in re: steven patrick schlegel joanne marie schlegel, 9th cir. bap (2015)

7/25/2019 In re: Steven Patrick Schlegel Joanne Marie Schlegel, 9th Cir. BAP (2015)

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FILEDFEB 25 2015

SUSAN M. SPRAUL, CU.S. BKCY. APP. PANOF THE NINTH CIRCU

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. SC- 14- 1132- Ki KuJ u)

STEVEN PATRI CK SCHLEGEL; ) Bk. No. 08- 13539- PB13J OANNE MARI E SCHLEGEL, )

)Debt or s. )

) )

)STEVEN PATRI CK SCHLEGEL; )J OANNE MARI E SCHLEGEL, )

)

Appel l ant s, ))v. ) O P I N I O N

)THOMAS H. BI LLI NGSLEA, J R. , )Chapt er 13 Tr ust ee, )

)Appel l ee. )

______________________________)

Submi t t ed Wi t hout Or al Ar gumentOn J anuar y 22, 20151

Fi l ed - Febr uar y 25, 2015

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Sout her n Di st r i ct of Cal i f or ni a

Honor abl e Pet er W. Bowi e, Bankrupt cy J udge, Presi di ng

Appear ances: Dani el J . Wi nf r ee on br i ef f or appel l ant s St evenPat r i ck Schl egel and J oanne Mar i e Schl egel ; J ennyJ udi t h Hayag on br i ef f or appel l ee Thomas H.Bi l l i ngsl ea, J r . , Chapt er 13 Tr ust ee.

Bef ore: KI RSCHER, KURTZ and J URY, Bankr upt cy J udges.

1 On November 25, 2014, t he par t i es f i l ed a j oi nt mot i on t osubmi t on br i ef s, whi ch was grant ed on December 1, 2014.


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KI RSCHER, Bankr upt cy J udge:

Appel l ant s Steven Pat r i ck Schl egel and J oanne Mar i e Schl egel

( Schl egel s) appeal an or der di smi ssi ng t hei r chapt er 132 case

f or f ai l i ng t o compl et e pl an payment s wi t hi n t he appl i cabl e f i ve-

year commi t ment per i od. Thi s appeal r ai ses f or t he f i r st t i me

whether a conf i r med chapt er 13 pl an may be di smi ssed f or t he

debt or s f ai l ur e to pay bot h t he r equi r ed pl an payment and t he

appr oved per cent age di vi dend t o unsecur ed nonpr i or i t y cr edi t or s

dur i ng t he appl i cabl e commi t ment per i od. We AFFI RM.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Pre-confirmation events

The Schl egel s, as above medi an i ncome wage earner s, f i l ed a

chapt er 13 bankrupt cy case on December 31, 2008. Thei r Schedul e A

i dent i f i ed a f ee i nt er est i n a r esi dence on Casi t a Way i n San

Di ego, Cal i f or ni a ( Resi dence) wi t h a val ue of $274, 500 and

secur ed cl ai ms agai nst i t t ot al i ng $434, 053. Thei r Schedul e D

i dent i f i ed a j uni or l i en on t he Resi dence hel d by Ci t i Mor t gage,

I nc. ( Ci t i Mor t gage) i n t he amount of $156, 348. The cl ai ms bar

dat e expi r ed on Apr i l 30, 2009. Ci t i Mor t gage di d not f i l e a pr oof

of cl ai m by t he cl ai ms bar dat e.

I n t hei r or i gi nal chapt er 13 pl an f i l ed on J anuar y 15, 2009,

Schl egel s pr oposed mont hl y pl an payment s of $963 f or 60 mont hs and

a 24% di vi dend t o unsecur ed nonpr i or i t y cr edi t or s. The or i gi nal

pl an pr ovi ded i n Par agr aph 19:

2 Unl ess speci f i ed ot her wi se, al l chapt er , code and r ul er ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532, andt he Feder al Rul es of Bankrupt cy Pr ocedur e, Rul es 1001- 9037.

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VALUATI ON AND RECLASSI FI CATI ON OF LI ENS ON REAL PROPERTYThe f ol l owi ng cr edi t or s ar e ant i ci pated by t hi s pl an t obe deemed unsecur ed cr edi t or s by operat i on of 11 USC 506( a) and 1322( b) and Federal Rul e of Bankr upt cyPr ocedur e [ si c] 3012, and wi l l be subj ect t o mot i on t ot hat end under Federal Rul e of Bankr upt cy Pr ocedur e [ si c] 9014: [ Ci t i Mor t gage] Hel oc on 3957 Casi t a Way i nappr oxi mate amount of $156, 500 . . . .

The chapt er 13 t r ust ee, Thomas H. Bi l l i ngsl ea ( Tr ust ee) ,

obj ect ed t o the or i gi nal pl an and moved t o di smi ss t he case,

cont endi ng t hat : Feasi bi l i t y of pl an at 24% di vi dend r equi r es

eval uat i on whet her t o- best r i pped cr edi t or s f i l e pr oof of cl ai m.

Ul t i mat el y, t he bankrupt cy cour t deni ed conf i r mat i on of t he

or i gi nal pl an.On Apr i l 8, 2009, Schl egel s f i l ed an amended Mot i on t o Avoi d

Li en and Recl assi f y Loan3 wi t h r espect t o Ci t i Mor t gage s j uni or

l i en on t he Resi dence ( Mot i on t o Val ue) . Schl egel s sought t o

val ue t he Resi dence at $266, 500, whi ch woul d l eave Ci t i Mor t gage s

j uni or l i en whol l y unsecur ed. Af t er proper ser vi ce of t he Mot i on

t o Val ue, Ci t i Mor t gage di d not r espond.

