Viegelahn v. Lopez

570 B.R. 51

Mary K. VIEGELAHN, Standing Chapter 13 Trustee, Appellant

v.Manuel Palomera LOPEZ, and Dolores Ronquillo Lopez, Appellees.

Case No: 5:15–cv–379–RCL

United States District Court, W.D. Texas.

Signed March 7, 2017

David W. Van Zyl, Jessica Lanoue Hanzlik, Vanessa Inez DeLeon Guerrero, Mary K. Viegelahn, Chapter 13, San Antonio, TX, for Appellant.

J. Todd Malaise, Malaise Law Firm, San Antonio, TX, for Appellees.

MEMORANDUM OPINION

Royce C. Lamberth, United States District Judge

This case comes before the Court on appeal from the March 10, 2015 Bankruptcy Court's orders granting the debtors' motion to voluntary dismiss their Chapter 13 case, and dismissing as moot the trustee's motion to modify the confirmed plan. The trustee—the appellant here—argues that the Bankruptcy Court erred in permitting the debtors—the appellees—to dismiss their Chapter 13 case because the debtors acted in bad faith. The debtors argue that, under Chapter 13, they had an absolute right to dismiss their case, regardless of any bad faith, and that in any case, they did not act in bad faith. The parties also dispute whether the Bankruptcy Court erred when it ordered the funds in possession of the trustee be returned to the debtors upon dismissal. This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a) which provides that district courts have jurisdiction to hear appeals from final judgments and orders of bankruptcy judges. It finds that the Bankruptcy Court did not err in granting the debtors' motion to dismiss or in dismissing as moot the trustee's motion to modify.

The Court does find, however, that the Bankruptcy Court erred in ordering that the funds in possession of the trustee be returned to the debtors upon dismissal. The Court will therefore affirm in part and reverse in part the Bankruptcy Court's orders and will remand for entry of an order allowing the trustee to disburse the funds in its possession to the debtors' creditors.

I. BACKGROUND

On June 29, 2009, the debtors filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas as well as a plan of reorganization. Individual debtors may declare bankruptcy under either Chapter 7 or Chapter 13. Chapter 13 is "wholly voluntary" and "allows a debtor to retain his property if he proposes, and gains court confirmation of, a plan to repay his debts over a three- to five-year period." Harris v. Viegelahn , ––– U.S. ––––, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015). It "benefit[s] debtors and creditors alike," allowing debtors to retain their assets and entitling creditors to a "debtor's ‘disposable’ postpetition income." Id. Chapter 7 on the other hand "allows a debtor to make a clean break from his financial past, but at a steep price: prompt liquidation of the debtor's assets," which are immediately transferred to a bankruptcy estate overseen by a trustee who sells the property and distributes the proceeds to creditors. Id.

The debtors' Chapter 13 plan proposed a monthly payment of $1,100 for five years, and a 2% dividend to general unsecured creditors. The debtors claimed as exempt their homestead under a provision of Texas law stating that "[a] homestead ... [is] exempt from seizure for the claims of creditors." Tex. Prop. Code § 41.001. The Bankruptcy Court confirmed the plan on October 9, 2009.

Throughout the debtors' Chapter 13 case, the trustee filed three motions to dismiss after the debtors failed to make payments under the plan and/or because the amount paid was insufficient to pay allowed secured and priority claims in full. In response to the first two motions, the plan was modified. In response to the third motion, filed on June 27, 2014, the debtors filed a nunc pro tunc motion to sell their homestead, which had been sold on July 11, 2011 for $166,500 via a wrap-around mortgage and balloon payment. Net proceeds to the debtors were estimated at $53,251.00 after the satisfaction of liens. The debtors sought the Bankruptcy Court's authorization to retain the net proceeds to be used for an eye surgery. The trustee objected, asserting that although under Texas law the homestead was exempt, the proceeds from the sale only retained their exempt status for six months, and only to the extent they were reinvested in another homestead within those six months. See Tex. Prop. Code. § 41.001(c) ("The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale."). When not reinvested in another homestead, the proceeds from the sale lost their exempt status and, according to the trustee, should have been turned over to her for the benefit of the debtors' creditors.

The Bankruptcy Court ordered that the net proceeds from the sale of the home, after satisfaction of all claims secured by liens on the property, were to be submitted to the trustee, who would hold the funds in trust until an order was entered modifying the plan. Thus, $42,148.58—the net proceeds after payment of the first lien—were delivered to the trustee. Both parties filed motions to modify the plan.

