Opinion
Bankruptcy No. 01-12942F, Chapter 13.
May 24, 2002
MEMORANDUM
Wells Fargo Home Mortgage, Inc. ("Wells Fargo") has filed a motion to dismiss the above-captioned chapter 13 case or, in the alternative, to obtain relief from the bankruptcy stay. The debtor, Mr. Otto Krebs, opposes either form of relief.
After a hearing, the following facts were proven.
I.
Mr. Krebs filed the instant chapter 13 case on March 2, 2001; his bankruptcy counsel is Gerald M. Alston, Esquire. His bankruptcy petition lists his residence at 3219 Emerald Street, Philadelphia, Pennsylvania.
I take judicial notice, under Fed.R.Evid. 201 (incorporated into bankruptcy oases by Bankr.R. 9017), of the docket entries of this case.See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D.Ill. 1993); In re Paolino, 1991 WL 284107, at *12 n. 19 (Bankr. E.D. Pa. 1991); see generally In re Indian Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995).
This is the debtor's first chapter 13 bankruptcy filing. Kenneth M. Lewis, however, has filed three prior chapter 13 cases. Ex. M-1. Mr. Lewis also disclosed his residence in all three cases as 3219 Emerald Street, Philadelphia, Pennsylvania. Mr. Krebs testified that he and Mr. Lewis both reside in the same realty.
The first case filed by Mr. Lewis occurred in August, 1998 and was docketed at Bankruptcy No. 98-30785. The docket entries in that case reflect that this chapter 13 case was dismissed upon motion of the chapter 13 trustee on April 15, 1999, after relief from the stay had been granted to Norwest Mortgage, Inc. Ex. M-1.
The instant motion states that Wells Fargo was formerly known as Norwest Mortgage.
Thereafter, Mr. Lewis filed his second chapter 13 petition on July 1, 1999, docketed at Bankruptcy No. 99-18323. In this second case, a settlement of a lift stay motion filed by Norwest was agreed upon. Once again, the bankruptcy case was dismissed upon motion of the chapter 13 trustee, on March 23, 2000. Ex. M-1.
On July 10, 2000, Mr. Lewis filed his third bankruptcy case, docketed at Bankruptcy No. 00-18539. In this third case, counsel of record was Mr. Alston. Ex. M-1. Thereafter, the bankruptcy stay was lifted on motion of Wells Fargo. On March 29, 2001, the bankruptcy case was dismissed upon motion of the chapter 13 trustee due to Mr. Lewis's failure to tender plan payments.
At the hearing, Wells Fargo offered no evidence concerning the amount allegedly due on its secured claim. It offered no evidence that the debtor's proposed plan is infeasible, or that the debtor is not tendering plan payments to the trustee or mortgage payments to the movant. Instead, Wells Fargo asserts that Mr. Krebs filed the instant bankruptcy case in an improper attempt to block a foreclosure sale of the realty scheduled for March 6, 2001, and relies completely upon the prior unsuccessful filings of Mr. Lewis.
I note that Mr. Krebs filed schedules in this bankruptcy case as well as a proposed chapter 13 reorganization plan. In his schedules, he asserted that the lien held by Wells Fargo exceeded the value of the residence; he also disclosed that Mr. Kenneth Lewis is a co-debtor with him on various obligations, but did not include the mortgage debt among those obligations. Nor did he schedule Mr. Lewis as a co-owner of the realty. His schedule of income provides that he receives $559.00 per month in social security income and $800.00 per month in "income from real property." He did not, however, disclose in his schedules the source of this additional income or the basis upon which it is paid to him. His schedule of expenses reported that his rent or mortgage payments are $265.00 monthly, and that his income exceeds his monthly expenditures by $429.00.
As noted by my colleague, Bankruptcy Judge Sigmund, "a court may not take judicial notice sua sponte of facts contained in the debtor's file that are disputed." In re Laddeck, Adv. No. 00-0426, slip.op., at 2 n. 1 (Bankr. E.D.Pa., April 11, 2001) (citing In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942)). Allegations made by a debtor in his bankruptcy schedules may be hearsay if offered by the debtor for the truth of the assertions made therein. See In re Indian Palms Associates, Ltd., 61 F.3d at 204. Thus, if the schedules have not beep offered in evidence, it may not be appropriate to take judicial notice of their contents if doing so would result in the consideration of hearsay statements.
