Third Parties Trying to Take Advantage of Automatic Stay in Chapter 13 Bankruptcy

In re Dorsey, 476 B.R. 261 (C.D. Cal. 2012).

Catch Her If You Can

When you think of hijacking, you typically think of a car or maybe a plane. A hijacker probably has a gun or a knife and forcibly takes control. We associate hijacking with violence and brute force. Hijacking has another meaning, however, in bankruptcy. A bankruptcy case may be hijacked by another debtor attempting to take advantage of your bankruptcy and your automatic stay. Even more frightening, this may occur without your knowledge.

Dana, a California resident, fought a losing battle with her bills until she could fight no more – she finally filed for bankruptcy. The automatic stay went into effect, preventing creditors from initiating proceedings against her assets.

Bankruptcy Scam Tries to Take Advantage of Automatic Stay…

A creditor may request relief from the automatic stay for several reasons, including a showing that the debtor “participated in a scheme to delay, hinder, or defraud creditors.” 11 U.S.C.A. § 362(d)(4). To Dana’s surprise, a local bank filed a motion alleging she had done just that! The bank claimed that the protection of the automatic stay acted to delay their collection on a house in Ventura County. In re Dorsey, 476 B.R. 261 (C.D. Cal. 2012).

That house did not belong to Dana. She didn’t know the house, its occupants, or its true owner. She just knew that it wasn’t hers. Her bankruptcy proceeding was threatened because she was accused of attempted fraud regarding a house of which she had no knowledge. So where did this house come from?

Third Party Tries to Piggy Back on Dana’s Automatic Stay 

As it turns out, the original owner of the house was another California resident, Angelica, who was almost $40,000 delinquent on her mortgage. Dana wasn’t her first victim. First, Gloria filed for chapter 13 bankruptcy at just the right (or wrong) time; Angelica transferred ownership of the house over to her without notifying her and took nothing in return. That way, Angelica’s house would benefit from Gloria’s automatic stay and creditors would be prevented from foreclosing on it. Id. at 264. Gloria and Angelica had no prior connection.

The bank filed for a relief of stay in Gloria’s bankruptcy to regain the right to foreclose on the house. Unfortunately for the bank, Angelica was a step ahead. She transferred ownership of the house yet again, this time to Dana, to take advantage of another automatic stay. The date on the deed of transfer was one day before Dana filed her bankruptcy case. Like Gloria, Dana had no prior connection to Angelica.

Property Dumping 

Angelica’s ploy is known as “property dumping,” or “hijacking.” Id. at 266. She would check public bankruptcy records and record a transfer of property to someone who had recently declared bankruptcy. She would doctor the record so that the transfer appeared to occur before the bankruptcy filing. Her house would benefit from the filer’s automatic stay until the bank filed for relief; then she would transfer the house to another bankruptcy filer and doctor the records again to make it appear the transfer had occurred before relief was granted to the bank.

The Court Isn’t Fooled 

For Angelica, this path ended at Dana’s bankruptcy proceeding. The court picked up on her scheme and put an end to it; they allowed the bank to reclaim her house. Id. at 270.  So, what happened to Dana?

With the petition for relief of the automatic stay, the bank effectively accused Dana of attempting to commit fraud. She filed a response to the motion stating that she had no knowledge of the property and did not object to the relief of stay; in other words, she told the bank they were welcome to take the strange house. Luckily for Dana, the records showed that Angelica was the true owner and had actually been committing fraud; otherwise, Dana’s case might have been seriously damaged by a finding that she acted in bad faith.

Dana fortunately had an experienced bankruptcy attorney that could handle this complex issue; when her bankruptcy case became the target of fraud, she had to extract herself and her property from Angelica’s plot. When a relatively routine bankruptcy case becomes a complex litigation issue, you want your lawyer to be able to handle it. When Angelica targeted her, Dana’s lawyer salvaged her reputation with the court, and hence her bankruptcy proceeding.

Image from Flickr user sashafatcat