FILED OCT 26 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. SC-14-1388-JuKlPa ) 6 JASON SCOTT BROWN, ) Bk. No. 13-11913 ) 7 Debtor. ) ______________________________) 8 ) JASON SCOTT BROWN, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M* 11 ) THOMAS H. BILLINGSLEA, JR., ) 12 Chapter 13 Trustee, ) ) 13 Appellee. ) ______________________________) 14 Submitted Without Oral Argument 15 on July 23, 2015** 16 Filed - October 26, 2015 17 Appeal from the United States Bankruptcy Court for the Southern District of California 18 Honorable Margaret M. Mann, Bankruptcy Judge, Presiding 19 _________________________ 20 Appearances: Michael G. Doan of Doan Law Firm on brief for appellant; Todd Headden on brief for appellee. 21 ______________________________ 22 * 23 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 24 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8024-1. 25 ** 26 The parties to this appeal filed a motion and stipulation for submission of the appeal on the briefs. By order entered on 27 May 13, 2015, the Panel determined that oral argument was not needed and that this appeal is suitable for submission on the 28 briefs and record without oral argument pursuant to Rule 8012.
-1- 1 Before: JURY, KLEIN,*** and PAPPAS, Bankruptcy Judges. 2 3 Debtor Jason Scott Brown (Debtor) appeals from the 4 bankruptcy court’s order converting his chapter 131 case to one 5 under chapter 7. We AFFIRM. 6 I. FACTS 7 On July 20, 2012, Debtor’s father died intestate. On 8 June 13, 2013, probate was initiated. Debtor was the personal 9 representative of the probate estate. In this capacity, Debtor 10 filed documents in the state court probate proceedings which 11 stated that his three brothers each assigned and abandoned to 12 him their beneficial interests in the father’s estate. Debtor 13 also arranged to sell his father’s home which was the only 14 significant asset owned by the probate estate. The sale of the 15 home closed on December 16, 2013, and generated net proceeds of 16 $65,812. 17 Three days before the closing, on December 13, 2013, Debtor 18 filed a bare bones chapter 13 petition. Thomas H. Billingslea 19 was appointed the chapter 13 trustee (Trustee). Eleven days 20 later, Debtor filed his schedules and chapter 13 plan which 21 proposed $520 monthly payments over thirty-six months. The plan 22 23 *** Hon. Christopher M. Klein, Chief United States Bankruptcy 24 Judge for the Eastern District of California, sitting by designation. 25 1 26 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure and “Civil Rule” references are to the Federal Rules of 28 Civil Procedure.
-2- 1 paid three secured creditors in full and proposed a 0% dividend 2 for unsecured creditors. 3 In Schedule B, Debtor listed an anticipated inheritance of 4 $2,500 which he claimed fully exempt in Schedule C. In 5 Schedule F, Debtor listed unsecured claims in the amount of 6 $33,499. At the time Debtor filed his petition he was 7 unemployed and collecting social security. Debtor indicated 8 that he was renting garage space to run an automotive repair 9 business and expected his income to increase within the next 10 year. 11 At the § 341(a) meeting, Debtor’s counsel and Trustee’s 12 counsel signed a pre-confirmation modification to the chapter 13 13 plan (PCM). The PCM resolved Trustee’s objection to the length 14 of the plan by requiring Debtor to turn over $3,224 in probate 15 proceeds within forty-five days of receipt because the plan 16 needed to pay a car creditor more funds. 17 On April 11, 2014, the probate estate closed and Debtor 18 distributed to himself $55,487.97 as the sole beneficiary of his 19 father’s estate. Debtor did not amend his schedules at this 20 time to include the increased inheritance or claim any further 21 exemption in the amount received. 22 In late April, Trustee objected to Debtor’s plan and moved 23 to dismiss his case. Trustee argued that since Debtor’s plan 24 did not make the non-exempt portion of the inheritance proceeds 25 available to pay creditors it failed the best interest of 26 creditors test under § 1325(a)(4). Trustee further asserted 27 that any confirmation order should be contingent upon Debtor’s 28 forwarding a check to Trustee’s lockbox account in the amount of
-3- 1 $37,569 and a PCM increasing the pro-rata pot for payment to the 2 general unsecured creditors to $34,563. 3 Attached to Trustee’s objection was the petition for final 4 distribution from the probate estate. This document showed that 5 Debtor’s brothers each filed assignments of their beneficial 6 interests in the inheritance to Debtor with the probate court on 7 August 7, 2013, and that $55,487.97 was available for 8 distribution. 9 On May 9, 2014, Debtor’s counsel resigned from the Doan Law 10 Firm and a new attorney was assigned to his bankruptcy case. 11 On the same day, Debtor filed a response to Trustee’s 12 objection. Debtor asserted that his equitable share of his 13 father’s estate was $12,372 and fully exempt. Thus, according 14 to Debtor, his plan did not need to be modified. In the 15 attached declaration, Debtor stated that he and his three 16 brothers were each entitled to 25% of the inheritance. Debtor 17 requested the bankruptcy court to confirm his plan as proposed 18 or, in the alternative, allow him additional time to negotiate 19 an alternative plan. 20 On May 20, 2014, Trustee filed a status report noting that 21 Debtor was the sole beneficiary of his father’s estate because 22 his siblings assigned their interest to him. Despite this 23 assignment, Debtor now asserted a contrary position — that his 24 three brothers “would receive their fair share.” In light of 25 this development, Trustee requested the bankruptcy court to 26 refrain from granting any request for voluntary dismissal 27 without a hearing to allow Trustee to consider conversion. 28 The bankruptcy court held an initial hearing on Trustee’s