The bankrupt cy cour t r evi sed i t s t ent at i ve r ul i ng4 on August

28, 2009, ent er ed i t s order gr ant i ng t he Mot i on t o Val ue on

Oct ober 22, 2009 ( Val uat i on Or der) and val ued t he Resi dence at

$266, 500. The Val uat i on Or der al so pr ovi ded:

The Cour t det er mi nes t hat t he Second Tr ust Deed ofCi t i bank (West ) . . . i s ent i r el y unsecur ed under 11

3

Schl egel s f i l ed an amended mot i on af t er t he cour t i nf or medt hem t hat t he mat t er needed t o be r enot i ced f or hear i ng, t hat t heywer e seeki ng i mpr oper r el i ef and t hat t hey f i l ed an i ncompl et edecl ar at i on wi t h t hei r mot i on.

4 The cour t i ssued a r evi sed t ent at i ve r ul i ng af t erSchl egel s at t or ney f i l ed an amended cer t i f i cat e of ser vi ceest abl i shi ng pr oper ser vi ce of t he mot i on.

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U. S. C. Sect i on 506( a) gi ven t he val ue of t he pr oper t y andt he amount of l i ens seni or t o Ci t i bank s ( West ) l i ensecur ed t her eby, and avoi ds Ci t i bank s ( West ) l i en under11 U. S. C. Sect i on 1322( b) , cont i ngent on ent r y of aconf i r mat i on or der so pr ovi di ng, and compl et i on ofDebt or s [ si c] Chapt er 13 Pl an and Debt or s r esul t antdi schar ge.

On Oct ober 12, 2009, af t er t he bankrupt cy cour t or al l y

gr ant ed t he Mot i on t o Val ue, but bef or e i t ent er ed t he Val uat i on

Or der , Ci t i Mor t gage f i l ed a secur ed pr oof of cl ai m f or i t s j uni or

l i en i n t he amount of $155, 246. 17, whi ch t he bankr upt cy cour t

r ender ed unsecur ed by i t s Val uat i on Or der , pur suant t o 506( a) .

Schl egel s di d not obj ect t o Ci t i Mor t gage s j udi ci al l y- det er mi ned

unsecur ed cl ai m.Meanwhi l e, on J ul y 1, 2009, Schl egel s had f i l ed an amended

chapt er 13 pl an i n whi ch t hey pr oposed mont hl y pl an payment s of

$812 f or 60 mont hs and a 48% di vi dend t o unsecur ed nonpr i or i t y

credi t or s. 5 The amended pl an provi ded t he same Paragr aph 19 as

di d t he or i gi nal pl an, wher ei n Schl egel s st at ed t hat Ci t i Mor t gage

woul d be t r eat ed i n t hei r pl an as an unsecur ed cr edi t or .

B. Post-confirmation events

The bankrupt cy cour t event ual l y conf i r med t he Schl egel s

amended pl an on May 5, 2010 ( t he Pl an) . The conf i r mat i on order

dr af t ed by Schl egel s counsel st at ed t hat consi st ent wi t h

Par agr aph 19 of t he Pl an dat ed J ul y 1, 2009, and t he Val uat i on

Or der ent ered on Oct ober 22, 2009, t he whol l y unsecur ed l i en of

Ci t i Mort gage woul d be t r eat ed and pai d as an unsecur ed cl ai m under

t he Pl an. However , t he Pl an appar ent l y di d not t ake i nt o

5 Schl egel s f i l ed t he amended pl an af t er t he cl ai ms bar dat eand t hey cal cul ated t he i ncr ease i n per cent age to unsecur edcr edi t or s based on t he cl ai ms f i l ed bef or e t he bar dat e.

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consi der at i on Ci t i Mor t gage s cl ai m when i t pr omi sed t o pay

unsecur ed cr edi t or s a 48% di vi dend, even t hough Ci t i Mor t gage f i l ed

i t s cl ai m mont hs bef or e Pl an conf i r mat i on.

On May 14, 2010, ni ne days af t er t he ent r y of t he

conf i r mat i on or der , Tr ust ee f i l ed a Not i ce of Cl ai ms Fi l ed and

I nt ent i on t o Pay Cl ai ms ( Not i ce of Cl ai ms) . The Not i ce of

Cl ai ms, whi ch i ncl uded Ci t i Mor t gage s j udi ci al l y- det er mi ned

unsecur ed cl ai m of $155, 246. 17, showed t he aggr egat e tot al f or al l

unsecur ed cl ai ms as $219, 596. The Not i ce of Cl ai ms al so st at ed:

Pur suant t o 11 U. S. C. 502( a) , t he cl ai ms whi ch have been f i l ed

as st ated above wi l l be deemed al l owed f or pur poses ofdi st r i but i on and shal l be pai d unl ess t he debt or or ot her par t y i n

i nt er est f i l es wi t h t he cour t i n accor dance wi t h Rul e 3007, [ an]

Obj ect i on t o Cl ai m and Request f or Hear i ng wi t hi n t hi r t y ( 30) days

of t hi s not i ce. The r ecor d r ef l ect s ser vi ce of t he Not i ce of

Cl ai ms on bot h Schl egel s and t hei r counsel . No par t y f i l ed any

cl ai m obj ect i ons.

1. Schlegels motion for hardship discharge

On December 13, 2013, on t he eve of t he si xt i eth mont h of t he

Pl an, Schl egel s f i l ed a mot i on f or har dshi p di schar ge ( t he

Har dshi p Mot i on) . Schl egel s cont ended t hat sever al r easons

war r ant ed a har dshi p di schar ge: ( 1) Mr s. Schl egel s recent cancer

di agnosi s and l oss of empl oyment ; ( 2) t he need of an addi t i onal 96

mont hs of payment s t o sat i sf y t he percent age di vi dend payout of

t he Pl an; and ( 3) t he i mpr act i cal i t y of pl an modi f i cat i on, gi ven

t he l apse of near l y f i ve year s i n t he pl an. The bankrupt cy cour t

schedul ed a Hardshi p Mot i on hear i ng on March 5, 2014.

