FILED
NOV 5 2020
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-20-1061-LST
ANSELMO CABRAL and ALMA
CABRAL, Bk. No. 2:15-bk-19370-SK
Debtors.
ANSELMO CABRAL; ALMA CABRAL,
Appellants,
v. MEMORANDUM*
JASON RUND, Chapter 7 Trustee;
UNITED STATES TRUSTEE,
Appellees.
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
Before: LAFFERTY, SPRAKER, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Anselmo and Alma Cabral appeal the bankruptcy court’s order
denying their motion to dismiss their chapter 71 case. After Debtors had
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1
Unless specified otherwise, all chapter and section references are to the
(continued...)
performed under their confirmed chapter 13 plan for over four years, they
found themselves unable to make plan payments and, on the advice of
counsel, converted their case to chapter 7. After the chapter 7 trustee began
taking steps to sell their residence, Debtors moved to dismiss their case for
cause under § 707(a). The bankruptcy court denied the motion.
We AFFIRM.
FACTUAL BACKGROUND2
Debtors filed a chapter 13 petition on June 11, 2015. About five
months later, the bankruptcy court confirmed their 60-month plan.
Approximately four and a half years into their plan, Debtors found
themselves unable to afford their plan payments due to Mr. Cabral’s loss of
work. On the advice of their attorney, they sought and obtained an order
converting the case to chapter 7. Appellee Jason Rund (“Trustee”) was
appointed chapter 7 trustee. At the time of conversion, the remaining
allowed unsecured claims totaled $30,458.91.
After conversion, Trustee filed an application to retain counsel to
assist with administering the estate, which the bankruptcy court granted.
1
(...continued)
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and“Rule” references are to the Federal Rules
of Bankruptcy Procedure.
2
Where necessary, we have exercised our discretion to examine the bankruptcy
court’s docket and available imaged papers in the bankruptcy case. See Woods &
Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
2
In the application, Trustee stated his belief that Debtors’ Los Angeles
residence had about $128,587 of non-exempt equity available to pay
creditors.
Debtors then moved to dismiss their chapter 7 case. Debtors
acknowledged that the equity in their residence had increased significantly
but explained that their attorney had not taken that fact into account when
he advised them to convert. They also acknowledged that Trustee’s counsel
had advised Debtors’ attorney that Trustee would be willing to allow them
to refinance their residence to pay unsecured creditors but stated that they
did not want to do so.
Debtors stated in their accompanying declaration that they would not
have agreed to conversion had they known their home’s equity would be
put at risk. They proposed to dismiss the chapter 7 case and file a new
chapter 13 case that would pay 100 percent to unsecured creditors over five
years, with the monthly estimated plan payment of $563.49 to be funded
with Alma Cabral’s and daughter Amanda Cabral’s employment income.
Debtors also stated that Mr. Cabral had a workers compensation claim that
would potentially pay out a “significant” amount. Additionally, Debtors
filed a declaration from Amanda Cabral stating that she lives with her
parents and confirming that she was willing and able to contribute $3,400
per month toward total household expenses to enable Debtors to afford the
plan payments. Debtors provided copies of Alma and Amanda’s paystubs
3
for December 2019 and January 2020.
The United States Trustee (“UST”) filed an opposition, arguing that
Debtors had not met their burden of proving that dismissal would not
prejudice creditors. Trustee filed a joinder to UST’s opposition, arguing
that there was no cause for dismissal and that permitting the course of
action proposed by Debtors would be unfair and prejudicial because their
proposal would, in effect, allow Debtors a ten-year plan that would require
creditors to wait another five years to be paid. Trustee also pointed out that
a second plan would potentially be confusing to creditors because those
creditors that had allowed claims in the first case would need to file proofs
of claim in the second case.
At the hearing on the motion, the bankruptcy court denied the
motion, finding that bad legal advice did not constitute cause for dismissal,
and there was no guarantee Debtors would refile or could repay creditors
were the case to be dismissed.
