De La Salle v. U.S. Bank, N.A. Ex Rel. Certificateholders of Structured Adjustable Rate Mortgage Loan Trust (In Re De La Salle) ( 2011 )

FILED
DEC 12 2011
1
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 ORDERED PUBLISHED O F TH E N IN TH C IR C U IT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5
6 In re: ) BAP No. EC-11-1258-JuKiD
)
7 BERENICE AND PIERRE THOREAU ) Bk. No. 10-29678
DE LA SALLE, )
8 )
Debtors. )
9 )
______________________________)
10 BERENICE AND PIERRE THOREAU )
DE LA SALLE, )
11 )
Appellants, )
12 )
v. ) O P I N I O N
13 )
U.S. BANK, N.A. AS TRUSTEE FOR)
14 THE CERTIFICATEHOLDERS OF )
STRUCTURED ADJUSTABLE RATE )
15 MORTGAGE LOAN TRUST, MORTGAGE )
LOAN PASS-THROUGH CERTIFICATES)
16 SERIES 2005-19XS, )
)
17 Appellee. )
______________________________)
18
19 Submitted on November 16, 2011
at Sacramento, California
20
Filed - December 12, 2011
21
Appeal from the United States Bankruptcy Court
22 for the Eastern District of California
23 Honorable Ronald H. Sargis, Bankruptcy Judge, Presiding
24 Appearances: George Gingo, Esq., argued for Appellants,
Berenice and Pierre Thoreau de la Salle; Robert
25 J. Esposito, Esq., argued for appellee, U.S.
Bank, as Trustee for the Certificateholders of
26 Structured Adjustable Rate Mortgage Loan Trust,
Mortgage Loan Pass-Through Certificates Series
27 2005-19XS.
___________________________
28
Before: JURY, KIRSCHER, and DUNN, Bankruptcy Judges.
1 JURY, Bankruptcy Judge:
2
3 Appellants, chapter 71 debtors Berenice and Pierre Thoreau
4 de la Salle, appeal the bankruptcy court’s orders (1) denying
5 confirmation of their second amended chapter 13 plan and (2)
6 granting the motion of appellee, U.S. Bank, N.A., as Trustee for
7 the Certificateholders of Structured Adjustable Rate Mortgage
8 Loan Trust, Mortgage Loan Pass-Through Certificates Series 2005-
9 19XS (“U.S. Bank”) to convert their chapter 13 case to one under
10 chapter 7. We AFFIRM.
11 I. FACTS
12 The orders on appeal relate to debtors’ lengthy dispute
13 with numerous parties, including U.S. Bank, regarding the
14 identity of the entity legally authorized and entitled to
15 enforce the note and deed of trust against debtors’ real
16 property and the validity of the deed of trust itself.
17 In 2005, Berenice de la Salle signed a note in conjunction
18 with a loan for $668,000 obtained from Countrywide Homes Loans,
19 Inc., dba America’s Wholesale Lender (“Countrywide”). The note
20 was secured by a deed of trust on debtors’ residence located in
21 Mammoth Lakes, California. In late 2008, she defaulted on the
22 note, a notice of default was recorded and the trustee’s sale
23 was scheduled for March 25, 2010. By then, she owed more than
24 $29,000 in arrears and approximately $840,000 on the note.
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 After Ms. de la Salle defaulted, but before the trustee’s
2 sale, she filed a complaint in the Eastern District of
3 California against Countrywide and others, seeking to invalidate
4 the security interest on her property based on various
5 theories. The defendants moved to dismiss the action, which the
6 district court granted by judgment entered on June 30, 2010.
7 Ms. de la Salle appealed that decision to the Ninth Circuit.
8 The appeal was dismissed due to her failure to prosecute and her
9 request for a voluntary dismissal.
10 On April 15, 2010, two days after the district court
11 announced its decision orally, debtors filed their chapter 13
12 petition pro se. They then mounted a multifaceted attack on
13 U.S. Bank’s “standing” to foreclose on their residence.
14 Debtors’ original Schedule D acknowledged that U.S. Bank
15 held a secured claim on their property. However, their Schedule
16 F also listed U.S. Bank with a disputed unsecured claim in an
17 undisclosed amount. Debtors later listed the full amount of
18 U.S. Bank’s debt as unsecured in an amended Schedule F, claiming
19 that there were three possible creditors who could enforce the
20 note and deed of trust and that by listing the debt as
21 unsecured, the true creditor would eventually come forward.
22 That amendment put their unsecured debt at $1,116,910, which was
23 over the jurisdictional limits for unsecured debt in a chapter
24 13 under § 109(e).