-4- 1 objection to Debtor’s plan on May 27, 2014. The matter was 2 continued to July 8, 2014, to allow the parties to present 3 additional evidence regarding distribution of the father’s 4 estate. 5 Trustee subsequently filed an amended objection to Debtor’s 6 plan and sought conversion to chapter 7 instead of dismissal. 7 Trustee maintained that conversion was appropriate because 8 Debtor failed to disclose his inheritance which was an abuse of 9 the bankruptcy system under the holding in Rosson v. Fitzgerald 10 (In re Rosson), 545 F.3d 764, 767 (9th Cir. 2008). Trustee also 11 renewed his request that Debtor turn over the non-exempt portion 12 of the funds and provide a PCM increasing the pro-rata to 13 unsecured creditors to $34,563 so that the plan complied with 14 the best interest of creditors test. If Debtor refused to 15 comply, Trustee requested the court to convert the case to 16 chapter 7 for a panel trustee to seek turnover of the funds and 17 request any other remedies available to the trustee. Attached 18 to the amended objection were Debtor’s brothers’ assignments of 19 their beneficial interest in the inheritance to Debtor and a 20 document showing Debtor had received $55,487.97 from the probate 21 estate on April 1, 2014. 22 On June 17, 2014, Debtor’s counsel filed a status report 23 advising the court that Debtor had misunderstood that the 24 inheritance funds were property of his estate and that he could 25 propose a 100% plan once he objected to a certain creditor’s 26 claim. 27 Trustee later filed a status report stating that Debtor 28 appeared to acknowledge that the inherited property was part of
-5- 1 the bankruptcy estate and that the unsecured creditors should be 2 provided a substantial pro-rata payment. Trustee also stated 3 that Debtor’s counsel indicated that he needed additional time 4 to present a confirmable and feasible plan which provided the 5 necessary pro-rata payments. 6 In a June 26, 2014 amended status report, Trustee again 7 expressed his concern that while Debtor was trying to formulate 8 a confirmable plan, the liquid assets of his estate would 9 continue to diminish. Trustee requested Debtor to deposit the 10 remaining funds in his counsel’s client trust account, provide a 11 declaration concerning the transfers to his brothers, and 12 provide bank statements and cancelled checks. If Debtor failed 13 to deposit $37,569 into his counsel’s client trust account by 14 the hearing, Trustee requested immediate conversion to 15 chapter 7. 16 At the July 8, 2014 continued hearing on Trustee’s 17 objection to confirmation of Debtor’s plan, without being sworn 18 in, Debtor explained to the court that his share of the 19 inheritance went into his business and the balance was paid in 20 cash to two brothers and by check to a third brother. The 21 bankruptcy court did not make any findings of bad faith at that 22 hearing, stating that it would require an adversary proceeding 23 or an evidentiary proceeding to decide whether Debtor acted in 24 bad faith. Nonetheless, the court opined that since the only 25 apparent source of assets to pay creditors had been dissipated, 26 Debtor’s pursuit of the chapter 13 plan could not be in good 27 faith. The bankruptcy court also found that cause existed for 28 conversion because a chapter 7 trustee would be better suited to
-6- 1 investigate Debtor’s transfers to his brothers and bring any 2 fraudulent transfer claims. 3 Debtor’s counsel represented to the court that he had been 4 unable to provide an accounting since several of the transfers 5 were to Debtor’s brothers in cash. Further, when the bankruptcy 6 court indicated that it would convert the case, Debtor’s counsel 7 asserted Debtor’s right under § 1307(b) to dismiss his case. 8 The bankruptcy court then ordered conversion of the case, 9 finding there was an abuse of the bankruptcy process, relying on 10 In re Rosson. When Debtor’s counsel requested an opportunity to 11 distinguish Rosson, the court stated: “You have that 12 opportunity. You may object to the order in the ordinary 13 course.” 14 On July 25, 2014, the bankruptcy court entered the order 15 converting Debtor’s chapter 13 case to chapter 7 under § 1307(c) 16 for cause. The order provided in part: 17 After inquiry by the Court regarding Debtor’s inheritance of $55,487.97; the Court finds Debtor's 18 actions constituted an abuse of the bankruptcy system and were not filed in good faith. 19 The Court grants the Trustee’s motion to convert to 20 chapter 7 under section 1307(c) for cause for the following reasons: 21 1) Debtor’s proposed plan (Docket # 11) as modified by 22 Pre-Confirmation Modification form (Docket # 24) provides a 0% dividend to the general unsecured 23 creditors; 24 2) Debtor has provided no evidence indicating that a modified plan is feasible; 25 3) Debtor ignored the entered Pre-Confirmation 26 Modification form (Docket #24) whereby Debtor would turnover $3,224 within 45 days of receipt of the 27 inheritance and thus is in default on his plan payments; 28
