Viegelahn v. Lopez et al
MEMORANDUM OPINION. Signed by Judge Royce C. Lamberth. (aej)
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
MAR 0 7
MARY K. VIEGELAHN,
Standing Chapter 13 Trustee,
CLERK, US. DISTRICT CLERK
Case No: 5:15-cv-379-RCL
MANUEL PALOMERA LOPEZ, and
DOLORES RONQUILLO LOPEZ,
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 trusteethe appellant hereargues
that the Bankruptcy Court erred in permitting the debtorsthe appelleesto dismiss their Chapter
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.
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
135 S. Ct. 1829, 1835 (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.
creditors." Tex. Prop. Code
[is] exempt from seizure for the claims of
41.001. The Bankruptcy Court confirmed the plan on October 9,
Throughout the debtors' Chapter
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.
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,
the net proceeds after payment of the first
lienwere 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
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
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 trusteethe sale proceedsbe returned to the debtors. Id. It also
dismissed as moot the trustee's motion to modifj 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 trusteethe homestead sale proceedsshould 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
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 BANKRUPTCY COURT DID NOT ERR IN GRANTING THE DEBTORS'
MOTION TO DISMIISS
The Right to Dismiss a Chapter 13 Case: Marrama 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."
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 (2007), which dealt with the interplay
between Chapters 7 and 13. Again, Chapters 7 and
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. Proceedings commenced under either Chapter may be converted to
the other. Chapter 7 provides "[t]he debtor may convert a case under this chapter to a case under
chapter 11, 12, or
of this title at any time, if the case has not been converted under section
1208, or 1307 of this title." 11 U.S.C.A.
706(a). Chapter 13 provides "The debtor may convert
a case under this chapter to a case under chapter 7 of this title at any time," and that "on request of
a party in interest or the United States trustee and after notice and a hearing, the court may convert
a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this
chapter, whichever is in the best interests of creditors and the estate, for cause."
In Marrama, the Court considered whether "a bad-faith debtor has an absolute right to
convert at least one Chapter 7 proceeding into a Chapter 13 case even though the case will
thereafter be dismissed or immediately returned to Chapter 7." Marrama, 549 U.S. at 368. The
Court held that the right to convert is not absolute. Id. at 371. It found that a provision in Chapter
7 prohibits conversion "unless the debtor may be a debtor under [the chapter to which he seeks
conversion]." Id. (citing 11 U.S.C.
706(d)). The Court then found that the debtor in Marrama,
who sought a conversion from Chapter 7 to Chapter 13, did not qualify to be a Chapter 13 debtor.
Id. at 373. Section 1307(c), which provides that a Chapter 13 proceeding may be dismissed or
converted to Chapter 7 "for cause," includes prepetition bad faith conduct of the debtor. Id. at
373-74. Section 706(d) therefore prohibited conversion because the debtor had acted in bad faith
in his Chapter 7 case, which is grounds for dismissal or conversion (back to Chapter 7) under
Subsequent courts interpreted Marrama in the context of voluntary dismissal under Section
1307(b), considering whether bad faith provided an exception to the right to dismiss. See, e.g., In
re Jacobsen, 609 F.3d 647, 657-60 (5th Cir. 2010) (collecting and summarizing cases). Several
courts found that an implicit bad faith exception to the right to voluntarily dismiss a Chapter 13
case did in fact exist. See In re Rosson, 545 F.3d 764, 773-74 (9th Cir. 2008) ("[un light of
Marrama, we hold that the debtor's right of voluntary dismissal under
1307(b) is not absolute,
but is qualified by the authority of a bankruptcy court to deny dismissal on grounds of bad-faith
conduct or 'to prevent an abuse of process."); In re Caola, 422 B.R. 13, 20 (Bankr. D.N.J. 2010);
In re Armstrong, 408 B.R. 559, 569-72 (Bankr. E.D.N.Y. 2009), as amended (July 20, 2009).
The Fifth Circuit, following Marrama, denied an absolute right to dismiss a Chapter 13
case and held "that a bankruptcy court has the discretion to grant a pending motion to convert for
cause under § 1307(c) where the debtor has acted in bad faith or abused the bankruptcy process
and requested dismissal under
1307(b) in response to the motion to convert." In re Jacobsen,
609 F.3d 647, 660 (5th Cir. 2010). It found no analytical distinction between Sections 706(a) and
1307(b) and "reject[ed] a construction of the statute that would afford an abusive debtor an escape
Interpreting the Bankruptcy Code: Law v. Siegel
Following these decisions, the Supreme Court revisited the Bankruptcy Code in Law
Siegel, 134 S. Ct. 1188 (2014). In Law, the bankruptcy court allowed a trustee to surcharge a
debtor's $75,000 homestead exemption, making the funds available for payment of the trustee's
attorney's fees incurred by the trustee in overcoming the debtor's fraudulent misrepresentations.