25 Meanwhile, debtors attempted to get their chapter 13 plan
26 confirmed. Despite acknowledging that a secured debt existed
27 against their residence, albeit disputed, none of debtors’ plans
28 provided for the payment of arrears or maintenance payments to
-3-
1 their secured creditor.2 The first plan, filed on April 29,
2 2010, placed U.S. Bank in Class 2,3 but provided for no monthly
3 payment. Debtors stated in ¶ 7.03 of an attachment to the plan
4 that they believed the entire debt secured by the first deed of
5 trust on their property was paid off by credit enhancements in
6 the form of credit default swaps at the time that Ms. de la
7 Salle defaulted.
8 Before any confirmation hearing was held, debtors filed a
9 “motion” to confirm an amended plan on May 27, 2010. In the
10 amended plan, debtors still included U.S. Bank in Class 2, but
11 amended ¶ 7.03 to state that they did not know who was the owner
12 of the note U.S. Bank sought to enforce. As a result, they took
13 the position that the entire amount of $862,462.33 owed on the
14 debt was unsecured. The chapter 13 trustee objected to the plan
15 on the grounds, among others, that debtors’ plan attempted to
16 modify a debt secured by their residence in violation of
17 § 1322(b) and that they were not making current payments on
18 their mortgage debt. On July 16, 2010, the court denied
19 confirmation of the amended plan, without prejudice, because of
20 inadequate service on the Internal Revenue Service.
21 Debtors filed and moved to confirm a second amended plan on
22
23 2
Debtors also had an equity line of credit for $218,000
secured by a second deed of trust on their property. OneWest
24
Bank filed a proof of claim relating to this debt which debtors
25 objected to. The bankruptcy court later sustained their
objection finding that OneWest Bank’s claim was unsecured.
26
3
The chapter 13 plan form for the Eastern District of
27 California (EDC3-080) designates Class 2 claims as “Secured
claims that are modified by the plan, or that have matured or
28
will mature before the plan is completed.”
-4-
1 August 9, 2010. In this plan, debtors deleted U.S. Bank from
2 Class 2 entirely and “clarified” that they would file a proof of
3 claim on behalf of the “purported” creditor, U.S. Bank, and
4 object to its claim. They also stated that they were in the
5 process of filing an adversary proceeding against U.S. Bank.
6 U.S. Bank objected to debtors’ second amended plan on the
7 grounds that (1) the plan did not provide for payment of the
8 arrears or ongoing mortgage payments and (2) was not feasible
9 given that debtors’ net monthly income of $1081 was insufficient
10 to make the monthly payments to U.S. Bank, which alone were
11 $6,423.77 per month. The chapter 13 trustee also objected to
12 debtors’ second amended plan essentially on the same grounds.
13 As further discussed below, the court later sustained these
14 objections to the second amended plan at a March 29, 2011
15 hearing.
16 A. Debtors’ Objection To U.S. Bank’s Proof Of Claim
17 U.S. Bank filed a timely proof of claim (claim no. 17),
18 asserting a secured claim of $828,710.32.4 On September 1,
19 2010, debtors objected to the claim, arguing that the bank had
20 not met its threshold burden of standing because the proof of
21 claim was not accompanied by evidence that it had authority to
22 bring the claim.
23 At an October 19, 2010 status conference on debtors’
24
4
25 U.S. Bank later filed an amended proof of claim (claim
no. 18). In that claim, U.S. Bank alleged that Mortgage
26 Electronic Registration Systems, Inc. (“MERS”) - as “nominee” for
America’s Wholesale Lender, in whose name the deed of trust had
27 been recorded - had assigned the deed of trust to U.S. Bank. The
MERS assignment was executed five days after the claims bar date.
28
-5-
1 objection to U.S. Bank’s claim, the bankruptcy court told Ms. de
2 la Salle:
3 And one of the things I tell debtors, who get very
excited about the standing issue, is, we can go ahead
4 and have hearings and bring people in, but first,
last, and foremost, if there’s a deed of trust
5 securing the loan on the property, whether you have
the creditor, the right creditor or the wrong creditor
6 in here, any plan, you are going to deal with the
secured claim, and any objection -- any objection to
7 claim now doesn’t necessarily take care of that lien.
8 Hr’g Tr. (October 19, 2010) at 5.
9 B. Debtors’ Adversary Proceeding Against U.S. Bank
10 On October 12, 2010, prior to the hearing on their claim
11 objection, debtors filed an adversary proceeding (Adv. No. 10-
12 02642-E) against U.S. Bank, Lehman Brothers Holdings, Inc.
13 (“Lehman”), Countrywide and MERS. The complaint sought a
14 declaration that the trust deed was defective and to quiet title
15 against the various defendants. The defendants moved to dismiss
16 the adversary proceeding on res judicata grounds because
17 debtors’ complaint raised many of the same issues that were
18 raised or could have been raised in the district court action.