-7- 1 4) Despite knowledge to the contrary, Debtor did not correct inaccurate schedules; and, 2 5) Debtor intentionally spent money of the estate and 3 transferred the funds to relatives. As such, an independent party is needed to evaluate whether the 4 estate should bring fraudulent conveyance actions [against] these parties. 5 6) The Court finds that the “best interest of the 6 creditors” is served by conversion to chapter 7. 7 Debtor filed an amendment to his schedules on August 8, 8 2014, updating the value of the inheritance and claiming his 9 exemption. 10 On August 11, 2014, Debtor filed a notice of appeal from 11 the bankruptcy court’s order converting his case. 12 On the same day, Debtor filed a motion for reconsideration, 13 the substance of which was that § 1307(c) required both a 14 finding of cause and that conversion be in the best interest of 15 the creditors and the estate. Debtor maintained that the 16 bankruptcy court’s findings at the initial conversion hearing 17 did not expressly state any of the grounds set forth in 18 § 1307(c) for cause. Debtor also argued that since most of the 19 inheritance was transferred pre-conversion, the inheritance was 20 no longer part of the estate under § 348(f)(1)(A). 21 After a hearing on the matter, the bankruptcy court 22 supplemented its previous findings of fact and conclusions of 23 law in a memorandum decision denying Debtor’s motion for 24 reconsideration.2 The court found that the undisputed facts 25 2 26 In essence, Debtor’s motion was a request for clarification and reconsideration. Under Civil Rule 52(b), 27 incorporated by Rule 7052, the bankruptcy court had discretion to amend its findings - or make additional findings - and amend the 28 (continued...)
-8- 1 demonstrated three separate statutory grounds for conversion 2 under § 1307(c). That section provides in relevant part: 3 (c) Except as provided in subsection (f) of this section, on request of a party in interest or the 4 United States trustee and after notice and a hearing, the court may convert a case under this chapter to a 5 case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best 6 interests of creditors and the estate, for cause, including-- 7 (1) unreasonable delay by the debtor that is 8 prejudicial to creditors; 9 . . . . 10 (4) failure to commence making timely payments under section 1326 of this title; 11 . . . . 12 (5) denial of confirmation of a plan under 13 section 1325 of this title and denial of a request made for additional time for filing another plan or a 14 modification of a plan; . . . . 15 First, the bankruptcy court determined that its findings at 16 the prior conversion hearing supported a determination of cause 17 under § 1307(c)(4); i.e., Debtor’s failure to turn over the one 18 time plan payment of $3,224 within 45 days of receipt of the 19 inheritance as required under the PCM. Instead, the court 20 observed that Debtor spent the money, could not account for it, 21 and blamed his counsel. 22 Next, the bankruptcy court found cause for conversion under 23 § 1307(c)(5). The court noted that at the July 8, 2014 hearing, 24 it denied confirmation of Debtor’s plan and denied Debtor’s 25 request to modify the plan to render it a 100% plan. The 26 27 2 (...continued) 28 conversion order accordingly.
-9- 1 bankruptcy court found the undisputed evidence showed that 2 Debtor could not fund a 100% plan since he transferred the 3 inheritance funds and he otherwise lacked cash flow to fund a 4 100% plan. In that regard, the court pointed out that Debtor’s 5 amended schedules filed after conversion reflected that his net 6 monthly income from his business at the time of conversion was 7 $2,052.17. According to the court, this was insufficient to 8 cover his previous living expenses of $2,266 set forth in his 9 original Schedule J. 10 Finally, the bankruptcy court found cause existed under 11 § 1307(c)(1) due to Debtor’s delay in confirming a plan that had 12 been prejudicial to creditors. The court observed that Debtor’s 13 case had been pending for seven months, during which time Debtor 14 received funds belonging to the estate of $55,487.97, an amount 15 sufficient to pay his creditors in full. Yet, during a three 16 month period, Debtor may have spent all of the money despite 17 Trustee’s pending claims to it and has never accounted for it. 18 The court found that the loss of the money was clear prejudice. 19 The bankruptcy court then concluded it did not need to 20 reconsider its finding that conversion was in the best interests 21 of creditors. The court simply noted that conversion would 22 result in the appointment of a chapter 7 trustee who would have 23 standing to assert avoiding powers against Debtor and his 24 brothers. The court also rejected Debtor’s argument that 25 conversion would not be in the best interests of creditors since 26 the inheritance was already spent. According to the bankruptcy 27 court, this premise did not apply when Debtor acted in bad 28 faith.
