|JAMES EDWIN WILD and LOIS EVELYN WILD||Bankruptcy No. L-92-00165C|
Citizens Savings Bank of Anamosa, Iowa, has filed a motion
for relief from stay. The Court, having heard the evidence and
testimony and having considered the arguments of counsel, enters
the following findings of fact, conclusions of law, and order.
1. This bankruptcy case was filed on the morning a lawsuit was to commence in the Iowa District Court in and for Jones County. citizens savings Bank ("Bank") had filed a foreclosure action in Jones County, Iowa, against the debtors and a similar action in Linn County, Iowa, as to real estate owned by the debtors in those respective counties. The debtors filed a counterclaim against the Bank asserting various theories of lender liability in each suit. The Jones County and Linn County actions were consolidated for trial and, as indicated, trial on the foreclosure and counterclaim was to have commenced on January 27, 1992. The debtors had originally filed a lawsuit against the Bank alleging similar theories of lender liability. That suit was eventually dismissed under Iowa Rules of Civil Procedure 215.1. The same theories of lender liability were asserted in the counterclaim to the foreclosure action commenced by the Bank on June 7, 1989.
2. The Bank had requested appointment of a receiver in the foreclosure actions filed in Linn and Jones County, Iowa. A hearing on the appointment of the receiver was to have been held on August 11, 1989. Within a few hours before the time set for the commencement of the hearing on August 11, 1989, the debtors filed their first Chapter 11 petition.
3. During the pendency of the first Chapter 11, an order was entered which clarified the fact that the automatic stay did not affect the right of the debtors to proceed with their action against the Bank. That order specifically provided that the pending lawsuit against the Bank could be tried to its conclusion. In addition, an order was subsequently entered authorizing the appointment of attorney Dennis Naughton as attorney for the debtors in that lawsuit. As previously indicated, that lawsuit was eventually dismissed under Rule 215.1.
4. The Bank sought relief from the automatic stay to pursue its foreclosure action in the first Chapter 11. That matter was eventually settled and the motion for relief from stay was withdrawn. An agreed cash collateral order was entered into which allowed the debtors to use cash collateral generated from the collateral securing the Bank's loan. The cash collateral was used to make contract payments on prior liens of real taxes on property which secures the Bank debt.
5. After approximately one year in the Chapter 11, no plan or disclosure statement had been filed by the debtors. This Court then set a show cause hearing to determine if the case should be dismissed for failure to effectuate a plan. As a result of that show cause hearing, an order was entered requiring the debtors to file a plan by October 31, 1990. The plan and disclosure statement were filed on October 31, 1990. However, a number of objections were filed to the disclosure statement. At the disclosure statement hearing, the Court ruled that the disclosure statement would have to be amended before the plan and disclosure statement could be submitted to creditors for balloting. The order went on to provide that if the disclosure statement was not amended by March 29, 1991, the case would be dismissed without further notice or hearing. No further amendment to the disclosure statement was made and as a consequence the case was dismissed on April 2, 1991.
6. Subsequent to the dismissal of the Chapter 11 proceeding, the Bank moved forward with its foreclosure action and motion for appointment of receiver. On September 23, 1991, an order was entered in the Iowa District Court in and for Jones County appointing a receiver to take control and manage all of the real estate of the debtors in Linn and Jones County, Iowa, as well as farm machinery, equipment, and other personal property which secures the Bank debt. The order setting the trial on the foreclosure and counterclaim, setting the trial for January 27, 1992, was also entered in September, 1991.
7. The debtors have had a number of disputes with the receiver over payment of input costs for the 1991 crop and payment to the debtors for their efforts in connection with harvesting the 1991 crop. A motion was filed in the Iowa District Court to compel the receiver to make further payment to the debtors for their work in connection with harvesting the crop, and to make payments to the debtors in order to allow the debtors to pay their attorney for his efforts in defending the foreclosure action and pursing the counterclaim. Both of those motions were denied by the Iowa District Court.
8. The attorney representing the debtors in the foreclosure and counterclaim has filed a motion to withdraw and a motion to continue the trial. Essentially, the debtors take the position that because of the receivership they do not have money to adequately prepare for trial and to pay their attorney to do the necessary discovery and make the necessary preparations for trial of the case. The motion to withdraw and the motion to continue the trial were both overruled. The debtors have filed a request with the Iowa Supreme Court seeking interlocutory appeal on the refusal to continue the trial. The Iowa Supreme Court has not entered a ruling on that interlocutory appeal.