Debtors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.3
3
Ordinarily, an order denying a motion to dismiss a bankruptcy case is
interlocutory. Jue v. Liu (In re Liu), 611 B.R. 864, 873 (9th Cir. BAP 2020). But we have
discretion to treat Debtors’ notice of appeal as a motion for leave to appeal. Rule
(continued...)
4
ISSUE
Whether the bankruptcy court abused its discretion in denying
Debtors’ motion to dismiss their chapter 7 case for cause under § 707(a).
STANDARD OF REVIEW
We review the denial of a debtor’s motion to dismiss a chapter 7 case
for abuse of discretion. Hickman v. Hanna (In re Hickman), 384 B.R. 832, 836
(9th Cir. BAP 2008); Bartee v. Ainsworth (In re Bartee), 317 B.R. 362, 365 (9th
Cir. BAP 2004).
Under the abuse of discretion standard, we must affirm unless the
bankruptcy court applied the wrong legal standard or its findings were
“illogical, implausible or without support in the record.” TrafficSchool.com,
Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v.
Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
DISCUSSION
Section 707(a) permits a bankruptcy court to dismiss a chapter 7 case
“only for cause.” In re Bartee, 317 B.R. at 366. “Cause” is not defined in the
statute, but it includes enumerated examples that are not relevant here. If
none of those examples apply, and there is no specific Code provision that
addresses the asserted cause, the court is to determine whether the totality
of circumstances amount to “cause” under § 707(a). In re Hickman, 384 B.R.
3
(...continued)
8004(d). We do so here, and we grant leave.
5
at 840. As part of establishing cause, a debtor seeking dismissal of a chapter
7 case has the burden to demonstrate that creditors will not be prejudiced
by dismissal. See In re Bartee, 317 B.R. at 365-66. This consideration is
crucial, and where prejudice exists, the debtor’s reasons for requesting
dismissal are nearly always irrelevant. See id. at 366 (“In the Ninth Circuit,
‘a voluntary Chapter 7 debtor is entitled to dismissal of his case so long as
such dismissal will cause no “legal prejudice” to interested parties.’”
(quoting Leach v. United States (In re Leach), 130 B.R. 855, 857 (9th Cir. BAP
1991))); see also Gill v. Hall (In re Hall), 15 B.R. 913, 917 (9th Cir. BAP 1981)
(“[U]nless dismissal will cause some plain legal prejudice to the creditors, it
normally will be proper.” (quoting Schroeder v. Int’l Airport Inn P’ship (In re
Int’l Airport Inn P’ship), 517 F.2d 510, 512 (9th Cir. 1975)).
In its ruling, the bankruptcy court relied heavily on Bartee. In that
case, debtors sought dismissal of their chapter 7 case four days after their
trustee filed a report indicating that the estate had assets to distribute to
creditors. In re Bartee, 317 B.R. at 364. The Bartees asserted that their
bankruptcy filing was the result of bad legal advice. They also advised the
court that they had sufficient assets to pay their creditors in full, and
expressed their intent to do so upon dismissal of their case. Id. The Bartees
never supported their dismissal motion with any admissible evidence. Id.
at 364-65.
Opposing the motion, the trustee pointed out that the Bartees had
6
been less than candid about their financial affairs and had not cooperated
with his request for additional financial information. As a result, the trustee
maintained that the Bartees could not be trusted to honor their promises to
repay their creditors outside of bankruptcy. Id. at 365.
After a hearing, the bankruptcy court denied the dismissal motion,
explaining that the Bartees’ intentions were too speculative and their
creditors’ interests were best served by the continuation of the bankruptcy
case. Id. at 365. On appeal, we affirmed. We pointed to the lack of evidence
supporting the Bartees’ motion. Id. at 366. We also expressed our
agreement with the bankruptcy court’s determination that the Bartees had
not demonstrated an absence of prejudice to their creditors. As we
explained: “This is an asset case. The trustee anticipates that there will be
funds available to pay unsecured creditors. Dismissal of debtors’ case
would have prejudiced their creditors, because there is no guarantee that
debtors will pay their debts outside of bankruptcy.” Id. (citation omitted).