-10- 1 The bankruptcy court also considered the test for bad faith 2 set forth in Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 3 1129 n.45 (9th Cir. 2013) (citing Leavitt v. Soto 4 (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999)): 5 1. whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy 6 Code, or otherwise filed his petition or plan in an inequitable manner; 7 2. the debtor’s history of filings and dismissals; 8 3. whether the debtor only intended to defeat state 9 court litigation; and 10 4. the presence of egregious behavior. 11 The court found factors 1 and 4 were amply supported by the 12 evidence and that the other two factors were not applicable. 13 As to factor one, the bankruptcy court found that whether 14 Debtor was misguided or not, he intentionally spent the 15 inheritance rather than pay his creditors despite Trustee’s 16 demands and Debtor was less than candid in his bankruptcy 17 disclosures in pursuing this aim. The court found the facts 18 similar to those in Rosson in that substantial property of the 19 estate was gone because Debtor ignored Trustee’s demands for the 20 inheritance and Debtor failed to provide an accounting. 21 The bankruptcy court also explained that ample evidence of 22 concealments supported its finding that Debtor intentionally 23 abused the bankruptcy system: (1) Debtor made inaccurate 24 statements that his inheritance was only worth $2,500, when he 25 had arranged the sale of property that generated $65,812 in 26 proceeds, and he had possession of this money before his 27 schedules were filed; (2) Debtor proposed a 0% plan when the 28 funds he now admits he was entitled to receive would have paid
-11- 1 his creditors in full; (3) his claim that his brothers were 2 entitled to 75% of the inheritance was inconsistent when the 3 evidence showed Debtor had filed the brothers’ waivers with the 4 probate court, and these waivers were the reason Debtor alone, 5 not his brothers, received the probate estate net funds. Debtor 6 never explained why he filed these waivers himself, if he always 7 intended to respect his parents’ will; (4) Debtor never provided 8 an accounting of the funds that he had given his brothers and 9 was evasive when the court asked him about these gifts; and 10 (5) although Debtor blamed his counsel for his misguided 11 actions, Debtor alone was responsible for his conduct and acted 12 intentionally, particularly since there was no evidence showing 13 counsel’s knowledge that Debtor was holding over $65,000 in 14 inheritance when Debtor had scheduled the inheritance at $2,500. 15 In the end, the court denied Debtor’s motion for reconsideration 16 by an order entered September 23, 2014. 17 II. JURISDICTION 18 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 19 §§ 1334 and 157(b)(2)(A) and (O).3 We have jurisdiction under 20 28 U.S.C. § 158.4 21 3 22 The bankruptcy court correctly concluded that it had jurisdiction over Debtor’s motion for clarification and 23 reconsideration despite the fact Debtor had filed a premature notice of appeal. Under Rule 8002(b), the notice of appeal 24 became effective with entry of the bankruptcy court’s order which resolved the motion for reconsideration. 25 4 26 Debtor did not amend his notice of appeal to include the order denying his motion for reconsideration. Nonetheless, we 27 conclude that his notice of appeal incorporates the bankruptcy court’s supplemental findings of fact and conclusions of law 28 (continued...)
-12- 1 III. ISSUE 2 Did the bankruptcy court abuse its discretion in converting 3 Debtor’s chapter 13 case to chapter 7? 4 IV. STANDARDS OF REVIEW 5 We review an order regarding conversion of a case for abuse 6 of discretion. In re Rosson, 545 F.3d at 771; Levesque v. 7 Shapiro (In re Levesque), 473 B.R. 331, 336 (9th Cir. BAP 2012). 8 We apply a two-part test to determine whether the 9 bankruptcy court abused its discretion. United States v. 10 Hinkson, 585 F.3d 1247, 1261–62 (9th Cir.2009) (en banc). 11 First, we “determine de novo whether the [bankruptcy] court 12 identified the correct legal rule to apply to the relief 13 requested.” Id. Second, we examine the bankruptcy court’s 14 factual findings for clear error. Id. at 1262 and n. 20. We 15 must affirm the bankruptcy court’s factual findings unless we 16 determine that those findings are “(1) ‘illogical,’ 17 (2) ‘implausible,’ or (3) without ‘support in inferences that 18 may be drawn from the facts in the record.’” Id. 19 Bad faith is a factual finding reviewed for clear error. 20 Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 21 455 B.R. 904, 914 (9th Cir. BAP 2011). 22 23 4 (...continued) 24 which clarified or amended its previous findings on the underlying conversion order. Further, Trustee had notice of the 25 issues on appeal and an opportunity to brief the issues that 26 arise out of both the underlying conversion order and the order denying reconsideration. Accordingly, we discern no prejudice 27 from Debtor’s failure to amend his notice of appeal. See United States v. Arkison (In re Cascade Rds., Inc.), 34 F.3d 756, 761- 28 762 n.5 (9th Cir. 1994).
