Opinion
No. 99-44867 JG
August 14, 2002
DECISION
Martha G. Bronitsky, standing chapter 13 trustee (the "trustee"), has filed a motion to dismiss this case with prejudice. The court will grant the motion.
A. Background
On July 26, 1999 debtors Winston and Barbara Reed (the "debtors") filed a chapter 7 petition herein. On August 3, 1999, the debtors filed amended schedules showing that they owned an interest in real property described as the "R Ranch." The debtors' schedules stated that the R Ranch had a fair market value of $5,000 and was encumbered by a lien in the sum of $3,100. The debtors' schedules further stated that the debtors were not parties to any executory contracts, and that their monthly expense for rent was in the sum of $900.
On August 12, 1999, the debtors converted their chapter 7 case to chapter 13.
In December 1999, the debtors decided to purchase a certain parcel of residential real property in Hercules, California (the "Residence"). On either January 6 or January 7, 2000, the debtors entered into a contract with the owners, Dennis and Corazon Zapanta (the "Zapantas"), to acquire the Residence and to assume the two deeds of trust thereon (the "Contract").
The Contract is dated January 6, 2000. Barbara Reed testified that it was actually signed on January 7, 2000.
Barbara Reed testified that the Contract, although inartfully drafted, entitled the debtors to take immediate occupancy of the Residence, required them to service the deeds of trust thereon for a period of two years, assume approximately $155,200 in debts secured by those deeds of trust, and close a purchase within two years of the date they assumed possession. This testimony is generally consistent with the allegations of a complaint the debtors filed against the Zapantas in California Superior Court in January 2002, which alleged, among other things, that pursuant to the Contract, the debtors "agreed to buy and defendants, Zapantas, and each of them agreed to sell" the Residence.
On January 6, 2000, the same date as appears on the Contract, the meeting of creditors for the debtors' chapter 13 case was held pursuant to Bankruptcy Code § 341 (a). The debtors appeared with their counsel, Cathleen Moran, who had been representing the debtors continuously from the filing of the chapter 7 petition and who continues to serve as the debtors' counsel herein. No creditors appeared. At the meeting of creditors, the trustee did not ask the debtors whether the R Ranch was the only real property in which they had an interest, or whether the information in their schedules remained accurate.
All further section references herein are to the Bankruptcy Code, 11 U.S.C. § 101 et seq.
Nor did the debtors voluntarily disclose that they had entered into, or were about to enter into, a contract that would materially alter their entire financial position by substantially increasing their assets, liabilities, and monthly expenses. Based on the information available to the trustee, the trustee advised debtors and their counsel that she would recommend confirmation of the plan. On January 10, 2000 (three or four days after the debtors had signed the Contract), the court entered its order confirming the debtors' plan.
At the time the court signed the order, the debtors' actual monthly expense for housing was $1,800 because of the liabilities they had assumed under the Contract, and not the $900 amount indicated in their schedules.
Thereafter, the debtors sought to amend their plan. On July 18, 2000, the debtors filed an application to modify the plan, which application stated that the modification was needed because "[t]he current plan is not feasible." Neither the application nor the declaration of counsel filed in support thereof mentioned the Contract. Nor did the application disclose that, in fact, the plan since confirmation had never been feasible because the debtors had rendered it unfeasible prior to confirmation. In essence, the proposed plan modification eliminated the 10% dividend to unsecured claimants required under the confirmed plan. The debtors submitted no schedule amendments in connection with the application, which the court granted by order filed September 27, 2000.
In January 2002, the debtors filed a lawsuit against the Zapantas and others seeking to enforce their purchase rights under the Contract and damages. Thereafter, the trustee discovered that the debtors' actual financial position as of the date the court confirmed their plan, and as of the date the court approved the plan modification, was quite different than that represented in their schedules. The present motion followed.
Barbara Reed testified that the suit has since been settled as to the Zapantas under an arrangement by which the debtors assigned their purchase rights to debtor Winston Reed's mother, who then bought the Residence. She also testified that the debtors now reside at the Residence, and that the action remains pending as to the other defendants.
Unlike a motion to revoke confirmation pursuant to § 1330, a motion to dismiss a case for cause under § 1307 (c) is not subject to any statutory time limitations.
B. Discussion
Pursuant to § 1307 (c), the court may dismiss a chapter 13 case for cause. Pursuant to § 349 (a), the court may dismiss a case with or without prejudice. A debtor's bad faith is cause for dismissal with prejudice. In re Leavitt, 171 F.3d 1219, 1224 (9th Cir. 1999). Bad faith involves application of a "totality of circumstances" test, under which the court should consider, among other things:
(1) whether the debtor misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner
(2) the debtor's history of filings and dismissals;
(3) whether the debtor only intended to defeat state court litigation; and
(4) whether egregious behavior is present.
Leavitt, 171 F.3d at 1224 (internal citations and quotes omitted).
Here, the court finds that the debtors unfairly manipulated the Bankruptcy Code, obtained an order confirming their chapter 13 plan in an inequitable manner, and engaged in egregious behavior that provides cause for a dismissal with prejudice.
It is essential that a chapter 13 trustee have accurate information regarding, among other things, the income and expenses of debtors seeking plan confirmation so that the trustee may determine whether a proposed chapter 13 plan meets the requirements of chapter 13, and thus, whether the trustee should object to or recommend confirmation to the court in fulfillment of the trustee's responsibilities under § 1302. See In re Andrews, 49 F.3d 1404 (9th Cir. 1995). Here, however, the court signed a confirmation order on January 10, 2000 and approved a plan modification on the basis of information that, by design of the debtors, had no relationship to reality, under circumstances where the actual facts were unknown to the trustee and the court. After the court confirmed the plan, the debtors, in violation Fed.R.Bankr.P. 4002 (5), failed to report their change of address to the trustee, thereby forestalling discovery of their true financial position for several years. Barbara Reed testified that she failed to do so because "a lot of things [were] going on."
