As a more effective and targeted remedy for dismissal of a chapter 13 petition filed in bad faith, New York’s Bankruptcy Judge Philip Bentley dismissed, but with a proviso that the automatic stay in a subsequent filing would not bar actions by the creditor who was being abused.

A couple had divorced. The qualified domestic relations order required the wife to transfer $155,000 from her retirement account to her husband’s. Instead, Judge Bentley said in his February 25 opinion, the wife transferred nothing to the husband, but “withdrew the great bulk of those assets and used them to pay personal obligations of her own.”

At a hearing in state court, the wife admitted she had made unauthorized withdrawals and disclosed that only $59,000 remained in her retirement account. The state court judge directed the wife to transfer the $59,000 to the husband and gave her 60 days to pay him the remainder of the $155,000.

When the wife failed to comply, the husband brought contempt proceedings in state court, where the judge ordered the wife to be jailed on weekends for six months or until she complied with the order.

Two days later, the wife filed a chapter 13 petition and prevailed on Judge Bentley to rule that the automatic stay prevented enforcement of the contempt order. Later, the husband and the chapter 13 trustee filed motions to dismiss the chapter 13 case.

The chapter 13 trustee pointed out that the wife had more debt than chapter 13 permits and that she had “fraudulently understated” the claims against her. Also, the wife had never made any payments to the trustee and failed to attend her meeting of creditors.

The wife did not respond to either motion to dismiss but filed a terse motion to dismiss the chapter 13 case. Given the wife’s motion to dismiss, Judge Bentley said that dismissal was “warranted.” Rather than enter a plain, vanilla dismissal order, he looked for a “remedy to strip[] the Debtor of the ability to employ the automatic stay for abusive purposes a second time, since the stay will not take effect absent a judicial finding of cause.”

“The undisputed facts,” Judge Bentley said, “clearly warrant a finding of bad faith.” However, he said that dismissal would not prevent the debtor from filing again.

Citing amendments made in 1984 and 2005 in Sections 109(g), 362(b)(21)(A), 362(c)(3) and 362(c)(4), Judge Bentley said that “Congress has wrestled for decades with the challenge of designing appropriate remedies to prevent abusive serial filings while permitting legitimate ones.” The amendments, he said, “have proved far from satisfactory,” were “needlessly complex” and “left ample opportunity for abusive repeat filings by bad-faith debtors.” He quoted the ABI’s Commission on Consumer Bankruptcy for having said in 2019 that the amendments were “a jumble of provisions that do not work well together.”

Even so, Judge Bentley said that “the Code as currently written gives bankruptcy judges ample power to police abusive future filings when, as here, the court finds the debtor has filed in bad faith.” He cited the Second Circuit and other courts for having “held that bankruptcy courts have the power to dismiss a bad faith bankruptcy with prejudice, i.e., with a bar on future filings.” In re Casse, 198 F.3d 327 (2d Cir. 1999).

However, the Tenth Circuit had taken the opposite position in Frieouf v. United States (In re Frieouf), 938 F.2d 1099 (10th Cir. 1991), where the Denver-based appeals courts decided that Section 349(a) prevents bankruptcy courts from putting limits on a debtor’s future filings. Judge Bentley observed that no other court had sided with Frieouf, nor had any lower courts outside of the Tenth Circuit. In fact, he said, “a number of courts have joined Casse in recognizing the bankruptcy courts’ power to dismiss bad faith bankruptcy cases with prejudice.”

Judge Bentley concluded that “Casse’s holding that section 349(a) does not bar dismissals with prejudice would extend equally to this less drastic sort of dismissal with prejudice.” In fact, he said that “an absolute bar on future bankruptcy filings is inherently problematic,” because “no one can predict what the future will bring.” Circumstances, he said, “may arise that cause the debtor to have a legitimate need for bankruptcy relief.”

“Far better is a flexible remedy,” Judge Bentley said, “that enables the court in a future case to provide relief to the debtor as needed, while stripping the debtor of her ability to abuse the automatic stay a second time.”

Judge Bentley characterized the wife as contending that “her request to voluntarily dismiss this case strips the Court of the power to put provisions in the dismissal order limiting the automatic stay in future cases.” He rejected the argument, saying that the debtor’s “unfettered right to dismiss her bankruptcy” does not give her “the right to evade the consequences of her bad faith filing.”

Judge Bentley granted the motions to dismiss by the husband, the trustee and the wife. However, he said that “the automatic stay in [a future] case will not bar any actions by [the husband] or any state or federal court to enforce the Debtor’s obligations to [the husband] unless and until the Debtor shows good cause to impose the stay as to such actions.”

Observations

Prof. Robert M. Lawless provided ABI with the following commentary:

The current provisions to address serial bad-faith filings need updating.

Section 109(g) can bar a refiling altogether for a period of time, but it covers only certain types of misconduct. As Judge Bentley also points out, a complete bar on refiling can be overinclusive.

Often, the abusive filer’s goal is to get successive stays against a particular creditor. Section 362(c)(3) and (4) try to target that abuse with a ban on successive automatic stays, but those provisions have their own problems. The ABI Commission on Consumer Bankruptcy recommended some statutory fixes, but I am not holding my breath on Congress acting anytime soon.

Until Congress does act, Judge Bentley’s opinion provides a persuasive roadmap for a court to use its inherent power to police serial filings by removing the stay as to a particular creditor in a future case. It is a power, however, that should be used sparingly.

Prof. Lawless is the Max L. Rowe Professor of Law and co-director of the Program on Law, Behavior & Social Science at the University of Illinois College of Law.