-13- 1 V. DISCUSSION 2 A. Legal Standards: Conversion for “Cause” 3 On request of a party in interest and after notice and a 4 hearing, the bankruptcy court may convert a chapter 13 case to 5 chapter 7, or may dismiss a case, whichever is in the best 6 interests of creditors and the estate, for cause. § 1307(c). 7 Section 1307(c) sets forth a non-exclusive list of factors which 8 constitute “cause” for conversion or dismissal including 9 unreasonable delay by the debtor that is prejudicial to creditors 10 (§ 1307(c)(1)); failure to commence making timely payments under 11 § 1326 (§ 1307(c)(4)); and denial of confirmation of a plan under 12 § 1325 and denial of a request made for additional time for 13 filing another plan or a modification of a plan (§ 1307(c)(5)). 14 Section 1307(c) establishes a two-step analysis for dealing 15 with questions of conversion and dismissal. “First, it must be 16 determined that there is ‘cause’ to act. Second, once a 17 determination of ‘cause’ has been made, a choice must be made 18 between conversion and dismissal based on the ‘best interests of 19 the creditors and the estate.’” Nelson v. Meyer (In re Nelson), 20 343 B.R. 671, 675 (9th Cir. BAP 2006). 21 In addition to the non-exclusive statutory list of factors 22 under § 1307(c), the filing of a chapter 13 case in bad faith may 23 constitute cause for conversion. See In re Leavitt, 171 F.3d at 24 1224 (citing Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th 25 Cir. 1994) (discussing bad faith in the context of chapter 13 26 case dismissal)). In determining whether cause exists based on a 27 bad faith filing, the bankruptcy court must assess the totality 28 of the circumstances. In re Eisen, 14 F.3d at 470. This
-14- 1 assessment includes consideration of the following four factors: 2 1. whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy 3 Code, or otherwise filed his petition or plan in an inequitable manner; 4 2. the debtor's history of filings and dismissals; 5 3. whether the debtor only intended to defeat state 6 court litigation; and 7 4. the presence of egregious behavior. 8 In re Welsh, 711 F.3d at 1129 n.45. “The bankruptcy court is not 9 required to find that each factor is satisfied or even to weigh 10 each factor equally.” Khan v. Curry (In re Khan), 523 B.R. 175, 11 185 (9th Cir. BAP 2014) (citing Meyer v. Lepe (In re Lepe), 12 470 B.R. 851, 863 (9th Cir. BAP 2012)(in the context of a good 13 faith determination at plan confirmation, the Panel noted that 14 two of the Leavitt factors were inapplicable to the case on 15 appeal)). Rather, “[t]he . . . factors are simply tools that the 16 bankruptcy court employs in considering the totality of the 17 circumstances.” In re Khan, 523 B.R. at 185. 18 So long as the bankruptcy court applied these legal 19 standards to the facts, it was for the bankruptcy court, as the 20 trier of fact, to determine whether there was “cause” for 21 conversion based on either § 1307(c) or bad faith grounds and to 22 determine whether conversion was in the best interest of 23 creditors and the estate. 24 B. “Cause” For Conversion Under § 1307(c) 25 1. Section 1307(c)(1) 26 Under § 1307(c)(1), the bankruptcy court may convert a 27 chapter 13 case to one under chapter 7 “. . . . for cause, 28 including . . . (1) unreasonable delay by the debtor that is
-15- 1 prejudicial to creditors.” Debtor argues that this provision 2 does not apply because first, there was no unreasonable delay 3 that was prejudicial to creditors when he was current on plan 4 payments the entire time and second, a PCM could have been 5 entered at the July 8, 2014 hearing allowing a 100% plan and 6 immediate disbursal to creditors. 7 We are not convinced. The bankruptcy court’s conclusion 8 that there was unreasonable delay which was prejudicial to 9 creditors was adequately supported by inferences drawn from the 10 facts presented at the underlying hearings. The record shows 11 Debtor’s case was pending for seven months during which time he 12 received funds of $55,487.97. The non-exempt portion of those 13 funds was sufficient to pay his unsecured creditors in full. 14 Yet, despite Trustee’s numerous requests for him to turn over the 15 funds, Debtor disbursed the bulk of the money to his brothers and 16 then spent the rest. On these facts, it was not error for the 17 court to conclude that Debtor’s creditors suffered prejudice from 18 the loss of the money. 19 Indeed, nowhere does Debtor contend on appeal that the 20 bankruptcy court’s findings were clearly erroneous. Instead, 21 Debtor focuses on his “proposed” 100% plan and “timely” payments. 22 Debtor’s focus is improper. First, the record shows that Debtor 23 never affirmatively “proposed” or “filed” a plan modification. 24 Rather, Debtor’s counsel stated both in a pleading and at oral 25 argument that Debtor anticipated objecting to a certain proof of 26 claim and, if successful, Debtor “believed” that he could propose 27 and complete a plan that paid 100% of all allowed claims. 28 Second, even if Debtor had affirmatively proposed such a plan, it
-16- 1 was unconfirmable on its face when Debtor’s income was 2 insufficient to support the payments. Finally, the record 3 reflects that Debtor never made the $3,224 payment to Trustee 4 under the PCM. Therefore, contrary to his belief, he did not 5 make all the payments under his plan in a timely manner. 6 Accordingly, the bankruptcy court did not err in finding “cause” 7 for conversion under § 1307(c)(1). 8 2. Section 1307(c)(4) 9 Under § 1307(c)(4), the bankruptcy court may convert a 10 chapter 13 case to one under chapter 7 “. . . . for cause, 11 including . . . (4) failure to commence making timely payments 12 under [§] 1326 of this title.” Section 1326, in turn, provides 13 that “[u]nless the court orders otherwise, the debtor shall 14 commence making payments not later than 30 days after the date of 15 the filing of the plan . . . in the amount . . . proposed by the 16 plan to the trustee.” 17 Debtor maintains that § 1307(c)(4) cannot be a basis for 18 conversion of his case because he was current and timely on his 19 plan payments. Debtor further asserts that he did not turn over 20 the $3,224 to Trustee on the advice of counsel. In any event, 21 Debtor contends that his failure to pay the $3,224 to Trustee 22 does not matter since the PCM has no relation to § 1307(c)(4). 23 These arguments fail. 24 Under § 1323 the debtor may modify the plan at any time 25 prior to confirmation. After the debtor files a modification, 26 “the plan as modified becomes the plan.” § 1323(b). Therefore, 27 the PCM required Debtor to make a payment of $3,224 to Trustee 28 within forty-five days of his receipt of the inheritance. Debtor
