FILED AUG 7 2019 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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-18-1218-SKuTa
ARNOLD W. GROSS and LAURIE E. Bk. No. 9:17-bk-10857-DS GROSS,
Debtors.
ARNOLD W. GROSS; LAURIE E. GROSS,
Appellants,
v. MEMORANDUM*
ELIZABETH F. ROJAS, Chapter 13 Trustee,
Appellee.
Argued and Submitted on July 18, 2019 at Pasadena, California
Filed – August 7, 2019
Appeal from the United States Bankruptcy Court
* 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. for the Central District of California
Honorable Deborah J. Saltzman, Bankruptcy Judge, Presiding
Appearances: Janet Audrey Lawson argued for Appellants; Melissa K. Besecker argued for Appellee.
Before: SPRAKER, KURTZ, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Chapter 131 debtors Arnold W. Gross and Laurie E. Gross appeal
from an order dismissing their chapter 13 case. They also appeal from an
order denying them relief under Civil Rules 59 or 60.
The Grosses’ chapter 13 case had been pending for roughly 14
months at the time the bankruptcy court dismissed their case. And they
had not confirmed a chapter 13 plan during that time, though the court
continued the confirmation hearing seven times. On the other hand, there
is nothing in the bankruptcy court’s findings or in the record indicating
that these continuances resulted from misconduct or neglect on the part of
the Grosses or their counsel. Instead, the record evidences that the
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure.
2 confirmation hearings were continued from time to time to permit the
Grosses to pursue challenges to the secured claims of two major creditors.
Both of these challenges ultimately succeeded. Moreover, throughout the
delay in confirming a plan, the Grosses duly made their $2,500.00 monthly
plan payments.
At the last confirmation hearing held, the bankruptcy court became
concerned that the Grosses were ineligible for chapter 13 and dismissed
their bankruptcy case. However, the Grosses filed a timely motion for relief
from the dismissal ruling in which they demonstrated that the chapter 13
eligibility concerns were unfounded. Appellee chapter 13 trustee Elizabeth
Rojas has conceded this point on appeal. Though the bankruptcy court also
had noted a handful of procedural misteps that prevented confirmation of
the Grosses’ plan at the last confirmation hearing, those mistakes were not
sufficient to support dismissal on this record. Accordingly, we REVERSE.
FACTS
The Grosses commenced their chapter 13 bankruptcy case in May
2017. They filed their original plan at the same time they filed their chapter
13 petition. The original plan provided for monthly payments of $2,500.00
for 60 months. The plan committed to pay all priority claims and estimated
a 32% distribution to the Grosses’ nonpriority unsecured creditors.
The plan and the Grosses’ bankruptcy schedules identified Select
Portfolio Servicing, Inc. (“Select”) as a secured creditor with a first priority
3 lien against the Grosses’ residence. The plan provided that the Grosses
would directly pay Select’s postconfirmation mortgage payments outside
their plan. But the Grosses also contemplated curing $29,000.00 in past-due
mortgage payments through their plan payment. The plan further
provided for direct payments to the secured creditors holding liens against
their vehicles.
Finally, the plan contemplated avoidance of the junior lien held by
Specialized Loan Servicing, LLC against the Grosses’ residence.2 The
Grosses’ schedules indicated that, given the value of their residence, this
junior lien was wholly unsecured.
In July 2017, shortly before the first confirmation hearing, the chapter
13 trustee filed an objection to the Grosses’ plan. The trustee stated that the
Grosses had failed to serve their plan on all of their creditors and to
disclose their 1997 chapter 7 case. The trustee also pointed out that the
Grosses had not provided sufficient information regarding their income.
According to the trustee, the Grosses’ 2015 and 2016 tax returns needed to
be provided. The trustee also needed six months’ worth of paystubs and
their calculation of aggregate annual income for the year immediately
preceding their chapter 13 case filing.
The trustee further maintained that the Grosses’ plan was not
2 The Grosses’ subsequently-filed motion to avoid lien suggests that Specialized Loan Servicing was the loan servicer on behalf of Ownit Mortgage Solutions, Inc.
