Pequeno v. Schmidt (In Re Pequeno)

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 4, 2005
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 04-40573
_____________________
In the matter of: JUAN PEQUENO
Debtor
JUAN PEQUENO
Appellant-Cross-Appellee
v.
MICHAEL B SCHMIDT, Trustee
Appellee-Cross-Appellant
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
No. 1:03-CV-29
_________________________________________________________________
Before KING, Chief Judge, and GARZA and BENAVIDES, Circuit
Judges.
PER CURIAM:*
This is a bankruptcy appeal in which the debtor initially
filed under Chapter 7, but petitioned several months later to
convert to Chapter 13. Soon after he filed for bankruptcy, the
debtor was awarded a substantial judgment in a suit against his
former employer. In the bankruptcy proceedings, he attempted to
characterize the judgment as being for lost future wages, and
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
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thus exempt from bankruptcy. The bankruptcy court denied both
the debtor’s petition to convert from Chapter 7 to Chapter 13 and
his attempt to characterize the judgment as exempt. He appealed
to the district court, which affirmed the bankruptcy court on the
exemption issue but reversed on the conversion issue. The debtor
now appeals as to the exemption issue, and the Chapter 7 trustee
cross-appeals as to the conversion issue. We AFFIRM on both
issues.
I. BACKGROUND
A. The Lawsuit Against Brownsville, Texas
Although this appeal directly concerns Appellant-Cross-
Appellee Juan Pequeno’s petition for bankruptcy, it is
intricately connected to another case. Pequeno’s main asset in
bankruptcy is a judgment against his former employer, the City of
Brownsville, Texas. To contextualize properly the bankruptcy
issues in this appeal, it is first necessary to trace briefly the
history of Pequeno’s suit against Brownsville.
In November 1998, Pequeno’s employment with Brownsville was
terminated. He subsequently filed suit against Brownsville in
the United States District Court for the Southern District of
Texas (the “§ 1983 district court”). Bringing his suit under 42
U.S.C. § 1983, Pequeno alleged that he was terminated in
retaliation for exercising his First Amendment rights when he
spoke publicly in opposition to the city’s plans to purchase a
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particular computer software program. The case went to a jury,
and on March 26, 2002, the jury awarded Pequeno a judgment for
$400,359. He was also awarded $20,385 in attorney’s fees. On
April 5, 2002, Pequeno filed a motion to amend the judgment to
include additional compensation for future lost wages. In
support of his motion, Pequeno cited statements from jurors to
the effect that they would have included compensation for future
wages if they had known that Pequeno would not get his job back
as a result of the verdict.2 Pequeno also cited these statements
in a letter he wrote to Appellee-Cross-Appellant Michael B.
Schmidt dated June 7, 2002, in which he requested Schmidt not to
oppose the motion to amend the judgment.3 Pequeno’s motion to
amend the judgment was denied in August 2002.
B. Bankruptcy Court Proceedings
As a result of losing his job, Pequeno suffered financial
difficulties. To forestall what he thought was the imminent
2
Specifically, Pequeno wrote that:
Plaintiff also found that jurors were not
aware that under [§ 1983] since Defendant had
not protected Plaintiff’s previous job
position and, in fact Defendant had filled in
the position with someone else, and because
placing Plaintiff back in his employment
position would be infeasible because of the
hostile, political environment, then aggrieved
Plaintiff is entitled to recover front pay as
appropriate remedy.
3
In his letter to Schmidt, Pequeno stated: “[b]y their
own testimony front-pay was not awarded by the jurors because
they believed that I was going to get my job back.”
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foreclosure on his home, on December 31, 2001, Pequeno filed a
pro se petition for bankruptcy protection under Chapter 7 of the
Bankruptcy Code. On January 4, 2002, the bankruptcy court
appointed Schmidt as the Chapter 7 trustee.
Under FED. R. BANKR. P. 1007(c), a debtor filing under
Chapter 7 has fifteen days from the time of filing his petition
to file a schedule of his assets and debts. Pequeno failed to
make such a filing. In response to a motion from Schmidt, in
June 2002, the bankruptcy court ordered Pequeno to file his
schedule of assets and debts, as well as his statement of
financial affairs. On June 17, Pequeno filed both documents.