-17- 1 does not dispute that he failed to make the payment as required 2 by the PCM. The requirement to make plan payments under 3 § 1307(c)(4) applies when a debtor commences making payments but 4 then pays less than the plan requires. See In re Mallory, 5 444 B.R. 553, 558 (S.D. Tex. 2011) (citing In re Jenkins, 2010 WL 6 56003, at *2 (Bankr. S.D. Tex. Jan. 5, 2010) (finding cause for 7 dismissal of a case in which the debtor commenced making the 8 payments required in the proposed plan but paid an amount less 9 than required)). Therefore, the bankruptcy court did not err in 10 finding “cause” for conversion of Debtor’s case under 11 § 1307(c)(4). 12 3. Section 1307(c)(5) 13 Under § 1307(c)(5), the bankruptcy court may convert a 14 chapter 13 case to one under chapter 7 “. . . . for cause, 15 including . . . (5) denial of confirmation of a plan under 16 section 1325 of this title and denial of a request made for 17 additional time for filing another plan or a modification of a 18 plan.” 19 Debtor asserts that § 1307(c)(5) requires both a denial of 20 confirmation and a denial of a request made for additional time 21 to file another plan or modification of a plan. Debtor maintains 22 that the bankruptcy court never denied his request for additional 23 time to file a modified plan and thus this section does not 24 apply. 25 Debtor correctly states that under § 1307(c)(5) two elements 26 must exist to constitute “cause” for conversion: (1) denial of 27 confirmation; and (2) denial of a request for time to file a new 28 or a modified plan. In re Nelson, 343 B.R. at 675–76.
-18- 1 We are persuaded that the second element of § 1307(c)(5) requires, at a minimum, that the court 2 must afford a debtor an opportunity to propose a new or modified plan following the denial of plan 3 confirmation. Because the court did not offer the debtor such an opportunity, the second element of 4 § 1307(c)(5) was not satisfied. It follows that there was no ‘cause’ to dismiss or convert the chapter 13 5 case under that authority.” Id. at 676. 6 Here, Debtor “proposed” a modified plan following the denial 7 of confirmation of his plan that proposed no payments to the 8 unsecured creditors. This proposal was in a pleading filed in 9 opposition to Trustee’s motion for conversion and made orally at 10 the conversion hearing. Although Debtor never affirmatively 11 filed a modified plan, the bankruptcy court found that Debtor 12 provided no evidence that his modified plan was feasible when his 13 income would not support a 100% plan and the inheritance, which 14 was the only source for 100% payment, was gone. While we held in 15 Nelson that the Bankruptcy Code contemplates that chapter 13 16 debtors “be afforded more than one opportunity to confirm a 17 Chapter 13 plan before the case is dismissed or converted 18 following denial of plan confirmation,” this does not mean the 19 bankruptcy court must grant infinite second chances to a debtor 20 when a modified plan fails confirmation standards on its face. 21 See Nelson, 343 B.R. at 678. Any further continuance would have 22 been futile. We thus conclude that the bankruptcy court applied 23 the correct legal standards under § 1307(c)(5) and did not err in 24 finding “cause” for conversion. 25 C. Cause For Conversion: Bad Faith 26 The bankruptcy court explicitly found that under the four 27 factor test for determining bad faith set forth in Leavitt, two 28 of the four factors were present: (1) whether the debtor
-19- 1 misrepresented facts in his petition or plan, unfairly 2 manipulated the Bankruptcy Code, or otherwise filed his petition 3 or plan in an inequitable manner and (2) the presence of 4 egregious behavior. 5 On appeal, Debtor argues that he never misrepresented facts 6 in his petition and plan. He valued his inheritance based on his 7 estimate of its worth. Further, Debtor maintains that he gave 8 notice to Trustee and the court of his intent to distribute the 9 inheritance to his brothers and, once he realized the legal 10 significance of the inheritance waivers in relation to bankruptcy 11 law, he proposed a 100% plan and amended his schedules. 12 Debtor also contends that there was no egregious behavior. 13 He filed his schedules in good faith, never concealed any assets, 14 and disclosed the inheritance in his schedules. Debtor asserts 15 that he “fully cooperated” with Trustee5 at all times and any 16 delay in amending his schedules was a direct result of his former 17 attorney resigning from the Doan Firm. In short, according to 18 Debtor, he acted in good faith throughout the entire process. 19 Finally, Debtor argues that there was no testimony under oath and 20 an evidentiary hearing and, thus, the bankruptcy court based its 21 findings on speculation and assumptions. 22 In its bad faith analysis, the bankruptcy court opined that 23 the facts here were very similar to those in Rosson and Marrama 24 25 5 This contention is not supported by the record when Debtor 26 failed to turn over the funds despite numerous requests by Trustee for him to do so. Furthermore, Trustee states in his 27 responsive brief that Debtor was not forthcoming with information about the probate estate as all the information obtained was the 28 result of Trustee’s research and investigation.
