In re: Jeanette Andujar Cumba

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: January 29, 2014
• Docket: 12-02396
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT 5 FOR THE DISTRICT OF PUERTO RICO

3 IN RE: CASE NO. 12-02396 4 || JEANETTE ANDUJAR CUMBA CHAPTER 13 5 Debtor 6 7 OPINION AND ORDER 8 This case is before the court upon the Chapter 13 Trustee’s (hereinafter referred to as “Trustee’’) unfavorable report to the amended Chapter 13 plan dated March 31, 2013 (Docket 10 No. 73) based upon lack of feasibility under 11 U.S.C. §1325(a)(6), and because the Trustee is unable to calculate the liquidation value and thus is unable to determine whether the Debtor 12 complies with 11 U.S.C. $1325(a)(4), which is a requisite for confirmation of a plan as the 8 Debtor has not assigned a value to a particular cause of action filed in state court, which has 4 been listed in Schedule B (Personal Property). The Debtor filed her reply (Docket No. 76) arguing that in the instant case it is reasonable to list the value of the state lawsuit as “unknown” '6 because it is difficult to assign a value to a pending or potential lawsuit and the Debtor has 7 chosen the state exemptions which means that there is no exemption applicable to the cause of 8 action of the Debtor at the state court. Subsequently, the Trustee filed an Objection to Plan Confirmation and Memorandum of Law in Support Thereof (Docket No. 79) and the Debtor *0 filed her reply (Docket No. 80) to which the Trustee filed a sur-reply (Docket No. 84). For the reasons set forth below the court grants Trustee’s motion and concludes that the Debtor must assign a value to the legal claim which she has included in Schedule B. Jurisdiction “4 The Court has jurisdiction pursuant to 28 U.S.C. §$ 1334(b) and 157(a). This is a cor *5 proceeding pursuant to 28 U.S.C. §$157(b)(2)(B) and (L). Venue of this proceeding is prope 26 under 28 U.S.C. §§1408 and 1409. 27

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1 Facts and Procedural Background 2 On March 30, 2012, the Debtor filed a bankruptcy petition under Chapter 13 of th 3 || Bankruptcy Code and a Chapter 13 plan (Docket No. 6). On April 3, 2012 the case wa 4 || dismissed due to failure to file the statement of social security number (Docket No. 12). On Apri 5 || 17, 2012, the Debtor filed a motion requesting reconsideration of the dismissal order (Docke 6 || No. 17). On May 31, 2012, the court granted the Debtor’s request for reconsideration of the orde 7 || dismissing the case (Docket No. 21). The 341 meeting of creditors was held and closed on Jun 8 || 29, 2012 (Docket No. 33). 9 On July 20, 2012, the Trustee filed an Unfavorable Report on Proposed Pla 10 || Confirmation under §1325 alleging that the plan dated March 30, 2012 fails the creditors’ bes 11 interest test under 11 U.S.C. §1325(a)(4) because the Debtor claimed the Puerto Rico homestea 12 exemptions in Schedule C and the Trustee will file his objection regarding this matter (Docke 13 || No. 42). On the same date, the Trustee filed his Objection to Debtor’s Claimed Exemption 14 ||(Docket No. 43). On September 20, 2012, the Trustee’s unopposed Objection to Debtor’ 15 || Claimed Exemptions was granted (Docket No. 52). Subsequently, on September 27, 2012, th 16 || Trustee filed another Unfavorable Report on Proposed Plan Confirmation under $1325 allegin 17 ||that the plan dated March 30, 2012 fails the best interest of creditors’ test under 11 U.S.C] 18 || $1325(a)(4) because the case’s liquidation value was reassessed to take into consideration th 19 || unopposed objection to the local homestead exemption and thus the minimum base needed total 20 || approximately $114,600 (Docket No. 54). On October 8, 2012, the Debtor filed a Motion fo 21 || Reconsideration of Order and Reply to Trustee’s Objection to Puerto Rico Homestead Law an 22 || Puerto Rico Exemptions Law (Docket No. 55). 23 On October 10, 2012, a plan confirmation hearing was held and continued without a □□□□□ 24 || The court granted the Debtor’s request for reconsideration of order entered granting Trustee’s 25 || objection to exemption (#55). The court took the contested matter concerning the homestea 26 ||exemption under advisement for a decision on the merits. On January 25, 2013, the court entere 27 || an Opinion and Order directing the parties to file memoranda within the next 21 days on whethe

