By: Donald L Swanson
“Backfire” = “to have the reverse of the desired or expected effect”
In 2005, the U.S. Congress decided to make life hard for individuals in bankruptcy.
Congress saw fraudulent intent in the minds of their destitute constituents—particularly those who had been living above the poverty line. So they decided to make bankruptcy difficult for those folks—and did so by passing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).
But BAPCPA has mostly failed to do anything other than punish those good folks who find themselves in difficult financial straights.
It’s ironic, therefore, to see the fraud-prevention provisions of BAPCPA nearly backfire: being simultaneously, (i) powerless to prevent bankruptcy refilings, and (ii) used and manipulated by a bankruptcy debtor to hinder, delay and nearly defraud a creditor.
On June 29, 2020, the U.S. Supreme Court denies certiorari in just such a case: Rose v. Select Portfolio Servicing, Inc, (Supreme Court Case No. 19-1035).
I’ll try to explain the convoluted (but not all that complicated) details of what happened, based on the trial court’s opinion.
Ms. Rose sues her mortgage lender in state court, seeking a declaration that Lender’s lien against her residential real property is invalid—because the statute of limitations for enforcing it has expired.
Lender responds by, (i) removing the case to Federal Court, and (ii) counterclaiming for judicial foreclosure of its lien.
Backstory—Purchase & Lien
Rose and her then-husband purchase a residential property in 2005 and then refinance it in 2006, granting the lien in question to Lender.
Rose and her husband divorce in 2010. The divorce decree awards her ex-husband the residential property and requires him to pay the secured debt. Then, he defaults on payments and conveys the property to Rose, as required by the divorce decree.
Backstory—Defaults and Bankruptcies
Rose can’t pay the secured debt on the residence, either.
Legal machinations ensue, involving multiple notices of acceleration, multiple non-judicial foreclosure sale dates, a TRO, and multiple bankruptcy filings.
- First Notice and Sale Date. On March 26, 2014, Lender sends Rose a Notice of acceleration and schedules a non-judicial foreclosure sale for May 6, 2014.
- A TRO. On May 5, 2014, (the day before the foreclosure sale) Rose sues Defendant in Texas state court and obtains a temporary restraining order, blocking the foreclosure sale. The parties ultimately agree to dismiss this case.
- Second Notice and Sale Date. Lender sends Rose a second Notice of acceleration and schedules a non-judicial foreclosure sale.
- First Bankruptcy. On January 4, 2016, Rose files her first bankruptcy (Chapter 13), which stops the foreclosure sale. The bankruptcy is dismissed on January 28, 2016 because of Rose’s failure to timely file a plan and/or schedules.
- Third Notice and Sale Date. On September 1, 2016, Lender sends Rose a third Notice of acceleration and schedules a non-judicial foreclosure sale for October 4, 2016.
- Second Bankruptcy. On October 3, 2016, Rose files her second bankruptcy (Chapter 7), which stops the foreclosure sale. Rose receives a discharge in this bankruptcy on January 25, 2017.
- Fourth Notice and Sale Date. On April 3, 2017, Lender sends Rose a fourth Notice of acceleration and schedules a non-judicial foreclosure sale for June 6, 2017.
- Third Bankruptcy. On June 5, 2017, Rose files her third bankruptcy (Chapter 13), which stops the foreclosure sale. This bankruptcy is dismissed at Rose’s request on July 26, 2017.
- Fifth Notice and Sale Date. On January 5, 2018, Lender sends Rose a fifth Notice of acceleration and schedules a non-judicial foreclosure sale for March 6, 2018.
- Fourth Bankruptcy. On March 2, 2018, Rose files her fourth bankruptcy (Chapter 13), which stops the foreclosure sale. This bankruptcy is dismissed on May 21, 2018, at Rose’s request.
Further legal action follows.
- The Lawsuit. On May 3, 2018, before dismissal of her fourth bankruptcy, Rose files this Rose v. Select Portfolio lawsuit.
- Sixth Notice and Sale Date. On August 2, 2018, Lender sends Rose a sixth Notice of acceleration and schedules a non-judicial foreclosure sale for October 2, 2018.
- Counterclaim. On September 21, 2018, Lender files its counterclaim, seeking judicial foreclosure of its lien.
BAPCPA limits the automatic stay in bankruptcy cases where the debtor has already been a debtor in a recent case. The automatic stay limitation applies, under § 362(c)(3)(A), if debtor:
- is an individual in a chapter 7, 11, or 13 case;
- was in a prior bankruptcy case within the preceding 1-year period; and
- the prior case was dismissed (except under § 707(b)).