See Law, 134 S. Ct. at 1193.
The Supreme Court found, however, that the surcharge was
unauthorized because it contravened Section 552 which entitled the debtor to the $75,000
exemption, and provides that such exempt property "is not liable for payment of any administrative
expense." Id. at 1195 (citing
552(b)(3)(A), (k)). Despite Section 105(a)'s provision
that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry
out the provisions of this title," 11 U.S.C.
105(a), the Law Court made clear that "[ut is hombook
105(a) 'does not allow the bankruptcy court to override explicit mandates of other
sections of the Bankruptcy Code." Law, 134 S. Ct. at 1194. The Court also addressed the
Marrama decision, noting that it "certainly did not endorse, even in dictum, the view that equitable
considerations permit a bankruptcy court to contravene express provisions of the Code." Id. at
Various courts have interpreted Law to mean that they may not graft a bad faith exception
into the right to dismiss under Section 1307(b) because the statute states that the debtor may "at
any time" request dismissal prior to conversion, and that "the court shall dismiss" the case, and
therefore that this right is in fact absolute. See, e.g., In re Fisher, No. 14-61076, 2015 WL
1263354, at *3
(Bankr. W.D. Va. Mar. 19, 2015) (finding that "Law change[d] the playing field"
and that the plain language of the statute indicates that a debtor's right to dismiss a case which has
not been converted is absolute, bad faith concerns do not curb this right, no statutory provision
limiting the right to dismiss exists, and application of a bad faith exception contravenes the
Bankruptcy Code and exceeds the authority of the bankruptcy court); see also In re Sinischo, 561
B.R. 176, 193 (Bankr. D. Cob. 2016) ("The Court finds that
1307(b) of the Bankruptcy Code
requires that the Debtor's request to voluntarily dismiss her case must be granted, despite creditor
1307(c) that the case be converted to a case under chapter 7 for Debtor's bad
faith"); In re Mills, 539 B.R. 879, 884 (Bankr. D. Kan. 2015) ("[Section] 1307(b) mandates
dismissal on the debtor's request by using the words 'at any time' and 'shall.' It only limits the
debtor's ability to dismiss cases that have previously been converted to chapter
7, 11, or 12. This court should not use § 105(a) to rewrite the mandatory provisions
AmeriChoice Fed. Credit Union, 530 B.R. 277, 287 (E.D. Pa. 2015) (The Court agrees
with the line of cases recognizing an absolute right to dismiss under
The Court finds that the debtors here had an absolute right to voluntarily dismiss their case.
Although the Fifth Circuit has not interpreted the decision in Law, the Court finds it need not
interpret Section 13 07(b) under Law because this case is distinguishable from Jacobsen, the Fifth
Circuit precedent relied on to argue that there is no absolute right to dismiss. In Jacobsen, the
court found that a court may deny a motion to dismiss brought under Section 1307(b) when two
circumstances are present: 1) the debtor has acted in bad faith; and 2) the motion to dismiss is
brought in response to a trustee's motion to convert. See Jacobsen, 609 F.3d at 660; see also id.
at 661 ("[W]e conclude that
1307(b) is subject to a similar [bad faith] exception, at least when
the debtor's requestfor dismissal is made in response to
a motion to convert under § 1307(c)."
(emphasis added)). The court made clear that it was not determining whether a court can dismiss
under Section 1307(b) "when the debtor's request for dismissal precedes the motion to convert."
Id. at 662 n.15.
The importance of the conversion element was reinforced in In re Elliot, where the court
found that the Jacobsen holding was "a logical extension of the Supreme Court's decision in
[Marrama] which identified a bad-faith exception in a provision that seemingly created an
unqualified right to convert a case from Chapter 7." In re Elliott, 506 F. App'x 291, 293 (5th Cir.