The bankruptcy court found the instant case similar to Bartee because
the debtors in that case argued that they had received bad legal advice and
pledged to repay creditors after dismissal, arguments that were rejected as
inadequate by this Panel. The court thus denied the motion based on the
reasoning of Bartee, finding that dismissal would be prejudicial to
7
creditors.4
On appeal, Debtors concede that bad legal advice does not constitute
cause for dismissal. They instead contend that they raised the issue only to
explain that they would not have agreed to conversion had they known
Trustee would target the equity in their home. They assert that counsel’s
failure to warn them of the potential consequences of conversion “was
meant to serve as an equitable consideration to determine whether there is
cause for dismissal.”
With respect to the question of prejudice to creditors, Debtors
contend that the bankruptcy court erred in finding that their proposal was
too speculative to ensure that creditors would not be prejudiced by
dismissal. They distinguish Bartee, pointing out that the debtors in that case
had been uncooperative and less than candid about their financial affairs,
and their repayment proposal was not supported by any documentary
evidence or affidavits. In contrast, they argue, they were truthful in their
schedules, performed under a chapter 13 plan for four and a half years, and
provided declarations and documentation to support their proposal to pay
creditors after dismissal. They also argue that, unlike the situation where a
trustee seeks to administer a liquid asset, there is little risk the equity in the
residence would be lost, i.e., “there is no indication Appellants would sell
4
While the bankruptcy court did not explicitly state that dismissal would
prejudice creditors, that conclusion is implicit in the court’s analysis.
8
their residence and abscond with the equity if the Chapter 7 case is
dismissed.”
Debtors are correct that the facts of this case differ from those
presented in Bartee. There is no evidence of bad faith, and Debtors
provided evidence to support their proposed course of action. But their
focus on that aspect of the case, and their assertion that their good faith
should weigh in their favor in an equitable balancing of rights between
debtors seeking to dismiss their chapter 7 cases and creditors whose
payment would be rendered less certain thereby, demonstrates that
Debtors misunderstand the applicable standard.
As an initial matter, there is no question that creditors in this case
would suffer prejudice were Debtors permitted to dismiss it, even if
Debtors follow through and file another chapter 13 case. Such an outcome
would increase the creditors’ risk of nonpayment: creditors presently have
the opportunity for reasonably prompt and highly certain payment in this
case through the Trustee’s liquidation of assets of a value sufficient to pay
all claims. Forcing creditors to trade that outcome for one in which they
would rely on the Debtors to file a new chapter 13 case, propose and
confirm a plan, and perform under that plan for five years would be
prejudicial; it would delay payment and increase the potential harm to
creditors from non-payment.
Debtors seek to imply that their presumed good faith, as exemplified
9
by their performance under a longstanding chapter 13 case that was
unsuccessful through no fault of theirs, and relying on the advice of
counsel in converting their case to one under chapter 7, acts as a mitigating
factor against the uncertainty of payment that their case dismissal would
create. This assertion is unmerited for at least two reasons.
First, while we have held that the bankruptcy court “may evaluate a
voluntary motion to dismiss using both legal and equitable
considerations[,]” In re Leach, 130 B.R. at 856, equitable considerations do
not come into play when a debtor is unable to show that creditors would
not be prejudiced by dismissal. See id. at 857 (holding that equitable
considerations are relevant only in the absence of dispositive legal
arguments, i.e., plain legal prejudice to creditors).
