the debtors, in return, would be barred from further bankruptcy filings without obtaining prior leave of court.
EMC's motion to dismiss was not settled and an evidentiary hearing was held on that contested matter, after which the motion to dismiss was denied. As Mr. Lee recalled, that hearing involved testimony concerning two properties that Mr. Lee owned: the Lansdowne residence, as well as commercial property located at 62nd and Market Street. The commercial property had failed to produce much income, purportedly due to the condition of Market Street caused by repair work done by SEPTA on its elevated railroad tracks, making it difficult for customers to reach the property. Mr. Lee remembered that he previously testified that the family's financial circumstances had been adversely affected by a number of unfortunate events: the violent death of his son at or near the commercial property in 2002; the illness of his daughter; and the need to care for his daughter's child. During the 2003 case, Mr. Lee opined that he could reorganize with income recently derived from the Social Security Administration and the Department of Public Welfare. I denied EMC's motion to dismiss in April 2004, thus affording Mr. Lee yet another opportunity to reorganize under chapter 13 and save his home from foreclosure.
Shortly thereafter, EMC and Juanita and Bryant Lee entered into a settlement agreement of the adversary proceeding brought by the debtors. Under this settlement, EMC, which had filed a secured claim in the amount of $142,219.41, agreed to hold an allowed secured claim of only $54,000, plus interest at 6%, to be repaid in full through the chapter 13 confirmation process. The debtors were obligated to pay all real estate taxes and insurance on the Lansdowne property. If the debtors failed to meet their settlement obligations, then the agreement became void. Ex. D-4.
In May 2005, Juanita Lee filed a "praecipe" to voluntarily dismiss the case as to her only. It was then revealed that she and Mr. Lee had never been legally married, although they lived together for many years and had children together. (Section 302 permits a joint bankruptcy petition to be filed only by individuals who are spouses.) The chapter 13 case thereafter continued with Mr. Lee as the sole debtor.
Despite the dismissal of Juanita Lee from the bankruptcy case, subsequent pleadings filed by Mr. Lee referred to the debtors in the plural.
In order to try to fulfill his obligations under the settlement agreement with EMC, Mr. Lee filed numerous amended proposed chapter 13 plans. Finally, on January 12, 2006, his sixth amended chapter 13 plan was confirmed without opposition from EMC or the chapter 13 trustee. This approved plan called for trustee payments totaling $8,000 from the beginning of the case until October 2005, and then Mr. Lee was to tender payments of $1,722 per month to the trustee beginning in November 2005 for the next 35 months. Ex. D-1.
The necessity of these substantial plan payments arose from Mr. Lee's action against EMC under section 506. Once EMC's claim was bifurcated into secured and unsecured components, Mr. Lee could not confirm a plan that would cure his pre-bankruptcy mortgage delinquency under section 1322(b)(5) (the most common form of chapter 13 reorganization in this district) while taking advantage of the bifurcation of the mortgagee's claim. Instead, his confirmed plan provided for repayment of EMC's allowed secured claim in full, with interest, pursuant to 11 U.S.C. § 1325(a)(5). See Sapos v. Provident Inst. of Sav., 967 F.2d 918, 927-28 (3d Cir. 1992); see generally In re Paschen, 296 F.3d 1203, 1206 (11th Cir. 2002) ("[T]aken together, [sections 506(a) and 1325(a)(5)] permit the bifurcation of an undersecured claim into its secured and unsecured parts, with creditors only assured of receiving full value for the secured portion of the claim."). Furthermore, section 1322(d) limits the length of a chapter 13 plan to 60 months (i.e., five years). See In re Sapos. Therefore, EMC's allowed secured claim had to be repaid by September 2008.
This provision was amended prospectively in October 2005 and the amendments would not have applied to Mr. Lee's 2003 bankruptcy case.
The trustee's ledger, Ex. D-3, shows that Mr. Lee was unable to tender the trustee payments required under his confirmed plan from November 2005 onward. Although partial trustee payments were remitted by Mr. Lee, they were much less than promised. In April 2006, EMC filed a motion to terminate the bankruptcy stay and resume foreclosure. Mr. Lee then filed a motion to amend his plan in May 2006, in which he proposed yet a seventh amended plan that would call for even greater trustee payments of $2,294 per month beginning in June 2006. Ex. D-2. That motion to amend was never adjudicated as Mr. Lee, recognizing that his proposed seventh amended plan was not feasible, did not oppose the chapter 13 trustee's motion to dismiss his case. Therefore, on July 18, 2006, the bankruptcy case that began almost three years earlier in September 2003 came to an end. In the 34 months that this sixth chapter 13 case was pending, the debtors paid $12,985 to the trustee, who then distributed $10,279.36 to EMC — an average of only $302 per month to the mortgagee.
