Chapter 7 Debtor Who Failed to Disclose Employment Discrimination Claim Could Not Convert to Chapter 13

Chapter 7 Debtor Who Failed to Disclose Employment Discrimination Claim Could Not Convert to Chapter 13

The Debtor filed a voluntary chapter 7 petition on December 21, 2010. A bankruptcy petition preparer assisted her in filing the paperwork. The Debtor marked “none” where she was instructed to “list all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case” in the Statement of Financial Affairs.

In a letter (the “Letter” or “Exhibit 1”) written to  the chapter 7 trustee, dated February 15, 2010 (the Debtor testified that the date was a typo, the year was 2011, as evidenced by the fact that the letter was written to the bankruptcy trustee after she had filed bankruptcy), the Debtor referred to an investigation before the Labor Commission. The Court quotes the pertinent section of the Letter, noting that some of the syntax reflects a language barrier:

3. I do usually work two full times jobs; however, I was unfairly terminated from one of my two works, which still is under investigation in Labor Commission.
4. Based on the hope that Labor Commission is helping me to recuperate my second job my debts increased every time more and more until this financial collapse.
5. Because of Labor Commission still has not given the date about when I will return to work, since 2010 I began searching for work without any success.

It does not appear from what has been presented to the court that the chapter 7 trustee inquired further about the action before the Labor Commission. The Court notes that the Debtor’s statements suggest that the only remedy she was seeking was to return to work.

On January 24, 2013, the Debtor filed a lawsuit against her former employer in the United States District Court, (the “District Court”) in which she alleged racial discrimination and sexual harassment, and made a claim for compensatory, emotional, economic and punitive damages, with the amounts to be proven later (the “Lawsuit”) based on events that occurred before the bankruptcy was filed. It does not appear that the Trustee was informed of the Lawsuit before the case was closed.

The Debtor’s bankruptcy case was closed on March 19, 2014. The Trustee’s Final Account, which the Court takes judicial notice of, shows that total distributions to claimants was $1,897.66 and $14,643.55 in claims were discharged without payment. Assets abandoned were $156,089.00, which represents the value of the Debtor’s home.

More than three years later, on June 19, 2017, the Debtor filed a motion to reopen her bankruptcy case in order to fix what she referred to as an omission. She also requested that the filing fee to reopen a case be waived due to her “severe poverty condition.” That motion was granted and the fee was waived by order entered July 27, 2017. However, as of the date of this hearing, no amendments to the Debtor’s schedules have been filed. The omitted asset, the Lawsuit or employment claim, has been discussed at several hearings and in the pleadings, but is still not listed in the bankruptcy schedules.

Shortly after the case was reopened, the Debtor filed the Motion to Convert to chapter 13, which is the only matter before the Court at this time. The chapter 7 trustee filed a response to the Motion to Convert, and his attorney later stated at a hearing that he does not oppose the Motion to Convert. ABM, who now has standing in this case as a creditor, has objected to the Motion to Convert. The Debtor has suggested that this is somehow unlawful. However, the practice of purchasing a proof of claim to become a creditor in a bankruptcy case is allowed, and based on what has been presented here, there is nothing improper about ABM’s actions in purchasing a claim and obtaining standing here. ABM purchased Claim 1-1 and Claim 2-1 from Latino Cash Center, LLC. Those claims were filed in January and May, 2011. The Trustee’s Final Report states that $55.35 was paid on each claim, for a total of $110.70. Despite the Debtor’s allegations that the claims were somehow improper, the Court finds that the claims were unchallenged when they were filed, and for six years thereafter. Since purchasing both claims, ABM has withdrawn Claim 1-1 because it was duplicative. Claim 2-1 remains a valid claim, and its transfer gives ABM standing in this case.

While the matter before the Court is the Motion to Convert, other issues such as abandonment and exemption of the asset have also been discussed. In the interest of dealing with all matters most efficiently, the Court will also explain the reasons for its holdings on these other topics as well.

Abandonment

There has been some discussion about whether the chapter 7 trustee knew of the Debtor’s claims against her former employer and therefore abandoned the claims or Lawsuit as an asset when the case was closed in 2014. While the claims were not disclosed in the schedules, the Debtor did refer to a proceeding before the Labor Commission in the Letter to the trustee. The question is whether this reference was enough to result in abandonment of the asset. If it was abandoned, then, it might be appropriate to grant the Debtor’s motion and allow her to proceed in chapter 13. However, there are other issues in conversion that will also be addressed herein.

