William R. Sawyer, United States Bankruptcy Judge.
This Chapter 11 case came before the Court for hearing on October 14, 2015, on the Debtors' Motion to Alter, Amend, or Vacate. (Doc. 71).
The Debtors request that the Court vacate its Order of September 17, 2015, granting Liberty Bank and Trust in rem
Stacy and Stephanie Danley ("the Danleys") initiated this Chapter 11 case on July 22, 2015. (Doc. 1). On August 10, 2015, Liberty Bank and Trust ("Liberty Bank") filed a motion for relief from the automatic stay, seeking in rem relief pursuant to 11 U.S.C. § 362(d)(4)(B) on the grounds that the Danleys' July 2015 petition was part of a scheme to delay, hinder, or defraud Liberty Bank. (Doc. 36). The Danleys filed a response on August 31, 2015, opposing Liberty Bank's motion. (Doc. 48). The Court held an evidentiary hearing on September 16, 2015. At the conclusion of the hearing, the Court made findings of fact and conclusions of law on the record, granted Liberty Bank's motion for in rem relief from the automatic stay, and further instructed counsel for Liberty Bank to prepare an appropriate form for an order. (Doc. 67). The Court entered an order on the form provided by Liberty Bank's counsel on September 17, 2015. (Doc. 58). The Danleys filed a timely motion to alter, amend, or vacate on October 1, 2015. (Doc. 71). The Court heard oral argument on the Danleys' motion on October 14, 2015 and took it under advisement.
This dispute centers on two loans made by Liberty Bank to the Danleys.
On November 1, 2007, Liberty Bank sent the Danleys a notice of default with respect to the Personal Residence Loan; at that point, the balance on it had grown to $427,546.08 and the delinquent balance was $9,961.50. Liberty Bank also accelerated the Rental Properties Loan and scheduled a foreclosure sale for November 29, 2007. In response to Liberty Bank's notice of default, the Danleys filed their
The Bankruptcy Administrator moved to dismiss the Danleys' first case because they did not file monthly operating reports as required by the Court's Local Rules.
On August 8, 2008, Liberty Bank sent the Danleys a second notice of default on the Personal Residence Loan and gave them until September 10, 2008 to cure the default. The loan balance had grown to $430,744.12 and the delinquency had grown to $40,641.38. In response to the notice of default, the Danleys filed a second bankruptcy case on September 9, 2008. (Case No. 08-32095, Doc. 1). The Danleys proposed a Chapter 11 plan that called for the payment of the two loans in issue here, as well as several other debts. (Case No. 08-32095, Doc. 60). The Danleys proposed to pay the Personal Residence Loan over a 30-year period at 6% interest, with monthly payments of $2,740.00. In addition, the Danleys acknowledged that the indebtedness on the Rental Properties Loan had grown to $275,460.59 and also proposed to pay it over a 30-year period at 6% interest, resulting in monthly payments of $1,652.00. This Court confirmed the Danleys' Chapter 11 Plan on December 3, 2008. (Case No. 08-32095, Doc. 67).
Although the Danleys confirmed a plan in their second case, they did not fund it. On January 7, 2009, and again on February 5, 2009, Liberty Bank filed notices of default for both loans. (Case No. 08-32095, Docs. 75 and 81). A second secured creditor, Chase Bank, moved for relief from the automatic stay on March 10, 2009 because the Danleys had not made any post-confirmation payments towards its loan. (Case No. 08-32095, Doc. 86). A third secured creditor, Colonial Bank, moved for relief from the automatic stay on July 14, 2009 for the same reason.
On June 26, 2014, Liberty Bank sent two letters to the Danleys, advising them that the Personal Residence Loan and Rental Properties Loan had been accelerated, and scheduled foreclosure sales for July 21 and 22, 2014. On July 18, 2014, the Danleys filed a civil action against Liberty Bank in the Circuit Court for Lee County, Alabama, under Case No. CV 14-111 ("the civil action"). The Danleys, acting pro se,
On June 5, 2015, the Circuit Court granted Liberty Bank summary judgment in the civil action and assessed the Danleys with Liberty Bank's costs of defending the action. Copies of documents from the civil action were filed in this Court. (Doc. 57).