19 The bankruptcy court granted that motion and dismissed all
20 claims with prejudice against defendants Lehman, Countrywide and
21 MERS by order entered on March 4, 2011.
22 However, the bankruptcy court allowed debtors to proceed
23 against U.S. Bank. The court reasoned that the issues of
24 whether the deed of trust was unperfected and whether U.S. Bank
25 had standing to enforce the note could not have been raised in
26 the district court action.
27 At a November 30, 2010 hearing, the bankruptcy court
28 indicated that it would administratively consolidate debtors’
-6-
1 objection to U.S. Bank’s proof of claim with the adversary
2 proceeding because the issues were intertwined.5
3 On April 15, 2011, debtors filed a motion for summary
4 judgment on their objection to U.S. Bank’s proof of claim and
5 motion for partial summary judgment in the adversary case.6 The
6 hearings were scheduled for May 26, 2011.
7 C. U.S. Bank’s Motion To Dismiss Or Convert Debtors’ Case
8 In late December 2010, U.S. Bank filed separate motions to
9 dismiss or convert debtors’ bankruptcy case under § 1307(c) on
10 the grounds that (1) debtors had made no postpetition payments
11 on its secured claim and (2) they were ineligible for chapter 13
12 relief because their debts exceeded the unsecured debt limit
13 prescribed by § 109(e) due to debtors’ listing of U.S. Bank’s
14 debt as unsecured.
15 At the January 18, 2011 hearing on the motions, the
16 bankruptcy judge expressed his view on the record regarding
17 chapter 13 debtors who sought to confirm plans that did not
18 provide for payments on their residence:
19
5
At this hearing, the court commented in passing that
20 since debtors did not know which entity could enforce their note
21 perhaps Governor Jerry Brown would like to get the money.
Debtors afterwards took the position that if they owed the money
22 at all, the money escheated to the State of California, and they
could pay a lesser amount than owed on the note. They went so
23 far as to file a creditor’s claim on behalf of the State of
California as holder of a secured claim on their property by
24
reason of escheat, in the amount of $668,000.
25 6
The record contains voluminous materials on the summary
26 judgment motions which have never been ruled on. Presumably
debtors included this material in the record to show that they
27 would succeed with their litigation against U.S. Bank due to the
overwhelming evidence they have against it. The motions for
28
summary judgment are irrelevant to this appeal.
-7-
1 I say, go to state court, sue, get your preliminary
injunction, because you are not telling me about a
2 bankruptcy plan. You’re telling me we are filing
bankruptcy to get a free injunction while we proceed
3 with the litigation.
4 Hr’g Tr. (January 18, 2011) at 7. However, the bankruptcy court
5 denied U.S. Bank’s first round of motions on procedural grounds
6 (U.S. Bank had failed to serve creditors) by order entered on
7 January 25, 2011.
8 In February 2011, U.S. Bank filed its second round of
9 motions to dismiss or convert debtors’ case, asserting the same
10 grounds as its prior motions. Debtors filed a response on March
11 15, 2011, alleging that U.S. Bank was neither a secured nor
12 unsecured creditor in their case, that it filed a fraudulent
13 proof of claim in their case, and that it committed a fraud on
14 the court by pretending to be a bona fide creditor. They
15 further asserted that it would violate § 1322(b)(1) to make
16 payments to U.S. Bank because such payments would discriminate
17 unfairly against bona fide creditors. In addition, debtors
18 maintained that U.S. Bank failed to prove that it was a party in
19 interest with standing to be heard by the court as there was no
20 evidence that it was the holder of the secured claim on their
21 property. Finally, debtors stated that if they were not
22 eligible for chapter 13, they would convert their case to one
23 under chapter 11.
24 D. The March 29, 2011 Hearing
25 On March 29, 2011, the bankruptcy court heard (1) U.S.
26 Bank’s motions to dismiss or convert debtors’ case; (2)
27 debtors’ motion to confirm their second amended plan; and (3)
28 -8-
1 the continued status conferences on debtors’ objection to U.S.
2 Bank’s proof of claim and their adversary proceeding.
3 The court, sustaining U.S. Bank’s and the chapter 13
4 trustee’s objections to debtors’ second amended plan, denied
5 confirmation of the plan finding that: (1) the plan failed to
6 provide for payment of the note securing debtors’ residence in
7 violation of § 1325(a)(5), and (2) until debtors prevailed on
8 their theory that the secured claim escheated to the State of
9 California, there was no reason for the court to believe that
10 U.S. Bank did not hold the first deed of trust for this claim.
11 See Civil Minutes dated March 29, 2011, Dkt. No. 210.
12 However, because debtors had newly retained counsel, the
13 court continued the bank’s motions to dismiss or convert to May
14 3, 2011, to afford debtors one final opportunity to file an
15 amended, confirmable chapter 13 plan. In its Civil Minutes, the
16 court gave detailed instructions to debtors and their counsel:
17 On or before April 15, 2011, the debtors shall file a
third amended plan and/or make provisions to make
18 mortgage payments to a blocked account . . . . This
includes making provision for curing all pre and
19 postpetition arrearages as permitted by the Bankruptcy
Code.
