567 B.R. 599
Bankr. D. Kan.2017Background
- Debtors Shala and Nathan Holman filed Chapter 13 in 2011 and confirmed a modified plan in 2012 requiring increased payments and imposing duties (notify Trustee of employment changes, timely file/provide tax returns, obtain approval before new debt or asset dispositions).
- Shala repeatedly failed to disclose ongoing income from Rodan + Fields and the couple understated income on schedules and modification motions; they later disclosed substantial commissions and incorporated a business (ETI).
- Debtors incurred substantial unauthorized post-petition obligations (notably federal income taxes exceeding $75,000 for 2014–2016) and acquired/encumbered vehicles and an apartment lease without Trustee or court approval.
- Trustee and the United States moved to dismiss for cause (unreasonable delay, material plan default, and bad faith); parties resolved earlier good-faith objections by an Agreed Order on December 2, 2015 requiring specified increased payments.
- Debtors completed plan payments (totaling $109,107) in December 2016 while dismissal motions were pending; they did not seek discharge prior to the opinion.
- Court found many plan/confirmation-order violations and bad-faith indicia but concluded that § 1328(a) mandates discharge upon completion of plan payments, so dismissal motions were denied as moot and debtors directed to apply for discharge.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debtor misconduct (undisclosed income, late tax returns, unauthorized debts/asset transfers) constitutes "cause" to dismiss under § 1307(c) | Trustee/United States: repeated violations and concealment are cause (unreasonable delay, material default, bad faith) warranting dismissal | Holmans: complied with Agreed Order, completed payments; some conduct excused or resolved by prior agreements | Court: Misconduct gives ample cause to dismiss, but dismissal denies discharge only discretionary; other statutory constraints controlled outcome |
| Whether bad faith supports dismissal under § 1307(c) | Trustee: totality of circumstances (concealment, underreporting income, incurring new debt) shows abuse warranting dismissal | Debtors: agreed resolution addressed pre-December 2, 2015 objections; payments thereafter completed | Court: conduct demonstrated lack of good faith, but pre-Agreed-Order issues were resolved and cannot be reopened absent timely revocation; bad faith alone insufficient to block discharge after plan completion |
| Effect of Agreed Order resolving earlier lack-of-good-faith objections | Trustee/United States: later misconduct and unpaid post-petition taxes justify reopening or conditioned dismissal | Debtors: Agreed Order settled those objections; they performed under it | Court: Agreed Order closed the pre-December 2 issues; revocation requires fraud and timely adversary complaint which was not pursued |
| Whether court may deny discharge despite completed plan payments because of debtor misconduct | Trustee/United States: equitable denial or dismissal with prejudice (and § 349/§ 109(g) relief) appropriate to prevent abuse | Debtors: completion of payments triggers mandatory discharge entitlement under § 1328(a) | Court: § 1328(a) is mandatory—having completed payments, debtors entitled to discharge; dismissal motions denied as moot; certain post-petition debts (e.g., taxes, mortgage, student loans) remain nondischargeable or unaffected |
Key Cases Cited
- Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326 (10th Cir.) (totality-of-circumstances test for bad-faith dismissal under § 1307(c))
- Flygare v. Boulden, 709 F.2d 1344 (10th Cir.) (factors relevant to good-faith analysis under Chapter 13 confirmation)
- In re Love, 957 F.2d 1350 (7th Cir.) (nonexclusive list of factors for § 1307(c) bad-faith inquiry)
- In re Parffrey, 264 B.R. 409 (Bankr. S.D. Tex. 2001) (debtor who failed to file/pay taxes nonetheless entitled to discharge after completing plan payments)
- Ron Pair Enterprises, Inc. v. Fidelity Trust Co., 489 U.S. 235 (U.S.) (statutory text governs court's duty; mandatory language must be followed)