4 feasible. As the trustee noted, the plan did not provide for certain creditors’
claims. Most notably, the plan did not include any provision for the
Internal Revenue Service’s (“IRS”) tax claims, which included a $127,904.55
secured claim and totaled more than $135,000.00. The trustee also
challenged the sufficiency of the evidence relating to whether the Grosses’
plan satisfied the “best efforts” requirements of § 1325(b)(1)(B). According
to the trustee, the Grosses’ reported expenses were too high and required
additional documentation.3
The original confirmation hearing was held on July 27, 2017. We do
not know what transpired at the hearing because the parties to this appeal
have not provided us with a hearing transcript. We only know that the
hearing was held and was continued to September 28, 2017, as reflected on
the docket.4
Roughly a month after the July 2017 confirmation hearing, the
3 It is unclear whether the Grosses ever addressed the trustee’s concerns regarding the amount of the Grosses’ expenses. However, this concern was not raised at the last confirmation hearing. Nor is there anything in the record to indicate that this concern factored into the bankruptcy court’s decision to dismiss. 4 With the exception of the last confirmation hearing held on July 26, 2018, the same is true for all of the confirmation hearing dates referenced below. We do not know specifically what transpired at these hearings because the parties only provided us with one transcript: the transcript from the July 26, 2018 final confirmation hearing. We have searched the docket, and the imaged documents appended thereto, for additional information regarding what transpired at the other confirmation hearings to no avail. We can take judicial notice of the contents of the bankruptcy court’s docket. Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
5 Grosses filed a motion to avoid the junior liens of Ownit Mortgage
Solutions, Inc. and the IRS. The Grosses reasoned that the liens could be
avoided under § 506(d) because the liens were wholly unsecured. The
motion was set for hearing at the same time and place as the continued
confirmation hearing. On September 28, 2017, the hearings on both matters
were continued to November 30, 2017.
Shortly before the continued confirmation hearing, on November 13,
2017, the trustee filed another objection to the Grosses’ plan.
The new objection was similar to the trustee’s first objection. It raised
almost all of the same issues, except the trustee raised an additional
concern regarding incomplete schedules. The trustee noted that the Grosses
held title to a third vehicle, a 2013 Toyota Corolla, encumbered by a lien in
favor of Toyota Motor Credit Corp. As pointed out by the trustee, the
Grosses needed to amend their schedules to list both the vehicle and the
corresponding debt.
On November 28, 2017, the Grosses filed an amended motion to
avoid lien. The amended motion changed the name of the junior lienholder
from Ownit Mortgage Solutions, Inc. to the Bank of New York Mellon. The
amended motion also dropped the request for relief against the IRS. On
November 29, 2017, the Grosses objected to the IRS’s proof of claim. In their
claim objection, the Grosses argued that the IRS’s claim should be treated
as wholly unsecured because all of their property subject to the IRS lien
6 was either fully encumbered or exempt.
Also on November 29, 2017, the Grosses filed an amended Schedule
A/B. In it, the Grosses addressed the trustee’s concern regarding the
allegedly omitted vehicle. The Grosses maintained that they co-signed for
the vehicle so that they could purchase it for their son. According to the
Grosses, their son had possession and control of the vehicle and made all of
the payments. Based on these allegations, the Grosses asserted that they
had no interest in the vehicle.5
At the November 30, 2017 confirmation hearing, the bankruptcy
court continued the confirmation hearing to December 21, 2017, which was
the same date the IRS claim objection was set for hearing. Meanwhile, the
bankruptcy court vacated and reset the hearing on the first amended lien
avoidance motion for the same date. The court subsequently rescheduled
all of these hearings for January 25, 2018.
The day before the January 25, 2018 confirmation hearing, the
Grosses filed a declaration itemizing their sources of income and
identifying the amounts obtained from each source. The Grosses
presumably submitted this declaration to address the trustee’s concerns
regarding income sources raised in both of her plan objections.
At the January 25, 2018 hearing, the bankruptcy court granted the
5 The Grosses later filed an amended Schedule D to the same effect. But the Grosses did not file their amended Schedule D until March 21, 2018.
7 motion to avoid the lien of the Bank of New York Mellon, and continued
the IRS claim objection hearing and the confirmation hearing to March 22,
2018. The court entered the order avoiding the Bank of New York Mellon’s
lien on February 13, 2018. The order specified that, subject to the terms set
forth therein, the Bank of New York Mellon’s lien in the amount of
$174,361.12 was avoided, but that amount would be treated as an
unsecured claim to the extent allowed.