20
21 Finally, because debtors’ adversary proceeding and claim
22 objection raised essentially the same issues, the bankruptcy
23 court consolidated the matters for all hearings, scheduling
24 deadlines, and discovery, by order entered on April 4, 2011.7
25
26
7
This order confirmed the oral ruling of the court on
27 November 30, 2010.
28 -9-
1 E. The May 3, 2011 Hearing
2 Debtors and their counsel failed to submit a third amended
3 plan by April 15, 2011, or any time thereafter. As a result, at
4 the May 3, 2011 hearing, the bankruptcy court granted U.S.
5 Bank’s motion to convert debtors’ case.
6 In its written decision, the court first noted that it had
7 previously warned debtors that they would have to propose a
8 confirmable plan and that until their argument that the claim
9 securing their residence escheated to the State of California
10 was adjudicated, they should make the payments on the disputed
11 note into a blocked account.
12 The court further found that debtors’ reorganization was a
13 sham because they had never provided for payment on the secured
14 claim against their residence while they obtained the benefits
15 of the automatic stay in lieu of a Civil Rule 65 injunction. In
16 addition, the court determined that U.S. Bank had standing to
17 participate in the case and assert its position and rights with
18 respect to its claim despite debtors’ objection to the bank’s
19 proof of claim and adversary proceeding against it.
20 Finally, the court found cause existed to dismiss or
21 convert debtors’ case on independent grounds: (1) unreasonable
22 delay by debtors that was prejudicial to creditors; (2) failure
23 to file a plan timely; (3) failure to commence making payments
24 under a plan proposed in good faith, and (4) failure to propose
25 a plan or prosecute a reorganization in good faith. The court
26 decided that it was in the best interests of the creditors and
27 the estate to convert the case; i.e., if debtors’ contention was
28 -10-
1 true that their property was free and clear of all liens, then
2 those monies could be made available to the unsecured creditors
3 in the case.
4 The court’s decision was without prejudice to the pending
5 adversary proceeding and debtors’ objection to U.S. Bank’s
6 claim.8 The court entered its order converting the case on May
7 9, 2011.
8 F. Denial Of Debtors’ Motion For Stay Pending Appeal And
Request For Judicial Notice
9
10 Debtors timely appealed the orders denying confirmation of
11 their second amended plan and converting their case.9
12 Debtors moved for a stay pending appeal which was denied by the
13 bankruptcy court and this Panel.
14 Debtors request us to take judicial notice of the
15 bankruptcy court’s memorandum decision denying their request for
16 a stay pending appeal in their reply brief. They contend such
17 notice is appropriate because the court’s decision clarifies the
18 court’s reasons for ordering the conversion of their case. We
19 deny debtors’ request for judicial notice because they seek to
20 use the court’s decision to establish the accuracy of the facts
21 within to support their position in this appeal; i.e., that the
22
23 8
The court observed that the chapter 7 trustee would have
standing as plaintiff in the adversary proceeding.
24
9
25 Debtors’ Notice of Appeal also includes the order that
administratively consolidated debtors’ claim objection and
26 adversary proceeding against U.S. Bank and numerous minute orders
scheduling and rescheduling the hearings on those consolidated
27 matters.
28 -11-
1 court did not act sua sponte in converting debtors’ case, but
2 simply ruled on U.S. Bank’s motion to convert and U.S. Bank did
3 not have standing to bring that motion. Debtors’ request goes
4 beyond the proper use of judicial notice for purposes of this
5 appeal.
6 II. JURISDICTION
7 The bankruptcy court had jurisdiction over this proceeding
8 under 28 U.S.C. §§ 1334 and 157(b)(2)(B), (K) and (L). We have
9 jurisdiction under 28 U.S.C. § 158.
10 III. ISSUES
11 A. Whether the bankruptcy court abused its discretion in
12 denying confirmation of debtors’ second amended plan;
13 B. Whether U.S. Bank was a party in interest with
14 standing to seek dismissal or conversion of debtors’ bankruptcy
15 case under § 1307(c); and
16 C. Whether the bankruptcy court erred in converting
17 debtors’ bankruptcy case from chapter 13 to one under chapter 7.
