The Debtor initially filed a chapter 7 case, but immediately converted to chapter 13 when the chapter 7 trustee expressed interest in selling the Debtor's home due to the existence of non-exempt equity. The Debtor did not file a chapter 13 plan within fourteen days after the conversion date and, as a result, the Court entered an order dismissing the case. The chapter 7 trustee and the chapter 13 trustee moved to vacate the order dismissing the case and to re-convert the case to chapter 7. The trustees asserted that the Debtor could take advantage of a larger homestead exemption by allowing his case to be dismissed and then re-filing it under chapter 7 after the effective date of an amendment to the homestead exemption statute. The Court found that its local rules were ambiguous as to whether the failure to file a chapter 13 plan may result in the dismissal of a case pursuant to the United States Trustee's Standing Motion to Dismiss Deficient Cases and that its procedures governing dismissal for failure to timely file a plan failed to satisfy the due process requirements of notice and a hearing for dismissal under § 1307(c). The Court contrasted the Bankruptcy Code's provision for automatic dismissal for the failure to file certain case commencement documents, found in § 521(i), with § 1307(c), which requires "notice and a hearing" prior to dismissal for failure to timely file a chapter 13 plan. The purpose for requiring a notice and opportunity for hearing prior to the dismissal under § 1307(c) is to allow any party who wishes to provide the court with input as to whether dismissal or conversion is in the best interests of creditors to have the opportunity to do so. Here, the only notice regarding the potential dismissal of the case was certain language in the Court's 341 meeting notice. This language failed to satisfy the minimal due process requirements of § 1307(c), therefore the Court vacated the order of dismissal pursuant to Fed. R. Civ. P. 60(b)(4) and reinstated the case.
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In a case of first impression in the Tenth Circuit, the Bankruptcy Court rules that §707(b) of the Bankruptcy Code applies to cases converted from Chapter 13 to Chapter 7, as well as to cases filed under Chapter 7. Because the Debtors failed to show eligibility under §707(b) for Chapter 7 relief upon conversion from Chapter 13, the Debtors' failure to perform under their Chapter 13 plan necessitated a dismissal of their case.
The Debtors' confirmed Chapter 13 plan provided for payment to creditors in the following order: (1) Debtors' counsel, (2) non-dischargeable tax debts, (3) secured lenders on Debtors' residence and secured lenders on Debtors' vehicles; and (4) then Class Four non-priority unsecured creditors, to be paid $10,680.70 on filed poofs of claim totaling $29,019.19.
Two and four months into the Debtors' five year plan, and after payments in full to all classes of creditors, except for Class Four non-priority unsecured creditors, the Debtors filed a Notice of Conversion to Chapter 7. Class Four creditors had received nothing under the Debtors' Chapter 13 plan.
The United States Trustee filed a Motion to Dismiss to which the Debtors objected arguing that pursuant to the language of §707(b)(1), §707(b) dismissals applies only to cases initially filed under Chapter 7 and not to cases converted to Chapter 7 from Chapter 13. After reviewing the statutory language and goals of §707(b) and after discussing the three different approaches bankruptcy courts have taken in deciding this question, the Court rules that §707(b) does apply to cases converted to Chapter 7 from Chapter 13.
The Court finds that in light of the (a) larger context of the bankruptcy scheme, and particularly, the effects of conversion on a case pursuant to §348(a); (b) procedures prescribed in Rule 1019(2) of the Federal Rules of Bankruptcy Procedure regarding conversion; and (c) the overarching goals of BAPCPA of avoiding abuse of the Bankruptcy Code, and specifically, relief under Chapter 7― the most logical and compelling conclusion is that Congress intended §707(b) to apply to cases converted to Chapter 7 with equal force.
Debtor filed for Chapter 13 relief without her husband. Debtor's husband had previously filed a bankruptcy case of his own without the Debtor. Despite the separate filings, the Debtor and her husband maintained a joint financial household: they had a joint bank account, filed joint tax returns, and were jointly and severally liable on a lease agreement for their residence.
Together, the Debtor and her husband's unadjusted monthly income was above median income for the household size. However, in her case the Debtor took a marital adjustment on line 13 of Form 22C for one-half of the rent expense, which rendered her below median income for purposes of applicable commitment period under §1325(b)(4) of the Bankruptcy Code. As a result, Debtor proposed a 36-month plan rather than a longer, more costly 60-month plan. The Trustee filed an objection to the Debtor's claim of the marital adjustment.
The Court noted that the analysis for applicable commitment period under §1325(a)(4) is the same as that for calculating disposable income under §1325(b)(2). Therefore, a marital adjustment is not proper if an item constitutes "a household expense of the debtor or the debtor's dependents" under §101(10A)(B).
The Court adopted Judge Romero's definition of a "household expense" in the Toxvard opinion to find that the Debtor's rental expense fell within the ambit of §101(10A)(B) because the Debtor, her husband, and their child lived together as a family in the leased property. However, the Court distinguished the facts of this case from those in Toxvard. Specifically, the Court found that here, the Debtor and her husband's lives were financially intertwined in a manner that allowing a 50/50 split of their monthly rent expense would create a judicial fiction and artificially reduce her monthly income so she would slip below the median income standard. The Court denied confirmation of the Debtor's plan.
The issues before the Court were whether an attorney representing the debtor who accepts a position with a creditors' firm during the pendency of the bankruptcy case creates a connection that must be disclosed; whether total or partial denial of compensation is warranted for the non-disclosure; and whether the settlement agreement reached in this case during the time of the alleged conflict was fair and equitable and in the best interests of the estate. To resolve these issues, the bankruptcy court first examined the employment standards of 11 U.S.C. § 327(a). In furtherance of the disinterestedness prong of § 327(a) and the fiduciary duties counsel for the debtor owes the estate, FED. R. BANKR. P. 2014(a) requires counsel for debtors to disclose any connections that have the potential of creating a conflict of interest. These disclosure requirements under Rule 2014(a) continue after the initial application to employ is approved. The bankruptcy court agreed with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the court when such a connection arises during the representation of a debtor-in-possession. The required supplemental disclosure allows the court, not counsel, to determine whether a conflict exists and counsel remains disinterested under § 327(a). Failing to make a supplemental disclosure robs the court the power to make such a determination.
In this case, the court determined the attorney's acceptance of a position with creditors' counsel in the midst of settlement negotiations involving the same creditors should have been disclosed and counsel failed to do so. The Court held counsel for a debtor-in-possession has an ongoing fiduciary duty to supplement initial employment disclosures with any connections that arise that create potential conflicts. After determining there was a violation of Rule 2014(a), the court turned to the available remedies for such a non-disclosure. In the Tenth Circuit, the failure to supplement initial disclosures when a connection with the potential to create a conflict arises warrants total denial and/or disgorgement of compensation. However, the bankruptcy court has the discretion to determine whether total or partial denial of fees is appropriate based on the facts of a case. Here, the court determined only partial denial of fees from the date the connection (when the associate accepted a position with the creditor's firm) arose was proper. Finally, with respect to the settlement agreement, the bankruptcy court found the agreement was not tainted. Based largely on the evidence from the other creditors, the court determined the settlement agreement resulted in a fair and equitable allocation of the remaining assets, and debtors had no real stake in the outcome. Thus, the court concluded the settlement agreement was in the best interests of the estates under the Rule 9019 standard, with one amendment. The court reduced the administrative claim for debtors' counsel under the settlement agreement consistent with the denial of part of the firm's fees.