Tr ust ee obj ect ed t o t he Har dshi p Mot i on, cont endi ng t hat

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Schl egel s had f ai l ed t o est abl i sh t he necessary el ement s t o

suppor t a har dshi p di schar ge f or t he f ol l owi ng r easons: ( 1) at

conf i r mat i on, t he Pl an ter m appr oxi mat ed 158 mont hs, gi ven the 48%

di vi dend, Ci t i Mor t gage s al l owed unsecur ed cl ai m and Schl egel s

f ai l ur e t o obj ect t o Ci t i Mor t gage s cl ai m; ( 2) Schl egel s pai d a

t ot al of $48, 391, appr oxi mat el y 58. 5 mont hs of t he r equi r ed 60

Pl an payment s; and (3) t he appr oxi mate remai ni ng payof f of $77, 780

r equi r ed an addi t i onal 96 mont hs t o compl et e. Under t he Pl an

t er ms, t he Schl egel s had pr ovi ded a 10. 8% t o 15. 42% di vi dend t o

unsecur ed nonpr i or i t y cr edi t or s.

2. Trustees motion to dismiss

On J anuary 6, 2014, Trust ee moved t o di smi ss t he Schl egel s

chapt er 13 case f or f ai l i ng t o compl et e pl an payment s wi t hi n f i ve

years f r omcommencement of t he case ( Mot i on t o Di smi ss) . The

at t ached not i ce pr ovi ded:

You ar e f ur t her not i f i ed t hat I F YOU FAI L TO REQUEST ANDSERVE NOTI CE OF HEARI NG wi t hi n [ t he] 28 day per i odpr ovi ded by t hi s not i ce, t he Tr ust ee wi l l pr esent [ an]or der di smi ssi ng t hi s case to t he Cour t f or ent r y wi t houtany hear i ng or f ur t her not i ce t o you.

The Schl egel s f ai l ed t o f i l e any opposi t i on t o t he Mot i on t o

Di smi ss by the deadl i ne of Febr uary 6, 2014.

On Febr uary 20, 2014, Trust ee f i l ed a St atement of Case

St at us r e Non- Cont est ed Mot i on t o Di smi ss and Opposi t i on to

Debt or s Mot i on f or Har dshi p Di schar ge. Tr ust ee mai nt ai ned t hat

Schl egel s: f ai l ed t o t i mel y oppose t he Mot i on t o Di smi ss; f ai l ed

t o make al l Pl an payment s; f ai l ed t o pay of f t he r emai ni ng bal ance

of $76, 960; and f ai l ed t o pay the per cent age di vi dend, al l wi t hi n

t he Pl an t er m. Accor di ngl y, he r equest ed t he cour t t o ent er a

noncont est ed di smi ssal or der . Tr ust ee not ed t hat hi s per i odi c

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and annual r epor t s sent t o Schl egel s t hr oughout t he case f r om 2009

t o 2013 shoul d have al er t ed t hem t o t he per cent age di vi dend

def i ci ency.

On Febr uar y 22, 2014, Schl egel s counsel f i l ed a r esponsi ve

Decl ar at i on r e St at us, asser t i ng t hat f i l i ng an opposi t i on t o t he

Mot i on t o Di smi ss woul d have been r edundant consi der i ng t he

pendi ng Har dshi p Mot i on. Nonet hel ess , he asser t ed t hat t he

Schl egel s i nabi l i t y t o per f or m t he Pl an r equi r ement s ar ose f r om

t he al l owance of Ci t i Mor gt age s cl ai m f i l ed af t er t he cl ai ms bar

dat e.

3. The bankruptcy courts ruling on both motions

The bankrupt cy cour t hel d a hear i ng on t he Har dshi p Mot i on on

Mar ch 5, 2014. Al t hough Schl egel s f ai l ed t o f i l e any wr i t t en

opposi t i on or t o request / obt ai n a hear i ng dat e on t he Mot i on t o

Di smi ss, t he t r anscr i pt of t he hear i ng conf i r ms t hat t he cour t

al so consi der ed t he par t i es ar gument s on t he Mot i on t o Di smi ss.

At t he hear i ng, Schl egel s counsel di d not di sput e t he

cour t s s t atement s t hat t hey knew by at l east May 2010, based on

Tr ust ee s Not i ce of Cl ai ms, t hat wi t h t he mont hl y payments and t he

48% di vi dend r equi r ed by t hei r Pl an, 96 addi t i onal mont hl y

payment s woul d be requi r ed t o compl ete thei r Pl an gi ven

Ci t i mor t gage s unsecur ed cl ai m. Thus, Schl egel s had known f or

near l y f our year s t hat t hey coul d not f ul l y per f or m under t he

t er ms of t he conf i r med Pl an. Hr g Tr . ( Mar ch 5, 2014) 3: 13- 3: 24.

Schl egel s counsel st at ed t hat t hey wer e hopi ng t o secur e a

f i nanci ng arr angement dur i ng t he appl i cabl e commi t ment per i od t o

compl et e al l f i nanci al obl i gat i ons of t hei r Pl an, but Mr s.

Schl egel s heal t h, her l oss of empl oyment and t he f or ecl osur e of

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t hei r r ent al pr oper t y pr event ed t hat f r om happeni ng, hence t hei r

need f or a har dshi p di schar ge. I d. at 3: 25- 4: 9, 4: 20- 5: 1, 5: 6- 22.