At the March 22, 2018 hearing, the bankruptcy court in large part
sustained the Grosses’ objection to the IRS’s secured claim, though the
docket reflects that the matter was continued to May 24, 2018. The court
also continued the confirmation hearing to May 24, 2018. On May 16, 2018,
the court entered its Order on Objections to Claims, which allowed the IRS
$2,500.00 as a secured claim and allowed the $133,156.71 balance of the
claim as unsecured. At the May 24, 2018 confirmation hearing, the court
once again continued the matter, this time to July 26, 2018.
In June 2018, the Grosses filed and served a first amended chapter 13
plan. The amended plan now provided for three priority unsecured claims,
as follows: (1) chapter 13 trustee’s fees, estimated in the amount of 11% of
all plan payments; (2) $2,000.00 in chapter 13 attorney’s fees; and (3) an IRS
priority claim in the amount of $2,626.18. The amended plan also provided
for the surrender of the 2013 Toyota Corolla. Otherwise, the amended plan
was similar to the original plan.
8 The amended plan contained a number of errors. For instance, it still
stated the Grosses’ intention to avoid the junior lien of Specialized Loan
Servicing, LLC, when in fact that lien already had been avoided.6 The
amended plan also misstated the date of the confirmation hearing. The
caption page of the amended plan erroneously listed the original
confirmation hearing date of July 27, 2017, instead of the pending
continued hearing date of July 26, 2018. The notice of the continued
confirmation hearing and the amended plan contained the same mistake.
At the July 26, 2018 confirmation hearing, the court pointed out the
mistake in the hearing notice regarding the date of the hearing. The court
also pointed out that the hearing notice listed the wrong courtroom
number. The trustee, through counsel, noted that the amended plan
reduced the percentage distribution to unsecured creditors (from 32% to
31%). According to the trustee, Mrs. Gross’s signature was also missing
from the amended plan. And the trustee stated that she still needed a
6 Additionally, the trustee’s November 2017 plan objection included an item regarding the amount of prepetition arrears on the Grosses’ senior mortgage debt. The trustee noted that the original plan provided for repayment of $29,000.00 in prepetition arrears, whereas the creditor’s proof of claim stated that $30,327.25 was in arrears prior to the bankruptcy filing. On appeal, the trustee pointed out in his responsive brief that the Grosses’ first amended plan also failed to address this discrepancy. The trustee contends that the Grosses’ failure to address this issue, of which the Grosses had months of advance notice, bolsters the court’s decision to dismiss. However, this issue was not raised at the final confirmation hearing. Nor is there anything else in the record to indicate that the bankruptcy court was aware of this lingering issue or considered it as part of its basis for dismissing the Grosses’ chapter 13 case.
9 complete copy of the Grosses’ 2017 tax return, as they had only “uploaded
just some schedules and extraneous documents, you know, like worksheets
and things like that. . . .”
After raising the above problems with confirmation, the trustee, for
the first time, claimed that the Grosses exceeded the debt limit for
eligibility for chapter 13. The trustee argued that when the IRS’s unsecured
claim and the stripped junior lien of the Bank of New York Mellon were
added to the preexisting amount of unsecured debt, the Grosses’ aggregate
unsecured debt totaled roughly $474,000.00, though she provided no
itemization for her calculation of unsecured debt. At the time the Grosses
filed their petition, § 109(e) limited chapter 13 eligibility to only those
debtors with unsecured debt of less than $394,725.00.
The Grosses had no advance notice of any of the trustee’s concerns.
None of them had been raised in the trustee’s two prior written objections
to the original plan. And the trustee did not file a written objection to the
amended plan. The Grosses were represented by appearance counsel at the
hearing, who was unable to adequately address any of these new issues. 7
7 By “appearance counsel” we mean someone other than the counsel the debtors retained to represent them in their case, who for a fixed fee agrees to represent the debtors solely for the purpose of a court appearance. See, e.g., In re Olson, Case No. 15-01580-TLM, 2016 WL 3453341, at *5 (Bankr. D. Idaho June 16, 2016); In re Dean, Case No. 12-12576-B-7, 2013 WL 3306418, at *3 (Bankr. E.D. Cal. June 28, 2013); In re Walker, 332 B.R. 820, 831 (Bankr. D. Nev. 2005). While appearance counsel often appear at “routine” hearings in bankruptcy cases without adverse results, they typically are ill- (continued...)