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1 or not the requirements of the 2011 PR Home Protection Act were complied with, and on an 2 || other outstanding objections to exemptions in each case which is not expressly addressed in this 3 |] Opinion and Order (Docket No. 63). On February 15, 2013, the Trustee filed its Position i 4 || Compliance with Order acknowledging pre-petition compliance with the 2011 PR Hom 5 || Protection Act (Docket No. 65). On February 22, 2013, the court ordered the allowance of th 6 || homestead exemption claimed by the Debtor because the Debtor complied pre-petition with th 7 ||2011 PR Home Protection Act (Docket No. 66). 8 On March 8, 2013, the Trustee filed a Favorable Report on Proposed Plan Confirmatio 9 |} under $1325 for the proposed plan dated March 30, 2012 (Docket No. 68). On March 31, 2013, 10 ||/the Debtor filed an Amended Schedule B (Personal Property) to include the followin 11 information regarding a state court action: “[c]ivil case No. DAC2012-0804 Teresita Arroyo 12 || Morales et als. V. Municipality of Catafio et. Als. Complaint claiming torts and restitution o 13 ||moneys paid to Developer and Banks because mortgage was not perfected due to error i 14 inscription of segregation of housing project lots of Urb. Vista al Mar, where Debtor’s propert 15 |}and residence are is located.” The Debtor listed the claim as a personal property with a 16 ||unknown value (Docket No. 69). On the same date, the Debtor filed an amended plan date 17 || March 31, 2013 to provide that any proceeds from this lawsuit will be used entirely to fund th 18 || plan (Docket No. 71). 19 On May 7, 2013, the Trustee filed an Unfavorable Report on Proposed Pla 20 || Confirmation under $1325 alleging the following deficiencies: (i) lack of feasibility pursuant t 21 11 U.S.C. §1325(a)(6) and (ii) the Debtor has failed to assign a value to the cause of actio 22 || pending in local court. The liquidation value cannot be determined until a value is assigned t 23 || their legal claim (Docket No. 73). On May 13, 2013, the court ordered the Debtor to reply withib 24 ||21 days to the Trustee’s unfavorable recommendation (Docket No. 74). On June 5, 2013, th 25 Debtor filed her Motion in Compliance of Order, Reply to Trustee Unfavorable Report an 26 || Request for Confirmation of Amended Chapter 13 Payment Plan Dated 3/31/2013 alleging tha 27 ||she listed the value of her legal claim as “unknown” because there is no tangible amoun