Nonetheless, a bankruptcy court way take judicial notice that the debtor has made certain assertions in his bankruptcy schedules, as admissions made by a party, since the averments of the schedules would not be hearsay if used against a parry declarant. Fed.R.Evid. 801(d)(1);see In re Bestway Products, Inc. 151 B.R. 530, 541 (Bankr. E.D.Cal. 1993), aff'd, 165 B.R. 339 (9th Cir. BAP 1994), aff'd sub nom. In re Wetherbee, 339 (9th Cir. BAP 1994); see also In re Indian Palms Associates, Ltd., 61 F.3d at 205.
It is only in this limited manner that I take into consideration the disclosures made in the debtor's schedules filed with this court.
I refer to these schedules because Wells Fargo offered no evidence regarding its mortgage obligation or evidence concerning ownership of the realty. Mr. Krebs did testify that Mr. Lewis was a "co-owner" of the property. But he also testified that he, Krebs, pays rent to Lewis, and that Lewis has lived in the property for one or two years. This testimony is not consistent with the residence which Mr. Lewis disclosed during his 1998 bankruptcy filing; nor is it consistent with the bankruptcy schedules, which do not reflect any lease agreements.
II.
Wells Fargo's motion seeks dismissal of this case as filed in bad faith under 11 U.S.C. § 1307(c). See generally In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996). A chapter 13 case filed in bad faith is indeed subject to dismissal under section 1307(c). Accord, e.g., In re Powers, 135 B.R. 980, 990-91 (Bankr. C.D Cal. 1991).
The mortgagee argues that the three prior filings of Mr. Lewis should be attributable to Mr. Krebs. If so, this would be the fourth bankruptcy filing with three earlier unsuccessful filings. In general, while the Code does not contain any express limitation on refiling a bankruptcy case after another is dismissed without prejudice, many courts have recognized that it is inappropriate for a debtor to file another bankruptcy reorganization case (under chapters 11, 12, or 13) after dismissal of an earlier one, unless there has been a material change of circumstances which demonstrates that the second (or later) reorganization attempt now has a possibility of success after the first had failed. Accord, e.g., Matter of Elmwood Development Co., 964 F.2d 508 (5th Cir. 1992); In re Chisum, 847 F.2d 597 (9th Cir.), cert denied sub nom. Mortgage Mart, Inc. v. Rechnitzer, 488 U.S. 892 (1988); In re Johnson, 708 F.2d 865 (2nd Cir. 1983); In re Oglesby, 158 B.R. 602 (E.D.Pa. 1993); In re March, 83 B.R. 270, 274 n. 7 (Bankr. E.D. Pa. 1988); see also In re Roxy Real Estate Co., Inc., 170 B.R. 571 (Bankr. E.D.Pa. 1993) (discussing serial chapter 11 filings after confirmation of a reorganization plan in the first case); In re Delaware Valley Broadcaster, Ltd. Partnership, 166 B.R. 36 (Bankr. D.Del. 1994) (same).
When there are successive reorganization bankruptcy filings without any material changes in circumstances, the latter filing is viewed as in "bad faith." E.g., Matter of Elwood Development Co. Compare In re Barrett, 964 F.2d 588 (6th Cir. 1992) (change in circumstances made the debtor's successful reorganization extremely likely and the filing undertaken in good faith). Since the first filing has been unsuccessful, there is little reason to believe that the second will yield any different result. And a bankruptcy reorganization tiling without any legitimate prospect of reorganization serves as grounds to dismiss the filing. See, e.g., Matter of Love, 957 F.2d 1350 (7th Cir. 1992); In re Brown, 951 F.2d 564, 572 (3d Cir. 1991); Matter of Cohoes Indus. Terminal, Inc., 931 F.2d 222 (2nd Cir. 1991); Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989).
Serial filing of a completed liquidation bankruptcy — one under chapter 7 — followed by a reorganization filing — one under chapters 11 or 13 — is permitted without regard to a change in circumstances. Johnson v. Home State Bank, 501 U.S. 78 (1991). In chapter 7, the debtor's ability to reorganize is not in issue.
Moreover, since dismissal of a case operates to terminate the automatic stay, 11 U.S.C. § 362(c), a bad faith bankruptcy filing also constitutes "cause" for relief from the bankruptcy stay under section 362(d)(1). See, e.g., In re Can-Alta Properties, Ltd., 87 B.R. 89, 91 (9th Cir. BAP 1988) (and cases cited); Matter of Nelson 66 B.R. 231 (Bankr. D.N.J. 1986), aff'd without op., 838 F.2d 1207 (3d Cir. 1988).