In such a newly-filed bankruptcy, the automatic stay terminates—automatically—“on the 30th day after” the second case is filed. Such termination is:
- “with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease”; and
- “with respect to the debtor.”
Wow! That’s a lot of “with respect to[s]”—which creates uncertainty on what the statute means.
Arguments of the Parties
- Each of her succeeding bankruptcy filings occurred within one year after the prior bankruptcy’s dismissal;
- BAPCPA provides (in § 362(c)(3)(A)) for automatic termination of the bankruptcy stay, after 30 days, for each such bankruptcy re-filing;
- The statute of limitations for foreclosing the lien, therefore, continues to run while the bankruptcy cases are pending; and
- Therefore, the statute of limitations under Texas law expires before Lender can take the appropriate actions to foreclose its lien.
- BAPCPA’s § 362(c)(3)(A) provision for automatic termination of the automatic stay after 30 days in a re-filing does not apply to Lender’s foreclosure action;
- That’s because § 362(c)(3)(A) only terminates the stay “with respect to the debtor”—not as to property of the bankruptcy estate; and
- Consequently, Lender filed its counterclaim for judicial foreclosure within the period allowed by Texas’s statute of limitations.
Circuit & Lower Courts Split
Courts are now split on the issue the parties raise.
One view, “sometimes called the majority view,” says the bankruptcy stay terminates (i) “only as to actions against the debtor and the debtor’s property,” but (ii) “not as to actions against property of the bankruptcy estate.” Fifty lower courts follow this view. Both the trial court and the Fifth Circuit adopt this majority view in their Rose v. Select Portfolio opinions.
[It’s on a Petition from the Fifth Circuit’s Rose v. Select Portfolio opinion that the U.S. Supreme Court denies certioriari.]
Another view, “sometimes called the minority view,” says the bankruptcy stay is terminated in its entirety after 30 days from a re-filing. The First Circuit has adopted this minority view (see In re Smith, 910 F.3d 576 (1st Cir. 2018)), as do twenty lower courts. Under the technicalities of this view, Rose would prevail in her dispute with Lender.
Trial Court Ruling
The trial court in Rose v. Select Portfolio adopts the majority view and holds that the termination of the stay by § 362(c)(3)(a) does not apply to property of the bankruptcy estate. As noted above, the Fifth Circuit affirms.
The trial court first notes that the secured Loan has been in default since at least March 1, 2011.
The court also notes that Rose, (i) has repeatedly thwarted Defendants’ attempts to foreclose by filing bankruptcy, and (ii) now seeks to use the shield of bankruptcy as a sword to claim that Defendants cannot foreclose.
The trial court explains further, based upon “the plain language” of the statute and its context, that the stay is terminated, by § 362(c)(3)(A), only with respect to:
- the debtor individually;
- the debtor’s exempt property that stands as collateral for a debt of the debtor; and
- certain leases.
The stay does not terminate as to property of the estate.
Accordingly, the trial court in Rose v. Select Portfolio declares:
- the automatic bankruptcy stay “did not terminate” as to the real property in question; and
- the statute of limitations was tolled during the entire pendancy of Rose’s four bankruptcy filings.
Therefore, the Court concludes, Defendant’s counterclaim for judicial foreclosure is not barred by Texas’s statute of limitations.
This ruling also makes good, practical sense, the Court reasons, because:
- Rose repeatedly filed bankruptcy or sought a temporary injunction just days before each scheduled foreclosure sale;
- Three of Rose’s four bankruptcy cases were dismissed either at her request or because she failed to pursue them;
- The timings of events show that Rose was abusing the bankruptcy system to stop scheduled foreclosures; and
- Allowing her to now succeed on a statute of limitations defense, based on technical timing details and an abuse of the bankruptcy system, would be inequitable.
Here is how the trial court concludes its opinion:
“The history of this case demonstrates beyond cavil that Rose has spent nearly five years gaming the system through a series of baseless bankruptcy actions and civil suits.
“Doing so has enabled Rose to achieve her one overarching goal: avoiding foreclosure on a property with little or no payment on the mortgage debt.”
“Rose has used the intended shields of litigation and bankruptcy as a sword to avoid foreclosure of her encumbered house.”
“The court cautions Rose, and her present and future counsel, if any, that further machinations to prolong this litigation or delay foreclosure proceedings could and likely will be met with sanctions.”
The Rose v. Select Portfolio opinions by the trial court, as affirmed by the Fifth Circuit Court of Appeals, are Exhibit A for jumping through significant hoops to prevent Congress’s fraud-prevention and debtor-punishing provisions from backfiring:
- i.e., from being used by a debtor to hinder, delay and nearly defraud a creditor; while,
- being, simultaneously, impotent to prevent bankruptcy re-filings.
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