18 IV. STANDARDS OF REVIEW
19 The proper interpretations of statutes and rules are legal
20 questions that we review de novo. Heath v. Am. Express Travel
21 Related Servs. Co. (In re Heath), 331 B.R. 424, 428 (9th Cir.
22 BAP 2005). Whether compliance with a given statute or rule has
23 been established is generally a question of fact, which we
24 review for clear error. Id.25 We review the bankruptcy court’s ultimate decision to
26 confirm or not to confirm a reorganization plan for an abuse of
27 discretion. Computer Task Grp., Inc. v. Brotby (In re Brotby),
28 -12-
1 303 B.R. 177, 184 (9th Cir. BAP 2003).
2 We review the issue of standing de novo. Brown v. Sobczak
3 (In re Sobczak), 369 B.R. 512, 516 (9th Cir. BAP 2007).
4 We review a decision to dismiss or convert a chapter 13
5 case under § 1307(c) for abuse of discretion. Ellsworth v.
6 Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904,
7 914 (9th Cir. BAP 2011).
8 In applying our abuse of discretion test, we first
‘determine de novo whether the [bankruptcy] court
9 identified the correct legal rule to apply to the
relief requested.’ If the bankruptcy court identified
10 the correct legal rule, we then determine whether its
‘application of the correct legal standard [to the
11 facts] was (1) illogical, (2) implausible, or (3)
without support in inferences that may be drawn from
12 the facts in the record.’ If the bankruptcy court did
not identify the correct legal rule, or its
13 application of the correct legal standard to the facts
was illogical, implausible, or without support in
14 inferences that may be drawn from the facts in the
record, then the bankruptcy court has abused its
15 discretion.
16 USAA Fed. Sav. Bank. v. Thacker (In re Taylor), 599 F.3d 880,
17 887-88 (9th Cir. 2010) (citing United States v. Hinkson, 585
18 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc)).
19 We review the bankruptcy court’s factual findings regarding
20 debtors’ lack of good faith for clear error. In re Ellsworth,
21 455 B.R. at 914.
22 We may affirm on any ground supported by the record.
23 Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir. 2008).
24
25 V. DISCUSSION
26 As we understand debtors’ arguments on appeal:
27 (1) by placing a claim at issue through an objection or
28 -13-
1 adversary proceeding and by keeping current on the plan payment
2 they proposed (in this case $1079), they need not make current
3 payments to U.S. Bank nor provide for its claim in their plan,
4 pending the outcome of the claim dispute;
5 (2) the bankruptcy court denied them a hearing on the claim
6 dispute and thus they were prejudiced by the premature
7 conversion of their case; and
8 (3) their claim objection, coupled with their overwhelming
9 evidentiary showing that U.S. Bank did not have standing to
10 enforce the note against their residence, caused the bank to
11 lose its standing for all purposes to participate in their case.
12 We address each contention below.
13 A. The Bankruptcy Court Did Not Err In Denying Confirmation
of Debtors’ Second Amended Plan
14
15 We are not persuaded by debtors’ argument that their
16 objection to U.S. Bank’s proof of claim authorized them to
17 suspend all payments to their secured creditor and ignore its
18 claim in their chapter 13 plan. To support their argument,
19 debtors cite to various statutes and Rules that pertain to the
20 claim objection and allowance process which are different from
21 the statutes and Rules that govern confirmation of chapter 13
22 plans. While debtors had the right to object to U.S. Bank’s
23 proof of claim, the notice and hearing procedures for the
24 objection were statutorily mandated by § 502(b).10 These
25
10
26 Section 502(b) provides that if an objection “to a claim
is made, the court, after notice and a hearing, shall determine
27 (continued...)
28 -14-
1 procedures, which are separate and apart from the plan
2 confirmation process, do not authorize debtors to change the
3 amount or reclassify a debt in their chapter 13 plan which was
4 set forth in a properly filed proof of claim.
5 The language in the chapter 13 plan form required to be
6 used in the Eastern District of California is consistent with
7 the statutes and Rules governing claims and their treatment in
8 chapter 13 plans. Section 3.04 of the plan form (EDC3-080)
9 states:
10 The proof of claim, not this plan or the schedules,
shall determine the amount and classification of a
11 claim. If a claim is provided for by this plan and a
proof of claim is filed, dividends shall be paid based
12 upon the proof of claim unless the granting of a valuation
or lien avoidance motion, or the sustaining of a claim
13 objection, affects the amount or classification of the
claim.
14
15 Accordingly, despite debtors’ claim objection and pending
16 adversary proceeding against U.S. Bank, as long as debtors
17 proposed a plan which provided for the bank’s proof of claim as
18 filed, confirmation of their plan could have occurred.11
19 But none of debtors’ plans provided for the payment of U.S.
20 Bank’s secured claim. Putting U.S. Bank’s proof of claim aside,
21 § 1322(b)(2) specifically prohibits debtors from modifying
22 claims which are secured by their principal residence.
