United States District Court, D. Kansas
In re NATHAN EDWARD HOLMAN and SHALA RENEE HOLMAN Debtors. CARL B. DAVIS Appellant. NATHAN EDWARD HOLMAN and SHALA RENEE HOLMAN, Appellees.
MEMORANDUM AND ORDER
F. MELGREN UNITED STATES DISTRICT JUDGE
matter comes before the Court on the Trustee Carl B.
Davis's appeal of the bankruptcy court's denial of
the Trustee's motion to dismiss. The Trustee argues that
the bankruptcy court erred when it found that language in 11
U.S.C. § 1328(a) required it to discharge Debtors'
bankruptcy even though cause existed to dismiss the case
pursuant to 11 U.S.C. § 1307(c). In addition, the
Trustee contends that the bankruptcy court erred in finding
that the court must revoke a confirmation order under 11
U.S.C. § 1330(a) before the court could consider
misconduct that arose prior to that order. Because the Court
finds the first issue dispositive, and affirms the bankruptcy
court's holding that the use of the word
“shall” in § 1328(a) mandates discharge, the
Court need not reach the second legal issue.
Factual and Procedural Background
and Nathan Holman (Debtors/Appellees) filed their bankruptcy
case on November 3, 2011. Nathan is a self-employed
chiropractor. Shala was a physician's assistant (until
February 2013) and a Rodan Fields associate or consultant.
They proposed a Chapter 13 plan requiring them to make 60
monthly payments of $707. In 2012, the bankruptcy court
entered an agreed order confirming a modified plan of monthly
payments of $1, 517 for 57 months.
standard confirmation order set out duties on the Debtors.
Some of these duties included: (1) Debtors notifying the
Trustee of any change in employment; (2) Debtors timely
filing all tax returns coming due during the case and
providing copies to the Trustee; (3) prohibiting Debtors from
incurring any new debt without the Trustee's or
court's approval; and (4) prohibiting Debtors from
selling, encumbering, or otherwise disposing of their assets
without a court order.
June 2012 and March 2015, Debtors sought three modifications
of their plan. In April 2015, Debtors filed their fourth
motion to modify. They requested reduction of their plan
payment and stated that they had experienced a reduction of
income since the filing of their case. In support of this
motion, Debtors included revised schedules I and J which
disclosed that Shala was involved in “direct sales,
” had been for six years, and was receiving $4, 558 a
month in commissions. The Trustee objected to this motion
arguing that it was not proposed in good faith and that
Debtors could afford to pay more to their creditors than
alleged. The bankruptcy court set trial for October 13, 2015.
October 12, 2015 (the day before the scheduled trial),
Debtors filed a fifth motion to modify. In this motion,
although they again stated that they had a drop in income,
they proposed increasing their plan payment by approximately
$2, 000 a month for the remainder of the plan. The Trustee
also objected to this request stating that it was not
proposed in good faith.
fourth modification motion went to trial on October 13, 2015.
Before the bankruptcy court issued a ruling, however, the
Trustee and Debtors entered into an agreed order on December
2, 2015, resolving the Trustee's objections to the fourth
and fifth modifications. The resolution provided for Debtors
to pay $3, 522 a month for three months and $4, 725 a month
for the remaining nine months of the plan.
26, 2016, the Trustee filed a second motion to dismiss after
Debtors defaulted on their plan payments and for failure to
pay post-petition taxes. The United States also filed its own
dismissal motion on August 23, 2016. On October 24, 2016, the
Trustee amended the motion to dismiss to include dismissal
for lack of good faith.
December 15, 2016, Debtors completed their plan payments. As
to the Trustee's motion to dismiss, discovery was
required to be completed by March 3, 2017, and trial was set
for March 22, 2017. In January 2017, the Trustee further
amended the motion to dismiss. Trial was held on March 22,
9, 2017, the bankruptcy court issued its order on the
Trustee's motion to dismiss. In this order, the
bankruptcy court found that the evidence demonstrated that
Debtors had flouted their duties throughout the case. The
court found that there was ample cause to dismiss the case
under § 1307(c) because of unreasonable delay by
Debtors, material default by Debtors, and lack of good faith.
the bankruptcy court found that Shala misrepresented her
employment status for several years, claiming that she was
unemployed although actually working for Rodan Fields.
Shala first revealed her employment in 2015, although she had
been working for Rodan Fields for six years at that time.
She made between $30, 000 and $40, 000 a year in 2012 and
2013. In 2014, Shala's earning records showed income of
$58, 729, and in 2015, they showed gross income of $126, 729.
incurred post-petition debts without the Trustee's or
court's approval, and the bankruptcy court stated that
some of those debts appeared to have been actively concealed.
Debtors owed the Internal Revenue Service approximately $75,
000 for the years 2014, 2015, and 2016. Although Debtors had
an adjusted gross income in each of those years of
approximately $100, 000, they only paid taxing authorities
$3, 400. Debtors also purchased two cars and titled those
cars in Shala's parents' names “due to the
bankruptcy.” In addition, Nathan drove a Denali that he
apparently acquired from Shala's mother during the
bankruptcy, but he did not disclose that or how the vehicle
is titled. As further evidence of Debtors' violation of
the confirmation order, the bankruptcy court noted
Shala's incorporation of her business and a residential
apartment lease in Kansas City.
bankruptcy court also noted Debtors' bad faith. Evidence
included repeated inaccurate statements concerning their
debts, income and expenses (as noted above). Debtors also
failed to disclose ten bank accounts. The court noted that
Debtors' actions demonstrated disregard for the
bankruptcy process and the court's orders, and that they
abused the provisions, purpose, and spirit of Chapter 13.
