In re Montes
MEMORANDUM OPINION
Before the Court is the Chapter 13 trustee’s motion to dismiss this case because the debtors also have a pending Chapter 7 case. The trustee contends such simultaneous bankruptcy cases are prohibited. She argues in the alternative that the case should be dismissed on bad faith grounds. The Debtors counter that having two cases pending at the same time is not necessarily verboten and should be allowed in this case. For the reasons set forth below the Court will deny the motion, subject to certain conditions.
I. FACTS
The Court finds the following facts:
According to the Debtors’ schedules filed in this case, the Residence is encumbered by a $71,150 first mortgage, a $39,700 second mortgage, and a small property tax lien. The Debtors estimate the Residence is worth $144,000.
Also according to their schedules in this case, the Commercial Property, estimated to be worth $163,000, is encumbered by mortgage of about $60,500 and a $11,700 property tax lien. In his most recent interim report the chapter 7 trustee estimated that the Commercial Property was worth $159,000.
Both properties are subject to a $16,600 IRS lien and a $4,500 New Mexico Taxation and Revenue Department (“TRD”) lien.
For reasons unknown to this Court, the Chapter 7 trustee has not yet sold the Commercial Property. In his last interim report, the Chapter 7 trustee showed that the Commercial Property was the only remaining assets to be liquidated, and estimated that he would realize about $69,700 after payment of all liens, exemptions, and other costs. That estimate appears to include full payment of the IRS and TRD tax liens.
The Court
In 2014 BOTW filed an action to foreclose its junior lien on the Residence. The foreclosure action apparently prompted this Chapter 13 case, filed October 13, 2014.
The Debtor’s bankruptcy schedules disclose assets and liabilities similar to those in the Chapter 7 Case. The main difference is that the second set reflects the Chapter 7 discharge of the Debtor’s general unsecured debts.
Shortly after commencing this case the Debtors filed a motion in the Chapter 7 Case to compel abandonment of the Commercial Property, arguing that the Chapter 7 trustee had dragged his feet too long trying to sell the property. On February 4, 2015, however, the Debtors apparently gave up and signed a stipulated order denying the abandonment motion.
At the final hearing on the Chapter 13 trustee’s motion to dismiss, Debtors stated that if their abandonment effort failed
II. DISCUSSION
A. Sequential Cases. A common form of multiple bankruptcy filing is the so-called “serial Chapter 20,” in which a Chapter 7 case is followed, after closure, by a Chapter 13 case. Typically, serial Chapter 20s are filed if the debtor has too much debt to qualify as a Chapter 13 debtor, see, e.g., In re Frazier,
The United States Supreme Court has held that the Bankruptcy Code does not prohibit serial Chapter 20 cases. In Johnson v. Home State Bank,
Congress has expressly prohibited various forms of serial filings. See, e.g., 11 U.S.C. § 109(g) (no filings within 180 days of dismissal); § 727(a)(8) (no Chapter 7 filing within six years of a Chapter 7 or Chapter 11 filing); § 727(a)(9) (limitation on Chapter 7 filing within six years of Chapter 12 or Chapter 13 filing). The absence of a like prohibition on serial filings of Chapter 7 and Chapter 13 petitions, combined with the evident care with which Congress fashioned these express prohibitions, convinces us that Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief.
B. Simultaneous Cases. Johnson dealt with the filing of a Chapter 13 case after closure of an earlier Chapter 7 case. The rule is less clear where (as here) the debtors file a Chapter 13 case while their earlier Chapter 7 case is still open.
1. The Issue is Not Addressed by Statute or Rule. As was the case in Johnson, there is nothing in the Bankruptcy Code expressly prohibiting simultaneous bankruptcy cases. See In re Lord,
Debtors argue that Bankruptcy Rule 1015(a) permits simultaneous eases. The rule states “If two or more petitions by, regarding, or against the same debtor are pending in the same court, the court may order consolidation of the cases.” Fed. R. Bankr.P. 1015(a). However, the Advisory Committee’s Notes to Rule 1015(a) state that it applies “when the same debtor is named in both voluntary and involuntary petitions, when husband and wife have filed a joint petition ..., when two or more involuntary petitions are filed against the same debtor .... [and] when cases are pending in the same court by virtue of transfer.... ” See also In re Kosenka,
2. Simultaneous Cases Are Prohibited Before Discharge Entered in the First Case. Despite the lack of statutory or rule guidance, there is little dispute .in the case law that a debtor may not file a second bankruptcy case before entry of the discharge order in the first case. For example, in Davis v. Mather (In re Davis),
We note that the Debtor filed his Chapter 13 petition after he received his Chapter 7 discharge but before the Chapter 7 proceedings were closed. A debtor who has been granted a discharge under one chapter under Title 11 may file a subsequent petition under another chapter even though the first case remains open, as long as the debtor meets the requirements for filing the second petition. Grimes v. United States (In re Grimes),117 B.R. 531 , 536 (9th Cir. BAP 1990).
