Sood et al v. Business Lenders, LLC

Filing 11

DECISION ON APPEAL. Signed by Judge Marvin J. Garbis on 7/9/2012. (aos, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
RAJAN SOOD, et al.

*

Appellants

*

vs.

*

BUSINESS LENDERS, LLC

*

Appellee
*

*

*

CIVIL ACTION NO. MJG-11-2528

*
*

*

*

*

*

*

DECISION ON APPEAL
The Court has before it Appellant’s Appeal from the
Bankruptcy Court’s Order with Notice Dismissing Chapter 13 Case
[Document 1] and the documents filed relating thereto.

The

Court finds a hearing unnecessary.

I.

BACKGROUND
On January 20, 2010, appellants, Rajan and Dida Sood

(“Debtors”), filed a voluntary petition for relief pursuant to
Chapter 7 of the Bankruptcy Code (Case number 10-11274
hereinafter referred to as the “Chapter 7 case”).

On August 25,

2010, the Bankruptcy Court issued an Order discharging various
unsecured debts, including Debtors’ liability on their home
mortgage.

Thus, as of the discharge, Debtors had an ownership

interest in their home that was subject to a secured debt to
Appellee, Business Lenders, LLC (“Lenders”), but no personal

liability on the secured debt.

The Chapter 7 case remained open

awaiting the Trustee’s final report and final account certifying
that the estate has been fully administered pursuant to Fed. R.
Bankr. P. 5009(a).

In fact, the Trustee’s final report was not

issued until March 20, 2012 – and the final decree closing the
bankruptcy case was entered on May 2, 2012 - more than a year
and a half after the discharge.
Lenders, of course, had no need to await the Trustee’s
final report – and commenced to foreclose its secured debt on
Debtors’ home.

On December 19, 2010, some four months after the

discharge, the Debtors filed a voluntary petition for relief
under Chapter 13 of the Bankruptcy Code (Case number 10-38434,
hereinafter referred to as the “Chapter 13 case”).1

The purpose

of the Chapter 13 case was to prevent the foreclosure and to
restructure the secured debts whose liens survived the Chapter 7
case’s discharge.
The Bankruptcy Court, sua sponte, noting that the Chapter 7
case was still pending, directed the Debtors to show cause why
the Chapter 13 case should not be dismissed.
held.

A hearing was

On July 26, 2011, the Bankruptcy Court entered an Order

dismissing the Chapter 13 case, referring to reasons set forth
1

Debtors’ petition included the following prior bankruptcy cases
filed within the last eight years: 10-11274 filed January 20,
2010; 07-20361 filed October 22, 2007; 06-13922 filed July 5,
2006; and 03-13837 filed April 1, 2003.

2

on the hearing record.

At the hearing, the Bankruptcy Court

said:
There has been no final report in that case,
there is no final account, that case is open
and these assets are subject to the
administration of the Chapter 7 Trustee.
The Chapter 7 Trustee has the exclusive
right to administer those assets until he
either files a motion to abandon them or he
for other reason files his final report . .
. .
. . . the Debtors cannot proceed to
seek a plan which [a]ffects these assets
until the Trustee has taken his action and
these two Estates are virtually identical .
. . .
Hr’g Tr. 7:13-8:1, ECF No. 2.
The Debtors timely filed the instant appeal contending that
the Bankruptcy Court erred in dismissing the Chapter 13 case and
that the dismissal deprives them of their due process rights.

II.

STANDARD OF REVIEW
When a District Court reviews a Bankruptcy Court final

Order, the District Court acts as an appellate court.
§ 158(a).

28 U.S.C.

Accordingly, legal conclusions are reviewed de novo,

whereas findings of fact may be set aside only if clearly
erroneous.

See In re Bulldog Trucking, Inc., 147 F.3d 347 (4th

Cir. 1998).
Matters within the Bankruptcy Court’s discretion are
reviewed under an abuse of discretion standard.

3

In re Arnold,

806 F.2d 937, 938 (9th Cir. 1986). That is, the Bankruptcy
Court’s decisions within its discretion will be reversed only if
they were “based on an erroneous conclusion of law or when the
record contains no evidence on which the [Bankruptcy Court]
rationally could have based [the decisions].”

