Edward Ellington, Judge.
The specific matter before the Court is the Order to Show Cause (Dkt. # 85) entered by the Court on August 22, 2016, in which the Court ordered the parties
On September 4, 2002, a complaint was filed in the Circuit Court for the First Judicial District of Hinds County, Mississippi, styled Pate, et al. v. Minnesota Mining & Manufacturing Comp., et al. (Civil Action No. 25-CI-1:02-01140) (Hinds County Action). The Hinds County Action was filed by ninety-three (93) plaintiffs, one of whom was William S. Roberts. Patrick C. Malouf and Porter & Malouf, P.A. (collectively, Malouf) filed the Hinds County Action as counsel for William S. Roberts.
On October 22, 2003, William S. Roberts (Debtor) and his wife, Sara A. Roberts, (collectively, Debtors) filed a joint petition for relief pursuant to Chapter 13 of the United States Bankruptcy Code. James L. Henley, Jr. (Trustee) was appointed the Chapter 13 Trustee. Neither the Debtor's Schedules
The Order Confirming the Debtor's Plan, Awarding a Fee to the Debtor's Attorney and Related Orders (Dkt. # 12) (Confirmation Order) was entered on January 7, 2004. Attached to the Confirmation Order is the Debtors' Chapter 13 Mini-Plan (Confirmed Plan). In the Debtors' Confirmed Plan, the Debtors state that their unsecured creditors hold claims totaling approximately $47,872.00, and that they are paying zero (0) to their unsecured creditors.
The Debtors completed their plan payments in January of 2007. The Trustee filed his Final Report and Account (Dkt. # 32) (Final) on June 20, 2007. The Final shows that a total of $57,831.93 in allowed unsecured claims were filed in the Debtors' case and that zero (0) was paid to the allowed unsecured creditors. Further, the Final shows that the Debtors received a refund in the amount of $1,133.31.
At some point during the pendency of the bankruptcy case, the Hinds County Action was settled by Malouf. On March 5, 2007, an Agreed Order of Dismissal of All Claims by Plaintiffs
On May 27, 2015, the Trustee filed a Motion to Reopen Chapter 13 Case (Dkt. # 72) because the Trustee had obtained information that the Debtor, William S. Roberts, had settled an undisclosed personal injury lawsuit during the pendency of his Chapter 13 case. The Order on the Trustee's Motion to Reopen Chapter 13 Case [Dkt. No.: 72] (Dkt. # 73) was entered on June 1, 2015.
An adversary proceeding was commenced on July 31, 2015, with the filing of the Complaint for Turnover of Property, Declaratory Judgment and Equitable Relief (Adv. Proc. No. 1500051EE; Adv. Dkt. # 1) by the Trustee. While not styled as amended, the Trustee filed an amended complaint on August 6, 2015, titled Complaint for Turnover of Property, Declaratory Judgment and Equitable Relief (Adv. Dkt. # 7) (Amended Complaint). Malouf is the only defendant in the Amended Complaint.
In the Amended Complaint, the Trustee alleged that the Hinds County Action was property of the Debtors' bankruptcy estate; that Malouf's representation of the Debtor was not approved by this Court; and that the settlement entered into by Malouf on the Debtor's behalf was never approved by this Court and is therefore void. Consequently, the Trustee requested that the Court order Malouf to turnover any and all settlement funds it received on behalf of the Debtor, including attorneys' fees and expenses, to the Trustee.
Malouf filed a Motion to Dismiss (Adv. Dkt. # 18) (Motion) on October 30, 2015. In the Motion, Malouf alleged that the Amended Complaint should be dismissed pursuant to several subsections of Federal Rule of Bankruptcy Procedure 7012.
On August 22, 2016, the Court entered its Opinion I on Malouf's motion to dismiss the adversary proceeding in which the Court:
In re Roberts, 556 B.R. at 284.
On August 22, 2016, the Court entered the Order to Show Cause (Dkt. # 85) (Show Cause). In the Show Cause, the Court ordered Mrs. Roberts and the attorneys to appear to show cause why the above-styled case should not be converted to a Chapter 7. On September 12, 2016, Malouf filed its Response to Order to Show Cause (Dkt. # 88) (Malouf's Response) in which Malouf asserts that due to the Debtor's death, § 1307(g) prohibits the case from being converted to a Chapter 7 because the Debtor's estate cannot qualify as a debtor under Chapter 7. Malouf further asserts that since the Debtor cannot be a debtor under Chapter 7, his case cannot be further administered as provided for in Federal Rule of Bankruptcy Procedure 1016.