3. Debtors Cannot Treat the Same Debt in Simultaneous Cases. Similarly, courts are united in the view that a debtor may not seek to treat the same debt in two pending bankruptcy cases. The seminal case for this proposition is Freshman v. Atkins,
A proceeding in bankruptcy has for one of its objects the discharge of the bankrupt from his debts. In voluntary proceedings, as both of these were, that is the primary object. Denial of a discharge from the debts provable, or failure to apply for it within the statutory time, bars an application under a secondproceeding for discharge from the same debts.... A proceeding in bankruptcy has the characteristics of a suit, and since the denial of a discharge, or failure to apply for it, in a former proceeding, is available as a bar, by analogy the pendency of a prior application for discharge is available in abatement as in the nature of a prior suit pending, in accordance with the general rule that the law will not tolerate two suits at the same time for the same cause.
4. A Split in Authority If the Above Criteria Are Met.
If the discharge in the first case has been entered and the debtor is not seeking to treat the same debt in both cases, courts are divided on whether the second case may proceed.
a. Per Se Prohibited. Some courts have ruled that, even if the discharge has been entered in the first case and there is no overlap of debts, simultaneous bankruptcy cases simply cannot be allowed. See, e.g., In re Lord,
A common theme in these cases is the “single estate” rule, i.e.' that resolution of a debtor’s affairs should be done by administration of his property as a single estate under a single Chapter within the Code. In re Cowen,
b. Not Per Se Prohibited. Other courts have declined to adopt a per se rule if the discharge was entered in the first case and the debts do not overlap. See Jim Walter Homes, Inc. v. Saylors (In re Saylors),
c. Scrutiny for Abuse or Bad Faith. Even if not prohibited outright, the second case is scrutinized carefully to ensure it does not constitute an abuse of the bankruptcy process or a “bad faith” filing.” See Sanford,
Typically, the good faith/abusive filing review occurs when the Chapter 13 plan is up for confirmation or a stay relief motion is filed. Hodurski,
C. Holding. The Court finds the reasoning of the “no per se prohibition” cases more persuasive. The Supreme Court, in Johnson and more recently is Law v. Siegel, — U.S. -,
Here, Debtors filed this case more than a year after the discharge order was entered in the Chapter 7 Case. Further
In addition, it appears that this case was filed in a good faith attempt to “save the house,” rather than to hinder creditors. The Residence may have substantial equity, which means that the mortgage lenders should be paid in full, with interest. This case does not seem to be one where the automatic stay is being used to delay creditors with no hope of reorganization. Cf. In re Brown,
Finally, Debtors retained new counsel to file this case, who stated at the final hearing on the motion to dismiss that, had he been counsel when the first case was filed, he would have filed a Chapter 11 or 13 case. The Court has no reason to doubt this statement.
As stated above, the Debtors told the Court that they would seek to convert this case to Chapter 11 if they were unable to regain control over the Commercial Property. The Debtors therefore should either file a motion to convert to Chapter 11 or (if their intent has changed) file an amended Chapter 13 plan and work diligently toward confirmation.
III. CONCLUSION
The discharge was entered in the Chapter 7 Case well before this case was filed, and the debts at issue in the two cases are separate. There is, therefore, nothing per se wrong about the filing of this case. Any issues about an abusive filing or “bad faith” can be dealt with in connection with plan confirmation or stay relief.
The Court will enter a separate order denying the Chapter 13 trustee’s motion to dismiss, so long as the Debtors, within the next 10 days, either file an amended Chapter 13 plan or a motion to convert to Chapter 11. The Debtors also should amend their Schedule A to indicate that the Commercial Property is in the bankruptcy estate in the Chapter 7 Case.
Notes
. In making these findings, the Court took judicial notice of the dockets of this case and the Debtor’s pending Chapter 7 case, no. 13-10123 — jl7 (the "Chapter 7 Case”). See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp.,
. Hon. Robert H. Jacobvitz.
. Each of the general unsecured creditors in this case is shown as having an "unknown'' claim amount.
. The Debtors’ claimed exemptions on personal property were not objected to in either case, and the deadline to object has passed, so the property is not properly of either estate. See In re Bucchino,
. Debtors represented that their monthly fixed income is insufficient to service the home mortgages and catch up the arrearages, so they must modify the repayment terms to avoid foreclosure. No such modification is possible in a Chapter 13 case. See 11 U.S.C. § 1322(b)(2).
. BOTW, which holds a junior lien on the Residence, filed a proof of claim in the Chapter 7 Case. Because BOTW's claim was filed as fully secured, by property that has been abandoned from the Chapter 7 estate, BOTW will not participate in any dividend to unsecured creditors in the Chapter 7 Case, and must look solely to this case for payment. The first mortgage holder did not file a claim in the Chapter 7 Case.