2013). The Elliot court found that, despite the fact that no party had filed a motion to convert, the
case was on all fours with Jacobsen because "the bankruptcy court on its own motion entered an
order to show cause why the case should not be dismissed or converted under
"Elliott filed his motion to dismiss only after the bankruptcy court threatened conversion." Id.
A different court within the Western District of Texas has considered the right to dismiss
in very similar circumstances. In In re Garcia, 535 B.R. 721 (W.D. Tex. 2015), the debtors filed
a voluntary petition for relief under Chapter 13. Id. at 722. The debtors subsequently filed a
motion seeking leave to sell their 50% interest in a landscaping company and to retain the proceeds.
Id. The trustee objected, "arguing the proceeds
of any such sale were a nonexempt asset of the
estate and should be for the benefit of creditors." Id. The Bankruptcy Court granted the motion
to sell, but ordered that the proceeds be turned over to the trustee as a nonexempt asset. Id. at 72223. The debtors then withdrew their motion to sell and the trustee filed a motion for redemption
in the company, "seeking to redeem the [debtors' interest in the company] by effecting the
proposed sale.. . under the same terms." Id. at 723. The Bankruptcy Court denied the motion for
redemption and the debtors subsequently filed a motion to dismiss their Chapter 13 proceedings
under Section 1307(b). Id. The trustee objected to the motion to dismiss and filed a motion to
modify the plan or to convert the case to a Chapter 7 proceeding. Id. The Bankruptcy Court
granted the motion to dismiss and rendered moot the motion to modif'. Id.
On appeal, the court acknowledged the "narrow exception" and "limited circumstances"
present in Jacobsen wherein "the request for dismissal [was] in direct response to a pending motion
to convert." Id. at 725. In Garcia, however, the motion to dismiss was not filed in response to a
motion to convert.
Id at 726. The court found that "[t]he narrow exception recognized
in In re
Jacobsen is applicable only in very specific circumstances. It allows a bankruptcy court the
discretion to grant an already pending motion to convert where, in response thereto, the debtor
moves to dismiss. This Court declines to extend the exception where such circumstances are not
present." Id. Because "[t]here was no motion to convert pending when Debtors moved to dismiss
their right to do so under
1307(b) was absolute and the Bankruptcy Court did
not commit reversible error when it granted the Motion to Dismiss." Id.
The Court here finds that the Bankruptcy Court did not err when it granted the debtors'
motion to dismiss. When the debtors moved to dismiss their Chapter 13 case, there was no pending
motion to convert or threat of conversion.
does not apply and the debtors had
an absolute right to dismiss their case, regardless of any alleged bad faith. Because there was no
error in granting the motion to dismiss, there was also no error in denying as moot the trustee's
motion to modify the plan. The trustee argues that her motion to modify, which sought approval
to distribute the home sale proceeds to creditors, should have been granted prior to any grant of
dismissal to the debtors of their case. The trustee does not argue, however, that her motion to
modify was or should be read as a motion to convert, due to bad faith, under Section 1307(c). She
merely advocates that the
holding should extend to include those situations where a
motion to dismiss brought under Section 1307(b), but not in response to a Section 1307(c) motion
Moreover, the Court finds that it cannot read the trustee's motion to modify as a motion to
convert. The motion to modify only sought approval to disburse the proceeds from the homestead
sale to creditors. It did not ask, in the alternative, for conversion to Chapter 7. Section 1307(c)
only allows conversion to Chapter 7 "for cause" and lists various circumstances constituting
1307(c). The trustee's motion to modify argues that the proceeds from the
sale lost their exempt status when not reinvested after six months, and that "there remains only
month to complete the plan which is an insufficient period of time for Debtor to retain the asset
and to satisfy the best interest of the creditors test," but it does not identify whether, why, or how
cause exists under Section 1307(c). Nor does the trustee's objection to the debtors' motion to
dismiss raise a conversion argument, arguing only that Jacobsen applies in this situation and that
the debtors' right to dismiss is blocked by bad faith. Finally, upon a review of the transcripts in
this case, the Court has found no reference to a motion to convert.
Therefore, the Court finds that the debtors' motion to dismiss was not filed in response to
a motion to convert, explicit or otherwise, and therefore that their right to dismiss was absolute.
The court will now turn to whether the Bankruptcy Court erred in ordering the homestead sale
proceeds be returned to the debtors upon dismissal.