I n r esponse, t he cour t st at ed t hat Schl egel s shoul d have f i l ed a

t i mel y pl an modi f i cat i on, r educi ng t he per cent age di vi dend based

upon t hei r ci r cumst ances, and shoul d not have wai t ed so l at e i n

t he Pl an s appl i cabl e commi t ment per i od t o r equest a har dshi p

di schar ge. I d. at 5: 23- 6: 2, 6: 20- 7: 5. Schl egel s counsel made no

ar gument as t o t he al l owance of Ci t i Mor t gage s pr oof of cl ai m and

t he cour t made no observat i ons on t he mat t er . Af t er hear i ng

f ur t her ar gument f r om t he par t i es, t he cour t or al l y deni ed t he

Har dshi p Mot i on. I d. at 11: 13- 12: 3. The bankrupt cy cour t di d notmake an or al r ul i ng on t he Mot i on t o Di smi ss.

The bankrupt cy cour t ent er ed a f or m or der grant i ng t he Mot i on

t o Di smi ss ( Di smi ssal Or der ) on Mar ch 7, 2014, f or Schl egel s

[ f ] ai l ur e t o f ul l y compl et e pl an payment s on or bef or e f i ve ( 5)

year s f r om t he commencement of t hi s case. I t ent er ed a separ at e

order denyi ng t he Hardshi p Mot i on on March 5, 2014, but Schl egel s

di d not appeal t hat or der . Schl egel s t i mel y appeal ed t he

Di smi ssal Or der on March 21, 2014.

II. JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on under 28 U. S. C. 1334

and 157( b) ( 2) ( A) . We have j ur i sdi ct i on under 28 U. S. C. 158.

III. ISSUE

Di d t he bankrupt cy cour t abuse i t s di scr et i on i n di smi ssi ng

Schl egel s bankr upt cy case f or f ai l ur e t o compl et e pl an payment s

wi t hi n f i ve year s?

IV. STANDARDS OF REVIEW

A cour t s i nt er pr et at i on and appl i cat i on of a l ocal r ul e i s

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r evi ewed f or an abuse of di scr et i on. Uni t ed St at es v. Hel l er , 551

F. 3d 1108, 1111 ( 9t h Ci r . 2011) . We r evi ew t he bankrupt cy cour t s

di smi ssal of a chapt er 13 bankr upt cy case under any of t he

enumer at ed par agr aphs of 1307( c) f or abuse of di scr et i on.

El l swor t h v. Li f escape Med. Assocs. , P. C. ( I n r e El l swor t h) , 455

B. R. 904, 914 ( 9t h Ci r . BAP 2011) . A bankrupt cy cour t abuses i t s

di scret i on i f i t appl i ed t he wr ong l egal st andar d or i t s f i ndi ngs

wer e i l l ogi cal , i mpl ausi bl e or wi t hout suppor t i n t he r ecor d.

Tr af f i cSchool . com, I nc. v. Edr i ver I nc. , 653 F. 3d 820, 832 ( 9th

Ci r . 2011) .

V. DISCUSSION

The bankruptcy court did not abuse its discretion when itdismissed the Schlegels chapter 13 bankruptcy case forfailing to complete their plan payments within the five-year

period.

Bef or e we tur n t o the mer i t s of t he bankrupt cy cour t s

deci si on t o di smi ss Schl egel s chapt er 13 case, we addr ess an

argument t hey rai se r egardi ng whether t he cour t pr oper l y deemed

t he Mot i on t o Di smi ss as uncont est ed.

The capt i on of t he Di smi ssal Or der , whi ch appear s t o be a

f or m or der submi t t ed by Tr ust ee, r eads: Or der on Noncont est ed

Mot i on Di smi ss i ng Chapt er 13 Case. A mot i on t o di smi ss a

bankrupt cy case under 1307( c) i s a cont est ed mat t er subj ect t o

Rul e 9014( a) . 6 Rul e 1017( f ) ( 1) . Schl egel s cont end t hat Rul e

9014( a) di d not r equi r e t hem t o f i l e a r esponse t o t he Mot i on t o

6 Rul e 9014( a) pr ovi des:

I n a cont est ed mat t er not ot herwi se gover ned by t hese r ul es,r el i ef shal l be r equest ed by mot i on, and r easonabl e not i ceand oppor t uni t y f or hear i ng shal l be af f or ded t he par t yagai nst whom r el i ef i s sought . No r esponse i s r equi r ed undert hi s r ul e unl ess t he cour t di r ect s ot her wi se.

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Di smi ss. Thi s cont ent i on i s cor r ect , but t hey al so concede t hat

Local Rul e 9014- 4( f ) f or t he Bankrupt cy Cour t f or t he Sout her n

Di str i ct of Cal i f orni a di rect s that f ai l ure t o f i l e a t i mel y

opposi t i on t o a cont est ed mot i on al l ows t he cour t t o deem t he

par t i es si l ence as consent t o gr ant i ng t he mot i on. Schl egel s

cont end t he bankr upt cy cour t er r ed by concl udi ng t hey f ai l ed t o

cont est t he Mot i on to Di smi ss when they ot her wi se act i vel y sought

a har dshi p di schar ge.

Cour t s have br oad di scret i on t o i nt er pr et t hei r l ocal r ul es.

