Thomas H. Curran Associates recently obtained the dismissal of a Chapter 13 case on behalf of its client, an investment fund and the Debtor’s largest unsecured creditor, in the Southern District of Florida. In the case, Thomas H. Curran Associates successfully argued that, among other things, the Debtor’s inaccurate and incomplete bankruptcy Schedules and Statement of Financial Affairs significantly understated the Debtor’s debt and disguised his lack of eligibility for reorganization under Chapter 13.[1] Further, the Debtor, a repeat filer, had failed to provide proper or actual notice of his motion seeking an extension of the automatic stay under section 362(c)(3) of the Bankruptcy Code and sought to use bankruptcy to avoid litigation in a pending state court matter. Thomas H. Curran Associates argued that the Debtor’s actions amounted to a classic case of “sewer service” that violated Constitutional Due Process, thereby rendering the prior order extending the stay void ab initio. The Court agreed with Thomas H. Curran Associates and dismissed the case.
The Debtor commenced his first bankruptcy case in or around October 15, 2019 (the “First Case”). The First Case was dismissed based on the Debtor’s failure to file required schedules and disclosures. Conveniently, the Debtor’s First Case was filed 3 months after, Thomas H. Curran Associates, on behalf of the investment fund, filed an action seeking to hold the Debtor liable for breach of a guaranty agreement (the “State Court Action”). Following dismissal of the First Action, Thomas H. Curran Associates served legal papers in the State Court Action, in which the Debtor failed to appear or otherwise respond. Three months later in early 2020, the Debtor again commenced a second bankruptcy (the “Second Case”). Despite knowing that the investment fund would need to receive notice of the Second Case given its position as one of the Debtor’s largest creditors, the Debtor chose to omit the investment fund from its relevant bankruptcy schedules. The Debtor also failed to disclose the pending State Court Action in the Second Case.
In or around February 2020, the Debtor filed a motion in the Second Case (the “Stay Extension Motion”) wherein the Debtor once more failed to reference the State Court Action, but selectively chose to disclose another action pending in a different state and court. The Debtor included proof of service with the Stay Extension Motion noting that he had completed service on all creditors, despite purposefully omitting the investment fund. Despite clear orders from the bankruptcy court in the Second Case to serve specific notices on all required parties regarding the Stay Extension Motion, the Debtor continued to omit the investment fund, while simultaneously claiming that the Second Case was filed in good faith. The Debtor’s Stay Extension Motion in the Second Case was granted, unbeknownst to the investment fund. Months later, the investment fund finally received information regarding the Debtor’s Second Case by way of a third party and moved to vacate the Stay Extension Order.
Thomas H. Curran Associates argued that the Debtor’s failure to provide proper notice in the Second Case violated the Due Process clause of the Fifth Amendment, which requires that parties receive notice and an opportunity to be heard in pending legal matters. Notice must be reasonably calculated under all circumstances to inform interested parties of the pendency of an action and allow parties to present objections. The Debtor’s conduct exemplified the practice of “sewer service,” which occurs when a creditor or party knowingly and deliberately fails to serve notice of a pending lawsuit and/or uses the basis of improper service to obtain a legal advantage in a pending matter. After the improper service is effectuated, a fraudulent affidavit confirming service is filed by the offending party. This practice is intended to ensure that the required party is never actually served with proper legal notice, which clearly violates due process. A single occurrence of sewer service is enough for a claimant to prevail. While a singular instance of sewer service may be less compelling than those involving numerous plaintiffs and multiple instances of improper service, only one occurrence of sewer service is required to establish liability. The number of violations regarding service and the presence of egregious or intimidating behavior ultimately affects the damages a Court will award.
As set forth by Thomas H. Curran Associates in the Second Case, the Debtor’s counsel failed to provide any notice whatsoever to the investment fund nor was the investment fund listed on the required creditor matrix. The court determined that when a Debtor fails to properly list his creditor’s address on the creditor matrix, the burden is on the debtor to prove that the creditor received actual notice.[2] Further, the Debtor’s counsel claimed to have mailed papers to Thomas H. Curran Associates but instead sent them to a former attorney not associated with the firm in years. Notice was also allegedly sent to a former address of Thomas H. Curran Associates. The bankruptcy court examined precedent in the Ninth Circuit, noting that “where a debtor mails a notice to an incorrect address of a creditor, he is not entitled to a ‘presumption of service but rather must prove that the creditor had actual notice and a reasonable opportunity to be heard.’”[3] Additionally, notice sent to a creditor’s attorney’s office must still specify the creditor to be noticed or identify the proper attorney under Fed. R. Bankr. P. 1007(a). The bankruptcy court held that the Debtor failed to follow any of the above requirements which resulted in clear violations of the investment fund’s right to substantive due process, showcasing the harms of “sewer service.”
As set forth in Federal Rule of Civil Procedure, Rule 60(b)(4), Courts are required “to set aside as void, without any discretion, an order issued in a manner inconsistent with the due process clause of the Fifth Amendment.” Further, to prove a judgement is void, a movant must both identify a technical inadequacy in the notice provided and establish the denial of a right to due process.[4] Because of Thomas H. Curran Associates’s thorough experience in bankruptcy, the firm was able to properly advocate on behalf of the investment fund, to prove to the bankruptcy court the Debtor’s counsel’s use of “sewer service” was a violation of due process and that the Second Case was filed in bad faith. The Court found in Thomas H. Curran Associates’s favor, ruling that the Stay Extension Order was void ab initio and the Debtor’s Second Case was dismissed.
[1] In re Lewis Frank Maffeo, Jr., No. 20-11512-SMG (S.D.F.L. 2020)
[2] In re Todd, 441 B.R. (Bankr. D. Ariz. 2011)
[3] In re La Sierra Fin. Servs., Inc., 290 B.R. (B.A.P. 9th Cir. 2002)
[4] In re Braden, 516 B.R. (Bankr. S.D. Ga. 2014)