In re Merlo

646 B.R. 389

IN RE: Michael J. MERLO, Debtor.

Case no. 22-71690-reg

United States Bankruptcy Court, E.D. New York.

Signed November 10, 2022

Scott T. Dillon, Kirschenbaum & Kirschenbaum, P.C., Garden City, NY, for Trustee.

Kenneth Kirschenbaum, Kirschenbaum & Kirschenbaum, Garden City, NY, Trustee, Pro Se.

Julio Ceasar Galarza, Galarza Law office, P.C., Massapequa Park, NY, for Debtor.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is a motion ("Motion") by SN Servicing Corporation as servicer for U.S. Bank Trust National Association as Trustee of the Cabana Series IV Trust (the "Movant") seeking to vacate the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2) and seeking in rem relief pursuant to § 362(d)(4) with respect to Michael J. Merlo's (the "Debtor's") residence ("Property") [ECF 11]. The Motion is unopposed by the Debtor and the Court granted the request for relief under § 362(d)(1) and (2) at a prior hearing. For the reasons set forth below, the request for in rem relief is granted. While this is one motion in one case, it is representative of a trend in this District. Due to several factors, the number of creditors seeking in rem relief under § 362(d)(4) has multiplied and continues to grow. Some cases involve multiple filings by different parties and others involve serial filings by the same debtor. Other cases involve transfers of real property or transfers of interests in real property without the consent of the secured creditor or the Court. As a result, secured creditors are prevented from exercising their state law remedies while these debtors cycle through the bankruptcy system.

The focus of this statute is on the effect the conduct of the filer or filers has on the secured creditor. To the extent that the Court finds that the conduct appears to be a scheme to hinder, delay or defraud the secured creditor, relief under this subsection is warranted. While the Court does not believe that a bright-line test can be crafted to ascertain when in rem relief under § 362(d)(4) should be granted, this Memorandum Decision provides some guidance to help determine when such a motion is appropriate.

If relief under § 362(d)(4) is granted and the secured creditor properly records the order then the automatic stay, which normally applies upon the filing of a case, is ineffective with respect to the real property at issue in a subsequent filer's case. This is true regardless of whether that filer had any part in the scheme. While this relief may seem extraordinary, it is consistent with other provisions of the Bankruptcy Code that limit protections otherwise afforded to debtors in the ordinary course. Congress has added these provisions to the Bankruptcy Code to winnow out improper filings which were made solely to frustrate secured creditors from exercising their rights. As with many of these provisions, it is not irreversible. The impacted filer may seek to have the automatic stay imposed by providing evidence that good cause exists to impose the stay or that there has been a change in circumstances from a previous case. The subsequent filer may also raise any issue in a non-bankruptcy forum they wish.

As a jurisdictional matter, the Court will consider granting relief under § 362(d)(4) in cases that are subject to being automatically dismissed pursuant to 11 U.S.C. § 521(i) so long as the in rem motion is filed prior to the 45^th day after the petition date. Under 11 U.S.C. § 349(b)(3), the Court has the discretion to so order that upon dismissal of a case, the Court may retain jurisdiction over property of the estate. It can be difficult for a secured creditor to have its motion heard before the debtor's case is scheduled for automatic dismissal due to the debtor's failure to comply with the requirements of the Bankruptcy Code. Retention of jurisdiction over the real property at issue to rule on an in rem motion despite dismissal of a case is an appropriate tool to curtail abuses of the bankruptcy system.

Procedural History

The Debtor filed a petition for relief under Chapter 7 on July 11, 2022. The Debtor is represented by counsel in this case. According to the Debtor's statement of intention filed with the petition, the Debtor will retain the Property and seek to obtain financing to pay off the mortgage held by the Movant. On August 19, 2022, the Movant filed the Motion. A hearing on the Motion was held on September 12, 2022, at which hearing the Movant appeared. The Court heard oral argument and granted the portion of the Motion seeking relief from the automatic stay pursuant to § 362(d)(1) and (2). The Court adjourned the portion of the Motion seeking in rem relief under § 362(d)(4). On September 20, 2022, the Chapter 7 Trustee filed a motion to dismiss the case due to the Debtor's failure to appear at a scheduled section 341 meeting. The hearing on the Trustee's motion to dismiss was scheduled for October 31, 2022. The Trustee filed a certificate of no opposition and the motion to dismiss was marked submitted by the Court.

