Bankruptcy Notice Requirements

The problem of abusive bankruptcy filings--to delay foreclosure of real property--has caused some bankruptcy judges to resort to issuance of "in rem orders." In rem orders purport to lift the automatic stay as to particular property without regard to any subsequent bankruptcy filing which would otherwise bring another automatic stay--and require another time-consuming motion and order lifting the stay. This remedy obviously raises serious constitutional due process issues, since anyone later acquiring an interest in the property--or filing a subsequent bankruptcy involving the property--may not get further notice or opportunity to object to foreclosure.



A classic example is In re Fernandez, 212 B.R. 361 (Bankr.C.D.Cal.1997). In June 1992 John and Florencia Fernandez gave a deed of trust for $600,000 to BSC Mortgage Corp. against their home on Sea View Ave. in L.A. They defaulted in 1996 and the assignee/lender (now a bank) commenced non-judicial foreclosure.



One day before the scheduled foreclosure sale, John (solely) filed a chapter 13 bankruptcy. When he failed to appear at his section 341(a) meeting of creditors, his case was dismissed with a 180-day bar against refiling.



Days later, Florencia (solely) filed a chapter 13 BK. Then, while her first case was still pending, Florencia filed a second chapter 13 petition. When she failed to attend her section 341(a) meeting of creditors, her cases were dismissed with 180-day bars against refiling.



On the same day that Florencia's second case was dismissed (2/6/97), John conveyed his interest in the PIQ to himself and one Belinda Amador, as joint tenants. The grant deed revealed this transfer was a gift. This deed was recorded the next day (2/7/97), and on the same day Amador filed a chapter 7 bankruptcy. Amador's schedules and statement of financial affairs stated that her address was in San Dimas--and failed to disclose any interest in the Sea View property.



On April 14,1997, on the bank's motion--but without notice to John--the court in the Amador bankruptcy issued an order lifting the automatic stay, which provided in part:



"IT IS FURTHER ORDERED that any relief from stay granted Movant herein be deemed binding and of full force and eftect in this case and in any case filed by the Debtor or any other entity claiming an interest in the subject property within 180 days of the date of entry of this order granting relief from stay."



On April 21,1997, John filed his second chapter 13 bankruptcy. The bank proceeded with its foreclosure sale and became the successful bidder at the sale. Although it had prior notice of John's second bankruptcy, the bank did not seek or obtain an order lifting the stay in that case. After the trustee's deed was recorded, John filed schedules and a statement of affairs, but he failed to file an adequate plan and, on May 13, 1997, John's second case was dismissed by the Clerk of the Court with a 180-day bar against refiling.



John, appearing pro per, moved for an order vacating the dismissal of his second bankruptcy, arguing that the foreclosure pursuant to the in rem order had cost him his home without notice and the opportunity to be heard, in violation of his rights of due process under the Fifth or Fourteenth Amendments to the U.S. Constitution.



The bankruptcy court denied John's motion, citing the five BK filings as evidence of abuse of process and collusion between John, Florencia and Amador. The court said none of the filers attended their section 341(a) meetings, none of the chapter 13 debtors made any payment (as required) to their trustee, and there were "a whole host of problems" with schedules and statements filed.



After upholding the Clerk's dismissal of John's last case, and finding that his mis-filings should not be treated as excusable, the court explained at length its reasons for denying John's motion--thereby enforcing the in rem order.



The court relied heavily on Bankruptcy Code section 105(a), which gives bankruptcy courts broad powers to "issue any order*necessary or appropriate to carry out the provisions of this title (11 U.S.C.)." Further, sec. 105(a) expressly contemplates and approves exercise of court powers to "prevent an abuse of process."



Still, the Fernandez court was sensitive to the constitutional issues, and mindful that it was "dealing with two separate problems that limit the efficacy of in rem relief. First, (John) was not given written notice by the bank of the bank's relief from stay motion in the Amador case. Secondly, the bank did not file and serve a relief from stay motion in the case now before the court."



Nevertheless, the court ruled that evidence of collusion between John and Amador was strong enough to support a finding that John should be charged with constructive notice of the bank's in rem relief from stay motion in the Amador case. With this issue behind it, the court ruled further that John's bad faith conduct would allow the court (under the authority of section 105[a]) to dispense with further notice requirements and deprive him of the right to invoke another automatic stay.



Overall, a strong victory for the concept of the in rem order.



By Bert Rush