When his sixth chapter 13 case ended the bankruptcy stay also terminated, see 11 U.S.C. § 362(c)(2)(B), and EMC resumed its state court foreclosure process. A foreclosure sale of the Lansdowne realty is now scheduled for November 17, 2006. Motion and Answer, ¶ 12. In order to prevent foreclosure, Mr. Lee currently seeks court approval to file a seventh case.
In support of his instant motion to refile, Mr. Lee has offered a copy of a chapter 13 plan he would propose were leave of court to be granted. Ex. D-5. This plan calls for payments of only $50 per month to the trustee. However, Mr. Lee would tender direct payments to EMC totaling $54,000 with interest at 6.24% over 60 months, which he estimates will equal $63,000. Mr. Lee's intended reorganization plan would also hold him responsible for payment of future taxes and insurance on the Lansdowne realty. The anticipated chapter 13 plan makes no provision for the payment of delinquent real estate taxes — Mr. Lee testified that he has not paid property taxes since 1999, estimated his tax obligation at $2,000 per annum, and believes that EMC may have paid $7,000 of the delinquent taxes — other than to state that he "will make arrangements to pay these claims directly outside the plan." Ex. D-5.
This would require 60 payments of $1,050 to EMC. Mr. Lee would propose direct payments as an attempt to avoid paying the chapter 13 trustee his statutory commission under 11 U.S.C. § 1326(b)(2) and 28 U.S.C. § 586(e)(1)(B). At the hearing, trustee's counsel did not endorse this proposal for direct creditor payments in these circumstances. See generally In re Harris, 200 B.R. 745, 747-49 (Bankr. D. Mass. 1996).
If Mr. Lee's estimate of annual property tax liability is correct, even if EMC paid $7,000 toward delinquent taxes, he would still owe about $7,000 more.
Mr. Lee further testified that he is unemployed. He receives $500 per month income from renting a portion of the Philadelphia commercial realty as an apartment; he also receives social security payments for his daughter and welfare payments for his grandson, both of whom live with him. Although he offered an exhibit estimating those two payments as totaling $728, Ex. D-6, he testified that the correct total is $850. Another daughter also lives with him who receives welfare of $200 per month.
Mr. Lee further testified (without objection) that Juanita Lee — who previously left the residence, informing him that she was not interested in living there any more due to its association with her deceased son — has returned to Lansdowne and is now willing to contribute to another chapter 13 reorganization. She purportedly receives $960 every two weeks, after taxes, for serving as a caretaker to her disabled daughter. Mr. Lee further stated that he would become the caretaker of his daughter, and thus the recipient of this income, should Juanita Lee again leave the residence.
Based upon the willingness of Juanita Lee to contribute her monthly income towards his reorganization plan, his rental income, and the governmental benefits paid to his children and grandchild, Mr. Lee opined that he could afford to pay EMC $1,200 per month for 60 months. Ex. D-6. To afford this monthly payment, Mr. Lee anticipates being able to keep his expenses very low: $450 per month for food for himself, Juanita, his daughters and grandson (plus food stamps): clothing for these same persons of only $50 per month; laundry only $20 per month; medical and dental, only $40 per month. Id. No expense for repaying his delinquent property tax obligation is specified; he has budgeted $200 per month for future property taxes.
Finally, Mr. Lee testified that he has renovated the commercial space on Market Street into two apartments, with additional commercial space. One apartment is purportedly rented — but a copy of the lease was not offered in evidence — and he intends to rent a second apartment in his commercial property for an additional $500 as soon as he can find a tenant for it. (Mr. Lee is not utilizing a rental agency to locate tenants, nor is he advertising; he has placed a "for rent" sign in the apartment window.) He also hopes to rent a portion of the Market Street property to a cousin, which relative would operate a day-care facility at the property, paying monthly rental of $1,000. Mr. Lee does not expect the opening of this day-care facility for a number of months, and assumes that his relative either has or can obtain any licensing needed, and will generate sufficient income to pay rent.
II.
Distinct from the requirement found in section 1325(a)(3) — that a chapter 13 plan be proposed in good faith — is the requirement implicitly found in section 1307(c): that the chapter 13 case be filed in good faith. E.g., In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996); Matter of Smith, 848 F.2d 813, 816 n. 3 (7th Cir. 1988); In re Myers, 334 B.R. 136, 142 (E.D. Pa. 2005); see also In re Boates, 2006 WL 166569, at *2 (E.D. Pa. 2006). Therefore, before I would grant Mr. Lee leave to file a seventh chapter 13 bankruptcy case, he must demonstrate that such a filing would be in good faith. See Haines v. Miller, 2004 WL 1987218 (E.D. Pa. 2004); see generally In re Oglesby, 158 B.R. 602, 606 (E.D. Pa. 1993) ("An inquiry into whether successive filings should be permitted, however, raises the question of good faith"); In re Narod, 138 B.R. 478, 482 (E.D. Pa. 1992) (bankruptcy court has a duty, even on its own initiative, to prevent the abuse of the bankruptcy process caused by serial filings).