Pequeno failed to list both his cause of action against
Brownsville and a $61,000 payment from Brownsville’s retirement
fund in his schedule of assets and debts. He did, however, list
these assets in his statement of financial affairs. Further, in
February 2002, Brownsville’s attorneys informed Schmidt of
Pequeno’s pending cause of action against the city. So, from an
early point in the proceedings, Schmidt had actual notice of the
suit against Brownsville.
On June 14, 2002, Pequeno attended the first meeting of
creditors as required by 11 U.S.C. § 341. At the meeting, he
requested, and was granted, an adjournment until June 28 so that
he could retain an attorney. However, Pequeno never retained an
attorney and did not attend the meeting on June 28, so the § 341
meeting was postponed for a second time until September 26, 2002.
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The day before that meeting was to take place, Pequeno requested
permission to participate in the meeting telephonically, claiming
that car difficulties would prevent him from attending in person.
The bankruptcy court denied this request, and Pequeno did not
attend the meeting. The meeting was rescheduled a third time for
October 31, 2002.
On July 18, 2002, Pequeno filed a motion under 11 U.S.C.
§ 706(a) to convert his bankruptcy filing from Chapter 7 to
Chapter 13. He claimed that he filed for bankruptcy to save his
home from foreclosure. After reviewing a book about bankruptcy,
he had the mistaken impression that filing under Chapter 7 would
stop the foreclosure. His attorney in the § 1983 suit informed
him that filing under Chapter 7 was ill-advised.4 Based on this
advice, Pequeno sought to convert his filing to Chapter 13. On
July 22, Schmidt filed an objection to Pequeno’s conversion
motion. At a hearing held on August 7, the court orally granted
Pequeno’s conversion motion. After having already granted
Pequeno’s motion, the Bankruptcy Court scheduled a hearing on the
matter for October 9, 2002.5
4
Upon receiving this advice, Pequeno initially moved to
dismiss his bankruptcy filing altogether. He claims that he
initially failed to file his schedules because he planned to
withdraw his bankruptcy petition. Once the bankruptcy court
denied the motion to dismiss, Pequeno filed his schedules and
ultimately filed a motion to convert his filing to Chapter 13.
5
One week after this hearing, on August 14, Pequeno
received a discharge of his debts because the automatic discharge
was unopposed. As part of the remand proceedings conducted
pursuant to the district court’s judgment, and at Pequeno’s
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On September 3, 2002, Pequeno filed amended schedules in
which he listed his interest in the litigation against
Brownsville. At that point, he also claimed that because the
judgment was for lost future wages, it was completely exempt from
the bankruptcy estate pursuant to 11 U.S.C. § 522(d)(11)(E).
Three days later, Schmidt responded to Pequeno’s claim of
exemption, arguing that the judgment was for mental anguish and
lost past wages. Schmidt cited the juror statements that Pequeno
presented in his motion to increase the judgment of the § 1983
district court. The trustee also offered a proffer from
Alejandro Garcia, Pequeno’s attorney in the § 1983 case. Garcia
stated that Pequeno told him that the jurors told Pequeno that
they had not awarded him compensation for lost future wages
because they thought he would be reinstated.6 Pequeno never
objected to the presentation of this evidence. Schmidt also
filed an emergency motion for authority to mediate and settle the
judgment. On September 10, the bankruptcy court granted Schmidt
authority to mediate a settlement. At that time, the court
insistence, on October 6, 2004, the bankruptcy court revoked the
discharge that was granted over two years earlier.
6
Garcia wrote that:
Mr. Juan Pequeno, the Debtor, stated to me
that he had spoken with some of the juror(s)
after the verdict was received and they asked
him if he would be suing to get his job back
and he told them “No”. According to Mr.
Pequeno these juror(s) explained that they had
not awarded him any future lost wages (“front
pay”) for this reason.
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scheduled arguments on the exemption issue for the October 9
hearing.