In re Windmill

Farms, Inc., 841 F.2d 1467, 1472 (9th Cir. 1988) (citing In re
Hill, 775 F.2d 1037, 1040 (9th Cir. 1985)).

III. DISCUSSION
As stated in In re Bateman, 515 F.3d 272, 275 n.2 (4th Cir.
2008),2
Chapter 7 is the chapter of the
Bankruptcy Code that governs the debtor’s
liquidation, a form of relief that involves
the collection, liquidation and distribution
of the debtor’s nonexempt property and
culminates in the debtor’s discharge.
Chapter 13 of the Bankruptcy Code is titled
“Adjustment of Debts of an Individual With
Regular Income” and is essentially a
reorganization that allows the debtor to
“deal comprehensively with both unsecured
and secured debts.”
It is not uncommon for a debtor to file a Chapter 13 case
after obtaining a discharge in a Chapter 7 case.
procedure is often referred to as a “Chapter 20.”
2

The two-step
In re Davis,

Quoting 6 Collier on Bankruptcy P 700.01 (Alan N. Resnick &
Henry J. Sommer eds., 15th ed. rev.2007), and 8 Collier on
Bankruptcy P. 1300.01.).

4

447 B.R. 738, 743 (Bankr. D. Md. 2011), aff’d (Jan. 12, 2012),
aff’d sub nom. TD Bank, N.A. v. Davis, CIV. PJM 11-1270, 2012 WL
439701 (D. Md. Jan. 12, 2012).
The United States Supreme Court has decided that there is
no per se rule preventing a debtor from filing a Chapter 13 case
following a Chapter 7 case.

See Johnson v. Home State Bank, 501

U.S. 78, 87 (1991) (“Congress did not intend categorically to
foreclose the benefit of Chapter 13 reorganization to a debtor
who previously has filed for Chapter 7 relief.”).
every Chapter 20 procedure will be permissible.

However, not
For example,

the Chapter 13 plan must still withstand the confirmation
requirements of 11 U.S.C. § 1325, which include the requirement
that the plan be filed in good faith.

Id. at 87-88.

Moreover,

a debtor may not receive a Chapter 13 discharge in a bankruptcy
case filed within four years of filing an earlier Chapter 7
petition that resulted in a discharge. See 11 U.S.C. § 1328(f)
(1); Bateman, 515 F.3d at 280.
The critical issue presented by the instant appeal is
whether a Chapter 20 procedure is permitted when the Chapter 13
case is filed while the Chapter 7 case is pending, i.e., is a
“simultaneous” (as distinct from a “sequential”) Chapter 20
permissible?

The Bankruptcy Court held that it was not.

5

In Johnson, the Chapter 13 case was filed after the
conclusion of the Chapter 7, thus it involved a sequential
Chapter 20.

The issue presented was whether a debtor could

include a mortgage lien in a Chapter 13 plan once the personal
liability of the debtor had been discharged in a Chapter 7 case.
Johnson, 501 U.S. at 80.

The Court held that the Bankruptcy

Code’s definition of “claim” was sufficiently broad to allow a
debtor to include a bank’s in rem claim against property of the
debtor to be treated in a Chapter 13 plan. Id. at 84.
In Bateman, the United States Court of Appeals for the
Fourth Circuit addressed consolidated appeals, one of which
involved Mr. Joseph Bateman and another involved Mr. and Mrs.
Graves.

In regard to Mr. Bateman, the court stated: “Bateman

previously filed for Chapter 7 bankruptcy on March 25, 2005 and
received a discharge on June 29, 2005.

Later that year, on

December 12, Bateman filed the Chapter 13 bankruptcy petition at
issue in this appeal to stop a pending foreclosure on his home.”
Bateman, 515 F.3d at 275.

The court did not state whether Mr.

