Court Outlines Bases for In Rem Relief Under Section 362(d)(4)

As the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act) works through its rebellious teenage years, courts continue to address debtor behavior through the provisions of the Act impacting the applicability of the automatic stay. Without limitation, courts have grappled with the substantive and procedural implications of the Act’s “repeat filer” provisions set forth in §§ 362(c)(3) and 362(c)(4). However, there has been somewhat less court activity with respect to the Act’s addition of § 362(d)(4).

Section 362(d)(4) allows for in rem relief from stay under certain circumstances evidencing a debtor’s abuse of the bankruptcy process. It provides:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay —
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved either —
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property.

Section 362(d)(4) further provides that if an order under subsection (d)(4) is recorded in compliance with applicable state laws governing notices of liens or interests in real property, such order “shall be binding in any other case under this title purporting to affect such property filed not later than 2 years after the date of the entry of such order by the court.” A debtor may move for relief from such an order based on changed circumstances or for good cause shown, after notice and a hearing.

The U.S. District Court for the Eastern District of Wisconsin recently analyzed the bases for in rem relief under § 362(d)(4). In re Syverson, [1] which held that the debtor’s repeated bankruptcy case filings, together with a lack of meaningful progress in each of those cases and the debtor’s failure to make payments on the debt secured by her residence, made relief under § 362(d)(4) appropriate.

In Syverson, the creditor sought relief under § 362(d)(4), asserting that the automatic stay should not apply to the debtor’s homestead property for a period of two years. In considering the motion, Judge Hanan observed that the history of the debtor’s six bankruptcy cases over a period of five years revealed a pattern of “continued failure to fulfill her obligations under the Bankruptcy Code and repeated avoidance of court orders.” The debtor’s first case was dismissed post-confirmation for failure to make payments and her failure to file an amended plan to resolve the creditor’s motion for relief from stay. Her second case, filed 14 months later, was dismissed for failure to timely file a plan, even after having been granted an extension of time by the court. Her third case, filed three months after dismissal of the second case, was dismissed for failure to comply with the court’s order to file an amended plan or participate in mortgage mediation.

The debtor’s fourth case, filed five months after the dismissal of the third case, was dismissed for failure to file an amended plan and budget in connection with the creditor’s motion for relief from stay. The fifth case, filed six months after dismissal of the fourth case, was dismissed with a 180-day bar to future filings due to the debtor’s failure to attend her meeting of creditors. The sixth case — currently pending — was filed less than five months after the bar period ended.

The creditor’s motion for relief under § 362(d)(4) outlined the procedural history of the debtor’s cases and noted that the pre-petition arrearage totaled $159,887.17, with a contractual due date of Aug. 1, 2014. The creditor also presented documents evidencing efforts to foreclose dating back to 2015. There was no dispute as to the debtor’s history of nonpayment on the mortgage loan.

Judge Hanan began her analysis by stating that “[t]here are times where it becomes apparent that a debtor is using the bankruptcy process not to reorganize his or her debts and treat creditors fairly, but solely to prevent secured creditors from exercising their rights.” She cited another case from the Eastern District of Wisconsin, In re Mendiola, [2] in which the court held that relief under § 362(d)(4) was warranted because the debtor had repeatedly defaulted on the terms of his mortgage and had failed to make plan payments for a sustained period in any of his previous five cases. In that case, the court concluded that an ordinary order granting relief from the automatic stay would be ineffective to protect the secured creditor’s rights. [3]

Judge Hanan recognized that the bare number of prior bankruptcy cases does not necessarily lead to the conclusion that a debtor is attempting to delay, hinder or defraud creditors. She noted that the court must take a deeper dive to determine the reasons for the failure of the debtor’s prior cases and the debtor’s treatment of a particular lender. In taking a deeper dive, however, Judge Hanan found that the debtor was entering her eighth consecutive year of mortgage default and that the debtor’s rapid-fire case filings supported the conclusion that the debtor did not intend to reorganize and pay her debt to the creditor, but rather to stall as long as possible. Judge Hanan opined that the debtor’s failure to fulfill the Bankruptcy Code’s most basic obligations undercut any suggestion that the debtor had attempted to comply with the Bankruptcy Code and treat her creditors fairly.

Based on the record, Judge Hanan concluded that the seriality of the case filings, continued nonpayment of the mortgage, and lack of effort to address the debt evidenced a scheme to delay or hinder the creditor’s efforts to protect its interests in the mortgaged property. Accordingly, she held that in rem relief under § 362(d)(4) for a period of two years was appropriate.