Bankruptcy: Prior Bankruptcy Petition - Dismissal "With Prejudice"

     In the case of Colonial Auto Ctr. Inc. v. Tomlin, the United States District Court at Charlottesville, Virginia, reviewed a Bankruptcy Court's decision denying a creditor summary judgment against the debtor in a motion to determine if the creditor's debtor was nondischargeable due to the debtor's prior bankruptcy case being dismissed "with prejudice". 

     In Tomlin the Bankruptcy Court had ruled that the words "dismissed with prejudice" meant only that the debtor could not file another bankruptcy petition for 180 days. The creditor, however, argued that the language meant that the debtor could not discharge pending debts in a later bankruptcy petition; the creditor asserted that dischargeability had a res judicata effect. 

     The District Court ascertained that the question before it was does an order stating only that a case is "dismissed with prejudice," which in the general legal context, the effect of precluding the subsequent litigation based upon the same claim, have, in the bankruptcy context, the effect of precluding the subsequent discharge of pending debts? 

     The District Court ruled that there was no reason to depart from the traditional effect of an order dismissing a case "with prejudice", and that the Bankruptcy Court erred in determining that the prior order as effecting something less than res judicata. The District Court further ruled that the debtor failed to identify any portion of the Bankruptcy Code in which Congress indicated an intention that a dismissal "with prejudice," once ordered, does not effect claim preclusion in relation to a pending debt. Accordingly, the District Court vacated the Bankruptcy Court's order denying the creditor summary judgment. 

Bankruptcy: Motion to Annul Automatic Stay upon Debtor's Third Petition

     In the case of Blue Ridge Bank v. Boswell the United States Bankruptcy Court at Roanoke, Virginia, denied the creditor bank's motion to annul the automatic stay. 

     In Boswell the debtor had twice previously, just prior to the bank's scheduled foreclosure sales, filed a bankruptcy petition on the eve of foreclosure. With each of the two bankruptcy filings, the debtor failed to provide schedules, a statement of financial affairs or a plan. When the Bankruptcy Court dismissed the debtor's second petition, the Court ordered the debtor not to file another petition for 180 days from the entry of the original order of dismissal. The debtor complied with this order. 

     The bank scheduled a third foreclosure sale, and at the same time, the debtor presented a letter from her attorney indicating that a third bankruptcy petition had been filed. The bank proceeded with the sale, announcing that the sale would be subject to bankruptcy court confirmation. After the sale, the bank moved to annul the automatic stay, arguing that the Court had discretion to validate actions taken in violation of the stay. 

     The Bankruptcy Court found as fact that the foreclosure trustee was advised by the bank and its counsel to proceed with the foreclosure sale of the debtor's residence, and that each was fully aware of the debtor's Chapter 13 petition. At the same time, the foreclosure trustee chose not to consult with the debtor, who was in attendance at the sale, or the debtor's attorney, whose identity was known to the trustee. In fact, the foreclosure trustee received only the bank's point of view and then obtained indemnification from the bank for any personal liability resulting from the sale. The Bankruptcy Court noted that under Virginia law, a trustee under a deed of trust is a fiduciary for both the debtor and the creditor and must treat them with perfect fairness and impartiality. 

     The Bankruptcy Court ruled that its dismissal of the debtor's second petition prohibited the debtor from filing any petition for a period of 180 days from entry of the original order of dismissal. The debtor filed her Chapter 13 petition nine days after the prohibitory period had expired. The debtor acted in accordance with the Court's directive and with her rights under the Bankruptcy Court. Further, the bankruptcy trustee reported that the debtor was current in her plan payments and that he was prepared to recommend confirmation. The Bankruptcy Court noted that such evidence did not support a finding that the debtor was abusing the bankruptcy process. 

     Accordingly, the Bankruptcy Court declined to annul the automatic stay of Bankruptcy Code §362, and the bank's motion to annul the stay was denied. 