With his authority to mediate, Schmidt quickly negotiated a
settlement with Brownsville for $140,000 in exchange for
Brownsville agreeing not to appeal the § 1983 district court’s
judgment. On September 25, 2002, the bankruptcy court approved
the settlement subject to a final ruling on Pequeno’s motion to
convert.7 As scheduled, on October 9, the bankruptcy court heard
arguments about Pequeno’s conversion and exemption motions. A
month later, on November 7, the bankruptcy court denied Pequeno’s
motion to convert and held that none of the judgment represented
compensation for lost future wages.
C. District Court Proceedings
Pequeno promptly appealed the bankruptcy court’s November 7
ruling to the United States District Court for the Southern
District of Texas. On April 1, 2004, the district court issued
its ruling. Pequeno v. Schmidt, 307 B.R. 568 (S.D. Tex. 2004).
It reversed the bankruptcy court’s judgment on the conversion
issue, finding that the right to convert from Chapter 7 to
Chapter 13 is absolute. It affirmed the bankruptcy court’s
determination on the exemption issue, holding that the juror
statements Pequeno cited in his motion to amend the judgment of
7
Such a conditional ruling was necessary because if the
bankruptcy court determined that Pequeno should be allowed to
convert to Chapter 13, then as debtor-in-possession, he, and not
Schmidt, would have the right to make any settlement decisions.
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the § 1983 district court constituted a judicial admission on his
part that the jury did not award any damages for future wages.
Pequeno now appeals the district court’s ruling on the exemption
issue, and Schmidt cross-appeals on the conversion issue.
II. STANDARD OF REVIEW
In this case we are called upon to review the district
court’s decision reviewing the bankruptcy court. In such
circumstances, we review the bankruptcy court’s findings of fact
for clear error and we review legal issues de novo. Milligan v.
Evert (In re Evert), 342 F.3d 358, 363 (5th Cir. 2003).
III. DISCUSSION
A. The Right to Convert Under § 706(a)
On appeal, we must consider two questions: (1) Does a debtor
have an absolute right to convert from Chapter 7 to Chapter 13?;
and (2) If there is no absolute right to convert, did the facts
and circumstances of this case warrant denial of Pequeno’s motion
to convert?
As to the first question, the district court found that
Martin v. Martin (In re Martin), 880 F.2d 857 (5th Cir. 1989),
mandates that a debtor who initially files under Chapter 7 has an
absolute one-time right to convert to Chapters 11, 12, or 13. In
Martin, the bankruptcy court denied a debtor’s motion to convert
from Chapter 7 to Chapter 13. The debtor appealed to the
district court, which held that the Bankruptcy Code places no
restrictions on the right to convert.
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In reviewing the district court, the Martin court began by
considering the relevant statutory text, which states:
The debtor may convert a case under this chapter
to a case under chapter 11, 12, or 13 of this
title at any time, if the case has not been
converted under section 1112, 1208, or 1307 of
this title. Any waiver of the right to convert
a case under this subsection is unenforceable.
11 U.S.C. § 706(a). The court found that the text of § 706(a)
represents an unequivocal statement of the right to convert.
Martin, 800 F.2d at 858. The court also cited the legislative
history, which states that § 706(a) “gives the debtor the one-
time absolute right of conversion of a liquidation case to a
reorganization or individual repayment plan case.” S. Rep. No.
989, 95th Cong., 2d Sess. 380, reprinted in 1978 U.S. Code Cong.
& Admin. News 5787, 5880.
Finally, the Martin court cited several cases which support
the notion that a “court does not have the discretion to block
the conversion[,]” Martin, 880 F.2d at 859, and that “a debtor’s
right to convert under section 706(a) is, as indicated by the
statute and its legislative history, an absolute one.” Id.The district court noted Martin’s mention in dicta of exceptional
circumstances,8 but focused on the fact that “in at least five
8
The court noted that “[t]here are, however, some cases
which block the conversion, but only in extreme circumstances . .
. .” Id. at n.2. The court further stated:
The courts refuse to interfere with [a right of
conversion] in the absence of extreme
circumstances. Because Martin does not allege
facts which if true would provide an adequate
ground to deny the debtor’s motion to convert,
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different places [Martin] states that the right to convert is
absolute (or uses words to that effect). A statutory right that
is absolute cannot have court-made exceptions.” Id. at 579
(footnote omitted). On appeal, Schmidt contends that this
resolution is flawed since it ignores the clear import of
Martin’s statements acknowledging the need to consider the
circumstances before granting a conversion motion.