Onl y i n r ar e cases wi l l an appel l at e cour t quest i on t he exer ci se

of di scret i on i n connect i on wi t h t he appl i cat i on of t he l ocalr ul es. Qual l s v. Bl ue Cr oss, 22 F. 3d 839, 842 ( 9t h Ci r . 1994) ;

Kat z v. Pi ke ( I n r e Pi ke) , 243 B. R. 66, 69 ( 9t h Ci r . BAP

1999) ( The bankrupt cy cour t has broad di scr et i on t o appl y i t s

l ocal r ul es. ) . Whet her or not t he bankrupt cy cour t consi der ed

t he Mot i on t o Di smi ss t o be uncont est ed, t he Schl egel s f ai l t o

st ate what di f f erence i t woul d make had t he bankr upt cy cour t

consi der ed t he mat t er cont est ed. I t appear s t he cour t

consi der ed t hei r or al ar gument s agai nst di smi ssal t o some extent

at t he Har dshi p Mot i on hear i ng. Even i f not , t he cour t cl ear l y

had di scr et i on t o deem Schl egel s l ack of a wr i t t en opposi t i on as

consent t o gr ant i ng t he Mot i on t o Di smi ss, as l ong as i t was

mer i t or i ous. We agr ee wi t h t he bankrupt cy cour t s concl usi on t hat

Schl egel s f ai l ed t o cont est t he Mot i on t o Di smi ss.

A. Dismissal under 1307(c)

Sect i on 1307( c) al l ows t he bankrupt cy cour t t o di smi ss a case

f or cause, i ncl udi ng a mat er i al def aul t wi t h r espect t o a t er m

of a conf i r med pl an. See 1307( c) ( 6) . The deci si on t o di smi ss a

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chapt er 13 case under 1307( c) i s a di scr et i onar y deci si on of t he

t r i al cour t . Si ever s v. Gr een ( I n r e Si ever s) , 64 B. R. 530, 530

( 9t h Ci r . BAP 1986) .

The bankrupt cy cour t di smi ssed t he Schl egel s case under

1307( c) ( 6) f or f ai l i ng t o compl et e t hei r pl an payment s wi t hi n

f i ve year s f r om t he commencement of t hei r case. Al t hough

Schl egel s had made thei r $812 mont hl y pl an payment s, t hey had

f ai l ed t o pay t hei r unsecur ed nonpr i or i t y cr edi t or s t he pr omi sed

48% di vi dend. Schl egel s cont end t hat t he bankrupt cy cour t er r ed

i n di smi ssi ng t hei r case because t hey compl et ed al l of t hei r

payment s under t he Pl an as r equi r ed by 1328( a) even i f t heyf ai l ed t o pay t he r equi r ed per cent age di vi dend. Nei t her t he Ni nt h

Ci r cui t nor t hi s Panel has addr essed t hi s pr eci se i ssue. However ,

per suasi ve aut hor i t y suppor t s t he bankrupt cy cour t s deci si on t o

di smi ss f or t hi s r eason.

B. Analysis

1. Authority supporting dismissal of the case

I n Rober t s v. Boyaj i an ( I n r e Rober t s) , 279 B. R. 396, 397- 98

( 1st Ci r . BAP 2000) , af f d, 279 F. 3d 91 ( 1st Ci r . 2002) , a case

wi t h near l y i dent i cal f act s, debt or s conf i r med chapt er 13 pl an

pr omi sed t o pay mont hl y payment s of $474, t o pay f i l ed t ax cl ai ms

and t o pay unsecur ed cr edi t or s a 10% di vi dend. Thr ee year s l at er ,

t he I RS f i l ed a pr oof of cl ai m f or a post pet i t i on t r ust f und t ax.

No per son f i l ed obj ect i ons t o t he I RS s cl ai m and t he t r ust ee

began maki ng payment s on account of t he I RS cl ai m. Si x year s

af t er conf i r mat i on, t he t r ust ee moved t o di smi ss on t he basi s t hat

debt or s pl an payment s f ai l ed t o pay bot h t he I RS cl ai m and t he

10% di vi dend t o unsecur ed cr edi t or s. I n r esponse, debt or s f i l ed a

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mot i on f or di schar ge under 1328( a) 7 or f or a har dshi p di schar ge

under 1328( b) . The bankr upt cy cour t di smi ssed t he case and

deni ed debt or s mot i on.

The Fi r st Ci r cui t BAP af f i r med. The Panel r ej ect ed debtor s

ar gument t hat t hey had sat i sf i ed t hei r obl i gat i ons under t he pl an

si mpl y because t hey pai d t he mont hl y dol l ar amount st ated i n t he

pl an f or 60 mont hs. Thi s ar gument i gnor ed t hei r f ai l ur e t o compl y

wi t h t he ot her pl an t er ms t o pay any post pet i t i on t ax cl ai ms and

t o pay unsecur ed cr edi t or s a di vi dend of 10%. I d. at 399. The

Panel hel d t hat debt or s f ai l ur e t o pay the I RS cl ai m or t hei r

unsecur ed cr edi t or s as pr omi sed i n t hei r conf i r med pl anconst i t ut ed a mat er i al def aul t war r ant i ng di smi ssal under

1307( c) ( 6) . I d. at 400. The Panel consi der ed debt or s f ai l ur e

t o obj ect t o t he I RS s cl ai m or t o seek modi f i cat i on of t hei r pl an

under 1329 i mpor t ant i n i t s deci si on. I d.

I n anot her si mi l ar case, I n r e Ri ver a, 177 B. R. 332 ( Bankr.