Bateman’s Chapter 7 case was pending when he filed the Chapter
13 case.
In regard to the Graveses, the Bateman court stated:
[T]he Graveses filed a joint Chapter 13
bankruptcy on February 7, 2006 to stop a
pending foreclosure on their home . . . .
The Graveses had previously filed a Chapter

6

13 bankruptcy petition on January 4, 1999,
and received a Chapter 13 discharge on June
16, 2004, after completing five years of
Chapter 13 plan payments.
Id. at 276.
The decision does not make clear whether the Graves’
procedure – presumably one that could be called a “Chapter 26” was sequential or simultaneous.

In any event, the Bateman

decision did not address any question relating to a simultaneous
Chapter 20.3

Rather, as pertinent to the instant case, the court

stated: “we must decide whether an individual may file a Chapter
13 petition if he is ineligible for a discharge under §
1328(f).”

Id. at 277.

The court held “that a debtor is not

precluded from filing in good faith a new Chapter 13 bankruptcy
case even though he may be ineligible for a discharge under §
1328(f).”

Id. at 283-84 (emphasis in original).

The Fourth Circuit has not specifically addressed the
matter of simultaneous Chapter 20 procedures. See In re Brown,
399 B.R. 162, 166 (Bankr. W.D. Va. 2009)(analyzing the law
addressing whether a debtor may maintain concurrent cases under

3

The court decided that the 2 and 4-year periods described in §
1328(f) run from the date of filing rather than the date of
discharge with regard to a prior petition. Bateman, 515 F.3d at
280.

7

Chapter 13).

Few appellate courts appear to have considered the

question, and those that have are not in agreement.4
The majority of bankruptcy courts that have considered the
issue since Johnson have adopted a per se ban on simultaneous
bankruptcy cases.

Id.

These courts appear to rely on the

Supreme Court’s decision in Freshman v. Atkins, 269 U.S. 121
(1925), which held that the pendency of the first application
for discharge precluded a debtor from seeking a discharge in a
second filing with respect to the same debts. See In re
Hodurski, 156 B.R. at 355 (noting that Freshman holds only that
two applications for discharge of the same debts cannot be
pending concurrently); In re Brown, 399 B.R. at 166.
However, a growing minority of bankruptcy courts do not per
se prohibit simultaneous cases.

See, e.g., In re Brown, 399

B.R. at 166-67 (citing cases).

These courts have required the

4

Compare In re Metz, 820 F.2d 1495 (9th Cir. 1987)(permitting a
home mortgage debt that had been discharged in a Chapter 7 case
to be cured in a subsequent Chapter 13 plan where the debtor
filed the proposed Chapter 13 plan on the same day he received
his Chapter 7 discharge), and In re Saylors, 869 F.2d 1434, 1437
(11th Cir. 1989)(declining to conclude as a matter of law that
filing a Chapter 13 petition before the Chapter 7 trustee filed
his final report was dispositive on the issue of good faith),
with In re Sidebottom, 430 F.3d 893, 896-98 (7th Cir.
2005)(discussing simultaneous “Chapter 20” filings and adopting
a per se rule prohibiting a debtor from having more than one
bankruptcy case open at any time); see also In re Young, 237
F.3d 1168 (10th Cir. 2001)(permitting a conversion of a Chapter
7 to a Chapter 13 and describing it as a “Chapter 20”
procedure).

8

Chapter 7 discharge to have been entered, although the Chapter 7
case remained open for certain administrative acts to be
performed, such as the filing of a trustee’s final report.

See

In re Sidebottom, 430 F.3d at 898; see also In re Turner, 207
B.R. 373 (B.A.P. 2d Cir. 1997)(noting universal agreement among
the courts that a Chapter 13 case was a nullity if the Chapter 7
case had not yet received a discharge); In re Hodurski, 156 B.R.
353, 356 (Bankr. D. Mass. 1993)(“In rejecting a per se
prohibition against simultaneous filings, these courts assess
the propriety of the Chapter 13 in light of the standards
applicable to confirmation of Chapter 13 plans, particularly the
debtor’s good faith.”).
There does not appear to be an express provision in the
Bankruptcy Code or the Federal Rules of Bankruptcy Procedure
that bars a Chapter 7 debtor from seeking simultaneous relief
under Chapter 13.

