In re: Anselmo Cabral and Alma Cabral

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: November 5, 2020
• Docket: CC-20-1061-LST
• Status: Unpublished

Opinion

FILED NOV 5 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. CC-20-1061-LST ANSELMO CABRAL and ALMA CABRAL, Bk. No. 2:15-bk-19370-SK Debtors. ANSELMO CABRAL; ALMA CABRAL, Appellants, v. MEMORANDUM* JASON RUND, Chapter 7 Trustee; UNITED STATES TRUSTEE, Appellees.

Appeal from the United States Bankruptcy Court for the Central District of California Honorable Sandra R. Klein, Bankruptcy Judge, Presiding

Before: LAFFERTY, SPRAKER, and TAYLOR, Bankruptcy Judges.

INTRODUCTION

Anselmo and Alma Cabral appeal the bankruptcy court’s order

denying their motion to dismiss their chapter 71 case. After Debtors had

* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the (continued...) performed under their confirmed chapter 13 plan for over four years, they

found themselves unable to make plan payments and, on the advice of

counsel, converted their case to chapter 7. After the chapter 7 trustee began

taking steps to sell their residence, Debtors moved to dismiss their case for

cause under § 707(a). The bankruptcy court denied the motion.

We AFFIRM.

FACTUAL BACKGROUND2

Debtors filed a chapter 13 petition on June 11, 2015. About five

months later, the bankruptcy court confirmed their 60-month plan.

Approximately four and a half years into their plan, Debtors found

themselves unable to afford their plan payments due to Mr. Cabral’s loss of

work. On the advice of their attorney, they sought and obtained an order

converting the case to chapter 7. Appellee Jason Rund (“Trustee”) was

appointed chapter 7 trustee. At the time of conversion, the remaining

allowed unsecured claims totaled $30,458.91.

After conversion, Trustee filed an application to retain counsel to

assist with administering the estate, which the bankruptcy court granted.

1 (...continued) Bankruptcy Code, 11 U.S.C. §§ 101-1532, and“Rule” references are to the Federal Rules of Bankruptcy Procedure. 2 Where necessary, we have exercised our discretion to examine the bankruptcy court’s docket and available imaged papers in the bankruptcy case. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).

2 In the application, Trustee stated his belief that Debtors’ Los Angeles

residence had about $128,587 of non-exempt equity available to pay

creditors.

Debtors then moved to dismiss their chapter 7 case. Debtors

acknowledged that the equity in their residence had increased significantly

but explained that their attorney had not taken that fact into account when

he advised them to convert. They also acknowledged that Trustee’s counsel

had advised Debtors’ attorney that Trustee would be willing to allow them

to refinance their residence to pay unsecured creditors but stated that they

did not want to do so.

Debtors stated in their accompanying declaration that they would not

have agreed to conversion had they known their home’s equity would be

put at risk. They proposed to dismiss the chapter 7 case and file a new

chapter 13 case that would pay 100 percent to unsecured creditors over five

years, with the monthly estimated plan payment of $563.49 to be funded

with Alma Cabral’s and daughter Amanda Cabral’s employment income.

Debtors also stated that Mr. Cabral had a workers compensation claim that

would potentially pay out a “significant” amount. Additionally, Debtors

filed a declaration from Amanda Cabral stating that she lives with her

parents and confirming that she was willing and able to contribute $3,400

per month toward total household expenses to enable Debtors to afford the

plan payments. Debtors provided copies of Alma and Amanda’s paystubs

3 for December 2019 and January 2020.

The United States Trustee (“UST”) filed an opposition, arguing that

Debtors had not met their burden of proving that dismissal would not

prejudice creditors. Trustee filed a joinder to UST’s opposition, arguing

that there was no cause for dismissal and that permitting the course of

action proposed by Debtors would be unfair and prejudicial because their

proposal would, in effect, allow Debtors a ten-year plan that would require

creditors to wait another five years to be paid. Trustee also pointed out that

a second plan would potentially be confusing to creditors because those

creditors that had allowed claims in the first case would need to file proofs

of claim in the second case.

