Mortgage Lender Wins the Battle But Loses the War in the Third Circuit

In a June 6, 2017 opinion, the United States Court of Appeals for the Third Circuit agreed with mortgage lender, AmeriChoice Federal Credit Union, that bankruptcy courts have the authority to impose limits on future bankruptcy filings by Chapter 13 debtors who move to dismiss their cases voluntarily.  Unfortunately for AmeriChoice, the Third Circuit’s decision left it no closer to foreclosing on its collateral than it was when it filed its foreclosure case more than five years earlier.

AmeriChoice filed a foreclosure case against Raymond Ross and his wife, Sandra, on May 9, 2012 seeking to foreclose a mortgage on their residence.  Although the Rosses filed a motion seeking recusal of the assigned judge and attempted unsuccessfully to remove the case to federal court which delayed the case, they did not answer AmeriChoice’s complaint.  Accordingly, the state court entered a default judgment against them on June 4, 2013.  To enforce the judgment, AmeriChoice scheduled a sheriff’s sale of the Rosses’ home for October 30, 2013.

On the day before the scheduled sale, Raymond Ross filed a Chapter 13 bankruptcy case.  Although Sandra Ross did not file for bankruptcy, the automatic stay that arose when Mr. Ross filed prevented AmeriChoice from enforcing claims against him or enforcing liens against his property so the sale was cancelled.

Six months later, Mr. Ross’s Chapter 13 case was dismissed because of his failure to make required payments.  AmeriChoice rescheduled the sheriff’s sale for August 27, 2014.  On the day of the rescheduled sale, Mr. Ross filed a second Chapter 13 case.

AmeriChoice filed a motion for relief from the automatic stay and a motion to dismiss Mr. Ross’s Chapter 13 case or to convert it to a case under Chapter 7 in which a trustee would sell his non-exempt assets to pay creditors.  The bankruptcy court quickly granted AmeriChoice relief from the automatic stay and scheduled a hearing on AmeriChoice’s motion to dismiss or convert Mr. Ross’s case.

After obtaining relief from the automatic stay, AmeriChoice rescheduled the sheriff’s sale of the Rosses’ home for October 29, 2014.  On that day, Sandra Ross filed a Chapter 13 case, once again invoking the automatic stay.  After the sale date had passed, Mrs. Ross’s Chapter 13 case was dismissed because she had failed to obtain required pre-bankruptcy credit counselling.

Before the hearing on AmeriChoice’s motion to dismiss or convert his Chapter 13 case, Mr. Ross filed a motion to dismiss his case voluntarily.  He did not attend the hearing on AmeriChoice’s motion.  At the hearing, AmeriChoice pressed for conversion to Chapter 7 as its first choice.  However, it also argued that if the court dismissed the case, it should include an injunction “barring future filings [of both Raymond and Sandra Ross] for 180 days,” or a filing injunction “barring the use of the automatic stay in any future filings by either one of them.”  The bankruptcy court declined to enter an order affecting Mrs. Ross since she had not been served with AmeriChoice’s motion and had not been given notice of the hearing.  Instead, it dismissed Mr. Ross’s case with prejudice and included in the dismissal order a provision that “the Debtor is not permitted to file another bankruptcy case without express permission from this Court.”

Since the bankruptcy court had not enjoined future filings by Mrs. Ross in the order entered in her husband’s case, AmeriChoice filed a motion in her case requesting “a general restriction on all Sandra’s filings for 180 days, or an order granting blanket relief from the automatic stay for any claims against the Rosses’ Ambler property for the indefinite future.”  On January 21, 2015, the same bankruptcy judge who had dismissed Mr. Ross’s case with prejudice enjoined any further bankruptcy filing by Mrs. Ross for 180 days.

Mr. Ross appealed the order barring him from filing for bankruptcy again without the bankruptcy court’s permission.  He argued that Section 1307(b) of the Bankruptcy Code prevented the bankruptcy court from attaching any strings to the dismissal of his case.  That section provides that, “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter.”  According to Mr. Ross, once he filed his motion to dismiss his case voluntarily, the bankruptcy court could not hold a hearing on AmeriChoice’s pending motion to dismiss his case.

The Third Circuit noted that there is a split of authority on whether or not a Chapter 13 debtor has an absolute right to dismiss his or her case and that it had not previously taken a position on the issue.  However, because the United States Supreme Court has held that a bankruptcy court may impose conditions on dismissal when a Chapter 13 debtor files a motion to dismiss voluntarily, the Third Circuit said that it did not need to take a position on the issue because even if dismissal of Mr. Ross’s case before the hearing on AmeriChoice’s motion was mandatory once he filed his motion to dismiss, “the Bankruptcy Court could have just as easily attached its filing injunction to Raymond’s requested dismissal order.”  Consequently, the Third Circuit concluded that Mr. Ross’s motion to dismiss did not deprive the bankruptcy court of authority to limit his right to refile even if dismissal was mandatory once it was filed.

Unfortunately for AmeriChoice, the case did not end there.  Despite its rejection of the argument that the bankruptcy court could not bar him from refiling, the Third Circuit said that, “The Bankruptcy Court’s filing injunction against Raymond is still problematic, however, due to the specific circumstances of this case.”  Those circumstances were that: (a) the injunction entered was broader than the relief requested by AmeriChoice; (b) the relief granted in Mr. Ross’s case was broader than the relief granted by the same bankruptcy judge in Mrs. Ross’s case; (c) the bar to filing without the court’s permission was broader than the 180 day bar to refiling provided for by statute in the case of a debtor whose case is dismissed for willful failure to comply with court orders; and (d) the bankruptcy court did not explain in its order why it had granted broader relief than had been requested by AmeriChoice.  Consequently, the Third Circuit vacated the bankruptcy court’s order and remanded the case to the bankruptcy court.

Had AmeriChoice completed the foreclosure process after the bankruptcy court dismissed both Mr. and Mrs. Ross’s cases and barred them from refiling and before the Third Circuit vacated the injunction in Mr. Ross’s case, vacating the injunction would have been an empty victory for Mr. Ross.  However, during that intervening period, Mr. and Mrs. Ross had succeeded in having AmeriChoice’s foreclosure judgment vacated on the grounds that the notice that AmeriChoice gave them of its intent to move for a default judgment did not comply with Pennsylvania law.  The notice given by AmeriChoice on May 23, 2013 was based upon a Pennsylvania Rule that had required a party who intended to move for a default judgment to give the defendant notice in “substantially” a prescribed form including notice that “You are in default because you have failed to take action required of you in this case.”  However, before AmeriChoice gave its notice to Mr. and Mrs. Ross, the Rule had been amended to provide instead that the notice inform the defendant that “You are in default because you have failed to enter a written appearance personally or by attorney and file in writing with the court your defenses or objections to the claims set forth against you.”  In November of 2013, six months after AmeriChoice gave notice to the Rosses of its intent to seek a default judgment the notice was given and after AmeriChoice’s sheriff’s sale would have occurred had it not been stopped by Mr. Ross’s first Chapter 13 filing, the Superior Court of Pennsylvania had held that a notice using the language from the former rule was insufficient to comply with the amended rule.

Before AmeriChoice can foreclose, it now needs to obtain a new judgment against Mr. and Mrs. Ross in state court.  If it obtains such a judgment and schedules yet another sheriff’s sale, more than 180 days have elapsed since the bankruptcy court barred Mrs. Ross from filing for bankruptcy again.  Regardless of what the bankruptcy court does in Mr. Ross’s case on remand, Mrs. Ross can stop the sale by filing for bankruptcy yet again.