By: Donald L Swanson
We are seeing voluntary dismissals of Chapter 11 cases these days. Some dismissals occur to take advantage of Subchapter V. Others occur to receive pandemic benefits unavailable to debtors in bankruptcy.
But hazards are lurking for debtors in such dismissals.
One such hazard is the automatic termination of bankruptcy stay, after 30 days, for individual debtors who dismiss and refile.
Here’s a case illustrating this hazard: In re Crilly, Case No. 20-11637 in Western Oklahoma Bankruptcy Court (Doc. 75, decided June 30, 2020).
Here’s what happened. Husband and wife Crilly had been Chapter 11 Debtors, but they dismiss their case on May 13, 2020, by agreement with creditors.
A few hours later, they refile a new Chapter 11, as small business debtors under Subchapter V.
The Gotcha Law
Under 11 U.S.C. § 362(c)(3), if an individual debtor refiles a second bankruptcy, within one year after dismissing a prior one (except for dismissal under § 707(b)):
- Automatic Stay Termination. The automatic bankruptcy stay “shall terminate . . . on the 30th day after the filing of the later case”;
- Extending the Stay. On motion of a party, the court may extend the stay if the second case is filed “in good faith as to the creditors to be stayed”; and
- Bad Faith Presumption. The second case “is presumptively filed not in good faith,” but “the presumption may be rebutted by clear and convincing evidence.”
In the second In re Crilly case, Debtors request a stay continuation under § 362(c)(3), to avoid the stay termination after 30 days. The U.S. Trustee and creditors Rita and Joe Jacks object, alleging a refiling in bad faith.
The Bankruptcy Court denies the extension request. Here’s why.
The Bankruptcy Court, being well-familiar with Debtors’ prior bankruptcy, makes the following findings:
- This is a family squabble—Rita Jacks is the mother of husband Crilly;
- The Jacks finance a build-out of the second floor of Debtors’ residence so the Jacks can live there as they age, but the Jacks live there only briefly before Debtors remove them.
- So the Jacks sue and obtain a judgment against Debtors for $200,000.00 in actual damages and $200,000.00 in punitive damages, plus $61,650.00 attorneys’ fees.
- Debtors appeal and file their first Chapter 11 case.
- In the first bankruptcy, Debtors do not schedule any leases, renters, or rental income for the second floor, do not identify themselves as sole proprietors of any business, do not identify any income from operating a business, and do not claim to be small business debtors.
- Debtors make multiple filings in the first case, including motions, a disclosure statement and plan, and various amended disclosure statements and plans, and multiple hearings occur thereon.
- After the Court denies confirmation, the US Trustee moves to dismiss the first case for cause, with support from the Jacks—but Debtors object.
- Just before a hearing on the dismissal motion, Debtors change their position, and the parties agree to dismissal—which the Court grants on May 13, 2020, at 11:31 a.m., using an agreed Order document.
- Meanwhile, Debtors pay their attorney fees and costs for both cases, without Court authorization.
- At 4:49 p.m. on May 13, 2020, Debtors file their second Chapter 11 case—under Subchapter V.
- On May 14, 2020, Debtors file their Motion for continuing the automatic stay under § 362(c)(3), claiming their second case is filed in good faith to take advantage of the new Subchapter V.
- However, Debtors cannot demonstrate a substantial change in their circumstances between dismissing the first and refiling the second case.
- The Subchapter V Trustee does not express high hopes for a consensual plan.
Conclusions of Law
The Court denies Debtors’ request for continuing the stay beyond 30 days because, (i) a presumption of bad faith exists, and (ii) Debtors have not rebutted that presumption.
–Presumption of bad faith.
A presumption of bad faith arises under § 362(c)(3), unless Debtors prove either (i) a substantial change in the debtor’s financial or personal affairs since dismissal of the prior case, or (ii) that the new case will conclude with a confirmed and feasible plan. Debtors have not rebutted that presumption.
On the first of these two exceptions, only five hours and eighteen minutes lapsed between dismissal of the first case and the refiling, so there is no change in circumstances. The new existence of Subchapter V cannot be such a change, because it was enacted before dismissal of the first case (not between that dismissal and refiling).
The second exception is not satisfied because, (i) the Court found, in the first case, that Debtors’ sixth amended plan was blatantly unfeasible, (ii) Debtors have not established any change in the second case, (iii) Debtors presented no evidence of terms for a proposed plan in the second case, and (iv) Debtors admit that no substantial change in circumstances has occurred to support a confirmable plan.
–Totality of Circumstances Test
Additionally, there is a totality of circumstances test to determine if good faith is established. Here’s how this test applies in the In re Crilly case:
- Timing. Debtors did not disclose their refiling intent before agreeing to the dismissal order for “cause.”
- Same Debts. Debts in the second case are nearly the same as in the first case, with the Jacks Judgment comprising over 90% of total debts in both cases. The only new debts are income taxes: $3,053.00 state and $5, 627.00 federal.
- “Cause.” The first case was dismissed for “cause” under Section 1112(b).
- Diminished Assets. Payments to Debtors’ attorney wiped out $50,000 of funds distributed from an inherited IRAs that were ordered to be held by the attorney in his trust account.
- Motive. Debtors say they want to take advantage of the new Subchapter V, but the Court “seriously doubts that Debtors qualify as small business debtors” because they have no business and no business debts.
- Manipulation. Debtors have manipulated the Bankruptcy Code for twenty months to serve their purpose of staying the Jacks’ collection activities without the necessity of posting an appeal bond or being required to pay anything on the Jacks’ Judgment debt.
- No Changed Circumstances. Circumstances did not change in the five hours and eighteen minutes that lapsed between dismissal of the first case and the refiling.
- Objections. Both the US Trustee and the Jacks vehemently object to any extension of the automatic stay.
–No Cause for Extension
Even of good faith were established, Debtors would still need to show why the Court should exercise discretion to extend the stay. But Debtors have not shown any such reason:
- There is no evidence of contents of a confirmable plan;
- Debtors do not qualify for Subchapter V; and
- The Jacks have been stayed for more than twenty months without the protection of an appeal bond.
Voluntary dismissals of Chapter 11 cases have consequences, when refiling is contemplated.
Sometimes those consequences are good for the debtor (e.g., taking advantage of Subchapter V in a refiling or getting pandemic benefits from the government before refiling).
Sometimes, however, the consequences are not so good for debtors. The In re Crilly opinion is Exhibit A for one of these.
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