Section 1325 (a) (6) provides that to confirm a chapter 13 plan, the court must find that "the debtor will be able to make all payments under the plan and to comply with the plan." Section 1325 (b) (1) prohibits confirmation of a chapter 13 plan over the objection of an unsecured creditor or the trustee unless "the plan provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan."
Section 1302 provides, in relevant part: "The trustee shall . . . appear and be heard at any hearing that concerns . . . confirmation of a plan."
Barbara Reed initially testified at trial that the debtors had decided to purchase the Residence in December 1999. Subsequently, she testified that the debtors did not make their decision to purchase until January 7, 2000, the day after the date on the Contract and the day after the meeting of creditors was held. The court declines to accept the proposition that it was mere coincidence that the debtors signed the Contract the day of or the day after the meeting of creditors.
Fed.R.Bankr.P. 4002 (5) provides: "In addition to performing other duties prescribed by the Code and rules, the debtor shall . . . file a statement of any change of the debtor's address.
Moreover, the debtors violated § 364 (c) by contractually obligating themselves to incur secured debt prior to confirmation of the plan, without court approval.
Filing of a chapter 13 petition creates an estate. Section 541 (a). The property of the estate does not revest in the debtor until plan confirmation. Section 1327 (b). Prior to such revesting, the debtor, absent court authority, may not use or sell estate property out of the ordinary course of business, § 1303, or incur secured debt. Section 364 (c).
The debtors raise three arguments in opposition to the trustee's motion. First and primarily, they argue that they have no duty under the Bankruptcy Code to amend their schedules to reflect developments after the schedules are filed. Second, they argue that they had no duty to volunteer information to the trustee at the meeting of creditors or otherwise, and that because the trustee did not ask them whether they had contracted to purchase real property and assume debt, or whether they planned to do so in the immediate future, they were within their rights to remain silent. Thirdly, they argue that no one was harmed.
The court rejects these arguments. As to the first, it is true that the Bankruptcy Code and Bankruptcy Rules do not generally require bankruptcy debtors to amend their schedules to reflect developments after the schedules are filed. In re Adair, 253 B.R. 85 (9th Cir. BAP 2000). It does not follow, however, that debtors may permissibly conceal information and mislead the trustee and court in order to obtain plan confirmation. Rather, under § 521 (3), a debtor has a duty to "cooperate with the trustee as necessary to enable the trustee to perform the trustee's duties under this title." Obviously, the debtors' withholding of material information that the trustee needed to perform her duties is not cooperation.
In some situations, not applicable here, debtors are required to file amendments to their schedules. See Fed.R.Bankr.P. 1007 (h). And if a debtor acquires real property before the debtor files his or her schedules, the debtor must report the acquisition to the trustee. Fed.R.Bankr.P. 4002 (3). This requirement, however, was not applicable here because the debtors acquired their interest in the Residence after they had filed their schedules.
Moreover, even if the debtors were not required to amend their schedules, they did not have license, as their second argument contends, to mislead and deceive the trustee and court by their silence, or to request confirmation of a plan that they knew was not feasible on account of facts that were not available to the parties in interest or court.See In re Hamilton, 270 F.3d 778, 784 (9th Cir. 2001) (discussing the importance of full disclosure by debtors seeking plan confirmation and the applicability of judicial estoppel to the facts at issue therein); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999).
These cases and other cases cited therein stress the duty of debtors to make full disclosure of all relevant financial information prior to confirmation of a chapter 11 plan. The court believes that chapter 13 debtors seeking plan confirmation likewise have a duty not to mislead the court or parties in interest by concealing information relevant to the confirmation process.
Barbara Reed admitted that she knew at the time she attended the meeting of creditors that the trustee had a duty to review the debtors' financial position, and make a recommendation to the court concerning confirmation. The debtors also knew at such time that their financial information had changed or was just about to change dramatically. Yet they remained silent as if bankruptcy were a game in which the winners are the debtors who can successfully hide material information from the trustee, the creditors, and the court.
The court holds that under the circumstances present here, the debtors had a duty to speak up at the meeting of creditors, and that they violated that duty by not doing so.
Adair is not to the contrary. In Adair, a chapter 7 trustee had moved to reopen a case three years after it had been closed, in order to claim the proceeds from the settlement of a lawsuit that the debtor had properly scheduled and which the trustee had chosen not to administer.Adair, 253 B.R. at 86. The BAP affirmed the trial court's denial of the motion, noting that the debtor had complied with her duty to file accurate schedules, and had no ongoing duty to update them as events changed. Id. at 90. Nothing in Adair, however, condones conduct of the type engaged in by the debtors here. Indeed, the Adair court noted that the trustee therein, unlike the trustee herein, was not "deprived of sufficient information so as to preclude him from performing his duties."Id. at 89.
The debtors' final argument is that no one was harmed. The court rejects this argument. How this chapter 13 case might have proceeded, if at all, and how the creditors may have fared had the court known the actual facts as they existed at the time it confirmed the plan is a matter of pure speculation. Possibly the case would have been dismissed based on the infeasibility of the plan, in which case the creditors could have acted several years ago to protect their interests without being stayed by § 362 (a). See Hamilton, 270 F.3d at 784. In any event, even if no creditors were harmed, this would not excuse the debtors' misconduct herein. See In re Adeeb, 787 F.2d 1339, 1343 (9th Cir. 1986) (holding that lack of harm to creditors is irrelevant to the issue of whether a debtor can be denied a discharge when grounds for denial are present).
C. Conclusion
The court will dismiss this case with prejudice, and requests the trustee to submit a proposed order within 10 days.