Facts

Prepetition, on June 25, 2003, the Debtor executed a note in the original principal amount of $303,000 secured by a mortgage in favor of the Movant's predecessor. The Debtor became delinquent under the terms of the note and mortgage and a foreclosure action was commenced in state court. On August 30, 2016, a judgment of foreclosure and sale was entered. Ex. B to the Motion. The Movant scheduled a foreclosure sale for January 17, 2017. The Debtor and Maria Farella Merlo ("Spouse"), the Debtor's spouse, filed an emergency order to show cause in state court, which cancelled the first sale. After various delays, the Movant scheduled a second sale for January 29, 2019. On January 28, 2019, the Spouse filed a petition for relief under Chapter 7 (Case no. 19-70699) ("First Filing"). On May 21, 2019, the First Filing was dismissed on motion by the chapter 7 trustee based on the Spouse's failure to appear at the section 341 meeting.

The Movant scheduled another foreclosure sale for December 3, 2019. On December 2, 2019, the Spouse filed a petition for relief under Chapter 13 (case no. 19-78128) ("Second Filing"), resulting in cancellation of the scheduled foreclosure sale. The Second Filing was automatically dismissed on January 17, 2020, pursuant to 11 U.S.C. § 521(i). As a result of the Covid-19 pandemic, all foreclosure sales were suspended in New York State. On February 21, 2022, after the moratorium on foreclosures was lifted in New York State, the Movant filed an application to notice a sale and obtain an auction date. The State Court authorized the Movant to proceed with the foreclosure sale and a sale was scheduled for July 11, 2022.

On the morning of July 11, 2022, the Debtor filed this petition ("Third Filing") under Chapter 7 of the Bankruptcy Code. According to the Debtor's Statement of Intention, he plans on reaffirming the debt owed to the Movant. The Debtor lists the value of the Property at $600,505.00 and lists the total mortgage debt at $550,000. According to the Movant the prepetition mortgage arrears are approximately $460,381.93. The Debtor's schedule I reflects combined monthly income with the Spouse in the amount of $6,026.00, and schedule J reflects combined monthly expenses of $8,568.00. Based on the information in the schedules, the Debtor has insufficient income to reaffirm the debt owed to Movant, let alone make consistent monthly mortgage payments to the Movant. Neither the Debtor nor the Spouse have successfully completed a bankruptcy case under any chapter. In the current case, the Debtor failed to appear at the section 341 meeting and the Trustee filed a motion to dismiss the case for this reason. In addition, the Debtor has not filed a certification of completion of a financial management course, which would preclude the Debtor from receiving a discharge even if he successfully completed the other requirements in this case. According to the Movant, in rem relief is appropriate because there have been three petitions filed between the Debtor and the Spouse and each of the filings took place shortly before scheduled foreclosure sales. In addition, there were serious deficiencies with respect to each filing. In the First Filing, the Spouse failed to appear at the scheduled section 341 meeting. In the Second Filing, the Spouse failed to file all of the necessary documents. In the Third Filing, the Debtor failed to appear at the scheduled section 341 meeting. A feasible plan was never proposed in the Second Filing, and with respect to the Third Filing, the Debtor's combined net monthly income is listed at -$2,542.00, which rendered the Debtor's stated intention of reaffirming the mortgage debt impossible.

Discussion

The Bankruptcy Code contains the following statutory language empowering the Bankruptcy Court to grant in rem relief from the automatic stay:

(4) with respect to a stay of an act against real property under subsection(a) [of § 362(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.

11 U.S.C. § 362(d)(4).

The statutory authority to grant such relief was vested in the Bankruptcy Court when this subsection was added to the Bankruptcy Code in 2005 with passage of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA").¹

This subsection further provides that if an order granting relief under this subsection is recorded in compliance with applicable state law:

[It] shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order by the court,

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