The trustee sought to distribute the proceeds to creditors, and opposed the retention of any portion of the proceeds by the debtors. The debtors proposed using the proceeds, less the amount needed for an eye surgery, to cure the plan payment arrearages and close out the plan. At a hearing on December 4, 2014 the Bankruptcy Court stated that the debtors' creditors would be entitled to the proceeds from the sale, less any expenses for the eye surgery, unless the case was dismissed, at which point the debtors could retain all of the proceeds. Pending a decision on the motions to modify, the debtors filed a motion to voluntarily dismiss their Chapter 13 case on January 7, 2015. The trustee objected, arguing that the home sale proceeds were a nonexempt asset of the bankruptcy estate, the debtors lost the right to withhold those proceeds from the estate, the voluntary motion to dismiss was filed in bad faith, and cause existed to overcome the presumption that property of the estate reverts to the debtors in the event of dismissal.

The Bankruptcy Court entered an order granting the debtors' voluntary motion to dismiss, finding that "[a]lthough Debtor Dolores Ronquillo Lopez sold her homestead without prior approval of the Court, the Court does not find cause for conversion to Chapter 7 or for an involuntary modification of the Chapter 13 Plan." See Order Granting Motion to Dismiss , Bankruptcy Case No. 09–52365, ECF No. 108 (Bankr. W.D. Tex. Mar. 10, 2015). It ordered that the funds in the hands of the trustee—the sale proceeds—be returned to the debtors. Id. It also dismissed as moot the trustee's motion to modify the plan.

The trustee appeals both of these orders, arguing that debtors, like those here, do not have an absolute right to dismiss their case when bad faith or abuse of the bankruptcy process is present. The trustee also argues that the Bankruptcy Court should have found that the funds in possession of the trustee—the homestead sale proceeds—should not have been returned to the debtors, and should instead have been disbursed to the debtors' creditors. The debtors argue that they had an absolute right to voluntarily dismiss their Chapter 13 case, and that even if bad faith was an exception to this right, bad faith and/or abuse of the bankruptcy process does not exist here. They also argue that the Bankruptcy Court correctly ordered that the sale proceeds be returned to the debtors upon dismissal. The Court will first address whether the debtors had a right to dismiss their case, then will determine whether the sale proceeds should have been returned to the debtors upon dismissal.

II. STANDARD OF REVIEW

The Bankruptcy Court's findings of fact are reviewed for clear error and conclusions of law are review de novo. In re Bass , 171 F.3d 1016, 1021 (5th Cir. 1999). Mixed questions of law and fact are reviewed de novo. Id. The Court notes that the Bankruptcy Court here did not make any detailed findings of fact or law, only concluding that cause did not exist for conversion to Chapter 7 or for an involuntary modification of the plan, and that the funds should be returned to the debtors.

III. THE BANKRUPTCY COURT DID NOT ERR IN GRANTING THE DEBTORS' MOTION TO DISMISS

A. Legal Standards

1. The Right to Dismiss a Chapter 13 Case: Manama and its Progeny

Under Chapter 13, "[o]n request of the debtor at any time, if the case has not been converted ... the court shall dismiss a case under this chapter."

11 U.S.C. § 1307(b). Courts have struggled with whether this right to voluntarily dismiss a Chapter 13 case is absolute, or is subject to any exceptions. Some have found that an implicit exception exists for bad faith, i.e. , if the debtor has acted in bad faith, he cannot voluntarily dismiss his Chapter 13 case despite the general voluntariness of Chapter 13. This line of cases extends from the Supreme Court's decision in Marrama v. Citizens Bank of Massachusetts , 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), which dealt with the interplay between Chapters 7 and 13. Again, Chapters 7 and 13 are avenues through which an insolvent individual may discharge his debts, but they differ in the following ways:

Chapter 7 authorizes a discharge of prepetition debts following the liquidation of the debtor's assets by a bankruptcy trustee, who then distributes the proceeds to creditors. Chapter 13 authorizes an individual with regular income to obtain a discharge after the successful completion of a payment plan approved by the bankruptcy court. Under Chapter 7 the debtor's nonexempt assets are controlled by the bankruptcy trustee; under Chapter 13 the debtor retains possession of his property.

Marrama , 549 U.S. at 367, 127 S.Ct. 1105. Proceedings commenced under either Chapter may be converted to the other. Chapter 7 provides "[t]he debtor may...