10 Appearance counsel did not specifically ask for a continuance of the
hearing or a chance for the Grosses to amend their plan. And he did not
argue that, as a factual matter, the trustee was wrong about the Grosses
exceeding the debt limit for chapter 13 eligibility. Instead, counsel
suggested that the regular counsel should be given the opportunity to brief
the debt limit issue. The bankruptcy court indicated that it disagreed with
the Grosses’s legal theory regarding the debt limit.
The court then announced its ruling, as follows:
All right. So at this stage we have a number of problems. We've had many confirmation hearings here. Given the debt limit issue and the fact that we still don't have a plan on file that I can go forward with, I'll give the Debtor's seven days to convert or the case will be dismissed.
Hr’g Tr. (July 26, 2018) at 3:4-9. The court made no other specific findings.
Nor did the court immediately enter a written order memorializing its oral
ruling from the hearing.
Instead of filing a request to convert the case to chapter 7, the Grosses
timely filed a motion seeking to alter the judgment or for relief from
judgment under Civil Rules 59 and 60 (made applicable in bankruptcy
7 (...continued) prepared to address any issues that arise at the hearing requiring an understanding of the history of their clients or their bankruptcy case. See, e.g., In re Brown, Case No. 6:16-BK-18361 MJ, 2017 WL 2869794, at *1 (Bankr. C.D. Cal. June 30, 2017); In re Garner, Case No. 10-20383-PB11, 2014 WL 5023224, at *2 (Bankr. S.D. Cal. Mar. 31, 2014).
11 cases, respectively, by Rules 9023 and 9024). 8 The Grosses principally
argued that the bankruptcy court had denied them due process. They
contended that they were not given an adequate or reasonable opportunity
to address the trustee’s objections, which were raised for the first time at
the July 26, 2018 confirmation hearing.
Among other things, the Grosses pointed out that, during the 14
months their case had been pending, they had duly paid to the trustee each
and every $2,500.00 monthly plan payment contemplated by their chapter
13 plan. They also claimed that, up to the time of the July 26, 2018
confirmation hearing, they had promptly responded to all issues and
concerns raised by the court and the trustee. They additionally noted that,
during the pendency of the case, they had avoided the Bank of New York
Mellon’s junior lien, had successfully objected to the IRS’s secured proof of
claim, and thereby had recast all but $2,500.00 of the IRS’s claims as
unsecured.
According to the Grosses, after their appearance counsel notified
them of the court’s ruling, they reviewed the case, corresponded with the
trustee, and realized that the trustee’s debt limit issue was factually
unfounded. The trustee had erroneously calculated the total unsecured
8 The Grosses did not specify which grounds for relief under Civil Rules 59 and 60 they particularly were relying on. Instead, they cited all of the grounds that typically and historically justify relief under these Rules.
12 debt to be roughly $474,000.00, when in fact the total unsecured debt
actually was much less. The Grosses explained that their original Schedule
E/F listed unsecured debt totaling $161,266.00. This amount of unsecured
debt included the $130,000.00 claim owed to the IRS. Therefore, the Grosses
reasoned, the trustee had double counted the IRS debt when she added an
additional $133,156.71 on behalf of the IRS to the Grosses’ total unsecured
debt on account of their successful claim objection. After avoiding the
second deed of trust against their residence, the trustee believed that the
Grosses were required to add Bank of New York Mellon’s $174,361.00
claim to their total unsecured debt.9 But even if Bank of New York Mellon’s
claim is added to the $161,266.00 in unsecured debt previously listed in
their Schedule E/F, the Grosses still only had a total of $335,627.00 of
unsecured debt, an amount well below the $394,725.00 debt limit imposed
by § 109(e).
The Grosses also noted that the trustee was simply wrong when she
9 The Grosses did not directly dispute in the bankruptcy court whether the unsecured debts resulting from the valuations of the challenged secured claims should be included within the calculation of their unsecured debt to establish eligibility under § 109(e). On appeal they note that based on their prior chapter 7 discharges, the in personam liability discharged in that bankruptcy is not counted in the subsequent chapter 13 case for purposes of determining eligibility under § 109(e). Free v. Malaier (In re Free), 542 B.R. 492, 497 (9th Cir. BAP 2015); see also Washington v. Real Time Resolution, Inc. (In re Washington), No. CC-18-1206, 2019 WL 345052 (9th Cir. BAP July 30, 2019). Because the trustee acknowledges that the Grosses qualify for chapter 13 under § 109(e), we need not address this issue further.