On October 3, 2016, the Trustee filed Plaintiff's Reply to Defendants' Response to Order to Show Cause (Dkt. # 91) (Trustee's Response). In the Trustee's Response, the Trustee asserts that Malouf is not a party in interest and lacks standing to object to the conversion of the case. The Trustee further disagrees with Malouf's interpretation of § 1307(g), Rule 1016 and § 302.
A hearing on the Show Cause was held on September 12, 2016. The Court subsequently set a briefing schedule, and once the final brief was filed, the Court took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A), (E) and (O).
The Trustee asserts that Malouf lacks standing to object to the conversion of the Debtors' case to a Chapter 7. The Court finds that for the purposes of the Show Cause, the Court will address Malouf's arguments in response to the Show Cause. While Malouf is not a party in the regular case,
The Court completely agrees that the Bankruptcy Code's definitions of debtor and person, do not include a decedent's estate, and therefore, a decedent's estate may not file a bankruptcy petition. In re Estate of Patterson, 64 B.R. 807, 808 (Bankr W.D. Tex. 1986). The situation before the Court, however, does not involve a decedent's estate attempting to file a bankruptcy petition. Instead, the case before the Court involves the Trustee acting on behalf of the bankruptcy estate of a deceased debtor to reopen a bankruptcy case.
Several courts have addressed the issue of the reopening of a bankruptcy case of a deceased debtor. In In re Walters, 113 B.R. 602 (Bankr. D.S.D. 1990), the court addressed whether a deceased debtor's Chapter 11 case could be reopened in order to avoid liens. The Internal Revenue Service argued that the case could not be reopened because the deceased debtor could not qualify as a person under § 101
The Walters court discussed the tension between § 350(b)
In re Walters, 113 B.R. at 605; see also In re Kennedy, 08-81687, 2016 WL 6649200, at *5 (Bankr. M.D.N.C. Apr. 6, 2016); In re Henson, No. 06-80191, 2013 WL 5417197 (Bankr. E.D. Okla. Sept. 26, 2013);
In the case at bar, when the Debtors filed their bankruptcy petition, they qualified as debtors under the Bankruptcy Code. The Debtors completed their plan payments and received their discharge. After the Debtor died, the case was reopened by the Trustee in order to administer an undisclosed asset. Following the reasoning of the Walters court, this Court also "refuses to don blinders and look only at whether the [debtor] qualifies as a `debtor' to file a bankruptcy petition."
Malouf argues that § 1307(g) prohibits the conversion of the Debtors' bankruptcy case because
Response to Order to Show Cause, Case No. 0306146EE, Dkt. # 88, p. 2, (Sept. 12, 2016) (citations omitted). Malouf further argues that the Court should dismiss the portion of the bankruptcy case and adversary proceeding that pertain to the Debtor because he also no longer qualifies as a Chapter 13 debtor. Id. at 3, n.4.
Section 1307 applies to the conversion or dismissal of a Chapter 13 case. It provides in pertinent part:
11 U.S.C.A. § 1307.
One case relied upon by Malouf in support of its position that § 1307(g) prohibits the conversion of the Debtors' case to a Chapter 7 is In re Spiser, 232 B.R. 669 (Bankr. N.D. Tex. 1999). In Spiser, a husband and wife filed a joint petition under Chapter 13. Before their plan was confirmed, the husband died, and the wife died shortly thereafter. The debtors' attorney filed a motion to convert the case to a Chapter 7, which the court granted. Several months later, the Chapter 7 trustee filed a motion to reconsider the order converting the debtors' case to a Chapter 7 stating that the estate(s) of a dead person cannot be a debtor under Chapter 7.
In setting aside the order of conversion, the court held that "[w]ith the deaths of both [debtors], there was no `individual' remaining in the Chapter 13 case; only the probate estates of [the debtors] remained. A probate estate is not a `debtor' eligible to convert the case to Chapter 7 under § 1307(a)." In re Spiser, 232 B.R. at 673.
The court then looked to Rule 1016. Rule 1016 provides for the death or incompetence of a debtor. Rule 1016 provides:
Fed. R. Bankr. P. 1016.
