Bankruptcy Law

Editor:
James Cole, Esquire

Plaintiffs failed to prove a case of nondischargeable fraud against debtors when plaintiffs failed to record their mortgages and lost their liens to subsequent, perfected mortgages that were foreclosed by banks. Marcusen v. Glen (In re Glen), No. 10-2031, U. S. Court of Appeals for the Eighth Circuit, April 12, 2011. 
Plaintiffs Marcusen were persuaded to help finance small development ventures of their relatives, defendants Glen.  They received copies of mortgages that the Glens had signed to secure the loans, but failed to obtain the originals of the mortgages and record them.  The Glens later borrowed more funds from banks, failing to inform the banks of the unrecorded mortgages they had given to the Marcusens.  The banks recorded their mortgages and later foreclosed, extinguishing the unrecorded liens of the Marcusens.  When the Glens filed under Chapter 7, the Marcusens sued to declare their loans to the Glens to be nondischargeable for fraud under Bankruptcy Code Section 523(a)(2)(A).
The bankruptcy court held for Marcusens on a theory that after the loans were made, there was a subsequent transfer of equity from them to the banks that resulted from the defendants' fraudulent silence about the previous unrecorded mortgages.
The bankruptcy appellate panel reversed and was affirmed by the Eight Circuit.  Section 523(a)(2)(A) requires that the plaintiffs show a transfer money or property to the defendants as a result of fraud.  In this case, plaintiffs did not transfer any money or property to defendants as a result of the defendants' fraudulent concealment of the unrecorded mortgages.  The injuries suffered by the plaintiffs were the result of their own failure to record the mortgages executed by the defendants, not any conduct of defendants that could be found fraudulent as to the plaintiffs within Section 523(a)(2)(A).

The Bankruptcy Code is clear that there is no automatic stay in a third (or subsequent) consumer case that is filed within one year of dismissal of the first in a series of bankruptcy filings.  Bates v. BAC Home Loans (In re Bates), No. 10-6084, U. S. Bankruptcy Appellate Panel (BAP) for the Eighth Circuit, March 23, 2011.
The case from which this appeal arose was the fourth case that debtor had pending in the bankruptcy court within the space of one year.  The first case, a Chapter 13, had been dismissed for failure to make plan payments to the trustee.  Section 362(c)(4) of the Bankruptcy Code now provides, with exceptions irrelevant here, that no automatic stay arises upon the filing of a case representing the third or subsequent case when the first case in the serial filings was dismissed within the previous one-year period.  Another subsection, Section 362(c)(3), applies when the filing is a second case following dismissal of a previous case within a year.  It provides that the stay arises automatically in the second case but expires in 30 days "with respect to the debtor."  By specifying termination as to the debtor, this provision appears to leave the stay in place after 30 days as to the Chapter 7 trustee, which would include a bar on acts to foreclose liens on or otherwise exercise control over property of the estate.  See Section 362(a)(3)-(4).  The same property can be both property of the debtor and property of the estate when a case is pending.  The courts are divided over the consequences of the 30-day expiration when creditors want to foreclose liens in a second case after 30 days and the stay has not been lifted as to property of the estate.
The bankruptcy court allowed BAC Homes to foreclose its mortgage on debtor's real estate because there was never a stay in the pending case.  Debtor appealed to the BAP.  The bankruptcy court stayed the foreclosure pending appeal. 
Debtor argued on appeal that an automatic stay should be found to arise under Section 362(c)(4) in respect to the real estate as property of the estate even if there was no automatic stay as to the debtor.  Debtor thus invited the court to import the ambiguity found in Section 362(c)(3) into the differing language of Section 362(c)(4).  The BAP declined debtor's invitation.  It could not find anything in Section 362(c)(4) that suggested a stay for property of the estate in the manner of Section 362(c)(3).  No cases from other courts were found that ruled otherwise on similar arguments made by debtors.  The bankruptcy court was affirmed.

The Missouri Bar Courts Bulletin, 11-Jun