C. D. Cal . 1995) , t he debt or s pl an, conf i r med pr i or t o t he cl ai ms

bar date, pr ovi ded f or 36 mont hl y payment s of $2, 300 and a

di vi dend of 65% t o unsecur ed cr edi t or s. I d. at 333. Had t he

al l owed cl ai ms been l i mi t ed t o t hose schedul ed by the debt or s, t he

$2, 300 mont hl y payment s woul d have been suf f i ci ent t o pr ovi de t he

pr oposed 65% r et ur n t o cr edi t or s wi t hi n t hr ee year s. However , t he

amount s f or f i l ed cl ai ms subst ant i al l y exceeded debt or s schedul ed

debt s and debt or s had not f i l ed any obj ect i ons t o t he cl ai ms. As

7 Sect i on 1328( a) pr ovi des i n par t : Subj ect t o subsect i on( d) , as soon as pr act i cabl e af t er compl et i on by the debt or of al lpayment s under t he pl an . . . t he cour t shal l gr ant t he debt or adi schar ge of al l debt s pr ovi ded f or by the pl an or di sal l owedunder sect i on 502 of t hi s t i t l e . . . .

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a r esul t , t he pl an f ai l ed t o pay t he 65% di vi dend by about

$15, 000. I d. The t r ust ee moved t o di smi ss debt or s case under

1307( c) ( 6) f or a mat er i al def aul t i n t he pl an. Debt or s

r esponded wi t h a mot i on f or di schar ge under 1328( a) .

The i ssue bef or e t he Ri ver a cour t i nvol ved whi ch pl an

pr ovi si on takes pr ecedence t he per cent age di vi dend to unsecur ed

cr edi t ors or t he mont hl y pl an payment s. Per suaded by t he

r easoni ng of I n r e Car r , 159 B. R. 538 ( D. Neb. 1993) and I n r e

Phel ps, 149 B. R. 534 ( Bankr. N. D. I l l . 1993) , t he Ri ver a cour t

f ound t hat debt ors payment of l ess t han t he per cent age di vi dend

r equi r ed i n t he pl an pr ecl uded a di schar ge. I d. at 334- 335. Byf ai l i ng t o pay t hei r unsecur ed cr edi t or s t he pr omi sed 65%

di vi dend, t he debt ors had not compl eted t hei r payment s under t he

pl an wi t hi n t he meani ng of 1328( a) . I d. at 335.

I n I n r e Hi l l , 374 B. R. 745 ( Bankr . S. D. Cal . 2007) , t he

bankrupt cy cour t consi der ed t wo separat e cases i n one deci si on

i nvol vi ng a husband and wi f e i n one and an i ndi vi dual woman i n the

ot her . I n each case, t he debt or s or debt or had a conf i r med pl an

pr ovi di ng f or mont hl y payment s and a 100% di vi dend pl us 10%

i nt er est t o unsecur ed credi t or s. I d. at 746- 48. I n bot h cases,

t otal cl ai ms ended up bei ng more t han debt ors had account ed f or ,

and t he debt or s f ai l ed t o seek amendment s t o t hei r pl ans i n or der

t o compl et e t hem wi t hi n 60 mont hs, despi t e t he t r ust ee s not i ces

t hat t hei r pl an payment s woul d necessar i l y exceed t he f i ve- year

t er m. I n one of t he cases, t he debt or needed an addi t i onal 33

mont hs t o compl ete t he pl an payment s; i n t he ot her , debt ors needed

an addi t i onal 53 mont hs of pl an payment s. The t r ust ee moved t o

di smi ss bot h cases f or f ai l ur e t o pay t he pl an i n f ul l wi t hi n f i ve

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year s.

The Hi l l cour t acknowl edged t hat f ai l i ng t o compl et e pl an

payment s wi t hi n t he appl i cabl e 36 or 60- mont h per i od coul d

const i t ut e cause f or di smi ssal under 1307( c) ( 6) . I d. at 748- 49.

However , i t opi ned t hat di smi ssal was not absol ut e, despi t e t he

mandate i n 1322 t hat a pl an must not pr ovi de f or payment s over a

per i od t hat exceeds f i ve year s. Sect i on 1322 i nvol ved

conf i r mat i on, not di smi ssal . I d. at 748. Whi l e t he cour t

det er mi ned t hat t he debt or s mat er i al l y br eached a t er m of t hei r

pl ans wi t hi n t he meani ng of 1307( c) ( 6) by needi ng an addi t i onal

33 or 53 mont hs t o compl et e t he pl ans i . e. , t hey had f ai l ed t opay t hei r unsecur ed cr edi t or s t he pr omi sed di vi dend of 100% pl us

10% i nt er est i t deci ded not t o di smi ss t he debt or s cases due t o

t hei r uni que ci r cumst ances. The debt or s or debt or i n each case

had been consi st ent l y per f ormi ng over t he past 60 mont hs, no real

pr opert y ar r ear ages cont i nued t o dr ag out and no unsecur ed

cr edi t or had compl ai ned about not r ecei vi ng 100% pl us 10% i nt er est

over t he past f i ve year s. I d. at 749- 50. See al so I n r e Gr ant ,

428 B. R. 504, 506- 508 ( Bankr. N. D. I l l . 2010) ( hol di ng t hat

f ai l i ng t o compl et e pl an payment s wi t hi n f i ve year s, and wher e the

pl an cannot be modi f i ed t o make compl et i on f easi bl e, const i t ut es a

mat er i al def aul t f or pur poses of 1307( c) ( 6) ; t he cour t al so

i nt er pr et ed 1322( d) as l i mi t i ng a pl an t o a maxi mum of f i ve

year s and concl uded t hat al l owi ng a pl an t o cont i nue an addi t i onal

t wel ve t o ei ght een mont hs beyond t hat woul d i gnore 1322( d) and

Congr ess cl ear i nt ent ) .

