Bankruptcy is a headache for lenders. 

For example, you make a commercial real estate loan and record your deed of trust.  The borrower pays you for a time but then defaults.  You tried loan forbearance and modification, but it was unsuccessful.  The borrower falls further and further behind on the loan.  You are left with no choice but to foreclose on your collateral.

You start a foreclosure special proceeding in state court.  You pay your attorney and a foreclosure trustee.  After what seems like forever — months of continuances, no payments, and possible depreciation of your collateral — the clerk of court authorizes the sale of the property.  Another month goes by, and a sale is conducted.  Your credit bid is the only bid for the property.  Nine days of the upset bid period pass, and you are one day away from owning the property.  Then, an unwelcomed companion arrives with your morning coffee: A NOTICE OF BANKRUPTCY CASE stamped with the official seal of the United States Bankruptcy Court. 

Your borrower has filed for bankruptcy, and the automatic stay is in effect.  You cannot complete the foreclosure.  You do not own the property.  Your loan is not off the books.

Now, you pay your attorney to represent you in the bankruptcy.  The borrower has filed Chapter 11, says he intends to reorganize and needs the property to succeed.  The bankruptcy case languishes for six months.  Finally, the debtor concedes that reorganization is unlikely, and the bankruptcy court dismisses the case.  You can now resume the foreclosure, but by law, you must conduct a new sale.  You can't just let the original upset bid run for the full 10 days.  You conduct another foreclosure sale, you credit bid again, and nine days of the upset bid period pass.  Then, in the words of Yogi Berra, it's déjà vu all over again.  Your borrower filed a second bankruptcy, and the automatic stay has blocked the completion of your foreclosure.

Now what?  A creditor can move for relief from the automatic stay.  This article focuses on real property collateral and when a debtor has schemed to delay, hinder, or defraud its creditors by transferring an interest in the property without permission or by filing multiple bankruptcy cases affecting the property.

A recent decision by the Honorable Ashley A. Edwards, the newly-appointed bankruptcy judge for the Western District of North Carolina, stresses the importance of proving the material facts necessary to pierce a debtor's automatic stay shield.

Stay relief is an exception to the broad protections of bankruptcy afforded a debtor.  The creditor must prove that the specific facts warrant it.  Our illustration, with the back-to-back bankruptcy filings, looks like an easy win for the lender.  However, the bankruptcy court denied the lender's motion for stay relief.  Why?  Because it appears the lender filed a motion and did little else to establish the key facts to support stay relief.

The bankruptcy court pointed out that the lender offered no evidence at the hearing – no documents, exhibits, or witness testimony.  The bankruptcy court also held that establishing a "scheme" is a heightened burden.  Courts define "scheme" narrowly.  The facts must establish a debtor's "intentional artful plot or plan," not just "misadventure or negligence."  Stay relief is appropriate where facts establish multiple property transfers without consideration to circumvent a creditor's rights and remedies.  Reliance on public records alone is insufficient.  The court will want testimony from key participants in the scheme. 

Despite the two bankruptcy filings during the upset bid period, sufficient facts remained unclear to the bankruptcy court to permit stay relief.  Even with judicial notice of the multiple bankruptcies, the court required additional facts showing a scheme and relating to the use, tenancy, and status of the property.

This case underscores an important lesson: if you're going to seek stay relief, follow the Powell Doctrine and deploy every relevant fact in your arsenal to support all the elements of your motion.  Don't simply file a motion, show up at the hearing, and expect the court to "get it."  Descend on the courthouse with your witnesses and exhibits and be ready to conduct a mini-trial.   This is time-consuming and expensive, but it will put you in the best position to win.