Apparently realizing that the state court would not grant a temporary restraining order in time to stop Liberty Bank's foreclosure sales, Stephanie Danley filed Chapter 13 bankruptcy on July 20, 2014. (Case No. 14-80885, Doc. 1). Stacy Danley did not join in filing the petition in this case.
Stephanie's Chapter 13 petition was met with a barrage of filings from outraged creditors. The first in line was the law firm of Espy, Metcalf & Espy, which sought relief from the co-debtor stay so that it could collect its unpaid attorney's fee from Stacy Danley.
Stephanie moved to dismiss her Chapter 13 case on October 16, 2014. (Case No. 14-80885, Doc. 38). The Court granted the motion to dismiss the following day. (Case No. 14-80885, Doc. 39). Because Stephanie did not confirm a plan, nothing was paid to creditors — all of the plan payments made by Stephanie were returned to her. (Case No. 14-80885, Doc. 46).
On June 4, 2015, Liberty Bank again sent the Danleys two letters giving notice of acceleration of the two loans, and scheduled a foreclosure sale for July 22, 2015. The indebtedness on the Rental Properties Loan had grown to $353,648.55 and the indebtedness on the Personal Residence Loan had grown to $457,544.34. Again, to stave off foreclosure, the Danleys filed the instant Chapter 11 petition on July 22, 2015. (Doc. 1). Shortly after this latest petition was filed, Liberty Bank filed a motion for relief from the automatic stay in which it sought in rem relief, not just leave to bring its foreclosure proceedings.
The Court held an evidentiary hearing on September 16, 2015. The parties filed a stipulation of facts, including 10 exhibits, that the Court accepted as findings of fact. (Doc. 57). In addition, Liberty Bank called as a witness Roger Dale Selph ("Selph"), a senior vice president for Liberty Bank and previously for First Tuskegee
Selph's testimony was devastating to the Danleys' case. He testified that the balance on the Personal Residence Loan, which had been made September 21, 2006 in the amount of $425,000, had grown to $474,354.78. Thus, in the nine years since the Personal Residence Loan had been made, the Danleys had not only failed to make any payment toward principal, they had also accrued almost $50,000 in unpaid interest. Selph also testified that the Danleys had not made a payment on the Personal Residence Loan since November 2012, and that it was then more than $96,000 in arrears. Furthermore, the Danleys had allowed the property insurance that they were required to carry under the Personal Residence Loan to lapse in November 2010, forcing Liberty Bank to carry force-placed insurance at a cost of $25,641.45 to protect its collateral. The Danleys were also delinquent five years in paying property taxes on their residence, forcing Liberty Bank to pay the taxes in the amount of $12,159.
The situation with the Rental Properties Loan was even more dismal. The Rental Properties Loan had been made September 1, 2005 in the amount of $264,000. Selph testified that its balance at the time of the hearing had grown to $363,398.13, nearly $100,000 more than the Danleys had borrowed ten years earlier, and that the Danleys had last made a payment in August 2011 and were in arrears $173,233.37 on the Rental Properties Loan. Selph further testified that the Danleys had failed to carry property insurance, as required by the Rental Properties Loan, since November 2010 and that Liberty Bank had maintained force-placed insurance at a cost of $19,306. Finally, Selph testified that Liberty Bank had paid $28,972 for taxes on the rental properties that the Danleys had failed to pay.
The Danleys testified that they intend to keep the rental properties and use rental income to fund a plan. However, the rental properties were vandalized in March 2011 and remain in disrepair, and the Danleys did not offer any evidence as to how much it would cost to repair the properties.
