In re Avery, 98-34984-A-13L.
| Decision Date | 30 January 2002 |
| Docket Number | No. 98-34984-A-13L.,98-34984-A-13L. |
| Citation | 272 B.R. 718 |
| Parties | In re Dr. John Philip AVERY and Cydney Ann Avery, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of California |
This case requires the court to determine whether it may vacate a chapter 13 discharge on the motion of a creditor whose timely filed proof of claim was not paid by the trustee as required by the chapter 13 plan. The court concludes that the motion must be granted.
In John and Cydney Avery's earlier chapter 7 case, American Investment Financial ("AIF") filed a complaint objecting to the discharge of a debt. The parties settled the complaint prior to trial. Dr. and Mrs. Avery ("the debtors") stipulated to the entry of a nondischargeable judgment in favor of AIF in the amount of $11,756.90. This judgment was entered on November 8, 1998.
Shortly before entry of the judgment, the debtors filed a chapter 13 petition. The chapter 13 petition, however, came as no surprise to AIF. The day before the debtors filed it, their original attorney, Julius Cherry, wrote to AIF's attorney and informed him as follows:
Enclosed for your review is a copy of schedules E, F, and Debtor's Plan. Be advised, Dr. & Mrs. Avery's Chapter 13 Bankruptcy Petition will be filed with the court on September 29, 1998. As indicated in the enclosed documents, American Investments will be paid 100%.
In other words, AIF agreed to a stipulated judgment in the chapter 7 case and to the payment of that judgment in the context of a chapter 13 plan.
The debtors scheduled only two creditors in their chapter 13 case, the Internal Revenue Service ("IRS") and AIF. According to the debtors' schedules, the IRS held total priority claims of $4,408.00 for 1996 and 1997 income taxes, and AIF held an undisputed, liquidated, noncontingent, and unsecured claim in the amount of $14,656.56.
The debtors' chapter 13 plan proposed to pay $350.00 a month to the chapter 13 trustee for 60 months. The plan instructed the trustee to pay ainistrative expenses1 first, then 100% of the priority claims, and finally 100% of the general unsecured claims. The court confirmed the plan without objection on December 16, 1998.
Assuming the maximum trustee compensation2 and no other administrative expenses, the debtors should have paid the $19,054.56 in total scheduled claims over approximately 60 months.3
The last day to file a timely proof of claim was February 16, 1999. See Fed. R. Bankr.P. 3002(c). On October 4, 1998, the IRS filed its proof of claim in the total amount of $4,719.20. It was comprised of a priority claim of $4,133.75 for taxes and pre-petition interest, and a general unsecured claim for a tax penalty of $585.45.
On January 19, 1999, AIF filed a timely proof of claim utilizing the standard proof of claim form, Official Form 10.4 On the form, AIF completed the court and case information (the location of the court, the debtors' names, the chapter number, and case number), as well as its own name and address. The face of the proof of claim also indicated that AIF's account number was 701003413, that its claim arose from a loan of money to the debtors, and that the debtors incurred the debt on April 21, 1995. AIF did not include on the face of the proof of claim any other information regarding its claim, such as its amount and whether it was a secured, priority, or general unsecured claim.
AIF attached to its proof of claim, however, copies of a promissory note and written financial disclosures it gave to the debtors in connection with the loan. From these copies, it was possible to determine that AIF's claim was unsecured, that the loan was in the original amount of $15,000.00, and that a total of $8,923.20 in finance charges would accrue over the 72 month term of the loan. AIF did not append a copy of the nondischargeable judgment to the proof of claim.
The chapter 13 trustee was aware that the IRS and AIF had filed timely proofs of claim. He reported their claims in the Notice of Filed Claims ("the Notice"), filed on April 9, 1999.5 The Notice advised the debtors and their attorney that the IRS had filed a priority claim for $4,133.75 and a general unsecured claim of $595.45.6 But the Notice erroneously reported the amount of AIF's proof of claim as "$0.00."
The court does not understand the reasoning that prompted the trustee to process AIF's proof of claim as if it were a demand for nothing. Although AIF's claim was not a model of clarity or completeness, by no stretch of the imagination can it be construed as a demand for nothing. The claim does not demand "$0.00" or "nothing." At worst, the face of the proof of claim was silent about the amount and classification of the claim. The attachments to the proof of claim made up for this paucity of detail and dispelled any doubt that AIF was demanding money from the estate — AIF wanted the debtors to repay the $15,000.00 loan.