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1 || determined and Debtor has not claimed an exemption on this claim and all the proceeds, if any 2 || will be devoted to fund the plan (Docket No. 76). On June 7, 2013, the court scheduled 3 || confirmation hearing for September 25, 2013. (Docket No. 77). 4 On September 23, 2013, the Trustee filed his Objection to Plan Confirmation an 5 || Memorandum of Law in Support Thereof arguing the following: (i) the Trustee is unable t 6 || determine the liquidation value in this case pursuant to 11 U.S.C. §1325(a)(4) because th 7 || Debtor has not assigned a value to her legal claim; (ii) causes of action are property of the estat 8 || and they have a value despite of the amount that can or will be awarded in the future; (iii) th 9 || Seventh Circuit in Polis v. Getaways, Inc. (In re Polis), 217 F. 3d 899, 903 7 Cir. 2000) applie 10 || the following rationale to valuing legal claims: “[l]egal claims are assets whether or not they ar 11 assignable, especially when they are claims for money; as a first approximation, the value o 12 || Polis’s claim is the judgment that she will obtain if she litigates and wins multiplied by th 13 || probability of that (to her) happy outcome. That is roughly how parties to money cases valu 14 them for purposes of determining whether to settle in advance of trial. They do so whether or no 15 the claim is assignable; unassignable claims (tort claims, for example) command positive price 16 the settlement “market;’” (iv) since the liquidation value cannot be determined without takin 17 ||into account the value of the Debtor’s pending cause of action in local court, the Trustee is 18 || unable to determine if the proposed plan is sufficiently funded to pay the liquidation value; (v) 19 ||the Chapter 13 Trustee has a limited time to administer the case, thus, if the Debtor was t 20 receive the funds from the pending cause of action after receiving the discharge it would be 21 || windfall; and (vi) the Debtor by failing to provide a value to the pending cause of action, an 22 || thus preventing creditors from participating in the revenues, does not comply with the good fait 23 requirement under 11 U.S.C. §1325(a)(3) (Docket No. 79). On September 24, 2013, the Debto 24 |\ filed her Reply to Trustee’s Objection to Plan Confirmation and Memorandum of Law an 25 || Request for Confirmation of Amended Chapter 13 Payment Plan Dated 03/31/2013 arguing th 26 || following: (4) this is not a claim for money that has a mostly certain nature, this a torts claim tha 27 depends on the credibility awarded by the state court to the plaintiffs; Gi) there is no unifo

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1 || procedure followed by the courts to value a cause of action; (ili) it is reasonable to list the valu 2 of the legal claim as “unknown” pursuant to recent court decisions according to the case o 3 ||Ingram_ v. Thompson, 141 Wn. App. 287 (Wash. Ct. App. 2007); and (iv) in this case th 4 || proceeds Gif any) received by the Debtor from the legal claim will be devoted entirely to fund th 5 Chapter 13 plan, and thus, are excluded and excepted pursuant to 11 U.S.C. §1327(b) and (c) 6 || (Docket No. 80). 7 On September 25, 2013, the plan confirmation hearing was held and the court determine 8 that the pending issue is whether the valuation of the pending civil action is mandatory. Th 9 || court continued the confirmation hearing without a date (Docket No. 82). 10 On October 1, 2013, the Trustee filed a Motion for Leave to File Sur-reply (Docket No] 11 || 83). On October 1, 2013, the Trustee filed his Sur-reply to Debtor’s Reply to Trustee’s Objectio 12 || to Plan Confirmation and Memorandum of Law (Docket No. 84). On October 8, 2013, the cour 13 || granted the Trustee’s Motion for Leave to File Sur-reply (Docket No. 86). 14 Applicable Law and Analysis 15 || Property of the estate in a Chapter 13 Case 16 Property of the bankruptcy estate includes all legal or equitable interests of the debtor 1 17 || property as of the commencement of the case. 11 U.S.C. §541(a)(1). In a Chapter 13 case, 18 || Section 1306! also includes as property of the estate property described in Section 541 that 1 19 || acquired by the debtor after the petition is filed and post-petition earnings from services earne 20 || by the debtor. A debtor’s pre-petition legal claim whether the same is unliquidated or settled a 21 || the time of the bankruptcy petition constitutes property of the estate. 22 23 24 25 section 1306(a) provides: “[p]roperty of the estate includes, in addition to the property specified in section 541 0 this tithe—(1) all property of the kind specified in such section that the debtor acquires after the commencement o 26 the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the cas 27 but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whicheve: occurs first.” 11 U.S.C. §1325(a). -5-