Although the court found ample cause to dismiss the case, it
found that two reasons prevented it from doing so.
the court found that the Trustee had challenged most of
Debtors' bad faith conduct at the October 2015 trial.
After the evidence was presented, the parties agreed to an
order on December 2, 2015, that stated in part: “To
resolve the Trustee's lack of good faith objection to
confirmation of their modified Plan, Debtors herein agree to
. . . .” The bankruptcy court determined that allowing
the Trustee to reopen the bad faith issues that had occurred
prior to the agreed order would be the equivalent of revoking
the agreed order. 11 U.S.C. § 1330(a) only allows the
revocation of a confirmation order (1) if it was
“procured by fraud” and (2) only after a party in
interest files an adversary proceeding within 180 days of the
order's entry. The bankruptcy court found that even if
the agreed order had been procured by fraud,  the Trustee's
dismissal motion was not filed until 237 days after the
agreed order. Thus, the bankruptcy court determined that any
bad faith issues occurring prior to the agreed order could
not be at issue.
and most importantly, the bankruptcy court found that
Debtor's completion of plan payments was a barrier to
dismissal. The court noted that dismissal was discretionary
under § 1307(c) because of the word “may, ”
but that discharge was mandatory under § 1328(a) because
of the word “shall.” Because Debtors had
completed their payment plan while the Trustee's motion
to dismiss was pending, the court found that Debtors were
entitled to a mandatory discharge pursuant to §
Trustee appealed the bankruptcy court's order to this
Court. The Trustee then moved, in bankruptcy court, for a
stay of judgment pending appeal. The bankruptcy court denied
the Trustee's motion finding that the Trustee's
likelihood of success on appeal was small and that the other
three factors weighed against the Trustee.
Court, the Trustee again moved for a stay pending
appeal. Debtors failed to respond to this motion
and failed to appear at the scheduled hearing on the motion.
Thus, the Court found that the Trustee's motion was
unopposed and that the Trustee made a prima facie showing
that the four factors for granting a stay weighed in the
filed a Motion for Reconsideration and requested that they be
allowed to file a response to the Trustee's Motion to
Stay out of time. This Court allowed the response and held a
hearing on Debtors' Motion for Reconsideration. Finding
that Debtors failed to identify any factual circumstances or
law that would entitle them to reconsideration of the
Court's previous order, the Court denied Debtors'
matter currently before the Court is the Trustee's appeal
of the bankruptcy's court's order denying the
Trustee's motion to dismiss.
district court sits as an appellate court on an appeal from
the bankruptcy court. The standard of review governing the
bankruptcy court's factual findings is whether they are
clearly erroneous. When reviewing the bankruptcy court's
conclusions of law, the standard of review is de
novo. Generally, “[t]he applicable
standard of review of an order dismissing a Chapter 13
bankruptcy case is abuse of discretion.” However,
“[i]f in making those orders, the trial court makes
conclusions of law, those are reviewable de novo,
requiring an independent determination of the legal issues,
giving no special weight to the bankruptcy's court
decision.” Furthermore, “[t]he bankruptcy
court's interpretation of a statute is a question of
the bankruptcy court denied the Trustee's motion to
dismiss, which would appear to make the standard of review an
abuse of discretion. Indeed, 11 U.S.C. § 1307(c)
provides that the bankruptcy court may dismiss a
case. However, the bankruptcy court, in denying the
Trustee's motion to dismiss specifically stated that if
it had “the discretion to deny a discharge and dismiss
this case, [it] would. As it is, the debtors completed their
plan payments and [the court] lack[s] discretion to dismiss
this case in spite of their conduct.” The bankruptcy
court found that it was constrained by language in a
different statute, 11 U.S.C. § 1328(a), and could not
grant the discretionary dismissal. Indeed, the bankruptcy court
found that the use of the word “shall” in §
1328(a) compelled the conclusion that dismissal could not
occur. Thus, the bankruptcy court made conclusions of law and
engaged in statutory interpretation when making its decision
that it could not dismiss the case. Thus, the standard of
review on these conclusions of law and statutory
interpretation is de novo.
Trustee argues that the bankruptcy court erred when making
two legal determinations. First, the Trustee contends that
the court erred by determining that the language in §
1328(a) required the court to discharge the bankruptcy even
though cause existed to dismiss the case and a dismissal
request pursuant to § 1307(c) was pending before the
court. The Trustee asserts that the bankruptcy court's
reasoning adds a nonexistent deadline into § 1307(c). In
addition, the Trustee argues that the bankruptcy court erred
when it found that Debtors' plan for reorganization had
to be revoked under § 1330(a) before a party in interest
could request dismissal of the bankruptcy under §
1307(c) for events occurring prior to that confirmation
do not add any meaningful response or argument to the
Trustee's motion. They do not discuss the cases nor the
law that the Trustee cites. Instead, they simply paraphrase
or repeat verbatim the bankruptcy court's order and state
that it is correct.
first question the Court must answer is whether §
1328(a) trumps § 1307(c). Several courts have discussed
the meaning of the word “shall” in § 1328(a)
and have concluded that a bankruptcy court must grant the
debtor a discharge as soon as practicable after completion of
all payments under the plan. These courts reason that the
word “shall” requires discharge.
with similar facts to this case is one from the Bankruptcy
Court for the Southern District of Texas, In re
Parffrey. There, the plan prohibited the debtor
from incurring additional debt except upon written approval
from the Trustee. The United States Internal Revenue
Service (“IRS”) filed a motion to dismiss because
the debtor failed to file postpetition federal tax returns
and incurred income tax liability without the trustee's
approval. In response to the motion, the debtor
paid the last four payments of his plan. The court
concluded that the ...