In Leach, the debtor sought to dismiss his chapter 7 case because he
filed his case too early to discharge certain federal income taxes. 130 B.R. at
856. The bankruptcy court denied the motion because it found that the
United States would be prejudiced by the dismissal. Id. at 857. On appeal,
the debtor argued that the bankruptcy court erred in not taking into
account certain equitable factors: (1) his early filing was based on bad
advice from his former attorney; (2) he did not act fraudulently or in bad
faith but was completely forthright; (3) he had no assets; (4) he was a
recovering alcoholic; and (5) denial of his motion to dismiss was a denial of
the fresh start guaranteed in bankruptcy. Id. We rejected that argument,
10
noting that the bankruptcy court had taken those facts into account, and
that it had correctly concluded that the equitable considerations were
irrelevant in light of the legal prejudice to the United States that would
result if the case were dismissed. Id. at 858.
Rather than focusing on equitable factors, the cases indicate almost
universally that courts should approve voluntary case dismissals only
where the payment of creditors is provided for, and reasonably prompt
and certain. See id.; In re Bartee, 317 B.R. at 366 (holding that because the
trustee anticipated that there would be funds available to pay unsecured
creditors, dismissal would prejudice creditors because there was no
guarantee that debtors would pay their debts outside of bankruptcy); In re
Hall, 15 B.R. at 917 (reversing order granting debtor’s motion to dismiss
because he had filed his homestead exemption too late, holding that
dismissal would result in plain legal prejudice to creditors because “[i]n the
present case the objections to exemptions filed by the trustee, if sustained,
would provide a payment to unsecured creditors. If the debtor were to
dismiss, file a homestead and then file a new bankruptcy there would be
no distribution to unsecured creditors.”)
Second, although bad faith conduct by Debtors would certainly
prejudice creditors’ ability to be paid, the good faith of Debtors, by itself,
does not remove or even necessarily lessen the prejudice to creditors, as the
bankruptcy court implicitly found here. Not only would it be prejudicial
11
for creditors to wait an additional five years to be paid in a new chapter 13
case, but, as was discussed candidly at oral argument, other factors are
now present. The California legislature recently amended California Code
of Civil Procedure § 704.730, effective January 1, 2021, to expand the
amounts available for homestead exemptions.5 Were Debtors to wait until
on or after January 1, 2021 to file a new case, as we assume they would,
given that it would be very much in their interest to do so, they would be
entitled to take advantage of this increased exemption. And taking
advantage of this exemption would almost certainly ensure that unsecured
creditors in the subsequent case would receive little or no distribution on
account of their claims.
Finally, the bankruptcy court correctly articulated the standard that
prejudice exists where assets that would have been available for
distribution to creditors are lost as a result of the dismissal. Simon v. Amir
(In re Amir), 436 B.R. 1, 16 (6th Cir. BAP 2010). Debtors misconstrue this
standard in arguing that they are unlikely to abscond with the equity in
their home post-dismissal. The “loss” of an asset, as contemplated by the
case law, refers to the fact that dismissal removes estate assets from the
control of the bankruptcy court, not the post-dismissal dissipation of an
asset. In addition, Debtors would not be bound to file a new chapter 13
5
The revised statute sets the minimum homestead exemption at $300,000 and the
maximum at $600,000, depending on the countywide median sale price for a single
family home in the previous calendar year.
12
case. This alone renders dismissal prejudicial to creditors. See In re
Komyathy, 142 B.R. 755, 757 (Bankr. E.D. Va. 1992) (“[I]f dismissal were to
be granted, the parties would no longer be under the jurisdiction of this
court nor the Bankruptcy Code. The trustee would be relieved of his
obligation to ensure payment to the creditors, and conversely, the creditors
would lose the guarantee of repayment. In the absence of affirmative
consent of the creditors, this lost guarantee constitutes plain legal
prejudice.”).
CONCLUSION
For these reasons, the bankruptcy court did not abuse its discretion in
denying Debtors’ motion to dismiss their chapter 7 case. Accordingly, we
AFFIRM.
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