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Dairy Farmer Abused Bankruptcy Process Filing Second Ch. 12; Stay Is Denied

Friday, January 18, 2013
By Diane Davis

The U.S. District Court for the Northern District of New York Jan. 11 denied a dairy farmer's motion for a stay pending resolution of her appeal because she failed to establish a substantial possibility of success on the merits and the bankruptcy court properly found that the appellant's second Chapter 12 petition was an impermissible collateral attack to the decisions rendered in the appellant's first bankruptcy case (Ellis v. NBT Bank NA, N.D.N.Y., No. 5:12-cv-01803-MAD, 1/11/13).

Judge Mae A. D'Agostino concluded that the appellant/debtor's filing of the second bankruptcy case amounted to an abuse of the bankruptcy process.

According to the court, the appellant/debtor failed to demonstrate, with substantive evidence, that her changed circumstances were not available to her during the first bankruptcy proceeding or that they would make any new amended plan feasible. Further, the court noted that the appellant failed to appeal the bankruptcy court's decision denying confirmation of her proposed plan and eventual dismissal of her first bankruptcy petition. Instead, she filed a second Chapter 12 case five days after the bankruptcy court's order dismissing the first action and one day after the appellee's rescheduled foreclosure sale. The filing of the second bankruptcy action, the court said, was an abuse of the judicial process and an impermissible collateral challenge to the orders of the bankruptcy court in the first Chapter 12 case. 

Chapter 12 Filing

Appellant/debtor Constance Ellis owns four parcels of property that she runs as a dairy farm in New York. Appellee NBT Bank NA holds mortgages on the property. In 2008, the debtor began having financial difficulties and defaulted on her farm loan payments. NBT Bank started a foreclosure action in 2009, and on Dec. 23, 2010, a judgment of foreclosure and sale was granted in a New York state court.

One day before the foreclosure sale scheduled by the appellee, the debtor filed for Chapter 12 protection, which stayed the foreclosure action. 

First Case Dismissed

On July 3, 2012, the bankruptcy court issued a memorandum decision and order denying confirmation of the appellant/debtor's Chapter 12 plan and granting appellee's motion for relief from the automatic stay, thereby allowing the appellee to continue the foreclosure proceeding. The court found that the appellant failed to carry her burden of establishing the plan's “feasibility” under Bankruptcy Code Section 1125(a)(6).

The Chapter 12 trustee filed a motion to dismiss the case, and the appellant did not oppose the motion. Her first bankruptcy case was dismissed by the court's order Sept. 21, 2012. 

Second Chapter 12 Case Dismissed

One day before the appellee's rescheduled foreclosure sale, the appellant/debtor filed a second Chapter 12 case. The appellee moved to dismiss, and the appellant/debtor opposed the motion, arguing that she should be permitted to propose and pursue another reorganization plan based on alleged changes in her financial circumstances.

Ruling from the bench, the bankruptcy court dismissed the appellant/debtor's second case, concluding that the appellant's invocation of the court's jurisdiction and the triggering of the automatic stay was an “abuse of the bankruptcy process in that the 'refiled case' constitutes an impermissible collateral challenge to the prior orders of the court from the first bankruptcy action.

The appellant/debtor appealed the bankruptcy court's dismissal and filed an emergency motion for a temporary restraining order, which the appellee opposed. 

Appeals Procedure

Proceedings filed under Chapter 12 are intended for “family farmers” and “family fishermen” who propose a plan for reorganization that restructures debts and repays creditors over time, the district court explained. The bankruptcy court will approve or confirm the reorganization plan only if certain statutory requirements are met, such as that the plan be “feasible,” the court noted.

Federal Rule of Bankruptcy Procedure 8005, the court explained, governs motions to stay pending appeal of bankruptcy court orders. The court noted that under the Second Circuit's four-pronged test for determining whether to grant a motion for a stay pending an appeal, a movant must show: (1) it will suffer irreparable injury absent a stay, (2) a party will suffer substantial injury if a stay is issued, (3) it has demonstrated “a substantial possibility, although less than a likelihood, of success' on appeal, and (4) the public interests that may be affected.

Under Section 1208, the court explained, a Chapter 12 case may be dismissed for “cause” for “unreasonable delay, gross management by the debtor that is prejudicial to creditors,” and denial of confirmation of a plan and denial of a request made for additional time for filing another plan or a modification of a plan. A Chapter 12 case may also be dismissed if the filing is considered to be an abuse of the bankruptcy process. 

Findings From First Ch. 12 Case

In the appellant/debtor's first bankruptcy case, the court found that the reorganization plan was “entirely speculative” and did not satisfy the Code's “feasibility requirements.” Further, the appellant/debtor had more than a reasonable amount of time to construct a confirmable plan necessary for a successful reorganization, and the appellant/debtor failed to make any payments to the trustee as of 14 months into the case, the court noted. The court also pointed out that the case was pending for more than one year, and there was “no reasonable possibility of a successful reorganization within a reasonable time.” Thus, the court refused to approve the appellant/debtor's plan and permitted the appellee to proceed with foreclosure. 

Second Case's Findings

Five-days later, in the second bankruptcy case, the appellant argued that her financial circumstances had changed and that she should be given an additional opportunity and more time to attempt bankruptcy reorganization. The court, however, found that the changes in the appellant/debtor's circumstances could have been actively pursued by the appellant/debtor in the first case, and that the second filing was an abuse of the bankruptcy process, which was, “in effect, an impermissible collateral challenge to the orders of this court in her prior case.”

According to the bankruptcy court, the appellant/debtor's proper course of action was to appeal the decisions in the first case, not to file a second bankruptcy appeal arguing that she should be given more time to reorganize. The appellant/debtor was given more than a reasonable amount of time to attempt to reorganize in the first bankruptcy proceeding, the court said. 

No Possibility of Success

The district court concluded that the appellant/debtor did not establish a substantial possibility of success on the merits of her appeal, and therefore, is not entitled to the stay pending appeal. “Dismissal of the first bankruptcy action after it had been pending for nineteen months, after Appellant had submitted three successive plans and the court held 'numerous hearings' and an evidentiary hearing following which the court denied plan confirmation was not an abuse of discretion,” the court said.

Further, the bankruptcy court's decision dismissing the second bankruptcy petition as an abuse of the bankruptcy process and an impermissible collateral challenge to the dismissal of the previous case was not improper, the court said. The appellant/debtor failed to demonstrate, with substantive evidence, that her changed circumstances were not available to her during the first bankruptcy proceeding or that they would make any new amended plan feasible, the court concluded.

The appellant/debtor's filing of the second Chapter 12 action five days after the bankruptcy court's order dismissing the first action and one day before the appellee's rescheduled foreclosure sale was an “abuse of the judicial process and an impermissible collateral challenge to the orders of the bankruptcy court in the first Chapter 12 case,” the court said, citing In re Kennedy, 181 B.R. 418 (Bankr. D. Neb. 1995). Further, the appellant/debtor's second Chapter 12 petition was an “impermissible collateral attack to the decisions rendered in the first bankruptcy case and that it amounted to an abuse of the bankruptcy process,” the court said, citing In re Beswick, 98 B.R. 900 (Bankr. N.D. Ill. 1989).

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