13 claimed that their signatures were missing from their first amended plan.
The trustee has conceded this point on appeal.
As for the missing 2017 tax return, the Grosses insisted they could
quickly and easily address this new issue and any other lingering plan
confirmation issues. With respect to the wrong hearing date and courtroom
number, the Grosses indicated that these errors were clerical mistakes
made by their counsel and that they should not suffer the harsh
consequences of dismissal as a result of their counsel’s inadvertent error.
Along with their motion for relief, the Grosses contemporaneously filed a
separate application asking the court to hear the motion for relief on an
expedited basis.
On August 3, 2018, the court entered an order denying the motion for
relief and dismissing the case. The order stated that the Grosses had not
demonstrated cause for relief from the court’s July 26, 2018 oral ruling. The
order further stated that, based on the record in the entire case and the
reasons set forth at the July 26, 2018 hearing, the case was dismissed and
the Grosses’ motion for relief and application for shortened-time
consideration were both denied.
The Grosses 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.
14 ISSUES
1. Did the bankruptcy court abuse its discretion when it dismissed the
Grosses’ chapter 13 case?
2. Did the bankruptcy court abuse its discretion when it denied the
Grosses’ motion under Civil Rules 59 and 60?
STANDARD OF REVIEW
We review the bankruptcy court’s chapter 13 case dismissal for an
abuse of discretion. Schlegel v. Billingslea (In re Schlegel), 526 B.R. 333, 338
(9th Cir. BAP 2015). We also review under the abuse of discretion standard
the bankruptcy court’s denial of motions under Civil Rule 59 and 60. First
Ave. W. Bldg., LLC v. James (In re Onecast Media, Inc.), 439 F.3d 558, 561 (9th
Cir. 2006).
A bankruptcy court abuses its discretion if it applies the wrong law
or its factual findings are illogical, implausible, or without support in the
record. In re Schlegel, 526 B.R. at 338 (citing TrafficSchool.com, Inc. v. Edriver
Inc., 653 F.3d 820, 832 (9th Cir. 2011)).
DISCUSSION
Under § 1307(c), the bankruptcy court may dismiss a chapter 13 case
for cause. The statute sets forth a non-exhaustive list of grounds that
constitute “cause” for dismissal or conversion, whichever is in the best
interests of the estate’s creditors. de la Salle v. U .S. Bank, N.A. (In re de la
15 Salle), 461 B.R. 593, 605 (9th Cir. BAP 2011).10 The bankruptcy court’s ruling
did not specify which enumerated ground under § 1307(c) the court was
relying on. Still, there are two enumerated grounds that arguably fit the
facts of this case: §§ 1307(c)(1) and (c)(5). We may affirm on any ground
supported by the record. See Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir.
2008). Therefore, we will address each of these grounds in turn.
A. Section 1307(c)(1).
“‘A debtor's unjustified failure to expeditiously accomplish any task
required either to propose or confirm a chapter 13 plan may constitute
cause for dismissal under § 1307(c)(1).’” In re de la Salle, 461 B.R. at 605
(quoting Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R.
904, 915 (9th Cir. BAP 2011)). In order to properly dismiss under
§ 1307(c)(1), the debtor’s delay must be both unreasonable and prejudicial
to creditors. Id. (citing § 1307(c)(1)).
The bankruptcy court obviously considered the Grosses’ delay in
confirming their plan to be unreasonable. As the bankruptcy court
reasoned, it already had continued the confirmation hearing a number
times, and there still was no confirmable plan on file. The court observed
10 The bankruptcy court did not consider whether dismissal or conversion was in the best interests of creditors as required by the statute. See Nelson v. Meyer (In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006). Nonetheless, this was harmless error because we must reverse in any event. We must ignore harmless error. Van Zandt v. Mbunda (In re Mbunda), 484 B.R. 344, 355 (9th Cir. BAP 2012).
16 that the first amended plan suffered from several problems raised at the
hearing. Most important of these was the chapter 13 eligibility problem
after the successful challenges to the secured claims of Bank of New York
Mellon and the IRS.
At the time of the Grosses’ chapter 13 filing, a debtor with $394,725.00
or more in total unsecured debt was ineligible to be a chapter 13 debtor. See
§ 109(e). As the Grosses later explained in their motion for relief from
judgment, the trustee erroneously concluded that the Grosses’ unsecured
debt exceeded this eligibility limit by inaccurately tallying up the Grosses’
debts. The trustee mistakenly double counted the debt owed to the IRS. The
trustee has conceded this point on appeal. The trustee also has conceded
that she was mistaken about the missing signature of Mrs. Gross.