-20- 1 v. Citizens Bank of Mass., 549 U.S. 365, 368 (2007). In Rosson, 2 after filing a chapter 13 petition, Rosson assured the court and 3 his creditors that he would soon be receiving several hundred 4 thousand dollars in an arbitration award and that he would use 5 that money to fund his proposed Chapter 13 plan. When the money 6 finally came in, however, Rosson failed to deliver it to the 7 chapter 13 trustee as the bankruptcy court had ordered him to do. 8 Upon discovering that the arbitration proceeds had not been 9 delivered to the trustee, the bankruptcy court found that Rosson 10 was “rebelliously” “horsing around” with estate assets and, on 11 its own motion, converted the chapter 13 case to one under 12 chapter 7. Before the court filed the formal conversion order, 13 Rosson invoked his right to voluntarily dismiss his chapter 13 14 petition under § 1307(b). The bankruptcy court denied the 15 request for dismissal and converted the case and its decision was 16 affirmed on appeal. 17 In Marrama, the debtor filed a chapter 7 case and 18 misrepresented the value of his principal asset, a house in 19 Maine, and also denied that he had transferred the property 20 during the preceding year. Marrama later admitted that he 21 transferred the property to a newly created trust for no 22 consideration seven months prior to his filing to protect the 23 property from his creditors. The chapter 7 trustee stated his 24 intention to recover the Maine property as an estate asset. 25 Thereafter, Marrama sought to convert the proceeding to 26 chapter 13, but the trustee and respondent bank, Marrama’s 27 principal creditor, objected, contending that the request to 28 convert was made in bad faith and would constitute an abuse of
-21- 1 the bankruptcy process. At the hearing on conversion, Marrama 2 explained that his statements about the Maine property were 3 attributable to “scrivener’s error,” and that he filed under 4 chapter 7 because he was unemployed and now that he was employed 5 he was eligible to proceed under chapter 13. The bankruptcy 6 judge denied Marrama’s request, finding under the totality of the 7 circumstances he had acted in bad faith. 8 On appeal, Debtor attempts to distinguish his case from the 9 bad faith conduct in Rosson and Marrama. Unlike Rosson, Debtor 10 maintains there was no court order for the turnover of the 11 inheritance funds. Moreover, unlike Rosson who failed to provide 12 any explanation of what happened to the missing funds, Debtor 13 maintains that he told the court at the July 8, 2014 hearing 14 exactly how the funds were disbursed. Finally, unlike Marrama, 15 Debtor maintains that he never lied to the court or took efforts 16 to conceal what he had done. Rather, the spending and transfer 17 of the inheritance took place with full disclosure. 18 We are not persuaded by these arguments. As an initial 19 matter, the bankruptcy court properly considered the Leavitt four 20 factors for determining bad faith which are simply tools in the 21 bad faith totality of circumstances analysis. Thus, the 22 bankruptcy court applied the correct legal standards and only its 23 factual findings are at issue. We conclude there was no clear 24 error in the bankruptcy court’s finding of bad faith. 25 In re Ellsworth, 455 B.R. at 914 (bad faith is a factual finding 26 reviewed for clear error). The facts Debtor points to as 27 evidence of his good faith as contrasted to those in Rosson and 28 Marrama do not make the bankruptcy court’s bad faith findings
-22- 1 clearly erroneous. 2 The bankruptcy court made numerous findings regarding 3 Debtor’s bad faith. The court found Debtor’s failure to provide 4 an accounting of the inheritance funds was bad faith as in 5 Rosson. The court also considered Debtor’s explanation for 6 disbursing the funds to his brothers, but found that his 7 explanation did not justify his actions when Trustee had made 8 demands on Debtor to place the funds in Trustee’s lockbox account 9 or deposit the funds in his counsel’s client trust account. The 10 bankruptcy court’s finding of bad faith derives further support 11 from several inconsistencies in Debtor’s disclosures. For 12 example, the evidence showed that Debtor already had the proceeds 13 from the sale of his father’s house at the time he filed his 14 schedules. Yet Debtor disclosed that he anticipated receiving 15 only $2500 from the probate estate. There is no explanation in 16 the record from Debtor as to how he came up with the $2500 17 number. Another example is that Debtor claimed his brothers were 18 entitled to 75% of the inheritance but his brothers had filed 19 waivers of their beneficial interests with the probate court. A 20 fair inference from these inconsistencies is that Debtor wanted 21 to withhold any non-exempt amount of the inheritance from his 22 unsecured creditors. 23 Debtor also argues that the bankruptcy court’s 24 interpretation of the facts is incomplete and not persuasive 25 evidence of bad faith because the court took no testimony and did 26 not conduct an evidentiary hearing. We reject these contentions. 27 Debtor neither requested an evidentiary hearing, nor has he 28 identified what material facts are in dispute or what facts were