Given the paucity of evidence presented, a discussion of the allocations of the evidentiary burdens is appropriate.
In the context of lift stay motions, while section 362(g) imposes upon the party opposing relief from the stay the burden of proof on all issues other than equity, such as adequate protection, courts generally have recognized that a party seeking relief from the stay has some initial evidentiary burden to demonstrate "cause" for relief. E.g., In re Purnell, 92 B.R. 625, 631 (Bankr. E.D.Pa. 1988):
Courts in this district have long held that while 11 U.S.C. § 362(g)(2) places the burden of proof upon a debtor, an initial burden of production rests upon a creditor who desires relief from the automatic stay.
Accord In re Skipwort, 69 B.R. 526 (Bankr. E.D.Pa. 1987); In re Stranahan Gear Co., 67 B.R. 834 (Bankr. E.D.Pa. 1986); In re Kane, 27 B.R. 902 (Bankr. M.D.Pa. 1983); In re Tursi, 9 B.R. 450 (Bankr. E.D.Pa. 1981). See In re Ward, 837 F.2d 124, 128 (3d Cir. 1988); L. King, 2 Collier on Bankruptcy, ¶ 362.10 (15th ed. rev. 2000).
This initial burden of production follows from the general notion that a party seeking to alter the status quo has some initial burden to justify the relief sought. See generally In re Fries, 68 B.R. 676, 684-85 (Bankr. E.D.Pa. 1986); McCormick on Evidence, § 337 (24 ed. 1972). Otherwise, the moving party could simply file a motion to lift the stay without alleging any basis for relief and without offering the respondent any opportunity to know in advance of trial the facts or issues in dispute. See, e.g., In re Kim, 71 B.R. 1011, 1014 (Bankr. C.D.Cal. 1987) ("Absent the requirement that a creditor establish a prima facie case to qualify for relief from stay, relief from stay motions would be reduced to one-liners . . . .").
And the court in In re Kim defined this initial burden as follows:
Where, as here, relief from stay is grounded in cause, based upon lack of post-confirmation maintenance payments, the moving creditor must establish a prima facie case supporting the cause for relief from the stay. Such a prima fade case must include: (1) a showing of an obligation owing by the debtor to the creditor; (2) a valid security interest as to which relief from the stay is sought . . .; (3) the cause justifying relief from stay, such as post-petition or post-confirmation default.
71 B.R. at 1016 (citation omitted).
Based upon recent appellate court decisions, a similar allocation of the evidentiary burden exists on the question of bad faith.
I appreciate that the Third Circuit Court of Appeals in In re Lilley, 91 F.3d at 496, cited with approval the Seventh Circuit decision Matter of Love on the issue of good faith filing requirement for chapter 13 cases. The Seventh Circuit there stated, with respect to the evidentiary burden:
Section 1307(c) does not specifically require that a debtor file a petition in good faith. Instead, Section 1307(c) provides that a petition may be dismissed "for cause." Dismissal for cause cannot mean that a debtor must show an absence of cause; it can only mean that the party moving for dismissal must demonstrate cause. . . . As such, the burden was on the [creditor] to show lack of good faith.
Matter of Love, 957 F.2d at 1355 (citation omitted).
To the extent one might infer Third Circuit approval in Lilley for theLove approach to the allocation of the burden of persuasion to demonstrate bad faith upon the moving creditor, such inference was severely undermined by more recent decisions. The Third Circuit Court of Appeals has instructed, when analyzing section 1112(b) — the chapter 11 provision substantially similar to section 1307(c) — that the evidentiary burden to demonstrate good faith falls on the debtor:
Once at issue, the burden falls upon the bankruptcy petitioner to establish that the petition has been filed in "good faith."
In re SGL Carbon Corp., 200 F.3d 154, 162 n. 10 (34 Cir. 1999) (citation omitted). This same allocation of the evidentiary burden was applied by the Circuit Court in a chapter 7 case. In re Tamecki, 229 F.3d 205, 207 (3rd Cir. 2000).