This left only the copy of the 2017 tax return and the noticing errors
as a basis for the court’s conclusion that the plan could not be confirmed at
the last confirmation hearing. On this record, more is required to show that
the delay associated with the noticing defects was “unreasonable” within
the meaning of § 1307(c)(1). In the context of this statute, “unreasonable
delay” is a term of art. Generally speaking, it should be viewed as a
determination of ultimate fact encompassing an equitable assessment of all
relevant circumstances, akin to the “excusable neglect” standard under
Rule 9006(b)(1) and Civil Rule 60(b)(1), as articulated in Pioneer Inv. Servs.
Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 391–96 (1993). Another
17 example would be the “bad faith” standard as applied in the chapter 13
dismissal context. See In re Ellsworth, 455 B.R. at 917-18 (citing Goeb v. Heid
(In re Goeb), 675 F.2d 1386, 1390–91 (9th Cir. 1982)).
We do not mean to suggest that the unreasonable delay inquiry
always will require an exhaustive analysis of all of the circumstances
surrounding a case. Often, it is apparent from the record that giving the
chapter 13 debtors further leeway would be futile. They may demonstrate
over time that they are unwilling or unable to propose a feasible chapter 13
plan, or they may fail to address plan defects pointed out by the court and
the trustee at prior confirmation hearings. See, e.g., In re de la Salle, 461 B.R.
at 596-99, 605 (court gave debtors detailed instructions after denial of
second amended plan but debtors did nothing); see also Villalon v. Burchard
(In re Villalon), BAP No. NC-14-1414-KiTaD, 2015 WL 3377854, at *1-3 (9th
Cir. BAP May 22, 2015) (debtor unable to cure even a small fraction of her
large delinquency in plan payments though court gave her repeated
opportunities to do so); Phillips v. Leavitt (In re Phillips), BAP No.
NV-14-1359-JuKuD, 2015 WL 2180321, at *1-2 (9th Cir. BAP May 8, 2015)
(debtor unable to propose a feasible plan over seven attempts).
Alternately, we also have upheld findings of unreasonable delay
when associated with bad faith – such as an apparent disregard by the
debtors of the need to promptly and accurately discharge their chapter 13
duties. These cases often involve debtors who filed their chapter 13
18 petitions not with the legitimate intent to pay back their creditors, but
rather with the intent of obstructing one or more of their creditors from
enforcing their debts. See, e.g., In re de la Salle, 461 B.R. at 606 (debtors
enjoyed the protection of the automatic stay, made zero payments to their
secured creditor, and refused to propose a plan providing for its claim,
instead focusing on their spurious noteholder standing litigation); In re
Ellsworth, 455 B.R. at 920 (numerous indica of bad faith, including
suspicious timing of petition filing and apparent intent of debtor to defeat
collection of a single disputed judgment debt); see also Beckner v. Rojas (In re
Beckner), BAP No. CC–16–1142–TaLN, 2017 WL 460967, at *1-4 (9th Cir.
BAP Feb. 2, 2017) (debtor focused exclusively on her dispute with her
secured creditors and ignored her duty to propose a confirmable chapter 13
plan providing for them); Burris v. Curry (In re Burris), BAP No.
CC–14–1552–TaKuD, 2015 WL 5922036, at *1-2 (9th Cir. BAP Oct. 9, 2015)
(same).
In addition to futility or bad faith, our decisions upholding dismissals
under § 1307(c)(1) also often reflect a debtor’s defiance of the court’s orders
and directives and the dictates of chapter 13 of the Code. See, e.g., In re de la
Salle, 461 B.R. at 605 (“Given the passage of time and debtors' repeated
failure to provide for the claim secured by their residence in their plan, the
bankruptcy court correctly concluded that conversion of debtors' case was
warranted on account of the resultant delay and prejudice.”); In re
19 Ellsworth, 455 B.R. at 915 (“the Ellsworths did not take seriously the court's
admonitions regarding the need for their numbers to be accurate.”).
