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In re Holman

United States District Court, D. Kansas

October 31, 2018

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

          ERIC F. MELGREN UNITED STATES DISTRICT JUDGE

         This 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.

         I. Factual and Procedural Background

         Shala 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.

         The 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.

         Between 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.

         On 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.

         The 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.

         On July 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.

         On 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, 2017.

         On May 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.

         Specifically, 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.

         Debtors 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.

         The 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.

         First, 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, [1] 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.

         Second, 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 § 1328(a).[2]

         The 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.

         In this Court, the Trustee again moved for a stay pending appeal.[3] 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 Trustee's favor.

         Debtors 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' motion.

         The matter currently before the Court is the Trustee's appeal of the bankruptcy's court's order denying the Trustee's motion to dismiss.

         II. Legal Standard

         The 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.[4] When reviewing the bankruptcy court's conclusions of law, the standard of review is de novo.[5] Generally, “[t]he applicable standard of review of an order dismissing a Chapter 13 bankruptcy case is abuse of discretion.”[6] 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.”[7] Furthermore, “[t]he bankruptcy court's interpretation of a statute is a question of law.”[8]

         Here, 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.[9] 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.[10]

         III. Discussion

         The 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 order.

         Debtors 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.

         The 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.

         A case with similar facts to this case is one from the Bankruptcy Court for the Southern District of Texas, In re Parffrey.[11] There, the plan prohibited the debtor from incurring additional debt except upon written approval from the Trustee.[12] 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.[13] In response to the motion, the debtor paid the last four payments of his plan.[14] The court concluded that the ...


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