At the hearing on the motion, the bankruptcy court denied the

motion, finding that bad legal advice did not constitute cause for dismissal,

and there was no guarantee Debtors would refile or could repay creditors

were the case to be dismissed.

Debtors timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.3

3 Ordinarily, an order denying a motion to dismiss a bankruptcy case is interlocutory. Jue v. Liu (In re Liu), 611 B.R. 864, 873 (9th Cir. BAP 2020). But we have discretion to treat Debtors’ notice of appeal as a motion for leave to appeal. Rule (continued...)

4 ISSUE

Whether the bankruptcy court abused its discretion in denying

Debtors’ motion to dismiss their chapter 7 case for cause under § 707(a).

STANDARD OF REVIEW

We review the denial of a debtor’s motion to dismiss a chapter 7 case

for abuse of discretion. Hickman v. Hanna (In re Hickman), 384 B.R. 832, 836

(9th Cir. BAP 2008); Bartee v. Ainsworth (In re Bartee), 317 B.R. 362, 365 (9th

Cir. BAP 2004).

Under the abuse of discretion standard, we must affirm unless the

bankruptcy court applied the wrong legal standard or its findings were

“illogical, implausible or without support in the record.” TrafficSchool.com,

Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v.

Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).

DISCUSSION

Section 707(a) permits a bankruptcy court to dismiss a chapter 7 case

“only for cause.” In re Bartee, 317 B.R. at 366. “Cause” is not defined in the

statute, but it includes enumerated examples that are not relevant here. If

none of those examples apply, and there is no specific Code provision that

addresses the asserted cause, the court is to determine whether the totality

of circumstances amount to “cause” under § 707(a). In re Hickman, 384 B.R.

3 (...continued) 8004(d). We do so here, and we grant leave.

5 at 840. As part of establishing cause, a debtor seeking dismissal of a chapter

7 case has the burden to demonstrate that creditors will not be prejudiced

by dismissal. See In re Bartee, 317 B.R. at 365-66. This consideration is

crucial, and where prejudice exists, the debtor’s reasons for requesting

dismissal are nearly always irrelevant. See id. at 366 (“In the Ninth Circuit,

‘a voluntary Chapter 7 debtor is entitled to dismissal of his case so long as

such dismissal will cause no “legal prejudice” to interested parties.’”

(quoting Leach v. United States (In re Leach), 130 B.R. 855, 857 (9th Cir. BAP

1991))); see also Gill v. Hall (In re Hall), 15 B.R. 913, 917 (9th Cir. BAP 1981)

(“[U]nless dismissal will cause some plain legal prejudice to the creditors, it

normally will be proper.” (quoting Schroeder v. Int’l Airport Inn P’ship (In re

Int’l Airport Inn P’ship), 517 F.2d 510, 512 (9th Cir. 1975)).

In its ruling, the bankruptcy court relied heavily on Bartee. In that

case, debtors sought dismissal of their chapter 7 case four days after their

trustee filed a report indicating that the estate had assets to distribute to

creditors. In re Bartee, 317 B.R. at 364. The Bartees asserted that their

bankruptcy filing was the result of bad legal advice. They also advised the

court that they had sufficient assets to pay their creditors in full, and

expressed their intent to do so upon dismissal of their case. Id. The Bartees

never supported their dismissal motion with any admissible evidence. Id.

at 364-65.

Opposing the motion, the trustee pointed out that the Bartees had

6 been less than candid about their financial affairs and had not cooperated

with his request for additional financial information. As a result, the trustee

maintained that the Bartees could not be trusted to honor their promises to

repay their creditors outside of bankruptcy. Id. at 365.