When property is abandoned, it “reverts to the debtor and stands as if no bankruptcy petition was filed.” There are several ways property can be abandoned from the bankruptcy estate. Property may be abandoned by a trustee of the case under § 554(a) and (b)2 only if it is determined to be “burdensome to the estate or [] of inconsequential value and benefit to the estate.” There is no basis to find that the Lawsuit was burdensome to the estate or of inconsequential value either in 2013 when it was filed or today, and so that condition precedent in § 554 is not met.

If property is eligible for abandonment, § 554(a) and (b) requires notice to creditors and the opportunity for a hearing. This requirement for notice and a hearing is not merely a formality. These procedures also “provide an opportunity for any potential opponent to the abandonment of such property to file objections and be heard by the Court.”3 If a trustee wishes to abandon an asset, he must give notice to creditors, who then have an opportunity to object to the abandonment and argue that the asset does have value to the estate at a hearing. The Letter written by the Debtor did not go to creditors, and they did not have an opportunity to object to an abandonment of her claims before the Labor Commission or the Lawsuit she eventually filed. Even if the trustee intended to abandon the Lawsuit, he could not have done so without following the statutory requirements. “Intent to abandon, without prior notice to creditors, is insufficient to establish abandonment.”4 Accordingly, the Lawsuit was not abandoned under § 554(a) or (b).

An asset may be abandoned under § 554(c) if it was “scheduled under section 521(a)(1) of this title [and] not otherwise administered at the time of the closing of a case.” As noted, the Lawsuit was not listed on the Debtor’s schedules, and so could not have been abandoned.5 “Because [the debtor] did not list the claims in her asset schedules, the trustee neither administered them nor abandoned them at the close of the bankruptcy case, and they remained the property of the bankruptcy estate.” Brumfiel v. U.S. Bank, 618 Fed. Appx. 933, 937 (10th Cir. 2015) (unpublished opinion).

On the petition date, the Debtor’s claims were before the Labor Commission. Before the case was closed, the Debtor had filed the Lawsuit and claimed money damages. The Debtor had the responsibility to amend her schedules and formally disclose the Lawsuit to the trustee. “A cause of action that was never listed in a debtor’s bankruptcy schedules and not administered by the trustee is not abandoned to the debtor and remains property of the estate, even after the case is closed, and even if the case trustee otherwise has knowledge of the claims.”6 Her failure to amend her schedules meant that the asset could not be abandoned under § 554(c).

As directed by statute, “Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.” § 554(d). Accordingly, the claim and the Lawsuit were not abandoned and remained property of the estate.

Conversion

A chapter 7 debtor’s right to convert her case is granted and limited by § 706. Subparagraph (a) states that a “debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208 or 1307 of this title.” However, “[n]otwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” § 706(d). In order to grant the Motion to Convert, the Court must find that the Debtor is eligible to be a debtor under chapter 13. The Court notes that the Debtor has not provided any reason to convert her case in her written Motion to Convert. In its entirety, the Motion to Convert states: “Chapter 7 convert to Chapter 13.” Furthermore, the Court has not been presented with any evidence that the Debtor could perform in a chapter 13 case.

For the following reasons the Court DENIES the Debtor’s Motion to Convert.

A. No Evidence of Regular Income

As stated above, in her Motion to Reopen Case, the Debtor requested a waiver of the court fee due to her “extreme poverty condition . . . in which I receive S.S.D.” The Debtor has stated at a hearing that she would be able to pay $200 or $250 per month in a chapter 13 plan. However, she has not filed a plan, nor an updated budget, nor any evidence of current income. Her written statement to this Court about her inability to pay the fee to reopen a case is inconsistent with her verbal statements about her ability to fund a chapter 13 plan. The Debtor has had three months since her case was reopened to provide any evidence or other indication of regular income, and has not done so. There should be some basis upon which the Court can evaluate whether a plan is feasible and identifying projected income with a current budget (i.e. schedules I and J) would suffice.

B. Conversion would be Prejudicial to Creditors

Courts have authority under § 105(a) to take action necessary to “prevent an abuse of process.” This authority is sufficient to authorize denial of a motion to convert filed under § 706 in lieu of authorizing a conversion that may very well be converted back to chapter 7 or dismissed “for cause” once it has been converted to chapter 13. See Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007).

One of the reasons a chapter 13 case may be converted or dismissed is for “unreasonable delay by the debtor that is prejudicial to creditors.” § 1307(c)(1). ABM has represented in its Creditor’s Objection that it has offered a settlement amount to the chapter 7 trustee that would pay in full all of the unpaid claims against the Debtor’s bankruptcy estate. In reply, the Debtor has offered statements that she could perform in a chapter 13 plan with payments of $200 or $250 per month, without filing any documents or other evidence that shows she has the ability to make those payments over a period of several years. Further, a hypothetical chapter 13 plan for her could then be a 36 month term at $250 per month. That would at most pay $9000 which is not the full payment that creditors could receive now if the Trustee could settle the Lawsuit.