23 Moreover, § 1325(a)(5) requires debtors to provide for the
24
10
25 (...continued)
the amount of such claim . . . .”
26
11
Indeed, debtors’ position would invite strategic
27 litigation to avoid making payments under a chapter 13 plan.
28 -15-
1 payment of their secured claims in an amount equal to the claim.
2 The record shows that debtors did not have the income to provide
3 for the payment of U.S. Bank’s claim. Accordingly, we conclude
4 that the bankruptcy court properly denied confirmation of their
5 second amended plan.
6 B. The Bankruptcy Court Did Not Prejudice Debtors By
Converting Their Case Prior To Resolving Their Objection To
7 U.S. Bank’s Proof Of Claim
8 We also find no merit to debtors’ contention that they
9 were prejudiced by the conversion of their case prior to the
10 resolution of their objection to U.S. Bank’s proof of claim.
11 There is no deadline in a statute or Rule for hearing claim
12 objections. Actually, imposing such a deadline creates
13 difficulties in the plan confirmation process and is
14 inconsistent with other deadlines established in the Code. An
15 accelerated process contemplates the confirmation of a chapter
16 13 plan and commencement of payments prior to the claims bar
17 date or the final allowance of claims.12 See §§ 1324 and
18 1326(a), Rules 3002(c) and 3015.13 Indeed, bankruptcy courts are
19
12
We recognize that some districts — and even selected
20 judges in a district — do not confirm a chapter 13 plan until
21 after the bar date.
13
22 Section 1324(b) states that the hearing on confirmation
of the plan may be held no earlier than twenty days and not later
23 than forty-five days after the date of the meeting of creditors
under § 341(a). Section 1326(a)(1) requires a debtor to commence
24 making payments not later than thirty days after the date of the
25 filing of the plan or the order for relief, and subsection (2) of
that provision states that the trustee shall distribute those
26 payments when the plan is confirmed.
Rule 3002(c) states that in a chapter 13 case, a proof of
27 (continued...)
28 -16-
1 authorized to go forward with confirmation, for the benefit of
2 the debtor and other creditors, even when final liquidation of a
3 claim of a particular creditor is impossible, by allowing the
4 estimation of claims.14 § 502(c). The key rationale for this
5 procedure is to allow creditors to be paid sooner, as the
6 chapter 13 trustee cannot make distributions until a plan is
7 confirmed. § 1326(a)(2).
8 Further, as stated above, confirmation of a plan is not a
9 determination of the amount of any allowed secured claim. The
10 form plan in the Eastern District of California expressly
11 provides that the amount of the secured claim, absent separate
12 court determination, is the amount stated as secured in the
13 proof of claim.
14 In addition, even if we were convinced that prejudice could
15 arise due to delay — which we are not — the record shows that
16 any alleged delay in the resolution of debtors’ claim objection
17 was due to their decision to file an adversary proceeding
18 against U.S. Bank prior to the hearing on their claim objection.
19 After debtors filed their adversary proceeding, the bankruptcy
20
13
21 (...continued)
claim is timely filed if it is filed not later than ninety days
22 after the first date set for the meeting of creditors under
§ 341(a). Rule 3015 requires a debtor to file a plan within
23 fourteen days after the petition is filed and that time cannot be
extended unless the court so directs.
24
14
25 Debtors argue in their appeal brief that the court did
not have to estimate U.S. Bank’s claim because it was liquidated
26 and not contingent. In that event, all debtors had to do was
provide for payment of the secured claim in their plan, which
27 they did not do.
28 -17-
1 court consolidated the matters for purposes of hearings and
2 discovery because of the similar issues involved. Civil Rule
3 42(a), which is made applicable to bankruptcy proceedings by
4 Rule 7042, allows the court to consolidate various actions
5 pending before it which “involve[ ] a common question of law or
6 fact . . . .” The opportunity for consolidation is designed to
7 promote not only judicial economy, Johnson v. Manhattan Ry. Co.,
8 289 U.S. 479, 496–97 (1973), but also the expeditious and
9 efficient conduct of litigation for all concerned.
10 Consolidation is within the broad discretion of the bankruptcy
11 court and trial courts may consolidate cases sua sponte.
12 Burchinal v. Cent. Wash. Bank (In re Adams Apple Inc.), 829 F.2d
13 1484, 1487 (9th Cir. 1987); See also Boone v. Derham-Burk (In re
14 Eliapo), 298 B.R. 392, 405 (9th Cir. BAP 2003) (bankruptcy
15 courts have wide discretion to manage their dockets).