1 || Confirmation of a Chapter 13 Plan 2 Confirmation of a Chapter 13 plan is governed by Section 1325. Section 1325(a)(4) 3 || provides in pertinent part: “[e]xcept as provided in subsection (b), the court shall confirm a pla 4 ||if—... (4) the value, as of the effective date of the plan, of property to be distributed under th 5 || plan on account of each allowed unsecured claim is not less than the amount that would paid o 6 || such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.’ 7 11 U.S.C. §1325(a)(4). Section 1325(a)(4), referred to as the “best interest of creditors test,” 8 || provides that unsecured creditors will be paid, at a minimum, the amount which they would b 9 || paid if the case were a hypothetical chapter 7 liquidation case. The “best interest of creditors 10 ||test” is designed to protect the unsecured creditors in Chapter 13 cases. “To determin 11 ||compliance with the test, a hypothetical liquidation of the debtor’s estate under Chapter 7 on th 12 || ‘effective date of the plan’ must be compared to the value on ‘the effective date of the plan’ o 13 what the debtor proposes to distribute to the holders of allowed unsecured claims. Tw 14 || mathematical calculations are required: (1) an estimate must be made of what would be availabl 15 ||for distribution to unsecured claim holders in a Chapter 7 case; and (2) the distributions t 16 || unsecured claim holders under the proposed plan must be ‘present valued’ (discounted) as of th 17 || effective date of the plan.” See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 18 || 4" Edition, $160.1 at {| [2], Rev. June 7, 2004, www. 3online.com. The proposed Chapter 13 19 plan must be present valued to compensate unsecured creditors for the delay in payments the 20 || would receive immediately in a liquidation proceeding. Moreover, for a Chapter 13 plan t 21 satisfy the best interest of creditors test, “... the capitalized present value of all deferre 22 payments proposed to be distributed, together with the present value of any other propert 23 || proposed to be distributed, to the holder of an allowed unsecured claim, must equal at least th 24 || liquidation value of the nonexempt property of the estate apportionable to the holder of suc 25 || allowed unsecured claim.” See Alan N. Resnick & Henry J. Sommer, 8 Collier on Bankruptc 26 || 91325.05[2][c] 6" ed. 2013). As part of the liquidation analysis calculation, the administrativ 27 || expenses and the trustee’s fees that would be incurred in a Chapter 7 must be deducted from th

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1 || valuation of estate assets. Generally the present value calculation under Section 1325(a)(4) 1 2 ||necessary only when the present valued (discounted) stream of payments to unsecured creditor 3 less than the Chapter 7 value. See In re Cook, 322 B.R. 336, 339, fn. 6 (Bankr. N.D. Ohi 4 2005). 5 In order to compare these two figures; namely, the discounted stream of payments tha 6 || unsecured creditors would receive in a chapter 13 with the liquidation value of nonexempt estat 7 || assets in a chapter 7 asset case requires the valuation of property. “The standard for valuin 8 || property for purposes of §1325(a)(4) has been the subject of few reported decisions. Intuitivel 9 || because the purpose of valuation is a hypothetical liquidation in a Chapter 7 case, propert 10 should be valued at what chapter 7 trustee would get—liquidation, foreclosure or forced sal 11 || value.” See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, qh Edition, □□□□□□ 12 |} at § [27], Rev. June 7, 2004, www. Ch13online.com. “The valuation of claims in a hypothetica 13 || chapter 7 liquidation is ‘not an exact science’ because the process entails a considerable degre 14 ||of speculation.” In re W.R. Grace & Co., 475 B.R. 34, 142 (D. Del. 2012) (citing Affiliate 15 || Foods, 249 B.R. 770 at 788 (citing In re Sierra-Cal, 210 B.R. 168, 172 (Bankr. E.D. Cal. 1997)); 16 |} Adelphia Comme’ns, Corp., 361 B.R. 337, 367 (Bankr. S.D.N.Y. 2007) (quoting In □ 17 || Crowthers, 120 B.R. 279, 297-98 (Bankr. S.D.N.Y. 1900)); In re PC Liquidation Corp., 383 B.R| 18 || 856, 868 (E.D.N.Y. 2008) ¢‘[T]he valuation of a hypothetical [C]hapter 7 liquidation is, b 19 ||nature, inherently speculative[.]”) (internal quotations and citations omitted). “Thus, the cour 20 |}need only make a well-reasoned estimate of the liquidation value that is supported by th 21 evidence on the record. It is not necessary to itemize or specifically determine precise value 22 || during the estimation procedure. Requiring such precision would be entirely unrealistic becaus 23 exact values could only be found if the debtor actually underwent Chapter 7 liquidation.” In r 24 || W.R. Grace & Co., 475 B.R. 34 at 258 citing Affiliated Foods, 249 B.R. at 788. 25 The Debtor has below median income and thus, the plan duration is 36 months. Th 26 || proposed plan dated March 31, 2013 is a base plan with a base of $3,600 and the genera 27 || unsecured creditors will be paid pro-rata from any remaining funds. The Debtor in Schedule