As to the question of whether the circumstances of the
instant case warrant the denial of Pequeno’s motion to convert,
the district court recognized that its answer was moot based on
its finding that the right to convert is absolute. Nevertheless,
it stated that even if exceptions were allowed under exceptional
circumstances, the facts of this case presented nothing
exceptional.
On appeal, Schmidt argues that Pequeno’s conduct throughout
the bankruptcy proceeding evinces considerable bad faith. As
evidence of bad faith, Schmidt cites Pequeno’s: (1) failure to
file initially the required schedules; (2) concealment of his
§ 1983 case and retirement fund payout when he did file his
schedules; (3) failure to attend the § 341 creditors meetings;
and (4) waiting until the last minute to claim an exemption for
his § 1983 judgment. Thus, Schmidt argues, allowing Pequeno’s
we agree with the district court’s conclusion
that the bankruptcy court erred in denying the
conversion.
Id. at 859.
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conversion would sanction an abuse of the bankruptcy process.
We agree with the district court’s read of Martin. The
statutory language makes it clear that the right to convert is
absolute and unqualified. Even were that not so, however, the
exceptional circumstances contemplated by the two bankruptcy
court cases cited in Martin are not present in this case. In re
Straugh, 41 B.R. 757 (Bankr. W.D. Pa. 1984), involved a post-
petition preferential transfer. In re Calder, 93 B.R. 739(Bankr. D. Utah 1988), the bankruptcy court denied conversion to
a debtor who was a practicing bankruptcy attorney who engaged in
substantial misconduct.
Schmidt seems to argue that Pequeno’s failure to list
initially the § 1983 suit in his schedule of assets evinces an
intent to shield his assets from the bankruptcy process. The
facts, however, do not bear out this argument. As Pequeno
argues, if he were trying to shield this asset, he would not have
listed it in his statement of financial affairs. The bankruptcy
court specifically declined to find fraud on the part of Pequeno.
The district court’s reversal of the bankruptcy court’s
denial of Pequeno’s conversion motion in the instant case must be
affirmed.
B. Exemption of Future Wages Under 11 U.S.C. § 522(d)(11)(E)
Section 522(d)(11)(E) of the Bankruptcy Code exempts from
the bankruptcy estate any “payment in compensation of loss of
future earnings of the debtor . . . to the extent reasonably
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necessary for the support of the debtor . . . .” Under FED. R.
BANKR. P. 4003(c), the party objecting to the exemption “has the
burden of proving that the exemptions are not properly claimed.”
The objecting party must carry this burden by a preponderance of
the evidence. In re Park, 246 B.R. 837, 840 (Bankr. E.D. Tex.
2000) (citing In re Ciotta, 222 B.R. 626, 629 (Bankr. C.D. Cal.
1998)).
The district court found that the record supported Schmidt’s
objection to Pequeno’s claimed exemption. The district court
particularly focused on the juror statements Pequeno presented to
the § 1983 district court in his attempt to increase the jury’s
award. Those statements reflect that the jury did not intend to
award damages for future wages. The district court ruled that
Pequeno’s presentation of those statements to the § 1983 district
court constitutes a judicial admission that he cannot now deny.
Further, this evidence was presented in the bankruptcy court
without objection.
Because Pequeno failed to object to the presentation of the
juror statements in the bankruptcy court, we review the admission
of the statements for plain error. Permian Petroleum Co. v.
Petroleos Mexicanos, 934 F.2d 635, 648 (5th Cir. 1991). “Plain
error is error which, when examined in the context of the entire
case, is so obvious and substantial that failure to notice and
correct it would affect the fairness, integrity, or public
reputation of judicial proceedings.” Id.- 12 -
On appeal, Pequeno asserts that the bankruptcy court’s
admission of Garcia’s proffer regarding the juror statements
constituted plain error in three ways. First, Pequeno argues
that any statements he made to Garcia were covered by the
attorney-client privilege. Second, Pequeno claims that the
statements are inadmissible under FED. R. EVID. 606(b). Third,
Pequeno avers that the juror statements are inadmissible hearsay.