16 Here, debtors’ objection to U.S. Bank’s proof of claim and
17 adversary proceeding were in the same procedural posture, there
18 were common issues of law and fact, and the parties were the
19 same. Under these circumstances, we discern no prejudice to
20 debtors.
21 Finally, although not required, the court made a reasonable
22 accommodation to allow debtors to place the payments owed to
23 their secured creditor in a blocked account pending the outcome
24 of the dispute so that payments would not be made to the wrong
25
26
27
28 -18-
1 party. Debtors chose simply not to comply.15
2 In sum, on this record we perceive no procedural error or
3 infringement on debtors’ substantive rights.
4 C. U.S. Bank Was A Party In Interest With Standing Despite
Debtors’ Objection To Its Proof Of Claim And Pending
5 Adversary Proceeding
6 Debtors’ objection to U.S. Bank’s proof of claim or pending
7 adversary proceeding did not cause the bank to lose its party in
8 interest standing to participate in debtors’ bankruptcy case.
9 Debtors cite Warth v. Seldin, 422 U.S. 490, 495 (1975), in
10 their appeal brief for the proposition that standing is a
11 threshold issue in every federal case, determining the power of
12 the court to entertain the suit. Debtors misapply this
13 precedent. In Warth v. Seldin, the Supreme Court explained that
14 “standing imports justiciability: whether the plaintiff has made
15 out a ‘case or controversy’ between himself and the defendant
16 within the meaning of Art. III.” 422 U.S. at 498. “A federal
17 court’s jurisdiction . . . can be invoked only when the
18 plaintiff himself has suffered ‘some threatened or actual injury
19 resulting from the putatively illegal action.’” Id. at 499.
20 The “threshold standing” inquiry in Warth v. Seldin has no
21 application in this context. Debtors do not contend the
22 bankruptcy court lacked jurisdiction or that debtors themselves
23 lacked standing to file their petition or seek confirmation of
24
25 15
On April 19, 2011, debtors deposited $1,000 into their
26 attorney’s trust account. This payment was allegedly made
pursuant to the court’s directive that money be deposited into a
27 blocked account in order to pay for the interest on the note.
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1 their proposed plan. Instead, debtors argue that U.S. Bank did
2 not have standing to enforce its secured claim against debtors’
3 residence. The requirement for standing in that instance is
4 irrelevant to this appeal. Perhaps if the bankruptcy court had
5 overruled debtors’ objection to the proof of claim or had
6 confirmed a plan requiring payment of claims to the improper
7 party without considering debtors’ arguments about U.S. Bank’s
8 lack of standing, then debtors’ argument might have merit. But
9 the bankruptcy court did not rule on the claim nor did it
10 require payment to an improper party, it simply converted
11 debtors’ case.
12 Furthermore, a creditor does not need an allowed claim to
13 be a party in interest for purposes of § 1307(c). Under that
14 section, a court may convert a chapter 13 case to a chapter 7
15 for cause on request of a party in interest and after notice and
16 a hearing. In applying a parallel statute in the chapter 11
17 context, this Panel held that creditors are parties in interest
18 and may move for the conversion or dismissal of a case under
19 § 1112(b) whether or not their claims have been allowed. See
20 Johnston v. JEM Dev. Co. (In re Johnston), 149 B.R. 158, 161
21 (9th Cir. BAP 1992); see also Martinez v. Arce (In re Torres
22 Martinez), 397 B.R. 158, 164 (1st Cir. BAP 2008) (same). The
23 holding in In re Johnston reinforces the notion that the claim
24 allowance process does not control a party in interest inquiry.
25
26
27
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1 Because the statutory language of § 1112(b)16 is almost identical
2 to that in § 1307(c) — both giving parties in interest the right
3 to seek conversion or dismissal of a bankruptcy case for “cause”
4 — we discern no reason why creditors should not be included
5 within the scope of a party in interest for purposes of
6 § 1307(c).
7 A statutory analysis supports this view. Under
8 § 101(10)(A), a creditor is defined as an “entity that has a
9 claim against the debtor that arose at the time of or before the
10 order for relief concerning the debtor.” Section 101(5)(A)
11 defines a “claim” as a “right to payment, whether or not such
12 right is . . . disputed . . . .” Under these statutory
13 definitions, U.S. Bank was a creditor under § 101(10)(A) because
14 it was the holder of a right to payment. “This right, although
15 in dispute, is nevertheless a claim.” In re Johnston, 149 B.R.
16 at 161. Therefore, as a “creditor,” U.S. Bank had party in
17 interest standing to request the conversion or dismissal of
18 debtors’ case.