We agr ee wi t h the above cases t o t he ext ent t hey hol d that ,

even t hough a chapt er 13 debt or has compl eted hi s or her mont hl y

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pl an payment s, f ai l ur e t o pay unsecur ed cr edi t or s t he pr omi sed

per cent age di vi dend const i t ut es a mat er i al def aul t wi t h r espect t o

a t er m of a conf i r med pl an. 1307( c) ( 6) . Because t he Schl egel s

di d not seek t o cont i nue thei r Pl an payment s beyond t he 60 mont hs

but i nst ead sought a hardshi p di schar ge, we do not r ender any

opi ni on as t o whet her 1322( d) l i mi t s a bankrupt cy cour t s

abi l i t y to al l ow a debt or t o cont i nue maki ng pl an payment s beyond

t he appl i cabl e commi t ment per i od.

Schl egel s ar gue t hat under Fr i dl ey v. For sythe ( I n r e

Fr i dl ey) , 380 B. R. 538 ( 9t h Ci r . BAP 2007) , a pl an i s compl et e

and debt or s are ent i t l ed t o a di schar ge when t hey ei t her pay al lcl ai ms 100% or make 60 mont hs of payment s. We di sagr ee wi t h t hei r

posi t i on. I n Fri dl ey, debt or s sought an ear l y di schar ge af t er

maki ng a l ump- sum payment i n mont h 14 of t hei r 36- mont h pl an,

whi ch sat i sf i ed t he pl an s dol l ar amount . 308 B. R. at 540. The

Panel hel d t hat si nce debt or s pl an di d not pr ovi de f or 100%

payment t o unsecur ed cr edi t ors, t hey had t o commi t t hemsel ves t o

t he t emporal r equi r ement of 36 mont hs and thei r pr epayment di d not

compl et e t hei r pl an f or pur poses of 1328( a) or 1329. I d. at

545. To obt ai n an ear l y di schar ge wi t hout payi ng al l owed

unsecur ed cl ai ms i n f ul l , debt or s had t o f ol l ow t he 1329

modi f i cat i on pr ocedur e. I d. at 544.

Fr i dl ey di d not hol d, or even i nf er , t hat si mpl y maki ng pl an

payment s f or t he appl i cabl e commi t ment per i od wi t hout al so

pr ovi di ng unsecur ed cr edi t or s wi t h t he pr omi sed per cent age

di vi dend ent i t l es a debt or t o di schar ge. Fur t her , t hat case

i nvol ved t he ear l y compl et i on of pl an payment s and ul t i mat el y

di schar ge, not debt or s f ai l ur e t o compl et e pl an payment s wi t hi n

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t he appl i cabl e commi t ment per i od and di smi ssal under 1307( c) .

At any rat e, Schl egel s are no l onger even abl e t o modi f y t he Pl an

as t hey have made al l mont hl y payment s. See 1329( a) . 8

2. It was proper to allow CitiMortgages unsecured claim

Schl egel s al so di sput e whet her Ci t i Mor t gage s l at e- f i l ed

cl ai m shoul d have been al l owed and pai d by Tr ust ee, whi ch cl ai m

ul t i mat el y caused t hei r Pl an t o i mpl ode and not pay unsecur ed

nonpr i or i t y cr edi t or s a 48% di vi dend. Al t hough Schl egel s spend a

gr eat deal of t i me ar gui ng t hi s i ssue, t hey have never f i l ed an

obj ect i on t o Ci t i Mor t gage s cl ai m. Ther ef or e, we f ai l t o see how

t hey can ar gue t hi s i ssue on appeal . Wi t hout obj ect i on,Ci t i Mor t gage s cl ai m i s deemed al l owed, 502( a) , subj ect t o t he

bankrupt cy cour t s subsequent Val uat i on Or der det er mi ni ng t he

cl ai m t o be unsecur ed under 506( a) and t he conf i r mat i on or der ,

decl ar i ng t hat Ci t i Mor t gage wi l l be t r eat ed and pai d i n t he Pl an

as an unsecur ed nonpr i or i t y cr edi t or .

Wi t hout quest i on, t he cl ai ms bar dat e i n Schl egel s case was

Apr i l 30, 2009. The Mot i on t o Val ue and t he avoi dance of

Ci t i Mor t gage s j uni or l i en came l at er . The Val uat i on Or der , whi ch

st r i pped Ci t i Mor t gage s l i en and r ender ed i t s cl ai m unsecur ed, was

ent er ed on Oct ober 22, 2009. Unt i l t hat poi nt , Ci t i Mor t gage was

oper at i ng i n t hi s case as a secur ed cr edi t or .

Secur ed cr edi t ors i n a chapt er 13 case may, but are not

r equi r ed t o, f i l e a pr oof of cl ai m. See Rul e 3002( a) . Such

8 Sect i on 1329( a) pr ovi des, i n r el evant par t : At any t i meaf t er conf i r mat i on of t he pl an but bef or e t he compl et i on ofpayment s under such pl an, t he pl an may be modi f i ed, upon r equestof t he debt or , t he t r ust ee, or t he hol der of an al l owed unsecur edcl ai m[ . ]

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cr edi t or s may choose not t o par t i ci pat e i n t he bankrupt cy case and

l ook t o t hei r l i ens f or sat i sf act i on of t he debt . Br awder s v.

Cnt y. of Vent ur a ( I n r e Br awder s) , 503 F. 3d 856, 872 ( 9t h Ci r .

2007) . Secur ed l i ens pass thr ough bankrupt cy unaf f ect ed. Long v.

Bul l ard, 117 U. S. 617, 620- 21 ( 1886) ; Dewsnup v. Ti mm, 502 U. S.