This is not to say that § 1307(c)(1) dismissals and conversions always
require proof of futility, bad faith, or defiance of the bankruptcy court, the
Code, or the Rules. We are saying only that when one or more of these
factors is evident in the chapter 13 debtors’ conduct, the bankruptcy court
need not conduct an exhaustive analysis of all of the relevant
circumstances.
Notably, the bankruptcy court here made no findings that any of
these critical factors were present. Nor is there anything in the record
indicating futility, bad faith, or defiance. To the contrary, we are confronted
here with a debtor whose plan at the time of the last confirmation hearing
suffered from only two known and valid flaws: defective notice and a
missing copy of their most recent tax return.11 There is nothing in the
11 It would violate the Grosses’ due process rights to consider the alleged eligibility problem and the alleged signature problem without any notice. The trustee raised these problems for the first time at the last confirmation hearing. In the Grosses’ motion under Civil Rules 59 and 60, once they were given a reasonable opportunity to understand the trustee’s calculations and consider the alleged problems, they were able to establish definitively that neither of these problems actually existed. The trustee has admitted on appeal that she was mistaken about these problems, and yet the court relied on them, in large part, in dismissing the Grosses’ chapter 13 case. In its order denying the Grosses’ motion for relief from judgment, the court did not explain why the inaccuracy of the trustee’s assertions was unimportant. Under these circumstances, the alleged eligibility and signature problems do not fairly support the bankruptcy court’s decision to dismiss the Grosses’ bankruptcy case.
20 record to suggest that the defective notice or the missing copy of the tax
return were the result of bad faith or some act of defiance. And there is no
serious dispute that the Grosses could have quickly remedied these
problems. On this record, it was error to rely on these problems to dismiss.
Contrary to the bankruptcy court’s determination, the record
indicates that the Grosses were serious about confirming their chapter 13
plan and delivering a significant dividend to their unsecured creditors.
Above all, they had paid to the trustee $2,500.00 per month for each of the
fourteen months their plan was pending. Additionally, they promptly
identified challenges to the secured claims of both Bank of New York
Mellon and the IRS and moved to recast those debts as unsecured claims.
Such activity often delays confirmation of a chapter 13 plan but is not
"unreasonable delay"absent other circumstances not identified in this case.
In sum, there is no finding, and no evidence, of futility, bad faith or
defiance of the bankruptcy court, the Code, or the Rules that would
support the bankruptcy court's implicit determination of unreasonable
delay. Furthermore, as a whole, the Grosses appeared dedicated to their
good faith rehabilitation efforts. While there is evidence of delay, there is
nothing in the record demonstrating that they caused the delay or that their
conduct was unreasonable within the meaning of § 1307(c)(1).
In any event, even if we were to accept that the unreasonableness
element for § 1307(c)(1) was met, the bankruptcy court made no finding of
21 delay prejudicial to the Grosses’ creditors. Nor is there anything in the facts
of this case demonstrating such prejudice. The noticing defect the
bankruptcy court relied on in dismissing the case easily and quickly could
have been rectified if the debtors had been given the opportunity to
re-notice the confirmation hearing. Furthermore, during the entirety of the
case, no creditors had expressed any interest in challenging confirmation of
the Grosses’ plan. Nor was there any legitimate reason to think creditors
would have done so if the first amended plan were re-noticed for hearing.
Indeed, for the vast majority of creditors, the first amended plan did not
treat them much differently than they were treated under the original plan.
We understand that, at the time of the final confirmation hearing, the
court was frustrated with the pace of the Grosses’ progress towards
confirmation. At bottom, however, the interest of the Grosses’ creditors in
the reasonable prospect of partial repayment is paramount. The Code and
§ 1307(c)(1) recognize the primacy of this interest, which is embodied in the
statutory provisions governing chapter 13. And, here, the record indicates
that the creditor goal of repayment was well within reach.
Given what devolves into minor procedural mistakes, it is hard to
fathom how dismissal was not dramatically more prejudicial to unsecured
creditors than an additional continuance. Under these circumstances, the
bankruptcy court’s decision to dismiss the Grosses’ bankruptcy case cannot
be justified under § 1307(c)(1).
22 B. Section 1307(c)(5).
Under § 1307(c)(5), a chapter 13 case may be dismissed or converted
when confirmation of the plan is denied under § 1325 and the court also
denies a request for additional time to file another plan or a plan
modification. In re Ellsworth, 455 B.R. at 917 (citing In re Nelson, 343 B.R. at
676 & n.9) (emphasis added). To apply this provision, both types of denial
typically are required (i.e., both denial of plan confirmation and denial of a
request for an opportunity to file another plan). Id.