Accordingly, the Court finds that creditors would benefit more from an immediate settlement with the chapter 7 trustee than from a case conversion to chapter 13.

C. Bad Faith Conduct

“[T]he federal courts are virtually unanimous that prepetition bad-faith conduct may cause a forfeiture of any right to proceed with a Chapter 13 case.” Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007).

When using the term “bad faith,” the Court is not referring to the Debtor’s character. The term “bad faith” refers to actions that do not accord with the bankruptcy purpose of maximizing the distribution to creditors while also giving a debtor a fresh start by discharging debts. It is not a negative statement about an individual’s character or behavior.

Concealing an asset is evidence of bad faith conduct. See id. The Debtor did not disclose any potential claims that she had or any proceeding before the Labor Commission in her bankruptcy schedules. She wrote the Letter in which she referred to the proceeding before the Labor Commission, but she did not inform the chapter 7 trustee of the Lawsuit when it was filed in 2013. Further, the Letter she wrote to the Trustee did not contain any statements that she had a pending lawsuit or that she was making a substantial pre-bankruptcy claim against her former employer. It was inadequate to put the Trustee on notice that a claim existed. She did not identify the Lawsuit when she filed her Motion to Reopen Case in July of this year. The Court was apprised of its existence by the trustee. She has not amended her schedules to include the Lawsuit as an asset, though her case was opened months ago for that purpose. The Letter did state that she hoped to be reinstated in employment, but contained no reference of the claim.

The timing of a debtor’s efforts to include an omitted asset may also be evidence of bad faith. ABM alleges in its Creditor’s Objection that the Debtor moved to reopen her bankruptcy case after ABM had filed a motion to have the Debtor’s claims judicially estopped in the United States District Court where the Lawsuit was pending, because she had not listed it in her bankruptcy. It does not appear that the Debtor was prompted to seek reopening of her case for any reason other than to proceed in the Lawsuit for her own benefit and was prompted to do so by the fear of having the Lawsuit dismissed over her failure to schedule it. She admits as much in the Debtor’s Opposition, when she states that she moved to reopen her bankruptcy after the matter was raised in the Lawsuit in district court.

ABM has also claimed that the Debtor filed the Motion to Convert to chapter 13 once it became clear that the chapter 7 trustee was willing to settle with ABM. The Debtor has stated that she is worried the chapter 7 trustee will settle the Lawsuit, and that she strongly wants a jury to hear the case. In her brief about the exemption issue, the Debtor stated that she filed the Motion to Convert “in order to preserve my right to have a jury trial in Federal District Court.” Then again, in the Debtor’s Opposition, she states that she filed the Motion to Convert “in order to preserve the legal control on my multiple causes of action filed in Federal District Court, prove my case before a Jury, and finally make Justice.” Based on these statements, the Court finds that her motivation to convert her case is to retain control of the Lawsuit. Retaining an asset (as here, property of the bankruptcy estate) at the expense of creditors is also evidence of bad faith. Chapter 7 debtors agree to turn over all their assets to the trustee for administration in exchange for a discharge, which the Debtor received. She cannot now seek to retain an asset that she should have identified seven years ago.

The Debtor has asked that she not be penalized for a mistake of omission, and stated that she did not know the reporting requirements or she would have followed them. It appears that the Debtor may believe that if she had disclosed the Lawsuit in 2013, she would have been able to keep control of it. This is most likely incorrect. If the Debtor had disclosed the Lawsuit in 2013, the Trustee would have administered it as an asset of the estate at that time. For the reasons stated above, it is unlikely the Lawsuit would have been abandoned even if disclosed. She is not being penalized for a mistake. The result would be the same whether she disclosed the Lawsuit in 2013 or 2017 – it is an asset of the estate and the Trustee takes control of it, as only the Trustee can administer property of the estate.7 The Debtor’s failure to report the Lawsuit affects only the timing and not the result.

The Court notes that the debtor is proceeding pro se. The Court has given the Debtor multiple opportunities to engage counsel, has continued hearings on this matter and given her multiple extensions to file briefs. The Court is sympathetic to the Debtor’s position, however, the Court as previously stated cannot find that the Lawsuit or claim was ever abandoned or that the current Motion to Convert was filed in good faith, concluding that the principles outlined in Marrama are persuasive here. Except for the sanctions motion which the court will address next, all that is before the Court today is the Debtor’s Motion to Convert to chapter 13.

 

Please note, in order to view NACBA Member Content, you must sign in and then visit NEWS. If you are not a NACBA member, you may Become a NACBA Member 

No Comments

Post a Comment