The Danleys had not filed any schedules or a statement of financial affairs at the time of the evidentiary hearing. However, they offered evidence that Stacy Danley was awarded a money judgment on May 16, 2015, in proceedings against Alabama State University in the Montgomery County Circuit Court. Danley v. Ala. State Univ., Case No. CV-2013-900181. It appears that the judgment consists of one part in the amount of $118,096.87 for back pay and another part for $22,120.00 for amounts improperly withdrawn from Stacy Danley's bank account, for a total of $140,216.87. The Court was informed that Stacy Danley's attorney's fees were paid by the teacher's union. As the $118,000
It was further disclosed that Alabama State University has prosecuted an appeal and that the Danleys will not receive anything until the appeals have been exhausted. No evidence was offered as to when that might be, and no estimate was made as to the likely outcome on appeal. While the judgment against Alabama State University is a point in the Danleys' favor, it is at this juncture something of a wild card. The Court considered the judgment in making its findings.
At the conclusion of the evidentiary hearing, the Court made findings of fact and conclusions of law, and ruled orally from the bench. The Court first determined that Liberty Bank lacked adequate protection and was entitled to relief from the automatic stay. The Court then concluded that each of the bankruptcies filed by the Danleys, plus the civil action in Lee County, had been filed in bad faith as part of a scheme to hinder, delay, or defraud Liberty Bank, and granted Liberty Bank in rem relief pursuant to 11 U.S.C. § 362(d)(4)(B).
The Danleys have filed a motion to alter, amend, or vacate the Court's order granting Liberty Bank relief from the automatic stay. (Doc. 71). The Danleys assert that the Court erred in concluding that Stephanie Danley filed her Chapter 13 case in bad faith, noting that she filed a petition, schedules, a plan, and had two paychecks withheld. They also argue that the mere fact that Stephanie filed her Chapter 13 case on the eve of a foreclosure sale does not amount to bad faith.
In addition, the Danleys point out that the Court erred in determining that they had not made a written offer of adequate protection, when in fact they had offered monthly payments of $3,000. (Doc. 48). They further note that they have now filed schedules and a statement of financial affairs, and claim that they did not do so beforehand because they were told by staff at the Clerk's office that they did not need to.
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(G). This is a final order.
This case is before the Court on the Danleys' motion to alter, amend, or vacate, which is governed by Rule 59(e) of the Federal Rules of Civil Procedure (as incorporated by FED. R. BANKR. P. 9023). To prevail on such a motion, the moving party must prove:
In re Muhammad, 536 B.R. 469, 477 (Bankr.M.D.Ala.2015); see also Eglin Fed. Credit Union v. Horlacher (In re Horlacher), 389 B.R. 257, 261 (Bankr.N.D.Fla. 2008). The Danleys have made no showing
The Court may grant a party relief from the automatic stay for cause, including a lack of adequate protection for the party's interest in property of the estate. 11 U.S.C. § 362(d)(1). A debtor's bad faith in filing the petition may also supply the necessary cause. Phoenix Piccadilly, Ltd. v. Meritor Sav. Bank (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir.1988); Natural Land Corp. v. Baker Farms, Inc. (In re Natural Land Corp.), 825 F.2d 296, 297-98 (11th Cir.1987); In re Club Tower, L.P., 138 B.R. 307, 310 (Bankr.N.D.Ga.1991). As the party moving for relief, Liberty Bank bore the burden of proof regarding the Danleys' equity in the properties. 11 U.S.C. § 362(g)(1). As the parties opposing relief, the Danleys bore the burden of proof on all other issues. 11 U.S.C. § 362(g)(2).
The evidence of cause in this case was overwhelming. The Danleys owe Liberty Bank almost $840,000 on their combined loans, and are more than $270,000 in arrears on them. They have not made a payment on either loan since 2012. Even worse, the Danleys have not paid taxes or maintained insurance coverage on their properties in five years, forcing Liberty Bank to cover both at a cost of over $86,000 (or more than $17,000 per year).