AIF's proof of claim was adequate in form and content for purposes of Fed. R. Bankr.P. 3001(a), which defines a proof of claim as a written statement setting forth a creditor's claim that substantially complies with Official Form 10. Because a representative of AIF executed its proof of claim and filed it with the court, the claim was presumptively valid and entitled to payment absent an objection by the trustee or the debtors. 11 U.S.C. § 502(a); Fed. R. Bankr.P. 3001(f). Thus, if the attachments to AIF's proof of claim did not inform the trustee of the amount and classification of the claim, the trustee should have objected to the proof of claim rather than unilaterally deeming it a demand for nothing.
A creditor does not normally take the time and trouble to file a proof of claim if it is owed nothing or if it does not wish to pursue its claim. Such a creditor is more apt to do nothing rather than file a proof of claim demanding nothing.7 On the other hand, when a creditor files a claim, the creditor usually wants money.8
In short, the trustee's interpretation of the proof of claim was unreasonable, particularly considering the fact that the debtors had scheduled the claim as undisputed, liquidated, and noncontingent and had filed their chapter 13 petition in order to pay AIF's claim in full.
The debtors doubtlessly considered themselves very lucky to learn that the trustee had processed AIF's claim as a demand for $0.00. This meant that the debtors would be completing their plan well in advance of its 60-month term.9
The debtors and their attorney, however, knew that their good fortune was undeserved. They were aware that AIF had filed a proof of claim and that the trustee had most likely misinterpreted it. This can be inferred from the following circumstances:
• AIF had gone through the trouble of filing a complaint in the debtors' prior chapter 7 case in order to prevent the discharge of its claim.
• The parties then negotiated a settlement that required payment in full of AIF's claim in this chapter 13 case.
• The debtors' counsel had corresponded with counsel for AIF the day before the filing of the chapter 13 petition, promising that the debtors would pay AIF's claim in full via their chapter 13 plan.
• The debtors scheduled AIF's debt as undisputed, liquidated, and noncontingent.
• The trustee served the debtors and their attorney with the Notice of Filed Claims which reported the filing of AIF's proof of claim.
• The debtors completed their plan in less than 15 months, rather than the 60 months they expected.
Therefore, the court concludes that AIF filed a timely proof of claim demanding $15,000.00 on account of an unsecured loan it made to the debtors. While the debtors or the trustee may wish to object to this proof of claim in order to reduce it to $11,756.90, the amount of the nondischargeable judgment, the trustee erred when he assumed the claim was a demand for nothing. The trustee should have paid the claim in full as directed by the plan.
The trustee's failure to pay AIF's claim in accordance with the plan should have come to light in connection with the case closing procedures which led to the approval of the trustee's final report and account and the issuance of the debtors' discharge. Instead, the case closing procedures used by the chapter 13 trustee and approved by the court have only compounded the injustice to AIF. Without affording AIF prior notice and opportunity to object, the court approved the chapter 13 trustee's final report and account, gave the debtors their chapter 13 discharge, discharged the trustee from his duties, released the trustee and his sureties from any liability, and closed the case.
The court may close a chapter 13 case once the estate has been fully administered. 11 U.S.C. § 350(a). Neither the Bankruptcy Code nor the Bankruptcy Rules define the phrase "fully administered." Cf. Matter of Wade, 991 F.2d 402, 406-07 (7th Cir.1993), cert. denied., Wade v. Shook, 510 U.S. 870, 114 S.Ct. 195, 126 L.Ed.2d 153 (1993); In re Ground Systems, Inc., 213 B.R. 1016, 1019 (9th Cir. BAP 1997). Therefore, the contours of the phrase are shaped by the duties imposed on the chapter 13 trustee.
The Bankruptcy Code requires a chapter 13 debtor to file a plan and to begin making plan payments within 30 days after the commencement of the case. 11 U.S.C. §§ 1321 and 1326(a)(1). The debtor must submit plan payments, to the extent they are necessary for the execution of the plan, to the supervision and control of the trustee. 11 U.S.C. § 1322(a)(1). The Bankruptcy Code directs the trustee to insure that the debtor makes all plan payments. 11 U.S.C. §...
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