Bankruptcy: Chapter 7 Case Dismissed Due to Substantial Abuse

     In the case of In Re Norris, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, ruled that although the debtors, a married couple, did not lead a lavish lifestyle and saw their financial woes mount over a ten year period before they filed their Chapter 7 petition, which was filed in good faith, their petition was nevertheless dismissed for "substantial abuse" under Bankruptcy Code §707(b).
     Judge Tice found as fact that the debtors did not lead an extravagant or excessive lifestyle, at least not in the terms of acquiring large amounts of personal property. The debtors did, however, remain in a large and expensive home which they have managed to retain, rejecting the prospect of moving to a smaller abode that would have been less costly to keep. Also, the debtors testified that some credit card debt resulted from dining out. Significantly, Judge Tice found that the debtors used their 401(k) plans to create a reserve for future expenses, thus diverting funds that could have otherwise been used to pay to creditors.
     In evaluating all the factors for determining substantial abuse pursuant to the 4th Circuit Court of Appeals case Green v. Staples, Judge Tice stated that the Court must consider more than just the debtor's ability to fund a Chapter 13 plan. In evaluating all of the Green factors together, Judge Tice stated that he was left with a rather close decision. The debtors certainly had the ability to repay a substantial portion of their debts, and this is the primary factor to be considered. Their ability to repay, however, was mitigated in part by the debtors' good faith and forthrightness, the relative accuracy of their bankruptcy schedules, and their lack of intent to deceive the Court. Judge Tice stated, on the other hand, that the debtors clearly took on debts while being unable to repay them, were not forced into bankruptcy due to a sudden, unexpected turn of events, and have included unreasonable expenses in their budget (including the deduction for income for deposit in their respective 401(k) plans, totaling nearly $500 per month) in order to make funds unavailable to their creditors. Judge Tice found that the debtors lived far beyond their means and could easily fund a significant Chapter 13 plan to discharge their debts and provide their creditors with some payout. Instead, the debtors propose by filing Chapter 7 to maintain their more-than-adequate lifestyle at the expense of their creditors. In addition, the debtors continue to try to retain money for future expenses to their creditors' detriment. The debtors' actions smack of the "unfair advantage" over creditors sought to be proscribed by Bankruptcy Code §707(b). Judge Tice stated that while the Court was sympathetic to the debtors' plight, and even taking into account the prescription of granting the debtors the relief they seek, the Court found that the debtors' Chapter 7 case should be dismissed for substantial abuse.
     The lesson in Green - look closely at a debtor’s available assets in a Chapter 7 case, especially retirement benefits.

Collections: Sanctions on Improper Fair Debt Claim

     In the case of Guidry v. Clare, a United States District Court in Northern Virginia granted an award of $16,000.00 in sanctions against a debtor who was a plaintiff in a Fair Debt Practices Collection Act (FDCPA). The Court held that the debtor’s case, which also included state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment, was filed wholly without merit.
     The Court found that the dispute arose when the debtor wrote the plaintiff, a company that provided cheerleading training, a check for $62.50 for the debtor’s daughter’s class. The check was returned for insufficient funds. The company’s office manager (Clare) contacted the debtor to make the check good. The debtor did not respond. Over the next several months the company made several other efforts to collect on the check, including a letter from the company’s attorney and from a collection agency. The company’s office manager also advised the debtor that the company would seek a warrant for the debtor’s arrest if the debt was not paid within seventy two hours. When the debtor did not respond, the company filed a criminal complaint for misdemeanor larceny by check. A few days later, a policeman served the warrant on the debtor at the same time he served a warrant from another creditor for felony larceny by check. The debtor was arrested and released on her own recognizance on both charges. She paid the face amount of the company’s check, plus a $30.00 bank service charge. As a result of this, the prosecutor withdrew the bad check charge.
     A few months later the debtor filed her FDCPA action. After much litigation, the case was dismissed, without prejudice, because the case was not served within 120 days. The complaint was refiled. The company’s attorneys sought dismissal and sanctions for filing a frivolous lawsuit. The Court dismissed the case, scheduled a hearing on sanctions, and ordered the parties to prepare briefs. After reviewing the briefs the Court concluded that the debtor’s case was “meritless, indeed flatly frivolous”. The meritless claims included allegations that the company’s manager had failed to make a meaningful disclosure of her identity and debt collection purpose in her telephone calls to the debtor, that a debt collector was barred from filing a criminal complaint, that the company’s manager had made false representations to authorities in order to disgrace the debtor, and that the collection letters failed to disclose their debt collection purpose. The Court ruled that the letters contained the required disclosures and the purpose of the phone calls were clear. The Court further ruled that the law prohibits only the threat of criminal action if there is no intent to follow through on the threat. In this case the intent to follow through was evident from the fact that a warrant was issued, and there was no evidence that the representations to authorities were false or made with an intent to disgrace the debtor. The Court found that there was also no basis for the state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment. The Court wrote that “it cannot be forgotten or overlooked” that the case “was spawned by Guidry’s failure to pay a $62.50 debt, or rather by her attempt to pay it with a bad check”.
     Creditors take heart - there is still some common sense in this world!