THE BANKRUPTCY COURT ERRED IN ORDERING THE HOMESTEAD
SALE PROCEEDS BE RETURNED TO THE DEBTORS UPON DISMISSAL
The trustee also argues that the bankruptcy court erred when it ordered the homestead sale
proceeds be returned to the debtors upon dismissal. The Bankruptcy Court ordered that "[tjhe
funds in the hands of the Trustee shall be returned to Debtor Dolores Ronquillo Lopez after
payment of the Trustee's commission." It did not discuss the reasoning for this decision. The
trustee argues that because the sale proceeds were not reinvested in another homestead within six
months, they belong to the debtors' creditors. In addition, she argues that cause existed to order
that the sale proceeds not be returned to the debtors. The debtors argue that the "property of the
estate" is property of the
not of creditors, and that creditors have no vested right in estate
property until it is distributed to them. They also refute the trustee's claims that cause existed to
order that the sale proceeds not be returned to the debtors.
Section 349 provides that "Unless the court, for cause, orders otherwise, a dismissal of a
revests the property of the estate in the entity in which such property was vested
immediately before the commencement of the case under this title."
Court first finds that, under Fifth Circuit precedent, the sale proceeds did not revest in the debtors
because the debtors are not the "entity in which such property was vested immediately before the
commencement of the case." When a debtor files for bankruptcy, "an estate comprising all legal
and equitable interests in property (including potentially exempt property) of the debtor as of that
date" is created. In re Zibman, 268 F.3d 298, 302 (5th Cir. 2001). Debtors may however, claim
property as exempt from the bankruptcy estate either under state or federal law.
522(b). Texas state law allows debtors to claim as exempt their homestead. See Tex. Prop. Code
41.001(a). If a debtor sells his home, however, this exemption only lasts as long as the sale
proceeds are reinvested in another homestead within six months of the sale. See Tex. Prop. Code
41.001(c). This is known is the "Texas Proceeds Rule."
Viegelahn, the Fifth Circuit considered whether proceeds from the sale of a
homestead exempted at the time of the petition, but sold post-petition, that had not been reinvested
within six months retained their exempt status or reverted to the estate. See In re Frost, 744 F.3d
384 (5th Cir. 2014). The court first examined the "snapshot rule," which "holds that all exemptions
are determined at the time the bankruptcy petition is filed, and that they do not change due to
subsequent events." Id. at 386. It then found that, although the character of the asset as a
homestead was "an essential element of the exemption [that] must continue in effect even during
the pendency of the bankruptcy,
.. . [o]nce
[the debtor] sold his homestead, the essential character
of the homestead changed from 'homestead' to 'proceeds,' placing it under section 41.00 1(c)'s six
month exemption." Id. at 387. Thus, when the debtor did not reinvest the proceeds from the sale,
they were removed from the protection of the law, no longer remained exempt, and reverted to the
bankruptcy estate. Id.
The debtors here sold their home on July 5, 2011. At that point, the essential character of
the homestead changed from "homestead" to "proceeds." See id. It is undisputed that the debtors
did not reinvest the proceeds in another homestead within six months. At that pointJanuary 5,
2012the proceeds were
no longer exempt from the bankruptcy estate. Id. Because Section
349(b) states that upon dismissal property of the estate revests "in the entity in which such property
was vested immediately before the commencement of the case,"
349(b)(3), it is
inapplicable to the sale proceeds, which did not exist at the commencement of the case. Cf H.R.
Rep. 95-595, at 338 (1977) ("The basic purpose of the subsection is to undo the bankruptcy case,
as far as practicable, and to restore all property rights to the position in which they were found at
the commencement of the case." (emphasis added)). The sale
proceedsessentially changed in
character from the homesteadwere never vested in the debtors prior to commencement of their
Chapter 13 case. Once the six months expired, the debtors "lost [their] right to withhold the sale
proceeds from the estate." Frost, 744 F.2d at 389. Therefore, on January 5, 2012, the sale proceeds
reverted to the bankruptcy estate. See In re Zibman, 268 F.3d 298, 305 (5th Cir. 2001) ("When
the [debtors] failed to reinvest the proceeds in another Texas homestead within the statutory time
period, those proceeds lost their exemption, freeing the Trustee to reach the proceeds as part of the
bankruptcy estate."). Because Section 349 says nothing regarding in whom sale proceeds arising
post-petition are to be vested, they were not vested in anyone for purposes of post-dismissal
distribution under this section. See In re Darden, 474 B.R.
