In re: Steven Patrick Schlegel Joanne Marie Schlegel
ORDERED PUBLISHED
O P I N I O N
Submitted Without Oral Argument On January 22, 20151
Filed - February 25, 2015
Appeal from the United States Bankruptcy Court for the Southern District of California
Appearances:
Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges.
KIRSCHER, Bankruptcy Judge:
Appellants Steven Patrick Schlegel and Joanne Marie Schlegel (Schlegels) appeal an order dismissing their chapter 132 case for failing to complete plan payments within the applicable five-year commitment period. This appeal raises for the first time whether a confirmed chapter 13 plan may be dismissed for the debtors failure to pay both the required plan payment and the approved percentage dividend to unsecured nonpriority creditors during the applicable commitment period. We AFFIRM.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Pre-confirmation events
The Schlegels, as above median income wage earners, filed a chapter 13 bankruptcy case on December 31, 2008. Their Schedule A identified a fee interest in a residenсe on Casita Way in San Diego, California (Residence) with a value of $274,500 and secured claims against it totaling $434,053. Their Schedule D identified a junior lien on the Residence held by CitiMortgage, Inc. (CitiMortgage) in the amount of $156,348. The claims bar date expired on April 30, 2009. CitiMortgage did not file a proof of claim by the claims bar date.
In their original chapter 13 plan filed on January 15, 2009, Schlegels proposed monthly plan payments of $963 for 60 months and a 24% dividend to unsecured nonpriority creditors. The original plan provided in Paragraph 19:
VALUATION AND RECLASSIFICATION OF LIENS ON REAL PROPERTY The following creditors are anticipated by this plan to be deemed unsecured creditors by operation of
11 USC §§ 506(a) and1322(b) and Federal Rule of Bankruptcy Procedure § [sic] 3012, and will be subject to motion to that end underFederal Rule of Bankruptcy Procedure § [sic] 9014 : [CitiMortgage] Heloc on 3957 Casita Way in approximate amount of $156,500 . . . .
The chapter 13 trustee, Thomas H. Billingslea (Trustee), objected to the original plan and moved to dismiss the case, contending that: Feasibility of plan at
On April 8, 2009, Schlegels filed an amended Motion to Avoid Lien and Reclassify Loan3 with respect to CitiMortgages junior lien on the Residence (Motion to Value). Schlegels sought to value the Residence at $266,500, which would leave CitiMortgages junior lien wholly unsecured. After proper service of the Motion to Value, CitiMortgage did not respond.
The bankruptcy court revised its tentative ruling4 on August 28, 2009, entered its order granting the Motion to Value on October 22, 2009 (Valuation Order) and valued the Residence at $266,500. The Valuation Order also рrovided:
The Court determines that the Second Trust Deed of Citibank (West) . . . is entirely unsecured under
11 U.S.C. Section 506(a) given the value of the property and the amount of liens senior to Citibanks (West) lien secured thereby, and avoids Citibanks (West) lien under11 U.S.C. Section 1322(b) , contingent on entry of a confirmation order so providing, and completion of Debtors [sic] Chapter 13 Plan and Debtors resultant discharge.
On October 12, 2009, after the bankruptcy court orally granted the Motion to Value, but before it entered the Valuation Order, CitiMortgage filed a secured proof of claim for its junior lien in the amount of $155,246.17, which the bankruptcy court rendered unsecured by its Valuation Order, pursuant to
Meanwhile, on July 1, 2009, Schlegels had filed an amended chapter 13 plan in which they proposed monthly plan payments of $812 for 60 months and a 48% dividend to unsecured nonpriority creditors.5 The amended plan provided the same Paragraph 19 as did the original plan, wherein Schlegels stated that CitiMortgage would be treated in their plan as an unsecured creditоr.
B. Post-confirmation events
The bankruptcy court eventually confirmed the Schlegels amended plan on May 5, 2010 (the Plan). The confirmation order drafted by Schlegels counsel stated that consistent with Paragraph 19 of the Plan dated July 1, 2009, and the Valuation Order entered on October 22, 2009, the wholly unsecured lien of CitiMortgage would be treated and paid as an unsecured claim under the Plan. However, the Plan apparently did not take into consideration CitiMortgages claim when it promised to pay unsecured creditors a 48% dividend, even though CitiMortgage filed its сlaim months before Plan confirmation.
