The Foreclosure Must Go On: L.A. bankruptcy judges give the hook to 'artful dodger' debtorsAuthor(s): STEVE FRANCESource: ABA Journal, Vol. 84, No. 5 (MAY 1998), p. 32Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/27840231 .

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NEWS

The Foreclosure Must Go On LA bankruptcy judges give the hook to 'artful dodger' debtors BY STEVE FRANCE

Battling to preserve the integrity

of the bankruptcy system in a

judicial district that saw 117,000 petitions filed last year, the bank ruptcy judges of Los Angeles are

resorting to their ultimate weapon: the equitable power to "take any action ... necessary ... to prevent an

abuse of process." In response to debtors' scams,

these judges are lifting the auto matic stays that take effect with bankruptcy filings and permitting mortgage holders to foreclose on debtors' property. In addition, or ders that bind partial owners of the property even if they are not before the court are being put into effect.

Playing Legal Keep-away One scheme involves insolvent

property owners who play legal keep-away with mortgage holders by giving away or selling a part in terest in a home or building. With the teamwork of a seasoned basket ball squad, the new owners file bliz zards of bankruptcy petitions.

Each petition triggers a new case with a new automatic stay in bankruptcy, just after the old stay is thrown out, and just before the bank tries again to foreclose. In some cases the debtors are trying to buy more time; in others they are

pocketing rent money while failing to pay the mortgage.

"This gives us constant prob lems," says Judge Thomas B. Don ovan of the Central District of Cal ifornia Bankruptcy Court. In a typ ical week, he sees five or 10 cases

involving the "schemes of artful dodgers."

Assistant U.S. Trustee Art Marquis in Santa Ana, where the L.A. scheme is also entrenched, says these foreclosure scams are "the most prevalent type of fraud

we see in bankruptcy." He remem

bers a case in which a property was an asset in a string of 24 bank ruptcies.

In a report last fall, the Na tional Bankruptcy Review Commis sion noted that the scams have begun to surface in other jurisdic tions, including Florida, New Jer sey, New York and Texas. Major

bankruptcy reform bills pending in Congress authorize the same solu tion that Donovan and other judges have already embraced?in rem relief.

Fed up with shooting blanks, Donovan joined a growing posse of

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Judge Thomas Donovan uses ?n rem orders as a way to avoid excessive rounds of motions and petitions.

his colleagues when he issued a de cision enforcing an in rem order on

property that was the subject of five bankruptcy petitions. The ruling, In re Fernandez, 1997 WL 523997 (Bankr. CD. Cal.), is on appeal to the 9th U.S. Circuit Bankruptcy Appeal Panel.

In rem orders apply directly to property, lifting the automatic stay in bankruptcy as to the debtor and any other person claiming an inter est in the property. The burden is then on the debtor to prove the stay should be revived.

In rem orders are "a magic bul let," says Los Angeles-based Bank

of America attorney Jill Sturtevant. She admits her bank is always seeking these orders now because they give title companies the confi dence to insure foreclosure sales of debtors' properties.

At this point, only a handful of Donovan's 25 Los An geles colleagues are re

fusing to issue in rem orders, Sturtevant says. "There are judges who will give them and judges who won't. Some judges feel they don't have the jurisdiction to issue the orders because they af fect the rights of parties not before them."

Some judges also hes itate because in rem re lief is not mentioned any

where in the Bankruptcy Code. Donovan himself admits he was extremely reluctant to endorse the concept in Fernandez. "There is nothing in the code or in bankruptcy case law providing for in rem orders; it's not really a bankruptcy concept," he says.

He overcame his res

ervations, though, writ ing in his opinion that such orders prevent bank ruptcy from becoming a "farce" with "endless rounds of motions, peti tions, and more motions, based solely on a Lewis Carroll view of the work ings of the automatic

stay and the requirements of due process."

Donovan says he still turns down more requests for in rem re lief than he grants. He sees a dis turbing trend to "ask for in rem re lief willy-nilly in almost every case.

Unless there is a darn good record [of abuse], I turn them down."

But turning down the requests will get harder as pressure to grant the relief mounts. "People may think there are other approaches," says Sturtevant, "but I who have to deal with this every day can tell you, there are no other effective ways to fight this, period."

32 ABA JOURNAL / MAY 1998 ABAJ/JIM CACCAVO

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