The Danleys suggested that Liberty Bank should have used the $65,000 in insurance proceeds it received due to the vandalism of the rental properties to repair them. This implied criticism is misplaced. It was the Danleys' obligation to maintain insurance coverage on the properties, and the responsibility for allowing it to lapse lies squarely on their shoulders. Because Liberty Bank was forced to maintain its own insurance on the properties, Liberty Bank had discretion to apply the proceeds to the loan balance.
The Danleys point out that the Court erred in its oral ruling at the evidentiary hearing when it stated that they had not made a written offer of adequate protection. In fact they had, in the amount of $3,000 per month. (Doc. 48). However, this error does not carry the day for them because $3,000 per month is not adequate. As counsel for Liberty Bank pointed out at the evidentiary hearing, the Danleys' confirmed Chapter 11 plan from the second bankruptcy called for a combined monthly payment to Liberty Bank of $4,392. That amount was necessary to provide Liberty Bank adequate protection back in 2008, when the Danleys were far less delinquent on their loans than they are now, and when they were still paying taxes and paying for their own insurance. Moreover, it is not at all clear that the Danleys can afford to even pay $3,000 per month given their other secured debt, their income, and the uncertain value of Stacy Danley's judgment against Alabama State University. They certainly did not offer credible evidence that they could pay that much at the evidentiary hearing. Their Schedule J of expenses that they filed since then accounts for the $2,740 monthly payment on the Personal Residence Loan, but does not account for the Rental Properties Loan at all, nor leave sufficient net income to cover it. (Doc. 63).
The error pointed out by the Danleys is a drop in a large bucket of evidence that insuperably demonstrates Liberty Bank lacks adequate protection, and suggests the Danleys filed this case in bad faith. Liberty Bank is entitled to relief from the
In addition to relief from the automatic stay, the Court granted Liberty Bank in rem relief pursuant to 11 U.S.C. § 362(d)(4)(B). That section requires a bankruptcy court to grant relief from the automatic stay with respect to real property "if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved... multiple bankruptcy filings affecting such real property." 11 U.S.C. § 362(d)(4)(B). An order of relief from the automatic stay that is entered pursuant to § 362(d)(4), as opposed to §§ 362(d)(1)-(3), has the following effect:
11 U.S.C. § 362(d) (hanging paragraph). In other words, a secured creditor who obtains relief from the automatic stay under § 362(d)(4) may record the order like one would record a mortgage or judgment lien, and the order of relief will be effective as to the subject real property in all subsequent bankruptcy cases filed by anyone within the next two years. Rodriguez v. Murphy, 2014 WL 1414424, *3-4 (S.D.Fla. Apr. 11, 2014); In re Spencer, 531 B.R. 208, 217 (Bankr.W.D.Wis.2015); In re GEL, LLC, 495 B.R. 240, 249 (Bankr. E.D.N.Y.2012); In re Montalvo, 416 B.R. 381, 386-88 (Bankr.E.D.N.Y.2009); see also In re Henderson, 395 B.R. 893, 901-04 (Bankr.D.S.C.2008).
In rem relief is extraordinary and not to be taken lightly. The Court does not presume that a debtor who files bankruptcy is acting in bad faith, or to hinder and delay his creditors; yet all bankruptcy filings have at least the short-term effect of delaying creditors. Moreover, many bankruptcy filings are made on the eve of a foreclosure, vehicle repossession, garnishment proceeding, or other debt collection device. The timing of a bankruptcy filing does not by itself mean the filing is in bad faith, but timing may be a factor. In addition, multiple bankruptcy filings, standing alone, may not meet the standard for in rem relief. Whether a series of bankruptcy filings is, or is not, a scheme to delay, hinder, or defraud a creditor, must be determined based on the totality of the facts and circumstances of the cases, including the amount of the debt and arrearage and the length of the delinquency.
At the outset, the Court notes that each of the Danleys' cases were filed on the eve of a scheduled foreclosure. That in itself might not be sufficient evidence of a scheme to hinder or delay Liberty Bank, but it is if the cases themselves were not prosecuted in good faith.