The debtor argued at the conclusion of the hearing that there is no good faith filing requirement in chapter 13 cases. The Third Circuit Court of Appeals has directed to the contrary in In re Lilley and then reached a similar conclusion for chapter 7 cases, In re Tamecki, 229 F.3d 205 (3d Cir. 2000), and chapter 11 cases. In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999). Such holdings are binding upon me.
The Third Circuit has instructed that the issue of good faith must be determined from the totality of the circumstances:
As the Seventh Circuit has noted, however, "good faith is a term incapable of precise definition." In re Love, 957 F.2d [1350] at 1355 [(7th Cir. 1992)]. As a result, we believe that "the good faith inquiry is a fact intensive determination better left to the discretion of the bankruptcy court." Id. We therefore join the Seventh, Ninth and Tenth Circuits in holding that the good faith of Chapter 13 filings must be assessed on a case-by-case basis in light of the totality of the circumstances. . . . Factors relevant to the totality of the circumstances inquiry may include, among others, the following:
the nature of the debt . . .; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.
In re Lilley, 91 F.3d at 496 (citations and footnote omitted).
In determining whether another chapter 13 case would be filed in good faith, among the circumstances that are appropriate to consider are whether Mr. Lee has a likelihood of reorganizing. A bankruptcy reorganization petition filed without any legitimate prospect of reorganization is done in bad faith, in that it only delays action under state law by creditors. That is, while the Code does not contain any express limitation on refiling a bankruptcy case after another is dismissed, many courts have recognized that it is inappropriate for a debtor to file another bankruptcy reorganization case (under chapters 11, 12 or 13) after dismissal of an earlier one, unless there has been a material change of circumstances which demonstrates that the second (or later) reorganization attempt now has a possibility of success after the first had failed. See Haines v. Miller, 2004 WL 1987218, at *3; see generally, e.g., Matter of Elmwood Development Co., 964 F.2d 508 (5th Cir. 1992); In re Chisum, 847 F.2d 597 (9th Cir.), cert. denied sub nom., Mortgage Mart, Inc. v. Rechnitzer, 488 U.S. 892 (1988); In re Johnson, 708 F.2d 865 (2d Cir. 1983); In re Oglesby, 158 B.R. at 606 ("A genuine change in circumstances may justify a debtor's multiple filings"); In re McKissie, 103 B.R. 189, 192 (Bankr. N.D. Ill. 1989).
Therefore, when there are successive reorganization bankruptcy filings without any material changes in circumstances, the repeat filing is generally viewed to be in "bad faith." E.g., Matter of Elwood Development Co., 964 F.2d at 511-12; Haines v. Miller, 2004 WL 1987218, at *3; compare In re Barrett, 964 F.2d 588, 592 (6th Cir. 1992) (change in circumstances made the debtor's successful reorganization extremely likely and the filing undertaken in good faith). Since the first filing has been unsuccessful, there is little reason for a debtor to believe that the second will yield any different result. See In re Oglesby, 158 B.R. at 606 ("The bankruptcy court must concern itself with whether the debtor is merely trying to frustrate the statutory requirements through a strategy of successive filings in an attempt to abuse the bankruptcy process.").
Indeed, serial or successive bankruptcy filings may be evidence of misuse of the bankruptcy process, intended only to forestall the foreclosure efforts of a secured creditor, and, therefore, not filed in good faith. See, e.g., In re Huerta, 137 B.R. 356, 367 (Bankr. C.D. Cal. 1992). The "kind of `changed circumstances' required to justify a successive filing must be positive changes" reflecting on the debtor's ability to successfully reorganize under chapter 13. Id. at 368. Moreover, when an individual has filed many failed reorganization cases, as in this instance, the evidence needed to demonstrate a material change in circumstances supporting a reasonable possibility of reorganization grows heavier. See In re LeGree, 285 B.R. 615, 620 (Bankr. E.D. Pa. 2002). Typically, the mortgage delinquency — threatened foreclosure is the typical reason for the chapter 13 bankruptcy filings — has increased with each unsuccessful effort, due to continued missed payments and additional execution costs and fees. Moreover, the serial filer may have abused the system with prior bad-faith filings and that conduct must be considered as part of the totality of the circumstances. See id.