On May 14, 2010, nine days after the entry of the confirmation order, Trustee filed a Notice of Claims Filed and Intention to Pay Claims (Notice of Claims). The Notice of Claims, which included CitiMortgages judicially-determined unsecured claim of $155,246.17, showed the aggregate total for all unsecured claims as
1. Schlegels motion for hardship discharge
On December 13, 2013, on the eve of the sixtieth month of the Plan, Schlegels filed a motion for hardship discharge (the Hardship Motion). Schlegels contended that several reasons warranted a hardship discharge: (1) Mrs. Schlegels recent cancer diagnosis and loss of employment; (2) the need of an additional 96 months of payments to satisfy the percentage dividend payout of the Plan; and (3) the impracticality of plan modification, given the lapse of nearly five years in the plan. The bankruptcy court scheduled a Hardship Motion hearing on March 5, 2014.
Trustee objected to the Hardship Motion, contending that Schlegels had failed to establish the necessary elements to support a hardship discharge for the following reasons: (1) at confirmation, the Plan term approximated 158 months, given the 48% dividend, CitiMortgages allowed unsecured claim аnd Schlegels failure to object to CitiMortgages claim; (2) Schlegels paid a total of $48,391, approximately 58.5 months of the required 60 Plan payments; and (3) the approximate remaining payoff of $77,780 required an additional 96 months to complete. Under the Plan terms, the Schlegels had provided a 10.8% to 15.42% dividend to unsecured nonpriority creditors.
2. Trustees motion to dismiss
On January 6, 2014, Trustee moved to dismiss the Schlegels chapter 13 case for failing to complete plan payments within five years from commencement of the case (Motion to Dismiss). The attached notice provided:
You are further notified that IF YOU FAIL TO REQUEST AND SERVE NOTICE OF HEARING within [the] 28 day period provided by this notice, the Trustee will present [an] order dismissing this case to the Court for entry without any hearing or further notice to you.
The Schlegels failed to file any opposition to the Motion to Dismiss by the deadline of February 6, 2014.
On February 20, 2014, Trustee filed a Statement of Case Status re Non-Contested Motion to Dismiss and Opposition to Debtors Motion for Hardship Discharge. Trustee maintained that Schlegels: failed to timely oppose the Motion to Dismiss; failed to mаke all Plan payments; failed to pay off the remaining balance of $76,960; and failed to pay the percentage dividend, all within the Plan term. Accordingly, he requested the court to enter a non-contested dismissal order. Trustee noted that his periodic and annual reports sent to Schlegels throughout the case from 2009 to 2013 should have alerted them to the percentage dividend deficiency.
On February 22, 2014, Schlegels counsel filed a responsive Declaration re Status, asserting that filing an opposition to the Motion tо Dismiss would have been redundant considering the pending Hardship Motion. Nonetheless, he asserted that the Schlegels inability to perform the Plan requirements arose from the allowance of
3. The bankruptcy courts ruling on both motions
The bankruptcy court held a hearing on the Hardship Motion on March 5, 2014. Although Schlegels failed to file any written opposition or to request/obtain a hearing date on the Motion to Dismiss, the transcript of the hearing confirms that the court also considered the parties arguments on the Motion to Dismiss.
At the hearing, Schlegels counsel did not disрute the courts statements that they knew by at least May 2010, based on Trustees Notice of Claims, that with the monthly payments and the 48% dividend required by their Plan, 96 additional monthly payments would be required to complete their Plan given Citimortgages unsecured claim. Thus, Schlegels had known for nearly four years that they could not fully perform under the terms of the confirmed Plan. Hr‘g Tr. (March 5, 2014) 3:13-3:24.
Schlegels counsel stated that they were hoping to secure a financing arrangement during the applicable commitment period to complete all financiаl obligations of their Plan, but Mrs. Schlegels health, her loss of employment and the foreclosure of their rental property prevented that from happening, hence their need for a hardship discharge. Id. at 3:25-4:9, 4:20-5:1, 5:6-22.
In response, the court stated that Schlegels should have filed a timely plan modification, reducing the percentage dividend based upon their circumstances, and should not have waited so late in the Plans applicable commitment period to request a hardship discharge. Id. at 5:23-6:2, 6:20-7:5. Schlegels counsel made no argument as to the allowance of CitiMortgages proof of claim and the court made no observations on the matter. After hearing further argument from the parties, the court orally denied the Hardship Motion. Id. at 11:13-12:3. The bankruptcy court did not make an oral ruling on the Motion to Dismiss.
