A situation that plays out far too often in bankruptcy courts: a debtor files bankruptcy on the eve of a foreclosure sale or the sale of a repossessed vehicle in an attempt to delay a lender from recovering and/or selling its collateral. Oftentimes, the debtor will repeat this process over the course of multiple years to the detriment of not only the secured lender, but also the other creditors whose collection efforts are stayed by the filing of the bankruptcy petition.
A 20-year study by the American Bankruptcy Institute of bankruptcy filers in Utah, found that 10.7 percent of debtors in the study had filed bankruptcy multiple times, and thus may have been abusing the bankruptcy system and 20.3 percent of those serial debtors who filed Chapter 7 bankruptcy cases, did not receive a discharge, and ultimately had their cases dismissed. Additionally, only 2.9 percent of repeat Chapter 13 filers completed their payment plan. With almost 800,000 bankruptcy filings in the year 2017, serial bankruptcy filers present a massive problem to the judiciary, attorneys and creditors.
Recently, the U,S. Court of Appeals for the Seventh Circuit issued an opinion that should serve as a warning to serial bankruptcy filers, and also, provide lenders with a potential remedy. In United States v. Williams, 2018 WL 2709457 (7th Cir. June 6, 2018), the debtor fell behind on her payments to several creditors, including the dues to her condominium association. Accordingly, in January 2003, the debtor filed her first of eventually five Chapter 13 bankruptcy cases. Her scheme was simple, upon the filing of the bankruptcy case the automatic stay would apply to stop the collection efforts of all creditors. Subsequent to the filing of the bankruptcy case, the debtor would propose a bankruptcy plan, but then fail to make all the payments required under that plan. The failure to make the required payments would eventually lead to the dismissal of the bankruptcy case.
Following the dismissal of the bankruptcy case, the debtor’s condominium association would once again begin collection lawsuits, at which point the debtor would again file for bankruptcy protection and the process would continue.
Between the second and third bankruptcy fillings, and in an effort to delay the condominium association’s eviction efforts, the debtor transferred title to her condominium to a friend, and then arranged for the property to be transferred back to her at a later date. No consideration was provided for either transfer of title. Even more, the debtor’s friend obtained two mortgage loans secured by the condominium during the brief period that he held title.
After dismissal of the debtor’s fifth and final bankruptcy case, the condominium association once again attempted to evict the debtor. But once again, the debtor concocted a scheme to delay the condominium association, by again transferring the condominium to her friend, who this time filed his own Chapter 13 bankruptcy. Following the filing of the bankruptcy case, a quitclaim deed was recorded transferring the property back to the initial debtor. This Chapter 13 bankruptcy case was ultimately dismissed following the debtor’s failure to make required plan payments and admission of false testimony regarding the condominium.
The government subsequently charged the debtor and her friend in a five count indictment, under 18 U.S.C. Sections 157(1) & (2), for bankruptcy fraud. The debtor was found guilty on all five counts, and her friend ultimately accepted a plea deal and cooperated with the government. In the sentencing phase, the government sought several enhancements. First, the government calculated the total loss at $193,291, which represents the increase in liabilities from the first bankruptcy filing to the fifth bankruptcy filing. Second, the total number of victims was calculated to be 10 or more, due to the fact that the creditor body had increased by 30 creditors since the initial filing. With these enhancements, the district court ultimately imposed a prison term of 46 months on the debtor. The debtor appealed to the Seventh Circuit.
On appeal, the debtor argued that the district court erred because there was no evidence that her debts, or the increase in those debts, was the result of unlawful conduct. The Seventh Circuit disagreed and found that what is relevant is the fact that the debtor’s multiple bad faith filings “fraudulently invoked” the automatic stay in an attempt to prevent creditors from collecting on their debts. The debtor next argued that the district court erred in calculating the total number of victims because the government had failed to prove that any creditor, other than the condominium association, had suffered harm. Once again, the Seventh Circuit disagreed, and found that upon each bankruptcy filing, all creditors affected by the automatic stay were considered victims.
The Seventh Circuit’s ruling is important for two reasons. First, it emphasizes the severity of serial bankruptcy filings. Debtors, often due to misleading advertisements or statements from counsel, believe that they can file multiple bankruptcy cases in an attempt to save their property. But, the four-year prison sentence handed down by the Seventh Circuit should dissuade some of this activity. Second, the decision provides a remedy for creditors who are the victim of a serial filing debtor to seek denial of a debtor’s discharge, even where that particular creditor’s debt was not the primary reason for the bankruptcy filing.
Jesse Cloyd, an attorney with Tripp Scott, focuses his practice on commercial litigation, corporate bankruptcy, creditors’ rights and insolvency related litigation matters.