Chapter 13 Bankruptcy petition was not filed in Bad Faith in Texas

Chapter 13 Bankruptcy petition in Texas

UNITED STATES OF AMERICA, Plaintiff(s), v. JAMES W. BISHOP, PATRICIA L. BISHOP, as Taxpayers, PATRICIA L. BISHOP d/b/a LIL DUMPLIN DAY CARE CENTER, ELGIN and SHIRLEY JUNG, as Mortgagees, TRAVIS COUNTY, TEXAS, KERR COUNTY, TEXAS, and CENTER POINT SCHOOL DISTRICT, Defendant(s).
CIVIL ACTION NO. SA-99-CA-885-OG

Case Law
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS, SAN ANTONIO DIVISION
262 B.R. 401; 2000 U.S. Dist. LEXIS 14013; 2000-2 U.S. Tax Cas. (CCH) P50,740; 86 A.F.T.R.2d (RIA) 6167

August 15, 2000, Decided

Facts: Defendant filed a voluntary Chapter 13 bankruptcy petition on the morning of a real property foreclosure sale. Defendant filed her objection to the confirmation of the sale. Plaintiff responded, asserting that defendant filed bankruptcy in bad faith for the purpose of subverting the court’s order of foreclosure and sale. Plaintiff urged the court to confirm the sale or, alternatively, to lift the automatic stay with respect to the property under 11 U.S.C.S. § 362(d), or withdraw the reference of the matter from the bankruptcy court’s jurisdiction. Plaintiff asserted that the sale should not be confirmed because the property was not part of the bankruptcy estate.

Issue: Whether the petition was filed in bad faith

Ruling: YNo. the court found that defendant still retained her interests in the property at the commencement of her bankruptcy case. Next, given its conclusion that the property became part of the bankruptcy estate, the court rejected plaintiff’s argument that it should exercise discretion to withdraw the reference of the matter due to defendant’s bad faith. Finally, the court stated that the motion to lift stay was a “core proceeding” and, as such, it was appropriate for the bankruptcy judge to hear the motion.

Lesson Learned: Texas law provides that a valid foreclosure sale, not just an order of foreclosure, must occur in order for a debtor to be divested of his interests in property. Logically then, if a foreclosure sale in accordance with state law takes place before a bankruptcy petition is filed, the debtor no longer has any legal or equitable interest in the property, and the foreclosed property does not become part of the bankruptcy estate.

Written by Kevin Levonas and Jerry L.