(Bankr. D. Mass. 2012) ("The
Debtor's cause of action for sanctions stemmed from GMAC's post-petition conduct and,
therefore, did not exist before the commencement of the case. It was not then vested in anyone....
[D]ismissal of the Debtor's case does not, by itself, give her a claim to the GMAC Settlement
In addition, leaving aside the conclusion that Section 349 is inapplicable and that the sale
proceeds did not revest in the debtors upon dismissal due to their post-confirmation origins, the
Court finds that "cause" existed to "order otherwise," i.e., to order that the sale proceeds did not
revest in the debtors upon dismissal. "Cause" is not defined in the Bankruptcy Code. Courts have
found that it may exist, however, not only when a debtor has acted in bad faith, but also when it
would be inequitable to creditors to return property to debtors upon dismissal. See In re Darden,
474 B.R. at 12-13; see also In re Hamilton, 493 B.R. 31, 45 (Bankr. M.D. Tenn. 2013) ("Creditors
may have statutory or equitable arguments for a share of the undistributed pie."); In re Hufford,
460 B.R. 172, 178 (Bankr. N.D. Ohio 2011) ("Having, thus, received the benefits of the
Bankruptcy Code for an extended period of time, it can be expected that payments made by the
Debtors while their bankruptcy case was pending should be allocated to their creditors in
accordance with the intention of their Chapter 13 plan."); In re Torres, No. 99-02609, 2000 WL
1515170, at *3 (Bankr. D. Idaho Oct. 10, 2000) (finding that the interests of the creditors were at
risk and cause existed to dismiss the case but pay the undistributed funds to creditors where no
"manipulative intent" existed, but the "[d]ebtors received protection through the Bankruptcy Code
for some ten months while their creditors received nothing").'
As explained above, the sale proceeds lost their exempt status and became part of the estate
on January 5, 2012, long before the debtors sought to dismiss their case. The only reason that the
Bankruptcy Court and the trustee became aware of the sale and the failure to reinvest in another
homestead was because the debtors filed a nunc pro tunc motion to sell when the title company
involved in the refinancing required a court order, three years after the actual sale. But, the debtors
had a duty to disclose the existence of such proceeds, acquired after confirmation of the plan,
particularly because the Chapter 13 plan in this case provided that upon confirmation, property of
the estate remained as property of the estate and did not vest in the debtors. See In re Flugence,
The Court notes that the debtors have not argued that "cause" only exists in situations where bad faith is present.
They have only argued that they have not acted in bad faith.
738 F.3d 126, 129-30 (5th Cir. 2013) (finding that a debtor "had an affirmative duty to disclose
her personal-injury claim" and rejecting any uncertainty regarding "whether a debtor must disclose
assets post-confirmation" where "the plan explicitly stated that the estate's assets would not revest
in the debtor until discharge"); In
508 B.R. 1, 7-8 (Bankr. W.D. Tex. 2014) ("The law
in this Circuit has consistently held that a debtor has a continuing obligation to disclose post-
petition claims, causes of action, and assets."). The debtors here did not disclose the newly
acquired proceeds as they were required to do.
Furthermore, the debtors sold their house without notice and or court approval. The debtors
argue that they were under no obligation to give such notice or seek court approval. This assertion
is belied by the Federal Rules
of Bankruptcy Procedure and the local rules in this District. Rule
7004 requires notice to be given of a proposed sale of property, and instructs that "[a] motion for
authority to sell property free and clear of liens or other interests shall be made
served on the parties who have liens or other interests in the property to be sold."
. . .
and shall be
(c). Local Rule 6004(c) states that in "Chapter 13 cases, a motion for proposed..