The bankruptcy court entered a form order granting the Motion to Dismiss (Dismissal Order) on March 7, 2014, for Schlegels [f]ailure to fully complete plan payments on or before five (5) years from the commencement of this case. It entered a separate order denying the Hardship Motion on March 5, 2014, but Schlegels did not appeal that order. Schlegels timely appealed the Dismissal Order on March 21, 2014.
II. JURISDICTION
The bankruptcy court had jurisdiction under
III. ISSUE
Did the bankruptcy court abuse its discretion in dismissing Schlegels bankruptcy case for failure to complete plan payments within five years?
IV. STANDARDS OF REVIEW
A courts interpretation and application of a local rule is reviewed for an abuse of discretion. United States v. Heller, 551 F.3d 1108, 1111 (9th Cir. 2011). We review the bankruptcy courts dismissal of a chapter 13 bankruptcy case under any of the enumerated pаragraphs of
The bankruptcy court did not abuse its discretion when it dismissed the Schlegels chapter 13 bankruptcy case for failing to complete their plan payments within the five-year period.
Before we turn to the merits of the bankruptcy courts decision to dismiss Schlegels chapter 13 case, we address an argument they raise regarding whether the court properly deemed thе Motion to Dismiss as uncontested.
The caption of the Dismissal Order, which appears to be a form order submitted by Trustee, reads: Order on Noncontested Motion Dismissing Chapter 13 Case. A motion to dismiss a bankruptcy case under
Courts have broad discretion to interpret their local rules. Only in rare cases will an appellate court question the exercise of discretion in connection with the application of the local rules. Qualls v. Blue Cross, 22 F.3d 839, 842 (9th Cir. 1994); Katz v. Pike (In re Pike), 243 B.R. 66, 69 (9th Cir. BAP 1999) (The bankruptcy court has broad discretion to apply its local rules.). Whether or not the bаnkruptcy court considered the Motion to Dismiss to be uncontested, the Schlegels fail to state what difference it would make had the bankruptcy court considered the matter contested. It appears the court considered their oral arguments against dismissal to some extent at the Hardship Motion hearing. Even if not, the court clearly had discretion to deem Schlegels lack of a written opposition as consent to granting the Motion to Dismiss, as long as it was meritorious. We agree with the bankruptcy courts conсlusion that Schlegels failed to contest the Motion to Dismiss.
A. Dismissal under 1307(c)
The bankruptcy court dismissed the Schlegels case under
B. Analysis
1. Authority supporting dismissal of the case
In Roberts v. Boyajian (In re Roberts), 279 B.R. 396, 397-98 (1st Cir. BAP 2000), aff‘d, 279 F.3d 91 (1st Cir. 2002), a case with nearly identical facts, debtors confirmed chapter 13 plan promised to pay monthly payments of $474, to pay filed tax claims and to pay unsecured creditors a 10% dividend. Three years later, the IRS filed a proof of claim for a postpetition trust fund tax. No person filed objections to the IRSs claim and the trustee began making payments on account of the IRS claim. Six years after confirmation, the trustee moved to dismiss on the basis that debtors plan payments failed to pay both the IRS claim and the 10% dividend to unsecured creditors. In response, debtors filed a motion for discharge under
The First Circuit BAP affirmed. The Panel rejected debtors argument that they had satisfied their obligations under the plan simply becаuse they paid the monthly dollar amount stated in the plan for 60 months. This argument ignored their failure to comply with the other plan terms — to pay any postpetition tax claims and to pay unsecured creditors a dividend of 10%. Id. at 399. The Panel held that debtors failure to pay the IRS claim or their unsecured creditors as promised in their confirmed plan constituted a material default warranting dismissal under
In another similar case, In re Rivera, 177 B.R. 332 (Bankr. C.D. Cal. 1995), the debtors plan, confirmed prior to the claims bar date, provided for 36 monthly payments of $2,300 and a dividend of 65% to unsecured creditors. Id. at 333. Had the allowed claims been limited to those scheduled by the debtors, the $2,300 monthly payments would have been sufficient to provide the proposed 65% return to creditors within three years. However, the amounts for filed claims substantially exceeded debtors scheduled debts and debtors had not filed any objections to the claims. As a result, the plan failed to pay the 65% dividend by about $15,000. Id. The trustee moved to dismiss debtors case under
The issue before the Rivera court involved which plan provision takes precedence — the percentage dividend to unsecured creditors or the monthly plan payments. Persuaded by the reasoning of In re Carr, 159 B.R. 538 (D. Neb. 1993) and In re Phelps, 149 B.R. 534 (Bankr. N.D. Ill. 1993), the Rivera court found that debtors payment of less than the percentage dividend required in the plan precluded a discharge. Id. at 334-335. By failing to pay their unsecured creditors the promised 65% dividend,
In In re Hill, 374 B.R. 745 (Bankr. S.D. Cal. 2007), the bankruptcy court considered two separate cases in one decision involving a husband and wife in one and an individual woman in the other. In each case, the debtors or debtor had a confirmed plan providing for monthly payments and a 100% dividend plus 10% interest to unsecured creditors. Id. at 746-48. In both cases, total claims ended up being more than debtors had accounted for, and the debtors failed to seek amendments to their plans in order to complete them within 60 months, despite the trustees notices that their plan payments would necessarily exceed the five-year term. In one of the cases, the debtor needed an additional 33 months to complete the plan payments; in the other, debtors needed an additional 53 months of plan payments. The trustee moved to dismiss both cases for failure to pay the plan in full within five years.
