In re: Shaun Micheil Martin and Patricia Maureen McCarthy
WW-15-1377-JuTaKu
| 9th Cir. BAP | Dec 6, 2016Background
- Debtors Shaun Martin and Patricia McCarthy filed Chapter 13 shortly after a state-court $224,000 judgment against Ms. McCarthy; schedules initially showed significant unsecured debt and purchase of a new minivan prepetition.
- Debtors filed multiple amended plans and schedules (including several Form B22C and Schedules I/J amendments); the court confirmed a second amended plan in Nov. 2013 finding good faith despite sloppy filings.
- Postconfirmation Debtors reported increased income and sought multiple plan modifications; objections by creditor/appellant Fearghal McCarthy alleged understated income, misstated expenses, improper tax returns, unauthorized disposition of a vehicle, and other misconduct.
- After evidentiary hearings, the bankruptcy court found misstatements of income/expenses and tax-return errors but concluded Debtors’ conduct was not "egregious" and dismissed the Chapter 13 case for cause under §1307(c) without prejudice (denying dismissal with prejudice).
- McCarthy appealed, arguing the record supported dismissal with prejudice for bad faith and that the court failed to consider lesser sanctions adequately. The BAP affirmed.
Issues
| Issue | McCarthy's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether dismissal with prejudice was warranted for bad faith | Debtor misrepresented income/expenses, concealed assets, manipulated filings, and engaged in cumulative egregious conduct meriting a permanent bar | Misconduct was not egregious; errors were due to sloppy counsel or corrected; lesser sanctions suffice; dismissal without prejudice is proper | Court affirmed dismissal for cause under §1307(c) but found misconduct not egregious enough to warrant dismissal with prejudice |
| Whether bankruptcy court applied correct legal standard (Leavitt factors) | Court should have weighed factors differently to reach prejudice dismissal | Court applied Leavitt totality-of-circumstances test and considered mitigation factors | Court applied correct legal framework; factual findings supported outcome |
| Whether record compelled alternative sanctions analysis before denying prejudice | Court erred by not analyzing lesser sanctions in detail (per Ellsworth) | Debtors proposed alternatives at hearing; court considered two-step process and alternative sanctions were unnecessary once prejudice dismissal was unwarranted | Court properly considered alternatives and received parties’ positions; no abuse of discretion |
| Whether factual findings (income, expenses, tax issues, vehicle sale) were clearly erroneous | Findings overstated or unsupported, so prejudice dismissal required | Findings were based on testimony, bank statements, CPA testimony, and allowable inferences | BAP held factual findings were plausible and not clearly erroneous; deference to factfinder upheld |
Key Cases Cited
- Leavitt v. Soto, 171 F.3d 1219 (9th Cir. 1999) (sets forth four-factor totality-of-circumstances test for Chapter 13 good-faith/bad-faith dismissal)
- Hinkson v. United States, 585 F.3d 1247 (9th Cir. 2009) (standards for reviewing for abuse of discretion and clear error)
- Eisen v. Curry (In re Eisen), 14 F.3d 469 (9th Cir. 1994) (bad faith as cause under §1307(c))
- Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904 (9th Cir. BAP 2011) (dismissal with prejudice is drastic; courts should consider lesser sanctions)
- Luxford (In re Luxford), 368 B.R. 63 (Bankr. D. Mont. 2007) (post-confirmation dismissal for fraud/failure to disclose)
- USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880 (9th Cir. 2010) (articulating Hinkson two-step inquiry for abuse-of-discretion review)