After a hearing, the bankruptcy court denied the dismissal motion,

explaining that the Bartees’ intentions were too speculative and their

creditors’ interests were best served by the continuation of the bankruptcy

case. Id. at 365. On appeal, we affirmed. We pointed to the lack of evidence

supporting the Bartees’ motion. Id. at 366. We also expressed our

agreement with the bankruptcy court’s determination that the Bartees had

not demonstrated an absence of prejudice to their creditors. As we

explained: “This is an asset case. The trustee anticipates that there will be

funds available to pay unsecured creditors. Dismissal of debtors’ case

would have prejudiced their creditors, because there is no guarantee that

debtors will pay their debts outside of bankruptcy.” Id. (citation omitted).

The bankruptcy court found the instant case similar to Bartee because

the debtors in that case argued that they had received bad legal advice and

pledged to repay creditors after dismissal, arguments that were rejected as

inadequate by this Panel. The court thus denied the motion based on the

reasoning of Bartee, finding that dismissal would be prejudicial to

7 creditors.4

On appeal, Debtors concede that bad legal advice does not constitute

cause for dismissal. They instead contend that they raised the issue only to

explain that they would not have agreed to conversion had they known

Trustee would target the equity in their home. They assert that counsel’s

failure to warn them of the potential consequences of conversion “was

meant to serve as an equitable consideration to determine whether there is

cause for dismissal.”

With respect to the question of prejudice to creditors, Debtors

contend that the bankruptcy court erred in finding that their proposal was

too speculative to ensure that creditors would not be prejudiced by

dismissal. They distinguish Bartee, pointing out that the debtors in that case

had been uncooperative and less than candid about their financial affairs,

and their repayment proposal was not supported by any documentary

evidence or affidavits. In contrast, they argue, they were truthful in their

schedules, performed under a chapter 13 plan for four and a half years, and

provided declarations and documentation to support their proposal to pay

creditors after dismissal. They also argue that, unlike the situation where a

trustee seeks to administer a liquid asset, there is little risk the equity in the

residence would be lost, i.e., “there is no indication Appellants would sell

4 While the bankruptcy court did not explicitly state that dismissal would prejudice creditors, that conclusion is implicit in the court’s analysis.

8 their residence and abscond with the equity if the Chapter 7 case is

dismissed.”

Debtors are correct that the facts of this case differ from those

presented in Bartee. There is no evidence of bad faith, and Debtors

provided evidence to support their proposed course of action. But their

focus on that aspect of the case, and their assertion that their good faith

should weigh in their favor in an equitable balancing of rights between

debtors seeking to dismiss their chapter 7 cases and creditors whose

payment would be rendered less certain thereby, demonstrates that

Debtors misunderstand the applicable standard.

As an initial matter, there is no question that creditors in this case

would suffer prejudice were Debtors permitted to dismiss it, even if

Debtors follow through and file another chapter 13 case. Such an outcome

would increase the creditors’ risk of nonpayment: creditors presently have

the opportunity for reasonably prompt and highly certain payment in this

case through the Trustee’s liquidation of assets of a value sufficient to pay

all claims. Forcing creditors to trade that outcome for one in which they

would rely on the Debtors to file a new chapter 13 case, propose and

confirm a plan, and perform under that plan for five years would be

prejudicial; it would delay payment and increase the potential harm to

creditors from non-payment.

Debtors seek to imply that their presumed good faith, as exemplified

9 by their performance under a longstanding chapter 13 case that was

unsuccessful through no fault of theirs, and relying on the advice of

counsel in converting their case to one under chapter 7, acts as a mitigating

factor against the uncertainty of payment that their case dismissal would

create. This assertion is unmerited for at least two reasons.

First, while we have held that the bankruptcy court “may evaluate a

voluntary motion to dismiss using both legal and equitable

considerations[,]” In re Leach, 130 B.R. at 856, equitable considerations do

not come into play when a debtor is unable to show that creditors would

not be prejudiced by dismissal. See id. at 857 (holding that equitable

considerations are relevant only in the absence of dispositive legal

arguments, i.e., plain legal prejudice to creditors).