See In re Brown, 399 B.R. at 165 (“There is

no provision in the Bankruptcy Code that expressly disallows
concurrent bankruptcy filings by the same debtor. . . .
Similarly, no provision of the Bankruptcy Code denies a
discharge to a debtor where another proceeding in which he is a
debtor is pending.”).
This Court finds more persuasive the decisions that reject,
rather than accept, a per se rule forbidding simultaneous

9

Chapter 20 proceedings.

Moreover, if the Bankruptcy Code and

Rules were interpreted to prevent debtors receiving a Chapter 7
discharge from utilizing a simultaneous Chapter 20 procedure,
there would be a serious due process issue presented.
In regard to the potential due process issue, it suffices
for present purposes to consider Schreck v. United States, 301
F. Supp. 1265 (D. Md. 1969) in which this court recognized a due
process issue in a tax context that found its way to the Supreme
Court.

In Schreck, the taxpayer was the subject of a terminated

year jeopardy assessment that, under the Government’s
interpretation of the Code, would prevent the taxpayer from
contesting the I.R.S. determination of liability in the United
States Tax Court.

Barred from the Tax Court, the taxpayer would

have to satisfy the “full payment rule” and sue for a refund in
a United States District Court or the Court of Federal Claims.
Flora v. United States, 362 U.S. 145 (1960).

In contrast,

taxpayers who received a “regular” jeopardy assessment were able
to contest the I.R.S. determination in the U.S. Tax Court
without prepayment of the asserted liability.

This Court noted

the constitutional issues that would be created if the
Government’s theory were accepted. Id. at 1283.
When the issue reached the Supreme Court, the majority
construed the Internal Revenue Code in favor of the taxpayers

10

and, thus, did not “decide whether the procedures available
under the Government’s theory would, in fact, violate the
Constitution.”
(1976).

Laing v. United States, 423 U.S. 161, 185

However, in his concurring opinion, Justice Brennan

wrote “to state [his] views of the considerations raised by the
due process claim.”

Id. at 186.

Of particular pertinence is

the Justice’s statement: “[The Code provision at issue] . . .
falls short, in my view, of meeting due process requirements.
This is because present law denies an affected taxpayer access
to any forum for review of jeopardy assessments for up to 60
days.”

Id. at 187.

If a per se prohibition against a simultaneous Chapter 20
were in effect, Debtors, and others similarly situated, would be
deprived of the ability to seek Chapter 13 relief, not just for
60 days, but for however long it might take for a trustee to
close the estate.5

In the instant case, the period of

deprivation of the right would have been over a year and a half.
However, it is not the duration of the period of deprivation,
5

Under the Bankruptcy Code, a Chapter 7 trustee has a duty to
close the estate “as expeditiously as is compatible with the
best interests of parties in interest.” 11 U.S.C. § 704(a) (1).
A debtor should not be subject to completion of “administrative
hurdles” by the Chapter 7 trustee, such as the filing of the
final report, which are “beyond the debtor’s control,” before
being able to file the Chapter 13 petition and propose a plan.
In re Hodurski, 156 B.R. at 356 (citing In re Saylors, 869 F.2d
at 1438).

11

but the existence of any period of deprivation, that creates a
potential due process issue.
The Court is persuaded that there should be no per se rule
barring a simultaneous Chapter 20.

Of course, the absence of a

per se rule does not necessarily mean that Debtors were entitled
to file the Chapter 13 case at issue.

Hence, the case shall be

remanded so that the Bankruptcy Court can make appropriate
findings and determine whether, even in the absence of a per se
prohibition, it will nevertheless dismiss the instant Chapter 13
case due to a finding of bad faith on the part of Debtors or on
other grounds.

IV.

CONCLUSION
For the foregoing reasons, the July 25, 2011 Order of the

Bankruptcy Court shall be REVERSED and REMANDED for further
proceedings consistent herewith.

SO DECIDED, on Monday, July 9, 2012.

/s/__________
Marvin J. Garbis
United States District Judge

12