Chapter 13 of the Bankruptcy Code is an important provision of the law because it enables a distressed homeowner to cure a defaulted mortgage and thereby save his or her home. Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24 (2d Cir. 1982). Bankruptcy jurisdiction is equitable. Bank of Marin v. England, 385 U.S. 99, 110 (1966). There are instances in which a debtor might be trying to abuse Chapter 13 to injure his or her creditors. See Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346 (8th Cir. 1990) (en banc). Bankruptcy Code §1307(c) provides a bankruptcy judge with discretion to dismiss a Chapter 13 case for “cause” when a debtor is abusing Chapter 13 and is attempting to harm his or her creditors. See In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992).
Bankruptcy Judge James Tancredi employed Bankruptcy Code §1307(c) to dismiss a Chapter 13 case because of the lack of good faith. In re Ciarcia, 2017 WL 5062144 (Bankr. D. Conn. 2017). There, debtor Paul Ciarcia owned 50 percent of a limited liability company named the Ciarcia Family, LLC, and Ms. Amy Ciarcia owned the other 50 percent of the limited liability company. The Ciarcia Family, LLC owned a real estate parcel, 804 Stanley Street, New Britain, Conn. (the property). Debtor Paul Ciarcia operated an automotive repair and a remodeling business at the property. Debtor Paul Ciarcia also collected rent from the other tenants at the property.
On or about Nov. 22, 2015, debtor Paul Ciarcia through his remodeling business, entered into a contract to remodel a dance studio with Ms. Denise Rivera. The remodeling contract entailed thirteen different jobs. Debtor Paul Ciarcia failed to complete the remodeling contract with Ms. Rivera.
On Oct. 18, 2016 the debtors filed for Chapter 13. The debtors’ filed a Schedule F and an Amended Schedule F. The debtors omitted Ms. Amy Ciarcia, the Ciarcia Family, LLC, and Ms. Rivera from their Schedule F and Amended Schedule F. On Dec. 15, 2016, the Chapter 13 trustee filed a motion to dismiss because it was alleged that the debtors were in default and failed to proposed a confirmable Chapter 13 plan. On March 23, 2017, Ms. Amy Ciarcia filed a lawsuit in Connecticut Superior Court against debtor Paul Ciarcia, Bayview Loan Servicing, LLC and the Ciarcia Family, LLC. The state court lawsuit alleged fraud, theft and forgery with respect to debtor Paul Ciarcia with respect to a loan modification concerning the property. On April 17, 2017, Ms. Amy Ciarcia filed motions to dismiss and relief from the automatic stay. On April 14, 2017, Ms. Rivera filed a proof of claim for $22,000.
The Bankruptcy Court granted the motions to dismiss. In determining whether to dismiss for the lack of good faith courts assess the following factors:
Factors that courts have considered in determining whether a debtor has failed to pursue a Chapter 13 bankruptcy in good faith are “whether the debtor was forthcoming with the court, whether the debtor accurately stated facts, debts, and expenses, whether the debtor misled the court through fraudulent misrepresentation, how the debtor’s actions affect creditors, and whether the debtor has abused the purpose of the bankruptcy code.”
Id. at 4.
The court found under the totality of the circumstances that the debtors lacked good faith. The debtors failed to list on Schedule F as creditors Ms. Amy Ciarcia and the Ciarcia Family, LLC. The debtors filed their Chapter 13 case five months after Ms. Amy Ciarcia accused debtor Paul Ciarcia of forging her signature to loan modification documents. Debtor Paul Ciarcia had notice that Ms. Amy Ciarcia had a claim against him; however, Ms. Amy Ciarcia and the Ciarcia Family, LLC did not receive notice of the filing of the Chapter 13 case.
Debtor Paul Ciarcia also failed to schedule Ms. Rivera. Ms. Rivera had unequivocally stated to debtor Paul Ciarcia that she had a claim for $22,000.00 against him. Nonetheless, debtor Paul Ciarcia failed to schedule the Rivera claim.
Debtor Paul Ciarcia also failed to list his customers and employees as creditors on his Schedule F. The court stated:
The Debtor also failed to give notice of his bankruptcy to an unidentified number of customers that made complaints about the work he did at Paul’s Automotive, LLC, and to co-workers or employees who “fronted” to secure utility accounts for him. According to the Debtor’s testimony, he received complaints from customers in the months immediately prior to the petition date regarding work that he performed at a time when his repairman’s license was suspended or revoked. The Debtor’s matrix indicates that no such customers were given notice of his bankruptcy, and the Debtor testified to the same. (footnotes omitted).