Due to the similarity between sections 1112(b) and 1307(c), there is little basis to doubt that the Court of Appeals for the Third Circuit would reject the Love approach and find that Mr. Krebs bears the ultimate burden to demonstrate that the instant chapter 13 case was flied in good faith. Therefore, I must conclude that the burden of persuasion on this issue falls upon this debtor,
As the moving party, however, Wells Fargo has an initial evidentiary burden of production to place the debtor's good faith "in issue." Cf. In re Kim, 71 B.R. at 1014. That is, although the ultimate burden of persuasion rests upon the debtor, the moving creditor must make some initial showing of bad faith to meet its burden of production. Otherwise, as discussed in connection with section 362(d)(1), the debtor would be unable to prepare for and fairly participate at a hearing in which his good faith is being challenged.
III.
The primary issue separating these parties is whether the prior filings of Mr. Lewis should be attributable to the instant debtor, Mr. Krebs. Mr. Krebs argues that this is his first bankruptcy filing, that he has proposed a plan in good faith, and that he should, at this early stage of the case, be given the opportunity to attempt to reorganize. Wells Fargo maintains that Mr. Krebs has filed the instant bankruptcy in an improper attempt to stall foreclosure, after Mr. Lewis repeatedly failed to reorganize.
There are circumstances in which the filing of prior bankruptcies by another individual will be attributable to the current debtor. For example, it is generally accepted that the unsuccessful bankruptcies of one spouse may be attributable to the other when the spouses reside together and have joint debts. See Matter of Greishop, 63 B.R. 657 (N.D.Ind. 1986); In re Felberman, 196 B.R. 678 (Bankr. S.D.N.Y. 1995); In re Ouverson, 79 B.R. 830 (Bankr. N.D. Iowa 1987); In re Kinney, 51 B.R. 840 (8ankr. C.D.Cal. 1985). Similarly, In re Merchant, 256 B.R. 572 (Bankr. W.D.Pa. 2000), the prior filings of an individual who resided with the current chapter 13 debtor, entered into a business partnership with him, and incurred joint debts were viewed as part of a joint scheme to forestall collection efforts by secured creditors.
Here, there is evidence that the debtor resides with Mr. Lewis and — according to the debtor's schedules — they have joint debts. There is no clear evidence, however, that the realty is jointly owned, that the mortgage held by Wells Fargo is a joint obligation, or that these two individuals share household obligations.
I appreciate that one might infer from the filing of lift stay motions by Norwest Mortgage and Wells Fargo in Mr. Lewis's prior bankruptcy cases, that he is a joint obligor on the mortgage agreement and a co-owner of the realty. But inferences (as noted above) may be incorrect. Mr. Lewis's mere residence in the realty — without any ownership interest or liability on the note and mortgage would be enough to trigger the automatic stay and require Wells Fargo to seek relief. See In re Atlantic Business and Community Corp., 901 F.2d 325, 328 (3d Cir. 1990); In re 48th St. Steakhouse, Inc., 835 F.2d 427 (2d Cir. 1987), cert denied, 485 U.S. 1035 (1988). Moreover, the ease with which the movant here could have demonstrated the financial interconnection between Messrs. Krebs and Lewis, if one existed, makes me reluctant to draw inferences in the absence of evidence.
In In re Tamecki, 229 F.3d at 207, the Third Circuit explained that:
"Dismissal based on lack of good faith . . . should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence."
(quoting In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991)). Since a filing of bad faith should be made upon sufficient evidence, see In re Brown, 951 F.2d at 572, I cannot conclude on this limited record that Wells Fargo has met its initial burden of production on the issue of bad faith.
Similarly, as the issue of bad faith serves as the sole basis for which Wells Fargo seeks alternative relief under section 362(d)(1), I also cannot lift the bankruptcy stay on this record. I can, however, treat the instant hearing as a preliminary hearing under section 362(e). I find it appropriate to do so because Wells Fargo may be able to present sufficient evidence of a joint scheme between Mr. Lewis and Mr. Krebs to wrongfully delay the exercise of its rights as a secured creditor. Moreover, upon observing Mr. Krebs' testimony, he did appear confused about a number of facts. His schedules may be inaccurate; his testimony may be erroneous.
An appropriate order shall be entered scheduling a final hearing on Wells Fargo's lift stay motion.
ORDER
AND NOW, this 27th day of April, 2001, for the reasons stated in the accompanying memorandum, it is hereby ordered that the motion to dismiss of Wells Fargo Home Mortgage, Inc. is denied. It is further ordered that the motion of Wells Fargo for relief from the automatic stay is denied preliminarily. A final hearing on this lift stay motion shall take place on May 8, 2001, at 2:00 P.M. in Bankruptcy Courtroom #2.