Duran v. Gudino (In re Duran)

630 B.R. 797

IN RE: Gabino F.A. DURAN, Debtor.

Gabino F.A. Duran, Appellant,

v.Luz Gudino; Elizabeth F. Rojas, Chapter 13 Trustee, Appellees.

BAP No. CC- 20-1045-KTG

Bk. No. 9:18-bk-11719-MB

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Filed JULY 27, 2021

Jerry Namba argued for appellant Gabino F.A. Duran;

Paul F. Ready of Farmer & Ready argued for appellee Luz Gudino.

Before: KLEIN,^* TAYLOR, and GAN, Bankruptcy Judges

KLEIN, Bankruptcy Judge:

All roads to dismissal pass through Bankruptcy Code § 349(a).¹ The debtor moved to dismiss as of "right" under § 1307(b) and wound up with an order under § 349(a) that dismissal of his case be "with prejudice."

The debtor's motion to dismiss under § 1307(b) drew an allegation of "cause" under § 349(a) to order that dismissal be with prejudice. The court found the requisite § 349(a) "cause" and ordered that dismissal be with prejudice, but the record is ambiguous whether dismissal was premised on § 1307(b), § 1307(c), § 1307(e), § 105, or inherent authority. From the standpoint of the debtor, the moral of the story is that the § 1307(b) "right" to dismiss is not a get-out-of-chapter-13-free card.

We hold: (1) every dismissal, including a § 1307(b) motion to dismiss, triggers the § 349(a) issue whether "cause" exists to order that dismissal be with prejudice; (2) no particular procedure prescribes how or when to initiate a contest regarding § 349(a) "cause" so long as there is due process notice appropriate for denial of discharge and a hearing; and (3) the proponent of a § 349(a) prejudice determination has the burden of persuasion. We AFFIRM and publish because of the novelty of the issue.

FACTS

Gabino F.A. Duran, who formerly did business as Duran Farming and Duran Strawberry Services, filed his chapter 13 petition on October 18, 2018. He was no stranger to bankruptcy, having filed chapter 12 cases in 2010 and 2012, the latter of which ended with a chapter 7 discharge.

In his initial verified schedules, Duran portrayed himself as a farmhand employee of Rancho Bonita Farms, earning monthly gross wages of $4,283.17, who owned a fractional interest in his residence subject to a $175,249.38 mortgage and owed priority unsecured state tax debt of $4,497.33 and unsecured debt of $101,901.04.

Gradually a different picture emerged. Duran thrice amended his schedules over seven months under pressure from Nemesis, played by creditor Luz Gudino, who had a pending unscheduled $141,944.04 lawsuit against Duran for contract farm labor.

The first two amendments added Gudino's pending lawsuit, a judgment debt of $134,676, as well as two assets and an increase of his proportionate interest in his residence.

The abrupt change occurred the day before the confirmation hearing when Duran filed his third verified amendment. In that peripeteia, Duran confessed that his gross income was not $0.00 in 2016 and 2017, as stated in his verified Statement of Financial Affairs, but rather respectively $1,345,074 and $1,424,611. He also revealed that 11 months before filing the chapter 13 case he transferred all his farm equipment (worth more than $50,000), and his owned and leased farmland, including 20-acres planted by Gudino's farm laborers, to insider Clara Galvan Hernandez ("Galvan"),² who is the mother of his five children.

Galvan, operating under the name Rancho Bonita Farms, nominally became Duran's "employer" in November 2017.

Galvan's bank statements for the period February 5 to October 31, 2018, reveal revenues of $1,101,915.60.

Even before these revelations, there were objections to Duran's plan to pay a 00.5% dividend to unsecured creditors. Gudino objected, mined records of prior Duran cases to ferret out assets, and spared no effort to hold Duran to account.

Gudino's "Rebuttal" to Duran's reply to the objection to confirmation ended with the statement "this case should be either dismissed or converted to a Chapter 7 proceeding to allow a disinterested trustee to claw back the assets and funds that should be available for payment to the creditors of this estate." Bankr. Docket No. 38, at pp. 3-4. But Gudino did not make a motion to dismiss or convert under the procedure prescribed by Rule 1017(f)(1).

The chapter 13 trustee additionally objected that tax returns were missing and that the plan was not feasible.

At the two-day evidentiary hearing on plan confirmation, Duran and Galvan, among others, testified. The focus included issues of good faith, accounting for farming equipment, and the election to forego harvesting 20 acres of strawberries planted by Gudino's farm laborers but thereafter to farm the same land under the Rancho Bonita flag. During the hearing, Gudino did not assert that the case should be converted or dismissed.

