633 B.R. 768
Bankr. S.D. Tex.2021Background
- Debtors Luis and Viola Gutierrez operated South Shore Automotive and were constructively evicted by landlord Billy R. Algoe in December 2018; they filed a Chapter 13 petition on February 27, 2020.
- Lone Star National Bank held a prepetition security interest, obtained a state-court judgment, caused sheriff seizure of much of the shop equipment and vehicles, and auctioned the repossessed collateral.
- Algoe filed a secured proof of claim for $53,340 based on an eviction judgment and asserted a landlord’s lien in business equipment remaining at the premises.
- Debtors’ amended Chapter 13 plans (ultimately the July 23, 2021 Plan) proposed to “surrender” business equipment to Algoe (and other secured creditors) under 11 U.S.C. § 1325(a)(5)(C).
- Algoe objected, contending surrender was fraudulent because collateral was not physically delivered, sought removal of the Chapter 13 trustee for failing to preserve assets (and clawback of $28,500 auction proceeds), and sought sanctions against debtors’ counsel.
- After evidentiary hearings, the court confirmed the July 23, 2021 Plan, denied removal of the trustee and sanctions, held that surrender need not involve physical delivery where the debtor has relinquished rights/made collateral available, and allowed Algoe a $29,340 unsecured deficiency claim.
Issues
| Issue | Algoe (Plaintiff) Argument | Debtors/Trustee (Defendant) Argument | Held |
|---|---|---|---|
| Does “surrender” under §1325(a)(5)(C) require physical delivery of collateral? | Surrender was fraudulent because business equipment was never physically delivered to Algoe. | Surrender may be effectuated by relinquishment of rights and making collateral available; physical delivery is not required. | Held: Physical delivery not required; surrender occurs if debtor relinquishes all rights/makes collateral available. |
| Is Algoe entitled to removal of the Chapter 13 trustee for failing to preserve assets / claw back auction proceeds? | Trustee breached fiduciary duties, was indifferent to other creditors, failed to investigate or claw back $28,500. | Trustee had no duty to expend estate resources because the assets were fully encumbered; Lone Star had superior liens; trustee acted reasonably. | Held: Denied. Algoe failed to show cause (no clear-and-convincing evidence of fiduciary breach or preponderance for misconduct). |
| Should the July 23, 2021 amended plan be stricken and should debtors’ counsel be sanctioned for filing amid a contested hearing? | The plan was filed without leave during an evidentiary hearing; Local rule requires timing; counsel multiplied proceedings—seek $1,000 under 28 U.S.C. § 1927. | Federal Rule 3015(f) governs national timing; the local Puerto Rico rule cited does not apply; amendment was justified to address LoanCare postpetition mortgage charges; no bad faith. | Held: Denied. The local rule cited was inapplicable; Rule 3015(f) provided adequate notice time; no bad faith or unreasonable multiplication of proceedings. |
| Does the July 23, 2021 Plan satisfy §1325 (good faith, liquidation test, feasibility, treatment of secured claims)? | Plan is not proposed in good faith and improperly treats Algoe’s claim as surrendered while collateral remained; Algoe sought adjustment of claim and nondischargeability. | Debtors: Plan complies with §1325; surrendered collateral is available; Debtors proposed reasonable payments and disclosed exemptions; deficiency to be treated unsecured. | Held: Confirmed. Court found plan proposed in good faith, satisfied §1325(a)(1)–(9); Lone Star’s claim satisfied by foreclosure/surrender; Algoe entitled to a $29,340 unsecured deficiency. |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (2011) (limits on bankruptcy courts’ constitutional authority and role of consent).
- Wellness Int’l Network v. Sharif, 575 U.S. 665 (2015) (parties may consent, expressly or impliedly, to bankruptcy adjudication).
- Bullard v. Blue Hills Bank, 575 U.S. 496 (2015) (plan confirmation fixes parties’ rights and is a final order).
- Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997) (clarifies cram-down framework under §1325(a)(5)).
- White v. IRS (In re White), 487 F.3d 199 (4th Cir. 2007) (surrender need not involve physical delivery; focus on relinquishment/availability).
- Pratt v. GMAC (In re Pratt), 462 F.3d 14 (1st Cir. 2006) (interpreting surrender in bankruptcy context).
- Grogan v. Garner, 498 U.S. 279 (1991) (standard of proof in nondischargeability contexts; presumption of preponderance in civil matters).
- Procter & Gamble Co. v. Amway Corp., 280 F.3d 519 (5th Cir. 2002) (standards for imposing sanctions under §1927).
- FDIC v. Calhoun, 34 F.3d 1291 (5th Cir. 1994) (§1927 bad-faith standard).
- Barnhill v. Johnson, 503 U.S. 393 (1992) (property interests are created by state law; federal courts apply state law to property questions).
- Logan v. Mullis, 686 S.W.2d 605 (Tex. 1985) (Texas factors for fixture analysis).