In determining whether bad faith filing exists, the bankruptcy court has the discretion to reach the appropriate result in a particular case based upon all of the circumstances. See In re Lilley, 91 F.3d at 496; Matter of Love, 957 F.2d 1350, 1354 (7th Cir. 1992); Haines v. Miller, 2004 WL 1987218, at *3; In re Mazzocone, 180 B.R. 782 (E.D. Pa. 1995).
III.
EMC emphasizes that, in many respects, Mr. Lee's financial circumstances are similar to those in his recently dismissed 2003 case. Juanita's contribution and the income derived from governmental sources were present during the 2003 filing. The death of Mr. Lee's son predated that filing, as did the illness of his daughter. Mr. Lee's current proposal to pay EMC $1,200 per month in a seventh bankruptcy case, instead of the more than $1,700 promised by the terms of his previously confirmed plan in his sixth case, does not arise due to any change in circumstances. This reduction occurs solely because he now seeks, through another bankruptcy filing, to repay EMC's allowed secured claim over five years rather than three.
Mr. Lee's purported significant change in his finances involves the present and anticipated rental income from the Market Street realty. Were Mr. Lee to receive $3,000 per month rent from that property for the next five years, that would be a material change in circumstances and render his reorganization prospects likely. However, the only evidence about this rental income came from Mr. Lee's testimony. He acknowledges having only one tenant, presently paying $500 per month. No evidence was offered regarding the stability of this tenant or the terms of the lease. For example, was there any security deposit paid? Is the tenant employed? Was a credit check performed? Did the tenant provide any references? Is the tenancy month-to-month?
Moreover, the other two tenancies upon which Mr. Lee relies do not yet exist. Thus, there is no evidence to demonstrate that a day-care center, at that location, operated by Mr. Lee's relative, would be licensed and be financially viable.
Anticipated rental income without evidence demonstrating its stability over the length of a reorganization plan has been found by some courts as not representing a material change in financial circumstances warranting another bankruptcy filing. See Matter of Elmwood Development Co., 964 F.2d at 512; Haines v. Miller, 2004 WL 1987218, at *3. Given that Mr. Lee has been attempting repeatedly to reorganize under chapter 13 since 1994, and been unsuccessful six times, his confidence alone that he will obtain this rental income in the near future and maintain it over the life of his proposed plan is not sufficient to meet his burden of good faith.
Indeed, between June 1994 and July 2006 — a period of slightly more than 12 years — Mr. Lee has had a chapter 13 case pending for about two-thirds of the time: approximately eight years. Not only did Congress place a five year limit on chapter 13 reorganization plans, but the mortgage delinquency owed to EMC most likely has increased significantly during this 12 year period. To the extent that Mr. Lee now seeks another five years of chapter 13 protection, stronger evidence regarding rental income was necessary.
Furthermore, Mr. Lee offers only passing reference to his past real estate tax obligations. Even if EMC tendered $7,000 toward that delinquency, if no taxes have been paid since 1999, and if the annual tax bill is about $2,000, a substantial delinquency remains. Mr. Lee's position — that he will reach some unspecified accord with the taxing authorities — is not sufficient. Given that unpaid property taxes may become a first lien on the realty, priming a mortgage lien, see 53 P.S. § 7102; 2 Ladner on Conveyancing in Pennsylvania § 12.09(d) (4th ed. rev. 1979), the payment of property taxes becomes a legitimate concern of EMC's and can affect Mr. Lee's reorganization prospects.
The totality of the circumstances also requires consideration of Mr. Lee's intended use of section 506 to bifurcate EMC's claim into secured and unsecured components. It is likely that EMC's claim, which may now far exceed the value of its collateral, grew much more rapidly than the value of Mr. Lee's residence because of the bankruptcy stay arising from his many prior bankruptcy filings and his failure to tender payments to EMC and the trustee. Therefore, another bankruptcy filing would be taking advantage of the result caused by the earlier dismissed cases. This is another factor against permitting refiling, as is the numerous settlements previously reached with EMC that were not fulfilled.
In evaluating all of the circumstances, I have also considered the neutrality of the chapter 13 trustee, who does not actively oppose a seventh filing (although he may not have been aware of pre-1998 cases), as well as the unfortunate events befalling the Lee family. However, as Mr. Lee acknowledged at the recent hearing, in 2004 I afforded him a sixth chance at reorganization. Unfortunately, that did not succeed. Based upon the evidence offered, a seventh opportunity is not justified.
Accordingly, Mr. Lee's motion for leave to file another chapter 13 case shall be denied. An appropriate order shall be entered.
ORDER
AND NOW, this 8th day of November 2006, for the reasons stated in the accompanying memorandum, it is hereby ordered that the motion of Mr. Bryant Lee for leave to file another chapter 13 bankruptcy petition is denied, and the objection of EMC Mortgage Corp. is sustained.