The Hill court acknowledged that failing to complete plan payments within the applicable 36 or 60-month period could constitute cause for dismissal under
We agree with the above cases to the extent they hold that, even though a chapter 13 debtor has completed his or her monthly plan payments, failure to pay unsecured creditors the promised percentage dividend constitutes a material default with respect to a term of a confirmed plan.
Schlegels argue that under Fridley v. Forsythe (In re Fridley), 380 B.R. 538 (9th Cir. BAP 2007), a plan is complete and debtors are entitled to a discharge when they either pay all claims 100% or make 60 months of payments. We disagree with their position. In Fridley, debtors sought an early discharge after making a lump-sum payment in month 14 of their 36-month plan, which satisfied the plans dollar amount. 308 B.R. at 540. The Panel held that since debtors plan did nоt provide for 100% payment to unsecured creditors, they had to commit themselves to the
Fridley did not hold, or even infer, that simply making plan payments for the applicable commitment period without also providing unsecured creditors with the promised percentage dividend entitles a debtor to discharge. Furthеr, that case involved the early completion of plan payments and ultimately discharge, not debtors failure to complete plan payments within the applicable commitment period and dismissal under
2. It was proper to allow CitiMortgages unsecured claim
Schlegels also dispute whether CitiMortgages late-filed claim should have been allowed and paid by Trustee, which claim ultimately caused their Plan to implode and not pay unsecured nonpriority creditors a 48% dividend. Although Schlegels spend a great deal of time arguing this issue, they have never filed an objection to CitiMortgages claim. Therefore, we fail to see how they can argue this issue on appeal. Without objection, CitiMortgages claim is deemed allowed,
Without question, the claims bar date in Schlegels case was April 30, 2009. The Motion to Value and the avoidance of CitiMortgages junior lien came later. The Valuation Order, which stripped CitiMortgages lien and rendered its claim unsecured, was entered on October 22, 2009. Until that point, CitiMortgage was operating in this case as a secured creditor.
Secured creditors in a chapter 13 case may, but are not required to, file a proof of claim. See
The exception under
Although the claim of a secured creditor may have arisen before the petition, a judgment avoiding the security interest may not have been entered until after the time for filing claims has expired. Under
Rule 3002(c)(3) , the creditor who did not file a secured claim may nevertheless file an unsecured claim within the time prescribed. A judgment does not become final for the purpose of starting the 30 day period provided for by paragraph (3) until the time for appeal has expired or, if an appeal is takеn, until the appeal has been disposed of.
CitiMortgage filed its proof of claim, albeit as a secured claim, on October 12, 2009, after the bankruptcy court had orally granted the Motion to Value, but before the entry of the Valuation Order on October 22, 2009, which deemed the claim unsecured. Thus, its claim was timely filed within the 30 days required under
Schlegels never objected to CitiMortgages timely filed claim. Their contention that they had nо notice of CitiMortgages claim defies credulity. Trustees Notice of Claims sent to Schlegels and their counsel, just days after confirmation, conspicuously listed CitiMortgages unsecured claim and the amount to be paid. Therefore, Trustee did not err in making payments to CitiMortgage under the Plan.10
VI. CONCLUSION
We conclude that the bankruptcy court did not abuse its discretion in granting the Motion to Dismiss, particularly since Schlegels failed to object to CitiMortgages claim or to modify their Plan to address the claim once filed. By failing to pay their unsecured creditors the promised 48% dividend, they did not complete plan payments within the applicable commitment period. Accordingly, we AFFIRM.