In re Frank J. LEVESQUE and Bonnie R. Levesque, Debtors. Frank J. Levesque; Bonnie Levesque, Appellants, v. Brian D. Shapiro, Chapter Trustee, Appellee.
BAP No. NV-11-1742-DKiPa.
Bankruptcy No. 10-21796-BAM.
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Decided June 25, 2012.
473 B.R. 331
Argued and Submitted on June 15, 2012.
Before: DUNN, KIRSCHER and PAPPAS, Bankruptcy Judges.
OPINION
DUNN, Bankruptcy Judge.
The debtor appellants Frank and Bonnie Levesque (the “Levesques“) filed motions (collectively, “Motions“) to reopen their chapter 71 bankruptcy case and convert it to chapter 11. The bankruptcy court granted their motion to reopen but denied their motion to convert. The Levesques appeal the denial of their conversion motion. We AFFIRM.
Factual Background
The facts relevant in this appeal are limited and straightforward.
On September 15, 2009, the Levesques were involved in a motor vehicle accident (the “Accident“) that apparently resulted in substantial personal injuries to both Mr. and Ms. Levesque. The Levesques already had fallen behind on their mortgage payments, and their financial problems worsened after the Accident.
The Levesques filed a chapter 7 bankruptcy petition on June 24, 2010. Their bankruptcy counsel was Shawn Christopher of the Christopher Legal Group. On June 24, 2010, Brian D. Shapiro (“Trustee“) was appointed as the chapter 7 trustee in the Levesques’ bankruptcy case.
In their schedules, the Levesques confirmed under penalty of perjury that they did not have any unliquidated claims against any third parties. On June 28, 2010, the Levesques provided written answers under penalty of perjury in a bankruptcy questionnaire, both answering “No” to the following questions:
9. Does anyone owe you any money for any reason?
10. Do you have any claim against anyone that is not listed in your Schedules?
11. Have you filed or do you have a reason to file any lawsuit against anyone for any reason?
The Levesques received their discharge by order entered on October 4, 2010. The Trustee was discharged and the Levesques’ chapter 7 case was closed by Final Decree entered on October 7, 2010.
Sometime prior to October 18, 2010, the Levesques retained the Law Office of Henness & Haight (the “Henness Firm“) to pursue recovery of damages (the “Claim“) from Falcon Industries, Inc. (“Falcon“) based on their injuries resulting from the Accident. On October 18, 2010, the Henness Firm made demand on Falcon for $750,000. On January 5, 2011, the Levesques filed a lawsuit against Falcon (the “Lawsuit“) to assert the Claim.
During a deposition of the Levesques taken in the Lawsuit, counsel for Falcon questioned the Levesques and asked them why they had not listed the Claim in their bankruptcy, intimating that they “had committed some fraud.” Tr. of December 13, 2011 Hr‘g at 4:1-8. Thereafter, on November 11, 2011, the Levesques, through new counsel, Edward S. Coleman, filed the Motions. In the combined Motions, the Levesques disclosed the Claim to the bankruptcy court for the first time.
The Trustee joined the Levesques’ motion to reopen their bankruptcy case but opposed their motion to convert it to chapter 11, based on their prior failures to disclose the Claim, citing Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). The Levesques filed the affidavit of Ms. Levesque in support of their motion to convert, stating in substance that the Levesques failed to disclose the Claim in their schedules and in their testimony at the
The bankruptcy court heard argument on the Motions at a hearing (“Hearing“) on December 13, 2011. At the Hearing, the bankruptcy court denied the Trustee‘s motion to strike Ms. Levesque‘s affidavit. Following argument, the bankruptcy court announced oral findings of fact and conclusions of law on the record, citing the Supreme Court‘s Marrama decision, and granted the Levesques’ motion to reopen their bankruptcy case, but denied their motion to convert to chapter 11.
The bankruptcy court entered an order reopening the Levesques’ bankruptcy case and denying their motion to convert the case to chapter 11 on December 19, 2011. The Levesques timely appealed.
At oral argument, the Trustee advised that he had been reappointed as the trustee in the Levesques’ reopened chapter 7 case.
Jurisdiction
The bankruptcy court had jurisdiction under
Issues
- Did the Trustee have standing to be heard on the Levesques’ Motions?
- Did the bankruptcy court abuse its discretion in denying the Levesques’ motion to convert?
Standards of Review
We review de novo whether a party has standing. Mayfield v. United States, 599 F.3d 964, 970 (9th Cir. 2010); Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th Cir. BAP 2011).
Discussion
1. The Trustee had standing to appear and be heard with respect to the Motions.
This appeal is all about control of litigation of the Claim. The Levesques argue that the Trustee had no standing to file pleadings and be heard with respect to the Motions because he had filed his final report and been discharged and, consequently, had no stake in the relief sought by the Levesques. Appellants’ Opening Brief at 6-7. The Trustee responds that the Levesques did not raise any issue as to the Trustee‘s standing in their pleadings, including the affidavit of Ms. Levesque, presented to the bankruptcy court. Appellee‘s Brief at 8. We note that counsel for the Levesques did not question the Trustee‘s standing at the Hearing.
