Restructuring

In the spirit of the season, we’re (re)visited by Doron Kenter, a member of the Weil Bankruptcy Blog’s O.G. Editorial Board (and, as far as we can tell, still holder of the dubious distinction of having published the most posts for us).

What do bankruptcy cases and Halloween have in common? Quite a lot, it turns out. But do all Halloween apparitions need to be spooky-scary? Certainly not. There are plenty of friendly, inspiring, nostalgic, and just plain goofy ghouls and ghosts to go around. But we’re a bankruptcy blog, so we’re on the lookout for the rich ones.
And so we turn to Liberty Bank & Trust Co. v. Danley.¹ Like any good tale, this case requires a bit of backstory. Stacy and Stephanie Danley had obtained a bank loan in September 2006, secured by a mortgage on their personal residence. In November 2007, the bank sent the Danleys a notice of default under that loan, after which the Danleys filed a chapter 13 petition. That case was dismissed for failure to file monthly operating reports. After a second notice of default, the Danleys filed a chapter 11 petition. That case was ultimately dismissed after the Danleys failed to perform under the terms of their confirmed chapter 11 plan. On June 26, 2014, the bank notified the Danleys that it was accelerating the loan and scheduling a foreclosure sale. On the eve of that sale, Stephanie Danley filed a chapter 13 petition, but voluntarily dismissed that case three months later without confirming a plan. In June 2015, the bank sent the Danleys another notice of acceleration. On the day of the scheduled foreclosure sale, the Danleys filed a chapter 11 petition, and the bank soon moved for in rem relief from the automatic stay under 11 U.S.C. § 362(d)(4)(B). The motion was granted and the case was subsequently converted to chapter 7.

Everyone with us? Let’s recap: Loan → Default → Chapter 13 filed, dismissed → Chapter 11 filed, plan confirmed, case dismissed → Chapter 13 filed, voluntarily dismissed → Chapter 11 filed, stay relief granted → Converted to chapter 7, eight years after the bank’s first notice of default. The Danleys had not made a payment since November 2012, and the bank had been forced to pay ad valorem taxes and carry insurance on the property since 2010.

Like vampires, zombies, and the Hydra, the Danleys could not be easily felled.

And so the bank sought an order in state court evicting the Danleys. Stacy Danley filed an answer and asserted a counterclaim of $100,000 on the grounds that the foreclosure was wrongful because the bank had refused to accept payments he had attempted to make. The bank removed the action to bankruptcy court and filed a motion for summary judgment. After an opus of an opinion on all manner of issues, including considerations of the court’s authority to hear and/or decide the issues before it, Judge Sawyer turned to the question of whether the bank had improperly refused to allow the Danleys to cure a defaulted loan on their residence unless and until they cured defaults on rental properties that they also owned. In connection with that argument, the Danleys had contended that they had, in fact, had the wherewithal to cure the loan on their home, but that the bank had (allegedly) refused to allow them to do so.

In assessing that claim, the court rejected the Danleys’ argument – not due to the question of whether the bank properly cross-collateralized the various loans or whether the bank had in fact refused to allow the Danleys the opportunity to cure – but because the Danleys’ argument that they could have cured simply did not hold water. The crux of their argument was that Stacy Danley had a rich uncle in Connecticut “who was willing and able to pay the funds necessary to bring the Residence loan current.” However, no evidence was offered to support the existence of any such uncle.

“If the Court were to credit such an implausible claim on such paltry evidence, it would soon find itself haunted by apparitions of wealthy benevolent relatives every time a debtor falls behind on a payment.”

Although the substance of the underlying claims, and the disposition thereof, were complex, we need not get any further into the weeds for purposes of a lighthearted post. The court’s reasoning, however, is demonstrative. We already know from “Ghostbusters II” that murderous Class IV Noncorporeal Elemental Spirits have no place in the courtroom. Thanks to the Danleys, we know there’s no room for the rich ones either.

Happy Halloween!