Pequeno argues that in the absence of this evidence, there is no
way to tell whether the judgment covered future wages. Citing In
re Cramer, 130 B.R. 193 (Bankr. E.D. Pa. 1991), Pequeno argues
that such speculation means that Schmidt cannot meet his burden
of proving by a preponderance of the evidence that the exemption
has not been properly claimed.
Upon review, it is clear that none of Pequeno’s objections
reflects plain error. Pequeno’s privilege argument fails because
TEX. R. EVID. 511 provides that one who holds a privilege, such as
the attorney-client privilege, waives the privilege when they
disclose the substance of the privileged communication. Thus, in
disclosing the substance of his conversation with Garcia through
his letter to Schmidt and his motion to amend the judgment,
Pequeno waived whatever privilege he may have held over his
statements to Garcia.
FED. R. EVID. 606(b) states: “Upon an inquiry into the
validity of a verdict or indictment, a juror may not testify as
to any matter or statement occurring during the course of the
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jury’s deliberations or to the effect of anything upon that or
any other juror’s mind or emotions.” In this instance, the
jurors’ statements are being used to determine the harms for
which the jury intended to compensate Pequeno. This is not an
inquiry into whether the verdict is valid. Rather, it is an
inquiry into what the verdict actually says. As such, it is not
within the ambit of Rule 606(b). See 27 CHARLES ALAN WRIGHT & VICTOR
JAMES GOLD, FEDERAL PRACTICE AND PROCEDURE § 6074, at 407 (1990) (making
clear that the rule “applies only in a specific procedural
context”).
As to Pequeno’s hearsay objection, Schmidt responds by
claiming that Garcia’s statement constitutes an admission by a
party opponent under FED. R. EVID. 801(d)(2), and is thus not
hearsay. Under Rule 801(d)(2), a statement is not hearsay if
“[t]he statement is offered against a party and is . . . the
party’s own statement . . . .” Here, Garcia’s proffer concerns a
statement Pequeno himself made. However, that statement was
itself hearsay since it concerned what the jurors had told
Pequeno. The fact that Garcia’s proffer is covered under Rule
801(d)(2) does not eliminate the need to identify a hearsay
exception to cover the jurors’ original statements to Pequeno.
United States v. Dotson, 821 F.2d 1034, 1035 (5th Cir. 1987).
Finding no exception, we rule that the proffer contains hearsay.
The next question is whether the court’s admission of this
hearsay constitutes plain error. We hold that it does not.
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Pequeno argues that it taints the integrity of the judicial
proceedings to allow a pro se litigant’s claim to be defeated
where the sole evidence against him is rank hearsay. This
argument is insufficient to establish plain error. Garcia’s
proffer is not the sole evidence used to defeat the exemption
claim. Schmidt also offered the letter Pequeno wrote to Schmidt
as well as Pequeno’s motion to amend the § 1983 district court’s
judgment. Since Garcia’s proffer was not the sole evidence
offered against Pequeno, Pequeno’s argument essentially becomes
that it is plain error to hold pro se litigants responsible for
making hearsay objections. This argument is of no moment because
even for pro se litigants, courts are not responsible for making
basic evidentiary objections.
For the above reasons, we conclude that it was not plain
error for the bankruptcy court and district court to consider
Garcia’s proffer. Furthermore, even if Garcia’s proffer were
stricken, there would still be ample reason to find that Schmidt
carried his burden of proving that the exemption was not properly
claimed. Pequeno does not argue that admission of either his
motion to amend the judgment or his letter to Schmidt constituted
plain error.9 The statements in these documents provide a
foundation, independent from Garcia’s proffer, to conclude that
9
It would seem that these documents suffer from the same
double hearsay problem as Garcia’s proffer. But since Pequeno
does not argue that admission of these documents constitutes
plain error, we need not consider the issue. Gentry v. Lowndes
County, 337 F.3d 481, 485 n.5.
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the jury did not award compensation for lost future wages.
IV. CONCLUSION
For the foregoing reasons we AFFIRM the judgment of the
district court. Costs shall be borne by Pequeno. All
outstanding motions are DENIED.
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