Id. at 5.
Debtor Paul Ciarcia also failed to disclose two pending lawsuits. A debtor is under an affirmative obligation to disclose all of his or her assets. Debtor Paul Ciarcia failed to satisfactorily explain why he failed to disclose the existence of these pending lawsuit in their schedules.
The record also established that debtor Paul Ciarcia engaged in conduct violate of state and federal law, and harmed several third parties. Debtor Paul Ciarcia engaged in during a period when he knew that his repairmen’s license was either suspended or revoked. Debtor Paul Ciarcia also testified that he engaged in disguised cash transactions to evade penalties imposed by financial institutions that prevented him from opening a bank account. Debtor Paul Ciarcia also collected rents from the property, and that these funds were not used to pay the mortgage on the property.
The court, in dismissing the debtors’ Chapter 13 case, reasoned that debtors who lack good faith should not be rewarded with the benefits of the bankruptcy process. Debtor Paul Ciarcia’s pre-petition and post-petition conduct was abusive to his creditors. Debtor Paul Ciarcia omitted assets and creditors. Debtor Paul Ciarcia acted in total disregard of his fiduciary duties to his creditors or to his responsibilities imposed by the Bankruptcy Code.
Judge Tancredi ruled that debtor Paul Ciarcia’s abusive conduct warranted a bar against him from refiling until certain conditions were satisfied. The court reasoned that there was sufficient cause to issue a prejudicial bar under Bankruptcy Code §§105(a) and 349(a) to prevent abuse of Chapter 13. The bankruptcy court issued an order prohibiting debtor Paul Ciarcia from refiling for a period of not less than three years unless the following circumstances occurred:
1) The claims of Denise Rivera have been fully and finally resolved by a judgment in his favor, or a complete settlement, or the satisfaction of any judgment or civil or criminal restitution order(s) in her favor; and
2) The entry of a final judgment in the Mortgage Litigation or any related civil or criminal proceeding(s) in the Debtor’s favor, or a complete settlement, or satisfaction of any claims or final judgement regarding the mortgage modification dispute in favor of Amy Ciarcia and/or Ciarcia Family, LLC.
Id. at 7.
The bankruptcy court reached the correct result in dismissing the debtors’ Chapter 13 case, and imposing a three year refiling bar against debtor Paul Ciarcia. Debtor Paul Ciarcia’s pre-petition conduct was egregious. Debtor Paul Ciarcia engaged in conduct that violated federal and state laws. Debtor Paul Ciarcia continued to conduct business after his license had been either suspended or revoked. In addition, Debtor Paul Ciarcia’s work for Ms. Rivera was poor, unresponsive or wholly incomplete. The debtors’ post-petition conduct was horrendous. The debtors failed to schedule known creditors, and list assets, including two lawsuits. The debtors’ Schedules B and F were materially false. The debtors failed to make post-petition mortgage or Chapter 13 plan payments.
As Ciarcia demonstrates, bankruptcy judges must be willing to punish dishonest debtors who seek to abuse the bankruptcy process. The imposition of stern sanctions is the correct response to a debtor who seeks to abuse the bankruptcy system, and also acts as a deterrent against future abuse of the bankruptcy process. In most cases dismissal or a bar order is an appropriate remedy for a debtor who has acted in bad faith. However, in a minute set of cases bankruptcy judges should also make criminal referrals to the U.S. Attorney. See 18 U.S.C. §3057(a). Bankruptcy Judges should make criminal referrals against unscrupulous debtors in situations where there is a reasonable belief that a debtor has violated the U.S. Criminal Code provisions that pertain to bankruptcy cases. 18 U.S.C. §§152 et seq. Equally important, the U.S. Attorneys should be willing to prosecute cases involving bankruptcy crimes. The prosecution of bankruptcy crimes is vital to the effective operation of the bankruptcy system because there is a minuscule class of ruthless debtors who abuse the bankruptcy system in furtherance of criminal schemes to defraud creditors. The failure to prosecute individuals who commit bankruptcy crimes is deleterious to the integrity of the U.S. Bankruptcy Court and injurious to creditors.
Carlos J. Cuevas is a solo practitioner in Yonkers and a research associate with the University of Houston School of Law.