In Leach, the debtor sought to dismiss his chapter 7 case because he

filed his case too early to discharge certain federal income taxes. 130 B.R. at

856. The bankruptcy court denied the motion because it found that the

United States would be prejudiced by the dismissal. Id. at 857. On appeal,

the debtor argued that the bankruptcy court erred in not taking into

account certain equitable factors: (1) his early filing was based on bad

advice from his former attorney; (2) he did not act fraudulently or in bad

faith but was completely forthright; (3) he had no assets; (4) he was a

recovering alcoholic; and (5) denial of his motion to dismiss was a denial of

the fresh start guaranteed in bankruptcy. Id. We rejected that argument,

10 noting that the bankruptcy court had taken those facts into account, and

that it had correctly concluded that the equitable considerations were

irrelevant in light of the legal prejudice to the United States that would

result if the case were dismissed. Id. at 858.

Rather than focusing on equitable factors, the cases indicate almost

universally that courts should approve voluntary case dismissals only

where the payment of creditors is provided for, and reasonably prompt

and certain. See id.; In re Bartee, 317 B.R. at 366 (holding that because the

trustee anticipated that there would be funds available to pay unsecured

creditors, dismissal would prejudice creditors because there was no

guarantee that debtors would pay their debts outside of bankruptcy); In re

Hall, 15 B.R. at 917 (reversing order granting debtor’s motion to dismiss

because he had filed his homestead exemption too late, holding that

dismissal would result in plain legal prejudice to creditors because “[i]n the

present case the objections to exemptions filed by the trustee, if sustained,

would provide a payment to unsecured creditors. If the debtor were to

dismiss, file a homestead and then file a new bankruptcy there would be

no distribution to unsecured creditors.”)

Second, although bad faith conduct by Debtors would certainly

prejudice creditors’ ability to be paid, the good faith of Debtors, by itself,

does not remove or even necessarily lessen the prejudice to creditors, as the

bankruptcy court implicitly found here. Not only would it be prejudicial

11 for creditors to wait an additional five years to be paid in a new chapter 13

case, but, as was discussed candidly at oral argument, other factors are

now present. The California legislature recently amended California Code

of Civil Procedure § 704.730, effective January 1, 2021, to expand the

amounts available for homestead exemptions.5 Were Debtors to wait until

on or after January 1, 2021 to file a new case, as we assume they would,

given that it would be very much in their interest to do so, they would be

entitled to take advantage of this increased exemption. And taking

advantage of this exemption would almost certainly ensure that unsecured

creditors in the subsequent case would receive little or no distribution on

account of their claims.

Finally, the bankruptcy court correctly articulated the standard that

prejudice exists where assets that would have been available for

distribution to creditors are lost as a result of the dismissal. Simon v. Amir

(In re Amir), 436 B.R. 1, 16 (6th Cir. BAP 2010). Debtors misconstrue this

standard in arguing that they are unlikely to abscond with the equity in

their home post-dismissal. The “loss” of an asset, as contemplated by the

case law, refers to the fact that dismissal removes estate assets from the

control of the bankruptcy court, not the post-dismissal dissipation of an

asset. In addition, Debtors would not be bound to file a new chapter 13

5 The revised statute sets the minimum homestead exemption at $300,000 and the maximum at $600,000, depending on the countywide median sale price for a single family home in the previous calendar year.

12 case. This alone renders dismissal prejudicial to creditors. See In re

Komyathy, 142 B.R. 755, 757 (Bankr. E.D. Va. 1992) (“[I]f dismissal were to

be granted, the parties would no longer be under the jurisdiction of this

court nor the Bankruptcy Code. The trustee would be relieved of his

obligation to ensure payment to the creditors, and conversely, the creditors

would lose the guarantee of repayment. In the absence of affirmative

consent of the creditors, this lost guarantee constitutes plain legal

prejudice.”).

CONCLUSION

For these reasons, the bankruptcy court did not abuse its discretion in

denying Debtors’ motion to dismiss their chapter 7 case. Accordingly, we

AFFIRM.