Debtors' Delusions Of Bankruptcy

Bankruptcy is intended to provide debtors with the opportunity of a fresh start by modifying their debt obligations, but the downturn in the economy and the real estate market has spurred a number of filings that can only be described as desperate bankruptcy petitions filed by entities hoping for a "miracle." See In re RYYZ, 490 B.R. 29, 33-34 (Bankr. E.D.N.Y. 2013). While not every case can be successfully restructured, despite the good intent of many debtors, filings must still be made in good faith.1 However, these baseless and ultimately futile bankruptcy filings continue to occur despite the previous attempts by Congress to set some parameters and minimize the misuse of the reorganization process.2

Several cases that have crossed the undersigned's path (directly or by word of mouth) have simply been remarkable wastes of time for our judiciary and generated unnecessary legal fees that needed to be paid by the creditors. These examples manifest at their core a misunderstanding of how the process should work and when bankruptcy truly can assist a debtor. What follows is a highlight of just a few cases that demonstrate how the failure to appreciate the law and the impact of a filing can lead to nothing more than delay, wasted resources and, at times, disaster for the debtor.

In late 2012, a filing took place in New Jersey by a debtor that owned no assets in New Jersey,3 and instead owned (at best) an interest in a right to redeem 13 parcels of land located in the Midwest for which the local county tax authority held the tax deeds to the parcels and was the legal owner of the same. See In re Plover Development, Bankruptcy Case No. 12-35579, District of New Jersey (Newark). There were no other real creditors in the case. Undoubtedly, it was the impending expiration of the redemption period (governed by state statute)—as opposed to an honest intent and genuine belief that a restructuring under Chapter 11 of the Bankruptcy Code was likely—that precipitated the debtor's filing of that case. The redemption period for 10 of the parcels was set to expire on the date of the filing of the bankruptcy case and the redemption period for the remaining three parcels was set to expire a short time thereafter. By virtue of Bankruptcy Code §108(b) (ii), a short extension of two months of the first redemption period was effectuated, while the remaining three parcels maintained the original redemption date (under Bankruptcy Code §108 it is the later of the time periods). However, for some unknown reason the debtor never even attempted to work within these deadlines, instead they filed an order to show cause to effectuate a sale of the property, but all of the hearings were scheduled after all of the original and extended redemption periods had expired.4 Arguably, once the period expired, the county could no longer even accept payment for the parcels under the state statute.

In Plover Development, the debtor's only saving grace was that, based upon the representation that the debtor had a buyer that would pay the full redemption amount, the Bankruptcy Court offered the debtor a few days respite to consummate the sale (which admittedly would have been to the benefit of the creditor). Unfortunately, this deadline also came and no deal transpired. The case was then dismissed by the Bankruptcy Court after the automatic stay was lifted to allow the tax sale to go forward. (The Order even further provided in rem relief protecting the parcels from further filings). The Bankruptcy Court recognized that keeping this two party dispute in bankruptcy served no viable purpose and the case was a bad faith filing. See Y.J. Sons & Co. v. Anemone (In re Y.J. Sons & Co.), 212 B.R. 793, 802 (D.N.J. 1997), citing In re Phoenix Piccadilly, 849 F.2d 1393, 1394-95 (11th Cir. 1988). The money spent on the filing was a complete waste as it accomplished nothing (in fact anything...