Having a Chapter 11 bankruptcy case dismissed for the failure to file monthly
One might conclude that confirmation of the Danley's Chapter 11 Plan in the second case demonstrates that they were acting in good faith, removing any taint from the first case. However, as subsequent events made clear, the Danleys did not fund their Chapter 11 Plan, paying little or nothing to creditors. A promise to pay is not the same thing as actual payment. A Chapter 11 Plan that is confirmed but not executed — where little or nothing is paid to creditors — is as much in bad faith as a case that is dismissed for failure to file routine reports. The second case was filed in bad faith and, following hard upon the heels of the first case, shows a scheme to delay and hinder creditors. Indeed, the Court found that the Danleys' second case was a cynical misuse of bankruptcy in which the Danleys confirmed a plan that they did not intend to honor.
The Danleys' first two cases were somewhat less significant because of the passage of time since they were filed. That is not the case for their state court civil action or for Stephanie Danley's third bankruptcy. At the time she filed her Chapter 13 petition, Stephanie owed secured indebtedness of over $887,172.29. This consisted of $25,975 owed to Santander that was secured by a vehicle, $298,888.08 owed to Liberty Bank on the Rental Properties Loan, $438,115.06 owed to Liberty Bank on the Personal Residence Loan, and at least $124,194.23 owed to Chase Bank that was secured by other rental property.
Further evidence of bad faith in the third bankruptcy case may be found in Stephanie Danley's stated intent, in her Chapter 13 plan, to surrender the rental properties to Liberty Bank. (Case No. 14-80885, Doc. 19). There were two problems with this proposal. First, as her husband owns one-half interest in the property, Stephanie could not surrender the property without his agreement. Second, the Danleys to this day have not abandoned the rental properties. Surrendering the rental properties would have reduced the amount of secured debt and thereby reduced the amount of the payment necessary to service that debt, but it is clear based upon subsequent events that Stephanie Danley did not intend to surrender the property. Her act of filing a plan that she did not intend to honor was yet another indication of bad faith.
Viewing the third bankruptcy case in the context of the unpaid mortgages to Liberty Bank and Chase Bank — all of which had been the subject of the Danleys' second bankruptcy filing — it was apparent that nothing of value was accomplished in the third case. The 2014 petition was filed strategically in response to notices of acceleration sent by Liberty Bank. The Chapter 13 plan filed by Stephanie would never have been confirmed because it failed to provide for her secured debt. Moreover, she did not have nearly enough income to fund a plan meeting the requirements of Chapter 13 of the Bankruptcy Code. Certainly she recognized that her Chapter 13 filing was hopeless and that she could not proceed to confirmation. Having considered the Court's record in the third bankruptcy case, the backdrop of the first two bankruptcy cases and the civil action in state court, and the testimony offered by both Stephanie and Stacy Danley at the evidentiary hearing, the Court correctly concluded that the third bankruptcy case was filed by Stephanie Danley in bad faith and that it was part of a scheme to hinder and delay Liberty Bank, and other creditors, from realizing on their collateral.
As if the Danleys' prior bankruptcy cases were not damning enough, they have also performed miserably in meeting their obligations thus far in this bankruptcy case.
Debtors are required to file a complete set of Statements and Schedules, on forms prescribed by the Judicial Conference of the United States, within 14 days of the date of the petition. 11 U.S.C. § 521(a)(1); FED. R. BANKR. P. 1007(c). The Danleys did not file their Schedules until September 29, 2015 — thirteen days after the evidentiary hearing on Liberty Bank's motion for relief from the automatic stay and more than two months after they filed their petition in bankruptcy. (Doc. 63). Seriously tardy filings is an indicator of bad faith.