sale of property shall indicate consent or lack of consent of the trustee and of any affected secured
creditor." W.D. TEX. BANKR. R. 6004(c). This indicates that a debtor must file a motion in order
to sell property, and that he or she must ask the trustee whether or not the trustee consents to such
Given these circumstancesthe fact that the debtors did not seek approval to sell their
home and did not give notice of the sale, and that they then failed in their obligation to disclose
the existence of the proceeds from the sale, and that the proceeds became property of the estate
after the debtors did not reinvest such proceeds in another homestead within six monthsthe Court
finds that cause existed to not return the sale proceeds to the debtors upon dismissal. After the
debtors failed to reinvest the sale proceeds within six months, the proceeds became non-exempt
property of the estate. The proceeds, changed in character from the homestead, did not exist before
the commencement of the case and were not vested in the debtors for purposes of post-dismissal
distribution. In addition, cause existed to order that the proceeds not be vested in the debtors. It
would be inequitable to the creditors to allow the debtors, who sold their home without notice or
approval and then effectively concealed the fact that they were in possession of the sale proceeds,
which belonged to the estate, for three years, to retain such proceeds. Those proceeds lost their
exempt status and belonged to the bankruptcy estate, and should have been distributed to the
debtors' creditors. Thus, even though the debtors had an absolute right to voluntarily dismiss their
Chapter 13 case, they did not have an absolute right to retain the sale proceeds. Cf In re Darden,
474 B .R. at 8 (finding that "although the Debtor has the right to dismiss her case under
she [did] not have an absolute right to the [settlement proceeds arising post-petition] upon her
doing so" because cause existed to order otherwise). The Court finds that the Bankruptcy Court
erred in ordering that the sale proceeds be returned to the debtors upon dismissal and will reverse
the Bankruptcy Court's order directing the sale proceeds be returned to the debtors.
The Court also notes, however, that Chapter 13 trustees may not administer property of the
estate to creditors as they please. Section 1326 directs that "[e]xcept as otherwise provided in the
plan or in the order confirming the plan, the trustee shall make payments to creditors under the
1326(c) (emphasis added). Unlike in Chapter 7, in Chapter 13 cases the trustee
is bound by the terms
of the confirmed plan:
Under section 704(1) of the Bankruptcy Code, a Chapter 7 trustee may "collect and reduce
to money the property of the estate for which such trustee serves.. . ." These powers are
absent from Chapter 13. A Chapter 13 trustee is neither empowered nor authorized to
collect or liquidate property of the estate or property of the debtor. Similarly, Chapter 13
does not contain any provision, like that in section 726(a) for Chapter 7 trustees, which
either permits or directs the distribution of "property of the estate" or which specifies how
"property of the estate shall be distributed. . . ." In fact, the only provision in Chapter 13
which authorizes or permits a Chapter 13 trustee to handle property of any nature is found
in section 13 02(b)(3), which requires the trustee to distribute the plan payments received
from a debtor. Consequently, other than relaying the funds directly entrusted to the trustee
by the debtor pursuant to a confirmed plan, a Chapter 13 trustee, unlike a Chapter 7 trustee,
has no statutory obligation, right, duty or power to sell, use, lease, collect, liquidate or
distribute any property, whether that property is denominated "property of the estate" or
"property of the debtor."
In re Ezzell, 438 B.R. 108, 121 (Bankr. S.D. Tex. 2010) (quoting EconoLube N' Tune, Inc.
Frausto (In re Frausto), 259 B.R. 201, 210 (Bankr. N.D. Ala. 2000)); see also In re Leslie, 318
B.R. 108, 112 (Bankr. N.D. Tex. 2004) ("The trustee collects plan payments, preserves the funds
as property of the bankruptcy estate, and disburses the funds to creditors as directed by the debtor's
plan or court order.").
Therefore, although the sale proceeds reverted to the bankruptcy estate on January 5, 2012,
the trustee is incorrect in stating that she did not need to seek approval from the court or
modification of the plan before distributing the proceeds to creditors. Therefore, the Court will
remand this case to the Bankruptcy Court to enter an order allowing the trustee to disburse such
funds to the creditors in accordance with this Court's order and the Chapter 13 plan in this case.
In sum, the Court finds that because the debtors' motion to dismiss was not filed in response
to a motion to convert by the trustee, Jacobsen does not apply and the debtors had an absolute right
to voluntarily dismiss their Chapter 13 case. The Bankruptcy Court did not err in granting the
debtors' motion to dismiss. The Court will affirm this part of the Bankruptcy Court's Order.
However, because the debtors sold their home without notice or approval, then effectively
concealed this fact for three years, and because the homestead sale proceeds lost their exempt
status and became property of the bankruptcy estate after the debtors failed to reinvest the proceeds
within six months, the Court finds that cause existed to order that the proceeds not be returned to
the debtors, but instead be distributed to the debtors' creditors. Therefore, the Bankruptcy Court
erred in ordering that the sale proceeds be returned to the debtors upon dismissal. The Court will
reverse this part of the Bankruptcy Court's order and will remand for entry of an order allowing
the trustee to distribute the proceeds to the debtors' creditors.
A separate order accompanies this Memorandum Opinion.
United States District Judge
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?