Methods of Moving a Stagnant Bankruptcy Action Towards Completion
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Have you ever represented a creditor in a bankruptcy action where the debtor and/or the debtor’s attorney seem to be dragging their feet in moving the action forward? In these situations, it may feel like your client will never see relief for its claim. However, there are multiple methods of jump-starting movement in the action. All you have to do is file the right motion based on the facts of the case. This article will provide a non-exhaustive list of potential avenues that can be used to get a stagnant bankruptcy action moving again.
Typically issues arise with stagnant bankruptcy actions in the realm of Chapter 11 and Chapter 13 reorganization cases. In such cases, the debtor must file a plan of reorganization that details how each creditor will be paid, or in some cases, not. There are multiple motions that can be filed in what appears to be a snail’s paced bankruptcy action that may kick start the debtor into creating and filing the required plan. Such motions include a motion for adequate protection, motion for relief from the automatic stay or a motion to dismiss the action. Remember, the most important aspect to representing a creditor in a bankruptcy action is getting your client paid as quickly as possible before nothing remains to pay the debt.
The first motion you should consider filing is a motion for relief from the automatic bankruptcy stay. Once relief is obtained, you can seek to recover the amount claimed through other methods, including legal or collection activities. 11 U.S.C. § 362(d) lays out the four reasons why a creditor would be entitled to relief from the automatic stay:
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that—
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate; or
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such 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 either—
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property.
The second avenue for relief may be to file a motion for adequate protection. This method is often used to obtain additional security beyond the already secured property that is worth less than the amount claimed by the creditor. There are various ways of obtaining adequate protection, including monetary payments by the debtor or a security interest in other property. 11 U.S.C. § 361. In either case, the creditor will be able to receive immediate payment on the debt or receive additional security which can be collected upon later.
The third method of prompting movement is to move to dismiss the entire bankruptcy action. This is a more drastic measure that should only be sought if the facts surrounding the filing of the action and/or delay of the case warrant such an extreme decision by the court. In a Chapter 11 action, a court may dismiss an action for cause if it is in the best interests of the creditors and the estate. 11 U.S.C. § 1112(b)(1). The word “cause” is defined by § 1112 as:
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance that poses a risk to the estate or to the public;
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors;
(E) failure to comply with an order of the court;
(F) unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter;
(G) failure to attend the meeting of creditors convened under section 341 (a) or an examination ordered under rule 2004 of the Federal Rules of Bankruptcy Procedure without good cause shown by the debtor;
(H) failure timely to provide information or attend meetings reasonably requested by the United States trustee (or the bankruptcy administrator, if any);
(I) failure timely to pay taxes owed after the date of the order for relief or to file tax returns due after the date of the order for relief;
(J) failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court;
(L) revocation of an order of confirmation under section 1144;
(M) inability to effectuate substantial consummation of a confirmed plan;
(N) material default by the debtor with respect to a confirmed plan;
(O) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan; and
(P) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
The rule is the same for a Chapter 13 case, except the types of cause defined by the Code differ. 11 U.S.C. § 1307(c) defines cause as:
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(3) failure to file a plan timely under section 1321 of this title;
(4) failure to commence making timely payments under section 1326 of this title;
(5) denial of confirmation of a plan under section 1325 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) material default by the debtor with respect to a term of a confirmed plan;
(8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan;
(9) only on request of the United States trustee, failure of the debtor to file, within fifteen days, or such additional time as the court may allow, after the filing of the petition commencing such case, the information required by paragraph (1) of section 521 (a);
(11) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
Be aware that the lists provided in the Code for cause under a Chapter 11 or Chapter 13 action are not exhaustive. Courts have heard and granted motions based on numerous additional allegations of cause. One such additional cause for relief is bad faith. That is, bad faith in filing the petition for bankruptcy or bad faith in administering the bankruptcy action. The Eleventh Circuit has ruled that a case may be dismissed or relief from the automatic stay granted if the petition was filed in bad faith. In re Phoenix Piccadilly, 849 F.2d 1393, 1394 (11th Cir. 1988). In this case, the debtor, Phoenix-Piccadilly, Ltd., owned a number of apartment complexes, all of which were secured by first mortgages. Id. When one of the creditors filed a foreclosure action, the debtor filed for bankruptcy the day before a receiver was to be appointed in the state court foreclosure action. Id. All of the creditors filed motions to dismiss the action based on the debtor’s bad faith filing to avoid foreclosure of the properties. The Court explained that there is no test for determining bad faith, but that courts may consider any factors that show intent to abuse the judicial process or delay or frustrate legitimate efforts of secured creditors to enforce their rights. Id. The Court then set forth some additional factors for consideration when ruling on a motion to dismiss based on bad faith. Those factors include:
- The Debtor has only one asset, the Property, in which it does not hold legal title;
- The Debtor has few unsecured creditors whose claims are small in relation to the claims of the Secured Creditors;
- The Debtor has few employees;
- The Property is the subject of a foreclosure action as a result of arrearages on the debt;
- The Debtor’s financial problems involve essentially a dispute between the Debtor and the Secured Creditors which can be resolved in the pending State Court Action; and
- The timing of the Debtor’s filing evidences an intent to delay or frustrate the legitimate efforts of the Debtor’s secured creditors to enforce their rights.
Id. at 1394-95. The Court found that the debtor filed bankruptcy for the purpose of preventing foreclosure of the properties, which constituted a bad faith filing. Further, the Court explained that having equity in the property, which could lead to a successful reorganization, was not enough to transform the bad faith filing into a good faith filing. Id. at 1395. Based on the results of this case, it is clear that courts will strongly consider any allegations made that a bankruptcy action was filed in bad faith to prevent a creditor from foreclosing on a piece of property.
The Eleventh Circuit further explained in In re Natural Land Corporation, 825 F.2d 296, 298 (11th Cir. 1987) that any plan created under the taint of bad faith could not legally approved because it would not meet the good faith requirements of Section 1129 of the Bankruptcy Code. Therefore, it stands to reason that any Chapter 11 or Chapter 13 case filed in bad faith must be dismissed because a reorganization plan is impossible.
In sum, there are multiple methods of promptly a sluggish debtor back into action. If the creditor simply wants to protect its secured collateral, and there is no evidence of bad faith on the part of the debtor, a motion for adequate protection may be sufficient. However, if it appears the debtor filed the action in bad faith, or is purposefully delaying filing a plan of reorganization, it may behoove you to move for relief from the automatic stay or have the case dismissed.