Ordinarily, if an issue is not raised before the trial court, it will not be considered on appeal and will be deemed waived. See, e.g., Laub v. U.S. Dep‘t of Interior, 342 F.3d 1080, 1087 n. 6 (9th Cir. 2003); Crosby v. Reed (In re Crosby), 176 B.R. 189, 195 (9th Cir. BAP 1994). However, in light of the significance of the issue of the Trustee‘s standing in this context, we exercise our discretion to consider the standing issue raised in the Levesques’ opening brief. See City of Los Angeles v. County of Kern, 581 F.3d 841, 845-46 (9th Cir. 2009).
This is an issue of first impression before this Panel. Rule 5010, titled “Reopening Cases,” specifically provides that, “A case may be reopened on motion of the debtor or other party in interest pursuant to
We conclude that to deny the Trustee standing to appear and be heard with respect to the Motions would, in the words of the Supreme Court‘s recent decision (albeit in a different context) in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, — U.S. —, 132 S.Ct. 2065, 2068, 182 L.Ed.2d 967 (2012), be “hyperliteral and contrary to common sense,” for the following reasons.
At the outset, it truly would be ironic, and reward disingenuousness, to deny standing to the Trustee as a party in interest to be heard with respect to the Motions at the behest of the Levesques, when at the time the Motions were filed, the Levesques did not own the Claim that was the
Procedurally, this appeal presents an unusual fact pattern. Ordinarily, the Levesques’ motion to reopen would have been set for hearing separately. After it was granted for the purpose of further administration of estate assets, the Trustee or a new chapter 7 trustee would have been appointed or reappointed. As noted above, the Trustee was reappointed in this case. If thereafter, the Levesques’ motion to convert was set for hearing, there would be no question as to the Trustee‘s standing to appear and be heard with respect to the motion to convert. However, the Levesques filed the Motions in a single pleading, and the Motions were scheduled to be heard together.
In these circumstances, we are inclined to follow what appears to be the majority approach, recognizing the standing of a discharged chapter 7 trustee to appear and be heard as a party in interest in proceedings relating to reopening a closed case for administration of undisclosed assets. The rationale for that position is well stated in the opinion of the district court in White v. Boston (In re White), 104 B.R. 951, 954 (S.D. Ind. 1989):
[T]he argument [against standing] is overly formalistic. Followed to its logical conclusion, it would also preclude creditors from seeking a reopening to administer undisclosed assets on the grounds that they would merely be former creditors. Moreover, it is established case law that a trustee‘s powers are terminated only when the estate has been properly closed. It would be incongruous to permit a debtor who has failed to disclose assets to use this failure (and the subsequent erroneous closing) as a shield against reopening. The distinction between a “trustee” and a “former trustee” urged by the debtors is semantic rather than substantive, and does not effect a talismanic change in the trustee‘s legal status. Therefore, the mere closing of an estate cannot in [and] of itself prohibit trustee standing. (Emphasis in original.)
See In re Linton, 136 F.3d 544, 546 (7th Cir. 1998) (“A bankruptcy proceeding can be reopened for cause,
In the White case, the debtors sought to overturn on appeal the bankruptcy court‘s
Although the trustee‘s standing to reopen the case was not raised as an issue in Petty, the Panel did discuss the impact of an undisclosed estate asset on case closure:
[S]ince the debtors’ potential interest in the subject real estate was not disclosed in the bankruptcy petition the case was never fully administered within the meaning of
§ 350(a) , and therefore not properly closed under that section.... Once it has been established that the case was not properly closed and may be reopened to administer the assets of the debtor‘s estate it would be anomalous to bar the collection of the very assets sought to be recovered because the case was closed.
Id. at 212. Likewise, in such circumstances, it would be anomalous not to treat the trustee, the most knowledgeable party concerning administration of the estate, as a party in interest for purposes of Rule 5010, exercising residual authority with respect to any undisclosed estate assets.
We recognize that the discharge of the Trustee in conjunction with the original closing of the Levesques’ chapter 7 case raises a technical question as to his authority to administer or otherwise deal with the Claim during the period between the date of entry of the closing order and the date of a new trustee appointment following the reopening of the case. However, under
Although the trustee is not vested with the title of the debtor under the Code, section 323(a) gives the trustee full authority to represent the estate and to dispose of the debtor‘s nonexempt property that makes up the estate.
The trustee is required to collect and reduce to money the nonexempt property of the estate, and therefore is entitled to administer the property of the estate wherever located, including the debtor‘s prepetition causes of action.