The court ordered post-hearing briefs regarding confirmation, to include the essential element that the plan had been proposed in good faith, before submitting the matter for decision.

Gudino's post-hearing brief included an assertion that cause existed to dismiss the chapter 13 case with prejudice for bad faith. But Gudino did not at any time file and serve a motion to convert or dismiss under § 1307(c), under the procedure prescribed by Rules 1017(f)(1) and 9014.

Before the plan confirmation question was ripe for decision, the United States filed a surprise $638,198.19 proof of federal tax claim. Duran's sworn schedules suggested no federal tax debt existed.

The United States also filed a confirmation objection stating that Duran exceeded the § 109(e) chapter 13 debt limits, that the plan was not feasible, and that the case should be dismissed under § 1307(e). Although the objection stated the United States "will move" to convert or dismiss, it did not file a motion to convert or dismiss under § 1307(c) or § 1307(e), under the procedure prescribed by Rules 1017(f)(1) and 9014.

Duran responded to the court's order to address the federal tax claim, conceding the claim is valid and rendered him ineligible for chapter 13. Duran thereupon filed a motion to dismiss under § 1307(b), following the procedure prescribed by Rules 1017(f)(2) and 9013.

Gudino filed an "opposition" to Duran's § 1307(b) motion urging only that dismissal should be with prejudice under § 349(a) for egregious bad faith. But, Gudino did not make a motion to dismiss or convert under § 1307(c).

As evidence of egregious bad faith, Gudino relied on the evidence of chicanery provided at the confirmation hearing, the failures to disclose and misrepresentations in the sworn schedules, the false portrayal of Duran as a mere farmworker employee, and the apparently intentional failure to disclose the substantial federal tax debt.

Duran's defense amounted to equivocations about various problems in the case.

While Duran contended that dismissal with prejudice amounts to denial of discharge as to which he would not have the burden of proof, he did not contend that an adversary proceeding or further evidentiary hearing was necessary.

The bankruptcy court held a hearing at which it considered the entire record and at which Duran did not seek to present additional evidence. As Duran's motion to confirm plan had been eclipsed and implicitly mooted by his § 1307(b) motion, the only formal motion before the court was Duran's § 1307(b) motion, coupled with Gudino's "opposition" that dismissal should be "with prejudice" under § 349(a).

The court's ruling had two phases. First, it explained why the by-then moot plan could not be confirmed, referring to (among other reasons) Duran's failure to meet his burdens to establish that the case and the plan were filed in good faith, as required by § 1325(a)(3) and (7). Second, the court focused on the § 349(a) question raised by Gudino, making findings of fact and conclusions of law orally on the record.

The court identified the governing § 349(a) standard as "totality of circumstances" under the law of the circuit established in Leavitt v. Soto (In re Leavitt) , 171 F.3d 1219, 1224 (9th Cir. 1999), aff'g 209 B.R. 935 (9th Cir. BAP 1997). It considered the four objective Leavitt factors: (1) whether Duran misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or plan in an inequitable manner; (2) Duran's history of bankruptcy filings and dismissals; (3) whether Duran only intended to defeat state court litigation; and (4) whether egregious behavior is present.

It then considered Duran's bankruptcy history, his litigation with Gudino, the falsities in his schedules, and the degree of Duran's missteps. The court determined that: (1) Duran's prepetition transfer of farmland, crops, and equipment to Galvan was part of a scheme to evade his debt to Gudino; (2) not harvesting the 20-acre strawberry crop planted with Gudino's contract farm labor was inexcusable waste; and (3) the chapter 13 petition, the misrepresentations, omissions, and misstatements under penalty of perjury cumulatively constituted egregious and inequitable bad faith conduct, as well as what the court described as "huge" unfair manipulation and abuse of the Bankruptcy Code.

As to credibility, the court explicitly disbelieved Duran's and Galvan's testimony. Their excuses for the prepetition transfers were rejected as not credible and not supported by evidence. Likewise, their spin on postpetition misrepresentations was deemed incredible.

The court concluded that the totality of circumstances strongly militated in favor of ordering that the effect of dismissal be with prejudice. Nothing suggests that the court was dismissing the case on any basis other than Duran's § 1307(b) motion to dismiss "of right." The court did not evaluate whether conversion or dismissal was in the best interests of creditors and the estate as required by § 1307(c) and § 1307(e). Nor did the court indicate that it was denying Duran's motion to dismiss in favor of dismissing on some other theory, such as § 105(a) abuse of process.

Although the only procedurally correct motion to...