9. The current debt owed to the Bank is approximately $943,700, plus accrual of interest at the rate of $199.99 per day. The parties have stipulated that the value of the real estate and equipment which secures the debt exceeds the amount of the Bank debt. The Bank takes the position, however, that the equity cushion is being eroded. No payment has been made on the Bank debt since May, 1988.
10. The debtors propose to attempt to refinance the Bank debt. The debtors believe that they have lined up necessary financing to refinance the debt and expect money to be received on the refinancing within the next several days. It should be noted, however, that this is essentially the plan that had been proposed in the original Chapter 11. The debtors repeatedly stated in that case that they were planning to refinance the debt owed to Citizens Savings Bank and that the receipt of the refinancing proceeds was imminent.
11. The debtors concede that this case was filed principally for the purpose of obtaining a delay in the foreclosure suit and counterclaim the debtors have filed against the Bank. The debtors are not prepared to go to trial and are seeking additional time through the bankruptcy filing in order to obtain the time and money necessary to adequately prepare to try the issues raised in that lawsuit.
Citizens Savings Bank has requested relief from the automatic stay of 362(a). As the Eleventh Circuit Court of Appeals has observed:
An automatic stay may be terminated for "cause"
pursuant to section 362(d)(1) of the Bankruptcy Code.
The statute specifically provides that "the lack of
adequate protection of an interest in property" is
cause to lift a stay. Further, a petition filed in
bad faith also justifies relief from a stay. In re
Natural Land Corp., 825 F.2d 296 (11th Cir. 1987).
Barclays-American/Business Credit, Inc. v. Radio WBHP, Inc. (In re Dixie Broadcasting, Inc.)), 871 F.2d 1023, 1026 (11th Cir. 1989) cert. denied, 493 U.S. 853 (1989). "A decision to lift the stay is discretionary with [a] bankruptcy judge." Id.
The Bank here has requested relief from the stay for cause on the grounds that the debtors filed their petition in bad faith. As the Eleventh Circuit Court of Appeals observed:
there is no particular test for determining whether a
debtor has filed a petition in bad faith. Instead,
the courts may consider any factors which evidence "an
intent to abuse the judicial process and the purposes
of the reorganization provisions" or, in particular,
factors which evidence that the petition was filed "to
delay or frustrate the legitimate efforts of secured
creditors to enforce their rights." Albany Partners,
Ltd., v Westbrook, (In re Albanv Partners, Ltd.), 749
F.2d 670, 674 (11th Cir. 1984).
In re Phoenix Piccadilly, Ltd., 849 F. 2d 1393, 1394 (11th Cir.
1988).(1) The Phoenix Piccadilly court went on to cite a number of factors which other bankruptcy courts have found evidence bad faith. 849 F.2d at 1394. Those factors are:
(i) The Debtor has only one asset, the Property, in
which it does not hold legal title;
(ii) The Debtor has few unsecured creditors whose
claims are small in relation to the claims of the
(iii) The Debtor has few employees;
(iv) The Property is the subject of a foreclosure
action as a result of arrearages on the debt;
(v) The Debtor's financial problems involve
essentially a dispute between the Debtor and the
Secured Creditors which can be resolved in the pending
State Court Action; and
(vi) The timing of the Debtor's filing evidences an
intent to delay or frustrate the legitimate efforts of
the Debtor's secured creditors to enforce their
Phoenix Piccadilly, 849 F.2d at 1394-95.(2) A number of courts have cited to and relied primarily on this list of factors for determining whether a bad faith filing occurred. See, e.g.,
Acquisition Corp. of America v. Fed. Savings & Loan Ins. Corp., 96 B.R. 380, 384 (S.D. Fla. 1988); In re Carco Partnership, 113 B.R. 735, 739-40 (Bankr. M.D. Fla. 1990).
This Court (like the Carco Partnership case) finds that the facts here "clearly show a bad faith filing." 113 B.R. at 740. One critical factor found-in all of the tests laid out above is whether the debtor's filing is simply an attempt to forestall or delay legitimate rights of creditors. See, e.g., Dixie Broadcasting, 871 F.2d at 1027-28 (noting that filing petition to circumvent pending or imminent state court litigation or filing as diversionary tactic indicate bad faith); Phoenix Piccadilly, 849 F.2d at 1395 (noting that filing with an intent to delay or frustrate creditors' legitimate efforts to enforce their rights evidences bad faith); Carco Partnership, 113 B.R. at 739-40 (adopting Phoenix Piccadilly standards); In re RAD Properties, 87 B.R. 827, 830 (Bankr. M.D. Fla. 1988) (noting that filing petition in bankruptcy on eve of foreclosure or other judicial action to forestall creditors is one of major categories of factors for bad faith).
