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Debtor Sanctioned with Dismissal of Case And 10-Year Bar to Refiling After Forging Letter to Mortgage Lender and Ignoring Court Order

Debtor Sanctioned with Dismissal of Case And 10-Year Bar to Refiling After Forging Letter to Mortgage Lender and Ignoring Court Order

May 30, 2023 Landon Van Winkle

The U.S. Bankruptcy Court for the Eastern District of North Carolina recently granted a motion filed by the standing Chapter 13 Trustee (“Trustee”), seeking to have the Chapter 13 Bankruptcy case filed by the debtors Marcus C. Purdy and Amanda J. Purdy (“Debtors”) dismissed for cause, and with prejudice. The motion was supported by the U.S. Bankruptcy Administrator for the Eastern District of North Carolina (the “B.A.”). In granting the motion, the Court dismissed the Debtors’ pending bankruptcy case. Additionally, it barred the Debtors from refiling any bankruptcy case under any Chapter of the U.S. Bankruptcy Code for a substantial period—10 years for Mrs. Purdy and five years for Mr. Purdy.

The Debtors filed their joint voluntary Chapter 13 case on October 7, 2019. At the time they filed, they were renting a residence in Fuquay Varina. The Court confirmed the Debtors’ Chapter 13 plan on April 10, 2020. It was estimated to result in a dividend of “less than one percent” of their general unsecured debts, estimated to total nearly $230,000.00. In re Purdy, No. 19-04614-5-DMW, Dkt. 126, 2023 WL 2938052, 2023 Bankr. LEXIS 1020, at *3 (Bankr. E.D.N.C. Apr. 13, 2023). Pursuant to Local Bankruptcy Rule 4002-1(g)(5), Chapter 13 debtors in this district are prohibited from incurring additional debt above $10,000 post-petition unless they seek and obtain approval from the Court. The Debtors were notified of this prohibition when they filed their bankruptcy case, and it was repeated in their confirmed plan.

In accordance with the Local Rule, the Debtors filed a motion to incur debt on December 8, 2021. 

They sought court approval to purchase a $560,000 residence in Clayton, North Carolina, which would have resulted in a monthly mortgage payment of approximately $2,900.00. The Court denied the motion, concluding that under the circumstances of the Debtors’ case, the purchase price and related new monthly debt payments were unreasonably high, were not in the Debtors’ best interests, and would jeopardize the Debtors’ ability to complete their Chapter 13 plan successfully. The Debtors filed a motion to reconsider the Court’s ruling, but they did not present any new or additional evidence at the hearing on that motion, and the Court, therefore, denied the motion to reconsider.

Rather than appeal the denial of the motion to incur debt, the Debtors proceeded to purchase the property and incur the debt without informing the Court. Perhaps most egregiously, when the prospective mortgage lender told the Debtors that it needed a letter from the Trustee confirming that the Trustee had authorized the Debtors to proceed with the transaction, Mrs. Purdy fabricated a letter purporting to come from the Trustee’s office, forged the Trustee’s signature, and submitted the letter to the mortgage lender. Purdy, 2023 Bankr. LEXIS 1020, at *7–8. The Trustee subsequently discovered the purchase of the property when reviewing bank statements the Debtors produced to comply with a Rule 2004 examination.  

Following the discovery of the Debtors’ unauthorized consummation of the transaction, the Trustee filed the motion seeking to dismiss the Debtors’ case for “cause” under 11 U.S.C. § 1307(c), and additionally sought dismissal of the case with prejudice under 11 U.S.C. § 349(a). The Trustee asked the Court to bar both from refiling any bankruptcy case for fifteen (15) years. However, while the Court had little difficulty finding that cause to dismiss the Debtors’ case existed, it found that the length of the refiling bar sought by the Trustee was “a bit extraordinary.” Purdy, 2023 Bankr. LEXIS 1020, at *14. Instead, it opted to bar Mrs. Purdy from refiling any bankruptcy case for ten (10) years, reasoning that she was the one who had forged the letter purporting to be from the Trustee. Since there was no evidence that Mr. Purdy had any knowledge of the forged letter, his bar to refiling was only five (5) years. Although he had apparently not participated in the fraudulent conduct involving the forged letter, he had nonetheless “reaped the benefits of the ill-begotten financing and participated in the execution” of the mortgage documents granting the lender a lien in the new home. It was undisputed that both Debtors had actual knowledge of the relevant local rule and were present when the Court denied their motion to incur debt and denied their motion to reconsider. In other words, the Court had ample grounds to find that the Debtors had actual knowledge of the prohibition on their conduct when they consummated the purchase and loan of the property.  

Worse for the Debtors, their defying the Court’s orders may have been for naught, as the Clayton property was purportedly destroyed by a structural fire in April 2022, just a few months after the Debtors purchased it. While the Court was understandably concerned by the Debtors’ egregious conduct, it appeared to be most perturbed by the Debtors’ unsuccessful argument that they should not suffer any consequences for their willful defiance of the Court’s orders because “no damage ha[d] been caused by their actions,” an argument the Court found “reflects unmatched callousness and narcissism this court has not witnessed in recent history.” Id. at *17. In addition to dismissing the Debtors’ case and barring them from refiling, the Court also instructed the B.A. to conduct an additional investigation into the Debtors’ affairs and, if warranted and in the B.A.’s discretion, to refer the Debtors to the United States Attorney’s office for the consideration of federal criminal charges. 

The message to debtors in this district and indeed in any other judicial district should be clear: You ignore the Court’s orders at your peril.

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