In Question No. 1 in the Statement of Financial Affairs, the debtor is called upon to "[s]tate the gross amount of income the debtor has received from employment, trade, or profession, or from operation of the debtor's business ... from the beginning of this calendar year to the date this case was commended." (Doc. 63). The Danleys provided the following information:
Debtors are further required to file, within 14 days of a petition, copies of payment advices they received from employers for a period of 60 days prior to the date of the petition. 11 U.S.C. § 521(a)(1)(B)(iv); FED. R. BANKR. P. 1007(c). The Danleys did not file their payment advices until September 29, 2015 and, again, did not comply with the statute. (Docs. 64, 65). To begin, 60 days of payment advices were called for but only one payment advice each was provided for both Stacy and Stephanie Danley. Moreover, the one payment advice filed by Stacy Danley was illegible. (Doc. 64). The Danleys' act of filing their payment advices late and incomplete, and in Stacy Danley's case illegible, is game-playing that is indicative of bad faith.
The Court acknowledges that the Danleys were acting pro se for a period of time during this case. However, they had an attorney for the first three weeks of this case and, when that attorney withdrew, the Court warned Stacy Danley of the need to file his schedules.
The Court has already concluded that Liberty Bank lacks adequate protection. Supra Part II(C). However, the staggering size of the Danleys' arrearage and the length of their delinquency also indicated that this case was filed in bad faith. Even with Stacy Danley's judgment against Alabama State University, the Danleys have no reasonable prospect of confirming a plan that would allow them to keep the properties securing Liberty Bank's mortgages. When combined with the timing of their prior bankruptcy cases and the lack of good faith in which they were prosecuted, the futility of reorganization in this case is further evidence of a scheme intended to delay or defraud Liberty Bank. See Henderson, 395 B.R. at 904 (holding
The Court also gave great weight to the fact that the Danleys have not carried insurance or paid taxes on the properties for five years, preferring instead to freeload at Liberty Bank's expense. It appears that the Danleys are attempting to see how long they can hold their property without paying anything to Liberty Bank, the tax collector, or the insurance man. This is very strong, if not conclusive, evidence of a scheme to hinder or delay Liberty Bank in and of itself.
Liberty Bank offered a massive amount of evidence of bad faith, none of which was successfully rebutted by the Danleys. The Court carefully considered the circumstances of the Danleys in this case as well as in their three previous bankruptcy filings, concluding that they are part of a scheme to delay and hinder Liberty Bank in its efforts to realize on its collateral. Given the Danleys' conduct in this case, and in their other cases, in rem relief is justified under 11 U.S.C. § 362(d)(4)(B).
The Danleys moved to extend the automatic stay beyond the 14-day period provided by Bankruptcy Rule 4001(a)(3),
On September 22, 2015, the Court entered an order to the Danleys to show cause why their case should not be dismissed for their failure to timely file schedules. (Doc. 60); see Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (9th Cir. BAP 2004); In re Wishon, 410 B.R. 295, 305 (Bankr.D.Ore.2009) (dismissing case notwithstanding the fact that amended schedules were filed prior to dismissal); LBR 1017-1.
A debtor's schedules and statement of financial affairs shall be filed within 14 days of the date of the petition. FED. R. BANKR. P. 1007(c). Upon a showing of cause, a court may extend the period. In this case, the Danleys argue they were misled by erroneous advice from the Clerk's office. The Court does not find Stacy Danley's affidavit convincing on this point. Supra note 12.
While the Danleys did not seek an extension of time to file their schedules and statement of financial affairs and while the Court does not accept the Danleys' claim that they were misled by the Clerk's office, the Court notes that the Danleys have now filed schedules, albeit more than one month tardy. The Court has been critical of much of the Danleys' conduct in this and in previous bankruptcy cases; nevertheless, it will not dismiss this case for the failure to timely file schedules and a statement of financial affairs.
For eight years, the Danleys have flagrantly used and abused the bankruptcy process to thwart Liberty Bank's realization of its collateral, all at Liberty Bank's expense. That ends now. Liberty Bank has offered a mountain of evidence showing that the Danleys filed this case in bad faith as part of a scheme to delay and hinder its efforts to foreclose on its now wildly-in-default mortgages. The Danleys' motion to alter, amend, or vacate this Court's order granting Liberty Bank in