The court in Spiser found the term further administration to imply "that the case would be carried to its normal conclusion with payments to the creditors as provided in the confirmed plan, rather than conversion of the case to Chapter 7." In re Spiser, 232 B.R. at 673. For all of these reasons, the Spiser court set aside the order of conversion and dismissed the case.
The Court finds that Spiser can be distinguished from the case at bar on several grounds. In Spiser, both of the debtors died early during the pendency of their bankruptcy case. The court found that therefore, "there was no `individual' remaining in the Chapter 13 case; only the probate estates of [the debtors] remained."
Further, this is not a case where a debtor or a probate estate is seeking to have a case converted to a Chapter 7. Rather, the Court entered the Show Cause to determine whether it is in the best interests of the creditors for the Court to sua sponte convert the Debtors' case to a Chapter 7. "The court may invoke Section 1307(c) sua sponte. In re Elliott, 506 Fed. Appx. 291 (5th Cir. 2013)." In re Yuen, No. 13-30249, 2013 WL 3430768, at *3 (Bankr. S.D. Tex. 2013). For these reasons, the Court finds that Malouf's reliance on Spiser is misplaced.
Malouf also cites other cases outside of the jurisdiction of the Court of Appeals for the Fifth Circuit in support of its position that § 1307 and Rule 1016 prohibit the conversion of the Debtors' case. The Court might be convinced to follow the rather narrow interpretation of Rule 1016 found in the Spiser opinion and in the other cases cited by Malouf were it not for the cases of Querner v. Querner (In re Querner), 7 F.3d 1199 (5th Cir. 1993) and Brown v. Sommers (In re Brown), 807 F.3d 701 (5th Cir. 2015).
In Querner, a Chapter 13 petition was filed by the legal guardian of the debtor. The debtor died shortly thereafter and before the plan was confirmed. The case continued and was eventually closed by the court. Despite the case being closed, the bankruptcy court continued to exercise jurisdiction over disputes between the co-executors of the deceased debtor's Chapter 13 probate estate. The Fifth Circuit "held that a bankruptcy court correctly exercised its discretion under Bankruptcy Rule 1016 to continue jurisdiction over a Chapter 13 debtor's property after the debtor's death; however, the bankruptcy court improperly
In Brown, the debtor was a successful surgeon who filed a Chapter 11. According to the Fifth Circuit, the "[d]ebtor engaged in significant misconduct during his bankruptcy case"
Citing § 1112(b)(1)
The Fifth Circuit's holding in Querner and its interpretation of the phrase further administration in Brown do not support the Spiser court's
The Court finds that in its discretion, the Court may convert the Debtors' case from a Chapter 13 to a Chapter 7 if the Court finds that it is in the best interest of the creditors.
Malouf believes that because the Debtors' case was not consolidated, Mrs. Roberts has no interest in the Debtor's settlement proceeds. As noted, the Debtors filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. Section 302 permits joint petitions of spouses, and provides:
11 U.S.C. § 302.
A case filed under § 302(a) is jointly administered.
2 Collier on Bankruptcy ¶ 302.06 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (footnotes omitted).
In 1985, the Court in In re Gallo, 49 B.R. 28 (Bankr. N.D. Tex. 1985) had before it the issue of stacking exemptions by joint debtors in a Chapter 7, however, the court also addressed the issue of consolidation of a joint bankruptcy case. The court found that "[i]n this district formal orders of consolidation customarily are not entered in husband and wife cases. They are deemed to be consolidated for all purposes and it is only in the rare instance where one of the spouses has separate property
The Gallo holding is in line with Keith M. Lundin & William H. Brown's treatise on Chapter 13, Chapter 13 Bankruptcy. In addressing the practical application of § 302(b), Judge Lundin and Judge Brown state:
Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 7.1, at ¶ 4, Sec. Rev. Mar. 4, 2009, www.Ch13online.com (footnotes omitted).
As acknowledged by Judge Lundin and Judge Brown and like the Gallo court, this Court has never entered a formal order consolidating the bankruptcy estates of a husband and wife case. Instead over the past thirty-plus years, the bankruptcy bar has proceeded as if joint cases were consolidated even though formal orders of consolidation have not been entered.