19 D. The Bankruptcy Court Did Not Err In Converting Debtors’
Bankruptcy Case
20
Section 1307(c) sets forth a non-exclusive list of factors
21
which constitute “cause” for conversion or dismissal, including
22
unreasonable delay by the debtor that is prejudicial to
23
24
16
25 This section provides in relevant part that “on request
of a party in interest, and after notice and a hearing, the court
26 shall convert . . . or dismiss a case under this chapter, which
ever is in the best interests of creditors and the estate, for
27 cause . . . .”
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1 creditors and failure to file a plan timely. § 1307(c)(1) and
2 (3). Moreover, a lack of good faith constitutes “cause” to
3 dismiss a chapter 13 case. Eisen v. Curry (In re Eisen), 14
4 F.3d 469, 470 (9th Cir. 1994) (per curiam); In re Ellsworth, 455
5 B.R. at 919.
6 Section 1307(c) establishes a two-step analysis for dealing
7 with questions of conversion and dismissal. “First, it must be
8 determined that there is ‘cause’ to act. Second, once a
9 determination of ‘cause' has been made, a choice must be made
10 between conversion and dismissal based on the ‘best interests of
11 the creditors and the estate.’” Nelson v. Meyer (In re Nelson),
12 343 B.R. 671, 675 (9th Cir. BAP 2006).
13 Cause
14 “A debtor’s unjustified failure to expeditiously accomplish
15 any task required either to propose or confirm a chapter 13 plan
16 may constitute cause for dismissal under § 1307(c)(1).” In re
17 Ellsworth, 455 B.R. at 915. Here, after denying confirmation of
18 their second amended plan, the court gave debtors detailed
19 instructions and a final opportunity to propose a confirmable
20 plan by April 15, 2011. However, debtors chose to do nothing.
21 More than a year after debtors filed their petition, they still
22 had not confirmed a chapter 13 plan. Given the passage of time
23 and debtors’ repeated failure to provide for the claim secured
24 by their residence in their plan, the bankruptcy court correctly
25 concluded that conversion of debtors’ case was warranted on
26 account of the resultant delay and prejudice.
27 Moreover, the record shows that debtors failed to file a
28 plan timely under § 1321. Section 1321 provides that the debtor
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1 shall file a plan and Rule 3015 states that the deadline for
2 filing the plan is fourteen days after the filing of the
3 petition or within another deadline ordered by the court. This
4 provision “applies not only to the first plan filed, but also to
5 any subsequent plan or modification required by the court.” In
6 re Ellsworth, 455 B.R. at 916. Here, the court ordered debtors
7 to file a third amended plan by April 15, 2011 with provisions
8 that provided for payment to their secured creditor. Debtors
9 failed to comply with that order. Thus, the bankruptcy court
10 did not err by converting debtors’ case for cause under
11 § 1307(c)(3).
12 Finally, “[t]o determine bad faith a bankruptcy judge must
13 review the ‘totality of the circumstances.’ A judge should ask
14 whether the debtor ‘misrepresented facts in his [petition or]
15 plan, unfairly manipulated the Bankruptcy Code, or otherwise
16 [filed] his Chapter 13 [petition or] plan in an inequitable
17 manner.” In re Eisen, 14 F.3d at 470. The record shows that
18 the bankruptcy court considered the totality of the
19 circumstances in deciding that debtors failed to propose their
20 plan and prosecute their case in good faith.
21 The record indicates that debtors enjoyed the protection of
22 the automatic stay for over a year while making zero payments to
23 their secured creditor; none of debtors’ plans complied with the
24 Code by providing for the payment of their secured creditor’s
25 claims; and debtors’ primary activity in their bankruptcy was
26 the continuing litigation of U.S. Bank’s claims. Furthermore,
27 after debtors and their counsel received detailed instructions
28 from the bankruptcy court to include payments for their secured
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1 creditor in their third amended plan, they ignored those
2 instructions by choosing not to file a third amended plan.
3 Under the totality of circumstances approach, we conclude the
4 bankruptcy court did not err in converting debtors’ case based
5 on their lack of good faith.
6 Best Interests Of Creditors And The Estate
7 At the hearing on U.S. Bank’s motions to dismiss or
8 convert, U.S. Bank argued for the dismissal of debtors’ case.
9 However, the U.S. Trustee suggested conversion because he had
10 discerned that there was some nonexempt cash which could be used
11 by the chapter 7 trustee to determine if there was any real
12 value in the real property or debtors’ adversary proceeding.
13 Since the U.S. Trustee made a showing that there might be a
14 recovery that would enhance the value of the estate for
15 unsecured creditors, we conclude the bankruptcy court properly
16 determined that conversion was in the best interests of the
17 creditors and the estate.
18 VI. CONCLUSION
19 For the reasons stated, we AFFIRM.
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