410, 418 ( 1992) ; I n r e Br awder s, 503 F. 3d at 872. However , i f t he

l i en i s avoi ded and t he f or mer l y secur ed credi t or f ai l ed t o f i l e a

secur ed cl ai m pr i or t o t he cl ai ms bar dat e, t he credi t or may f i l e

a pr oof of cl ai m wi t hi n 30 days af t er t he or der avoi di ng t he l i en

becomes f i nal . See Rul e 3002( c) ( 3) ; 9 Pr est i ge Ltd. P shi p- Concor d

v. E. Bay Car Wash Par t ner s ( I n r e Pr est i ge Lt d. P shi p- Concor d) ,234 F. 3d 1108, 1118 ( 9t h Ci r . 2000) ; Zebl ey v. Fi r st Hor i zon Home

Loans ( I n r e Ong) , 469 B. R. 599, 601 ( Bankr . W. D. Pa. 2012) .

The except i on under Rul e 3002( c) ( 3) per mi t s a cr edi t or l i ke

Ci t i Mor t gage, whose unsecur ed cl ai m ar i ses as t he r esul t of an

or der i nval i dat i ng i t s secur ed cl ai m, t o f i l e a pr oof of cl ai m

wi t hi n 30 days af t er ent r y of t he or der r egar dl ess of expi r at i on

of t he 90- day l i mi t at i on i n Rul e 3002( a) . As expl ai ned i n t he

Advi sor y Commi t t ee Notes t o Rul e 3002( c) :

Al t hough t he cl ai m of a secur ed cr edi t or may have ar i senbef or e the pet i t i on, a j udgment avoi di ng t he secur i t yi nt er est may not have been ent er ed unt i l af t er t he t i mef or f i l i ng cl ai ms has expi r ed. Under Rul e 3002( c) ( 3) ,t he credi t or who di d not f i l e a secur ed cl ai m maynever t hel ess f i l e an unsecur ed cl ai m wi t hi n t he t i mepr escr i bed. A j udgment does not become f i nal f or t hepur pose of st ar t i ng t he 30 day per i od pr ovi ded f or bypar agr aph ( 3) unt i l t he t i me f or appeal has expi r ed or ,

9 Rul e 3002( c) ( 3) provi des i n par t : An unsecur ed cl ai mwhi ch ar i ses i n f avor of an ent i t y or becomes al l owabl e as ar esul t of a j udgment may be f i l ed wi t hi n 30 days af t er t hej udgment becomes f i nal i f t he j udgment i s f or t he r ecover y ofmoney or pr oper t y f r om t hat ent i t y or deni es or avoi ds t heent i t y s i nt er est i n pr oper t y.

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i f an appeal i s t aken, unt i l t he appeal has been di sposedof .

Ci t i Mor t gage f i l ed i t s pr oof of cl ai m, al bei t as a secur ed

cl ai m, on Oct ober 12, 2009, af t er t he bankrupt cy cour t had or al l y

gr ant ed t he Mot i on t o Val ue, but bef or e t he ent r y of t he Val uat i on

Or der on Oct ober 22, 2009, whi ch deemed t he cl ai m unsecur ed.

Thus, i t s cl ai m was t i mel y f i l ed wi t hi n t he 30 days r equi r ed under

Rul e 3002( c) ( 3) . See I n r e Pr est i ge Lt d. P shi p- Concor d, 234 F. 3d

at 1118 ( pr oof of cl ai m f i l ed bef or e j udgment became f i nal

consi der ed t i mel y f or pur poses of Rul e 3002( c) ( 3) when cour t wai ved

credi t or s secur i t y i nt erest) .Schl egel s never obj ect ed t o Ci t i Mor t gage s t i mel y f i l ed

cl ai m. Thei r cont ent i on t hat t hey had no not i ce of Ci t i Mor t gage s

cl ai m def i es credul i t y. Tr ust ee s Not i ce of Cl ai ms sent t o

Schl egel s and t hei r counsel , j ust days af t er conf i r mat i on,

conspi cuousl y l i st ed Ci t i Mor t gage s unsecur ed cl ai m and the amount

t o be pai d. Theref or e, Tr ust ee di d not er r i n maki ng payment s t o

Ci t i Mor t gage under t he Pl an. 10

VI. CONCLUSION

We concl ude t hat t he bankr upt cy cour t di d not abuse i t s

di scret i on i n gr ant i ng t he Mot i on t o Di smi ss, par t i cul ar l y si nce

10 Al t hough not r ai sed by t he Schl egel s, t he bankrupt cy cour tdi d not engage i n any best i nt er est of cr edi t or s anal ysi s bef or edi smi ssi ng t hei r case, whi ch i s r equi r ed. Nel son v. Meyer ( I n r e

Nel son) , 343 B. R. 671, 675 ( 9t h Ci r . BAP 2006) . However , on t hi sr ecor d di smi ssal appear s t o be i n t he best i nt er est of cr edi t or sand t he est ate. Over t he cour se of 60 mont hs, t he unsecur edcr edi t or s have not r ecei ved anywher e near t he 48% di vi dendr equi r ed by t hei r Pl an. Wi t h di smi ssal and t he di ssol vi ng of t hest ay, t hese credi t or s ar e now f r ee t o pur sue col l ect i on of t hei rcl ai ms agai nst t he Schl egel s, whi ch woul d l i kel y resul t i n mor emoney t han i f t he case had been convert ed t o chapt er 7.

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Schl egel s f ai l ed t o obj ect t o Ci t i Mor t gage s cl ai m or t o modi f y

t hei r Pl an t o addr ess t he cl ai m once f i l ed. By f ai l i ng t o pay

t hei r unsecur ed cr edi t or s t he pr omi sed 48% di vi dend, t hey di d not

compl ete pl an payment s wi t hi n t he appl i cabl e commi t ment per i od.

Accor di ngl y, we AFFI RM.

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in re: steven patrick schlegel joanne marie schlegel, 9th cir. bap (2015)

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