3 Collier on Bankruptcy ¶ 323.02[1] (Alan N. Resnick and Henry J. Sommer, eds., 16th ed. 2012) (emphasis added).
In addition, the bankruptcy court in In re Sweeney questioned the assumption that a discharged trustee has no authority to act on behalf of the estate when
There are decisions denying a discharged trustee standing to move to reopen a chapter 7 case to administer assets. See, e.g., In re DeLash, 260 B.R. 4 (Bankr. E.D. Cal. 2000) (citing In re Ayoub, 72 B.R. 808, 812 (Bankr. M.D. Fla. 1987)); In re Thomas, 236 B.R. 573, 576-77 (Bankr. E.D.N.Y. 1999). Two rationales support this result. First, when a bankruptcy case is reopened, the United States Trustee (“UST“) appoints a new trustee, but only following a determination by the bankruptcy court “that a trustee is necessary to protect the interests of creditors and the debtor or to insure efficient administration of the case.” Rule 5010. Once that determination is made, the UST may or may not reappoint the original trustee. Handbook for Chapter 7 Trustees (hereafter, “Handbook for Chapter 7 Trustees“), U.S. Dep‘t of Justice, Executive Office of the United States Trustee, July 1, 2002, at p. 8-44. Until reappointment by the UST, the discharged trustee arguably is not authorized to represent the bankruptcy estate and receive compensation for doing so and accordingly, would have no standing to move to have the case reopened or appear in proceedings relating to the case. See In re Thomas, 236 B.R. at 576-77. The bankruptcy court further arguably would be treading improperly upon the UST‘s prerogatives in recognizing standing for a former trustee in advance of such reappointment. See In re DeLash, 260 B.R. at 6-8; In re Ayoub, 72 B.R. at 812.
Second, other parties with standing, such as the UST and creditors, ostensibly are available to move to reopen bankruptcy cases to administer assets. See In re DeLash, 260 B.R. at 6-7; In re Thomas, 236 B.R. at 577. The UST is explicitly authorized under the Bankruptcy Code to “appear and be heard on any issue in any case or proceeding under this title,” except for filing a plan under chapter 11.
Relying on “creditors” to move to reopen a case is problematic, both on technical and practical grounds. First, as a technical matter, if the discharge has been entered, do the “former” creditors of the debtor have standing to move to reopen the case? The DeLash court discounted that argument, asserting that under the distribution scheme mandated by the Bankruptcy Code, prepetition creditors are entitled to distributions from estate assets that have not previously been administered. “Given this right, it would be illogical to argue that a creditor of a discharged chapter 7 debtor is a former creditor without standing to reopen the case.” In re DeLash, 260 B.R. at 7. Accepting that position, it would appear that prepetition creditors would satisfy the “pecuniary interest” test for standing stated in Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 442-43 (9th Cir. 1983), if they took the initiative to file a motion to reopen.
Based on our analysis of the applicable law and foregoing authorities in this context, our ultimate conclusion is that it would exalt form over substance, to the detriment of creditors and the bankruptcy estate, if the Trustee were not recognized as having standing to appear and be heard with respect to the Motions. No party was in a better position than the Trustee to advise the bankruptcy court as to the status and history of the Levesques’ bankruptcy case and administration of their estate. We conclude that the Levesques’ argument that the Trustee had no standing to appear regarding the Motions lacks merit.
2. The bankruptcy court did not abuse its discretion in denying the Levesques’ motion to convert the reopened case to chapter 11.
Under
While the Levesques’ motion to convert requested a conversion from chapter 7 to chapter 11, rather than to chapter 13, the language of
The Levesques argue, however, that the bankruptcy court did not give adequate weight to the evidence of the Levesques’ good faith in relying on the advice of their counsel, as set forth in Ms. Levesque‘s affidavit, and that they “effectively canceled” any failure to disclose their Claim by filing the Motions. They earnestly spin the facts in their favor, but their argument misapprehends the standards applicable to analyze whether the bankruptcy court clearly erred in its fact findings.
As noted above, in determining whether the bankruptcy court abused its discretion, we must affirm the bankruptcy court‘s fact findings unless we determine
In this case, the bankruptcy court was very careful in its fact findings in support of denial of the motion to convert. It did not find that the Levesques had committed fraud, and it did not determine that the Levesques had “lied.” However, the bankruptcy court did find that the Levesques “didn‘t tell the truth and certainly signed things under oath and under penalty of perjury that were not true.” Tr. of December 13, 2011 Hr‘g at 21:3-5. The record, as discussed above, amply supports those findings. In addition, the bankruptcy court questioned the Levesques’ credibility based on their failure to pursue any claim against their former bankruptcy counsel, whose advice they claim led them to their failures of disclosure and thus allegedly put them in their present predicament.
Based on the record presented in this appeal, we can discern no error, let alone clear error, of fact that would lead us to conclude that the bankruptcy court abused its discretion in denying the Levesques’ motion to convert.
Conclusion
For the foregoing reasons, we AFFIRM.