Testimony here indicated that the primary, if not the only, reason for filing the petition was to achieve a tactical delay in the state foreclosure action. This Court believes the following observation by the Carco Partnership court applies equally in this case:
It is apparent to the Court that bankruptcy offered
the only means for the Debtors to forestall the loss
of its property. It is also obvious to the Court,
that the Debtors' problems are principally with its
secured creditor and that [this disputes . . .
should most appropriately be decided in the State
Court Foreclosure Action rather than in the Bankruptcy
court. See In re Albany Partners, 749 F.2d 670 (11th
Cir. 1984); Phoenix Piccadilly, 849 F.2d 1393 (11th
Cir. 1988); In re Little Creek Development Co., 779
F.2d 1068 (5th Cir. 1986).
113 B.R. at 740. This Court must also point out that "the existence of equity in the property and/or the prospects of a successful reorganization cannot transform a filing that is otherwise in bad faith under the [relevant factors] into one undertaken in good faith." Carco Partnership, 113 B.R. at 740-41 (citing Phoenix Piccadilly, 849 F.2d at 1395).
Delaying a creditor's right to foreclose is not, in and of itself, grounds for lifting the automatic stay. Delaying the right of a particular creditor to foreclose while the debtor obtain the necessary time to formulate a plan of reorganization and arrange their affairs so as to treat all creditors equitably is an inherent part of the Chapter 11 process. However, the problem arises when the debtor does not appear to have realistic possibilities for reorganization and the Chapter 11 case is filed for the sole reason of obtaining delay of the state court proceedings.
This case represents such a bad faith filing. These
debtors spent more than 1 years in a Chapter 11 proceeding
while the Bank's foreclosure petition was stayed. During that
entire period of time the debtors made no meaningful progress
towards confirmation of the reorganization plan. The debtors
repeatedly indicated that a reorganization would involve
refinancing of the Bank debt through monies to be received from
The other significant factor leading the Court to the conclusion that this is a bad faith filing is the fact that the issues between the debtor-and Bank are primarily, if not exclusively, state law issues. These are all issues which are more appropriately dealt with in the pending foreclosure action in the Iowa District Court. The debtors have raised a number of issues about how the receivership has been handled and appear to be attempting to collaterally attack some of the State Court orders issued in connection with administration of the receivership. This Court firmly believes that those are matters which should be dealt with in the State Court litigation and it is more appropriate to have the State Court which appointed the receiver adjudicate issues concerning the administration of the receivership.
Finally, this Court believes it is highly inappropriate to use a bankruptcy filing for the sole reason of obtaining a continuance of a trial when the continuance has been sought and denied in the State Court litigation. If the debtors are dissatisfied with the State Court litigation, the remedy is with the Iowa Supreme Court, not this Court.
This Court is making no determination at this time as to whether the debtors' motivation in filing this case warrants an ultimate dismissal of this Chapter 11 proceeding. However, this Court wishes to make clear that the filing of a case for the mere purpose of delay is impermissible. This is particularly true when the issues to be adjudicated in the state court proceeding are issues which will have to be resolved in order to determine whether the Bank has an allowed claim, the extent of the Bank's security interest in the debtors' property, and the extent and validity of any claim the debtor may have against the Bank.
This Court must therefore conclude that the debtors' sole purpose for filing this case of obtaining a delay of the state court litigation is impermissible. Consequently, cause exists pursuant to 11 U.S.C. 362(d)(1) to modify the automatic stay to allow the state court litigation to proceed. In making this ruling, the Court notes that in the motion for relief from stay, the Bank has agreed to not execute upon any judgment which it may obtain in the foreclosure action. Thus, this lifting of the stay will have the effect of allowing the parties to litigate the issues and obtain a determination as to the respective rights of the Bank and the debtors against each other.
IT IS THEREFORE ORDERED Citizens Savings Bank's motion for relief from stay under 362(d) is granted.
DONE AND ORDERED this 30TH day of January, 1992.
|Michael J. Melloy|
|Chief Bankruptcy Judge|
1. Discussing bad faith filing tests as being applicable to both 362(d) determinations and Chapter 11 dismissals under 1112(b).
2. The Dixie Broadcasting case also cited a similar list of factors. 871 F.2d at 1027.
3. A review of the plan and disclosure statement filed by the debtors in the original Chapter 11 case does not indicate that the debtors planned to pursue any claims against the Bank. Rather, the debtor intended to pay the Bank in full, with interest, if the plan were confirmed.
It should also be noted that the debtors and their son, David Wild, were both in Chapter 11 proceedings at the same time. Both the debtors and their son made repeated references during those Chapter 11 cases to a foreign "trust" which was going to invest the necessary monies to take out the Bank debt.