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No Automatic Stay For Serial Bankruptcy Filers

Creditor-Side Bankruptcy and Real Estate Law by Peter N. Brewer, Esq.

Last month, in In re: Leafty, the Bankruptcy Appellate Panel for the Ninth District reaffirmed the statutory bar against debtors filing serial bankruptcies to stop a foreclosure after a creditor has obtained relief from stay in the debtor’s earlier bankruptcy.

Facts of the Case

Leafty, the borrower and debtor in the case, filed for Chapter 13 bankruptcy protection after she was unable to receive a loan modification for her loan.  Several months later, the lender moved for and received relief from the automatic stay to proceed with foreclosure.  Immediately after relief from stay was granted Leafty sued in state court to stop the foreclosure sale.  Leafty eventually lost her state court case.  On the morning of the trustee’s sale, Leafty dismissed her bankruptcy case and filed a second bankruptcy petition.  Because the trustee did not receive notice of the bankruptcy prior to the sale, the foreclosure was completed.  After the sale, the lender moved to dismiss the bankruptcy and for a finding that the stay was not in place at the time of the sale.  The bankruptcy court granted the motion nunc pro tunc (retroactively applied the relief for stay to allow the foreclosure sale) and dismissed the second bankruptcy.  The debtor appealed from that order.

Holding

Under 11 U.S.C. 109(g), the bankruptcy statute provides that people cannot receive the protection of the bankruptcy statutes in certain instances.  Those instances include people filing for bankruptcy protection within 180 days of their case being dismissed by the court for violating court rules, or if they dismissed the bankruptcy after relief from the automatic stay was granted.  The Appellate court found that although there are exceptions to this statute, those exceptions are narrow and are limited to circumstances where there is a “bona fide change in circumstances” or where the dismissal would cause an “illogical, unjust, or capricious result, or when the benefit of a dismissal would inure to a bad faith creditor.”  Further, it is the burden of the debtor to prove that there are changed circumstances in order to overcome the statutory provision.  Absent such a showing, the automatic stay does not prevent a foreclosure and the creditor is not required to seek relief from stay prior to taking action.

Takeaway

In recent years, there have been many creative debtors and attorneys who sought to delay foreclosure sales.  While the bankruptcy court is often very pro-debtor, this decision reaffirms the statutory protections for lenders.

If you or someone you know is interested in seeking legal counsel regarding such matters, don’t hesitate to contact Brewer Offord & Pedersen LLP at (650) 327 – 2900 or visit us on the web at www.BrewerFirm.com.

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