In re Nelson described the purpose underlying the second of these
requirements:
The policy underlying the second element of § 1307(c)(5) relating to a request for time to try again is that chapter 13 plan confirmation is an iterative process. A debtor who wishes to submit to the rigors of living for a number of years in the straightjacket of a plan that represents one’s “best efforts” to pay creditors should, in principle, be permitted the latitude to correct perceived deficiencies in proposed plans.
In re Nelson, 343 B.R. at 676. Nelson’s observation as to the iterative process
is even more relevant where, as here, the debtors have a significant track
record of making substantial plan payments.
Thus, the bankruptcy court could not have properly applied
§ 1307(c)(5) unless debtor was given a reasonable opportunity to correct or
explain the trustee’s perceived deficiencies. The bankruptcy court gave the
Grosses no such opportunity. The court simply noted the deficiencies,
23 noted the numerous times the confirmation hearing had been continued
and concluded that dismissal of the case was appropriate, arguably sua
sponte. When the Grosses, in their reconsideration motion, attempted to
bring to the attention of the bankruptcy court why the trustee was wrong
regarding their chapter 13 eligibility and regarding the missing signature,
the court denied the motion without any explanation – other than to say
that the Grosses had not established cause for reconsideration.
Under these circumstances, § 1307(c)(5) does not support the court’s
decision to dismiss. See id.; see also Penland v. Rakozy (In re Penland), BAP
No. ID-05-1467-HKMa, 2006 WL 6811002 at *4-5 (9th Cir. BAP Aug. 17,
2006) (citing In re Nelson and holding that chapter 13 debtors typically must
be given an additional chance to confirm a chapter 13 plan after denial of
plan confirmation before the bankruptcy court can invoke § 1307(c)(5) as a
ground for dismissal). The Grosses were not given a meaningful
opportunity to address the points raised for the first time by the trustee at
the last confirmation hearing, so we cannot uphold the bankruptcy court’s
decision to dismiss the Grosses’ bankruptcy case under § 1307(c)(5).
C. Unenumerated “Cause” For Dismissal.
While the bankruptcy court could have, in theory, fashioned its own
cause for dismissal, it presumably would have articulated the specifics of
that cause to make clear its intent. See generally Keith M. Lundin & William
H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 334.1, at ¶ [1] (2004)
24 (collecting cases). It did not. We are reluctant to consider whether the court
meant to fashion its own cause for dismissal in the absence of some clear
signal from the bankruptcy court.
Even so, there are no findings or evidence here that would support a
finding of unenumerated cause for dismissal. This is particularly true here,
where the court appears to have primarily relied on an incorrect calculation
of the Grosses’ unsecured debt and relatively minor procedural defects, of
which the Grosses were not given prior notice. The court apparently was
frustrated with the amount of time it was taking the Grosses to confirm a
chapter 13 plan. But Congress made clear that delay only constitutes cause
for dismissal when it is both unreasonable within the meaning of
§ 1307(c)(1) and prejudicial to creditors.
Whatever powers the bankruptcy court had to fashion its own cause
for dismissal, that power doubtlessly did not give the court authority to
dismiss for a type of delay different than that contemplated by Congress in
chapter 13 of the Code. Bankruptcy judges must work within the confines
of the Code and may not exercise their general and equitable powers in a
manner inconsistent with the Code’s express provisions. Marrama v.
Citizens Bank of Massachusetts, 549 U.S. 365, 382 (2007) (citing Norwest Bank
Worthington v. Ahlers, 485 U.S. 197, 206 (1988)).
Accordingly, we cannot uphold the bankruptcy court’s decision to
dismiss the Grosses’ bankruptcy case based on some unenumerated theory
25 of “cause” for dismissal. In light of the fact that none of § 1307(c)’s
enumerated grounds applied here, and given the absence of a valid
unenumerated theory of cause to dismiss, we cannot uphold the
bankruptcy court’s dismissal of the Grosses’ chapter 13 case.12
CONCLUSION
For the reasons set forth above, we REVERSE the bankruptcy court’s
dismissal of the Grosses’ chapter 13 case.
12 Because we have concluded that the bankruptcy court’s dismissal order must be reversed, we decline to consider its order denying the Grosses’ motion under Civil Rules 59 and 60.