Another case involving exemptions, however, finds that consolidation must be ordered. The court in In re Bippert, 311 B.R. 456 (Bankr. W.D. Tex. 2004), addressed the issue of consolidation of a joint Chapter 13 bankruptcy case. In Bippert, the bankruptcy court analyzed the Eleventh Circuit's opinion in Reider v. FDIC (In re Reider), 31 F.3d 1102 (11th Cir. 1994), and found its ruling persuasive:
In re Bippert, 311 B.R. at 463-64.
The Eleventh Circuit in Reider established the following standard to be used when determining whether a joint bankruptcy case should be consolidated: (1) is there a substantial identity between the debtors' assets, their liabilities and their handling of their financial affairs? (2) does any harm caused by not consolidating a joint case outweigh any harm caused by consolidations? and (3) is there fraud or bad faith on the part of the debtors?
Looking to the first factor, the Court examined the Debtors' schedules to determine whether there was substantial identity between the Debtors' assets and liabilities. All debts listed on their Schedules are listed as joint debts, including a joint liability to the Internal Revenue Service for federal income taxes. None of the Debtors' liabilities were business debts of either party, but instead, were all consumer debts. The Debtors list one checking account with Union Planters Bank. The Debtor's source of his income was Social Security Benefits, and Mrs. Roberts' source of income was Supplemental Security Income from the Social Security Administration. The Order Upon Debtor Directing Payments to Trustee (Dkt. #6) (Wage Order) was issued to the both Debtors because they were personally sending their plan payments to the Trustee (as opposed to a case where the Wage Order is issued to an employer). Consequently, the Court finds that there was a substantial identity between the Debtors' assets and liabilities which favor consolidation of their bankruptcy estates.
Skipping to the third factor, the Court finds if not fraud, bad faith at a minimum, on the part of the Debtor for failing to list his pre-petition cause of action in his Schedules. The cause of action was clearly property of the Debtor's bankruptcy estate. When Malouf settled the lawsuit during the Debtor's Chapter 13 case, the failure to obtain Court approval of the settlement, and the subsequent payment of attorneys' fees and expenses and the disbursement of funds to the Debtor are all problematic-not only for the Debtor, but also for Malouf.
As for the second factor, the Court must look to whether harm would be caused if the bankruptcy estates are consolidated which would out weight the benefit of consolidating the bankruptcy estates. The Debtors' Schedules list all of their debts as joint debts, therefore, the Court does not see where any creditor would be prejudiced if the Debtors' bankruptcy estates are consolidated. If the bankruptcy estates are consolidated and the settlement funds are paid over to a Chapter 7 trustee, there would be a distribution to all of the Debtors' unsecured creditors. Since the unsecured creditors were paid zero in the
The Court notes, however, that a party in interest has not filed a motion to consolidate. While § 302(b) states that "the court shall determine"
Since this is a matter of first impression for the Court and since parties in interest have not been given an opportunity to respond to a motion to consolidate the Debtors' bankruptcy estates, the Court will reserve ruling on the issue of consolidation of the Debtors' bankruptcy estates until the case is converted to a Chapter 7 and a Chapter 7 trustee appointed.
When the Debtors filed their bankruptcy case, they qualified as debtors under the Bankruptcy Code. Since neither the Bankruptcy Code nor the Rules require a debtor to re-qualify as a debtor when a case is reopened, the Court finds that the Debtors are qualified to be debtors under the Bankruptcy Code.
After the death of a debtor, Rule 1016 permits the further administration of a case if it is in the best interest of the parties. In Brown,
It is clear that the Hinds County Action was filed pre-petition and was property of the Debtor's bankruptcy estate. It is also undisputed that not only did the Debtor fail to disclose the Hinds County Action in his Schedules, but he also failed to disclose the settlement of the Hinds County Action while his Chapter 13 case was pending. In addition, it is undisputed that Malouf disbursed property of the bankruptcy estate without Court approval.
As the Court stated in its Opinion I in this case, "`[a] debtor may not conceal assets and then, upon termination of the bankruptcy case, utilize the assets for [his]
In this Court, formal orders of consolidation of joint debtors' bankruptcy estates are not entered. In reviewing the Reider
To the extent the Court has not addressed any of the parties' other arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this Opinion will be entered in accordance with Rule 9021 of the Federal Rules of Bankruptcy Procedure.