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1 || (Real Property) lists a real property which she values at $100,000 and which has no mortgage (o 2 || secured claim). The Debtor lists in her Amended Schedule B (Personal Property) assets in th 3 || amount of $1,011.15. The Debtor in her amended Schedule C (Property Claimed as Exempt) list 4 ||the total value of the claimed exemptions in the amount of $100,875 of which $100,000 is 5 || allocated to the homestead exemption pursuant to 31 P.R. Laws Ann. $§385(a); 1851-1857. Th 6 || Debtor does not list any claims in Schedule D (Creditors Holding Secured Claims). In Schedul 7 ||F (Creditors Holding Unsecured Nonpriority claims) the Debtor lists unsecured claims whic 8 || total $147,209.83, of which $105,000.00 is allocated to a loan with Banco Popular de Puert 9 || Rico for the purchase of a residence which has not been registered at the Property Registry. Th 10 court notes that in Schedule F, the Debtor lists a claim whose holder is Asociacion Empleado 11 ||del ELA which is a 1996 personal loan in the amount of $16,727 and the same is subject to 12 || setoff. The Debtor does not list any creditors holding unsecured priority claims in Schedule E. 13 The Debtor’s nonexempt assets (Schedule A + amended Schedule B — amended Schedul 14 ||C), without considering the value of the legal claim, total $136.15. Thus, the liquidation analysis 15 entails a comparison between the present value of $3,600 plus the present value of the lega 16 ||claim versus the liquidation value of the Debtor’s nonexempt assets in the amount of $136.15 17 || plus the liquidation value of the legal claim. 18 This court finds that for the proposed plan to be confirmed, it must satisfy th 19 requirements of Section 1325(a)(4). Thus, all of the property of the estate must have an assigne 20 || value in order to perform a liquidation analysis. The court notes that the Debtor lists in the stat 21 || court complaint her alleged contractual and emotional damages in the total amount of $283,72 22 || which is allocated in the following manner: (i) $43,722 which constitutes the totality of th 23 ||monthly mortgage payments paid by the Debtor for a void mortgage loan; (ii) $60,000 i 24 || property improvements; (iii) $5,000 for the deposit and closing costs; (iv) $60,000 in damages 25 || for not being able to (being deprived) sell the real property; (v) $65,000 in damages for not bein 26 || able to refinance the property and thus benefit from lower interest rates; and (vi) $50,000 due t 27

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1 || suffering and mental anguish because they are unable to fully enjoy their property and they are i 2 || a state of terrible uncertainty. 3 The court concludes that the value the Debtor must assign to her legal claim is a 4 || estimate of the current value she deems that particular claim is worth. The court understands th 5 || difficulty in assigning a current value to a legal claim, given that a market does not exist for suc 6 an asset. The court finds that the best guide for establishing the current value of a particul 7 ||cause of action (legal claim) is to find out the monetary awards that the state courts hav: 8 ||awarded to similar legal claims (causes of action) in the past. However, the Debtor is no 9 ||required to personally fund distribution to unsecured creditors based upon the hypothetica 10 || recovery value of a legal claim. The requirement is to pay the amounts actually received. 11 Conclusion 12 For the foregoing reasons, the Trustee’s Objection to Plan Confirmation and 13 || Memorandum of Law in Support Thereof is hereby granted. Therefore, the court orders the 14 |! Debtor to file an amended Schedule B (Personal Property) which assigns a current value to her 15 legal claim in order for the Trustee to be able to calculate the liquidation analysis. 16 SO ORDERED. 17 In San Juan, Puerto Rico, this 28" day of January, 2014. 18 19 _

unitdh states Bankruptcy Judge 21 22 23 24 25 26 27

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