-23- 1 not before the bankruptcy court which would influence its 2 decision. See Romley v. Sun Nat’l Bank(In re The Two “S” Corp.), 3 875 F.2d 240, 242 (9th Cir. 1989) (no purpose served by 4 evidentiary hearing if all facts are before bankruptcy court and 5 not disputed). 6 In short, the record shows that there was sufficient 7 evidence before the bankruptcy court to support a finding of bad 8 faith. In reality, Debtor’s main complaint on appeal is that the 9 bankruptcy court misinterpreted the evidence before it. However, 10 when the evidence gives rise to competing interpretations, each 11 plausible, “the factfinder’s choice between them cannot be 12 clearly erroneous.” Anderson v. City of Bessemer City, N.C., 13 470 U.S. 564, 574 (1985). In sum, the bankruptcy court relied on 14 substantial evidence in the record when determining Debtor’s bad 15 faith, and its factual inferences were permissible. 16 D. Best Interests of Creditors And The Estate 17 On appeal, Debtor argues that the conversion was not in the 18 best interests of creditors and the estate because, had the case 19 remained in chapter 13 with a 100% dividend, creditors would have 20 been receiving payments since July 8, 2014. Debtor further 21 asserts that conversion cannot be in the best interests of 22 creditors since the inheritance has been eliminated as an asset 23 of the estate under § 348(f), thereby rendering the chapter 7 24 case a “no asset” case. Last, Debtor maintains that upon 25 dismissal, the creditors would have been free to immediately 26 collect against him and their security. Now, they will never be 27 able to collect due to the new “no asset” estate. In essence, 28 Debtor’s argument is that the creditors will fare worse under
-24- 1 chapter 7. 2 Once again, these arguments do not demonstrate error. When 3 a case under chapter 13 is converted to a case under another 4 chapter, “property of the estate of the converted case shall 5 consist of all property of the estate as of the date of filing of 6 the petition, that remains in the possession of or is under the 7 control of the debtor on the date of conversion. . . .” 8 § 348(f)(1)(A). Under this section, all non-exempt assets in the 9 chapter 13 case would become property of the chapter 7 estate 10 unless the debtor had authority to dispose of the asset, either 11 by court order or pursuant to the Bankruptcy Code. Here, there 12 was no court order authorizing Debtor to dispose of the property 13 nor was Debtor’s conduct authorized under the Bankruptcy Code. 14 Moreover, § 348(f)(1)(A) “was never designed to be a safe harbor 15 for Debtors who fraudulently and surreptitiously dispose of 16 property of the estate while in chapter 13.” Wyss v. Fobber 17 (In re Fobber), 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000). 18 There is also no evidence in the record that showed Debtor’s 19 unsecured creditors had any avenue for prompt payment if Debtor’s 20 case was dismissed. As a consequence, we fail to see how 21 dismissal was more advantageous than conversion. Because the 22 inheritance was a potentially valuable asset and appointment of a 23 disinterested chapter 7 trustee would facilitate pursuit and 24 possible recovery of that asset to pay creditors, it is axiomatic 25 that conversion of Debtor’s case was in the best interests of the 26 creditors and the estate. 27 E. Absolute Right To Dismiss 28 To the extent Debtor argues that he has an absolute right to
-25- 1 dismiss his case under § 1307(b) he is mistaken. The Ninth 2 Circuit in Rosson held that a chapter 13 debtor’s right of 3 voluntary dismissal under § 1307(b) was not absolute, but was 4 qualified by the authority of a bankruptcy court to deny 5 dismissal on grounds of bad faith conduct or “to prevent an abuse 6 of process.” 545 F.3d at 774 (citing § 105(a)). 7 VI. CONCLUSION 8 Having found no error, we AFFIRM. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
-26-