In re Strause
| Decision Date | 08 February 1989 |
| Docket Number | RS No. 0018.,Bankruptcy No. 88-09553-LM13 |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California |
| Parties | In re Eddie D. STRAUSE and Robin A. Strause, Debtors. Clifford HELBOCK and Otylia M. Helbock, Movants, v. Eddie D. STRAUSE, Robin A. Strause, Steven D. Petach, Federal National Mortgage Association, Hydro-Scape Products, Inc., and Ornamental Plant Sales, Inc., Respondents. |
Joe R. Sutter, San Diego, Cal., for movants.
Jeffery S. Styers, Rasmussen & Styers, San Diego, Cal., for respondents.
This case presents a troublesome issue regarding the viability of a Chapter 13 case filed while a Chapter 7 case involving the same debtors and debts is pending. The issue is raised by motion for relief from the automatic stay in the Chapter 13 case.
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
In April, 1987 the debtors borrowed $28,000, evidenced by a promissory note and second deed of trust. That note and deed of trust were assigned to the movants, the Helbocks, in May, 1987. In 1988 the debtors defaulted on the note, failing to make the May and June payments. On July 18, 1988 a notice of default was recorded by the Helbocks. The debtors also did not make the July, 1988 payment.
On August 24, 1988 debtors filed their petition for relief under Chapter 7 of Title 11, United States Code. In their schedules they reported that Mr. Strause generated a net income of $1,500 per month through his own business as a landscaper, and that Mrs. Strause was unemployed. The debtors' schedules also reflected monthly expenses exceeding $1700.
The debtors listed their residence, showing first and second trust deeds with a combined secured debt of $86,231. The debtors stated their intent to retain their residence, and claimed a market value of $110,000. The debtors listed priority debt of $13,500 for wages to employees of the landscaping business. In addition, they listed 77 unsecured creditors with combined claims totalling $79,757.54. Many of those debts were business debts from the landscaping operation (33 of the 77, but $49,179.07 of the total).
Thereafter, notice was given to all creditors of both the § 341 meeting and that the last date for filing complaints objecting to discharge or to determine the dischargeability of a particular debt was set as November 28, 1988. The trustee's report of no distribution was filed October 14, 1988.
On November 7, 1988 the Helbocks filed a motion for relief from the automatic stay. The motion alleged that debtors were in default on three pre-petition payments, and on all three post-petition payments. In addition, the debtors were in default for the same number of pre and post petition payments to the first trust deed holder. Furthermore, two judgments aggregating approximately $6400 had been recorded against the property, as well.
The motion for relief from the stay was heard on December 5, 1988, and relief was granted by order lodged December 6, 1988 and entered December 23, 1988. In the interim, no complaints objecting to discharge or asserting the non-dischargeability of any debt were filed.
On December 14, 1988 debtors filed another petition for relief in bankruptcy, this one pursuant to Chapter 13 of Title 11, United States Code. In their Statement they disclosed the existence of the Chapter 7 proceeding.
The Chapter 13 Statement reported that Mr. Strause was working for another company, and that he had been so employed for 2½ months. Mrs. Strause was now employed, also, and had been for one month. Mr. Strause's net monthly pay had risen to $2,150, and Mrs. Strause was bringing home $378 per month. Interestingly, the Strauses claimed a combined annual income for the preceding year of $30,000, and in their Chapter 13 budget their expenses had increased to $2,321 per month from the $1,716 per month listed in August, 1988. Importantly, the debtors listed as their only creditors the holders of the first and second trust deeds on their residence.
On December 22, 1988 the Helbocks filed another motion for relief from stay. The Helbocks' primary argument is that relief should be granted because the debtors improperly have two proceedings pending at the same time.
The Chapter 13 Trustee filed an opposition to the Helbocks' motion, pointing out that a "Chapter 20" is not per se impermissible in the Ninth Circuit, and cited In re Metz, 67 B.R. 462 (9th Cir. BAP 1986), aff'd 820 F.2d 1495 (9th Cir.1987).
The debtors also oppose relief from the stay and argue that their only purpose in filing the Chapter 13 case was to set up a plan to pay the arrearages on the first and second trust deeds. They acknowledge those two creditors are the only ones scheduled.
The question posed by the creditors' motion is what is the viability of a Chapter 13 case when the same debtors already have a Chapter 7 case pending. Several courts have been called upon to consider the question, and they have arrived at differing conclusions.
One line of cases is predicated on the Supreme Court's decision in Freshman v. Atkins, 269 U.S. 121, 46 S.Ct. 41, 70 L.Ed. 193 (1925). In that case, the debtor filed his first petition in 1915. He then applied for a discharge, but the referee recommended discharge be denied. After the referee's report was filed, the case lay dormant. Then, in 1922, the debtor filed a second petition, listing debts identified in the original petition, plus some new ones. The debtor again applied for a discharge, and this time the referee recommended it be granted. The court, however, took note of the earlier case and denied discharge as to the debts listed in the original petition, and granted discharge as to the new debts.
While noting that the trial and appellate courts had not followed the same lines of reasoning, the Court observed:
. . . They reach the same conclusion, which is, in effect, that the pendency of the first application precluded a consideration of the second in respect of the same debts. In this conclusion we concur. A proceeding in bankruptcy has for one of its objects the discharge of the bankrupt from his debts. In voluntary proceedings, as both of these were, that is the primary object. Denial of a discharge from the debts provable, or failure to apply for it within the statutory time, bars an application under a second proceeding for discharge from the same debts.
269 U.S. at 122-123, 46 S.Ct. at 41-42.. The court explained further:
A proceeding in bankruptcy has the characteristics of a suit, and since the denial of a discharge, or failure to apply for it, in a former proceeding is available as a bar, by analogy the pendency of a prior application for discharge is available in abatement as in the nature of a prior suit pending, in accordance with the general rule that the law will not tolerate two suits at the same time for the same cause.
269 U.S. at 123, 46 S.Ct. at 42. Lastly, the court stated:
Many cases have followed the decision in Freshman v. Atkins, some with an explanation of what Freshman actually holds. In Prudential Loan & Finance Co. v. Robarts, 52 F.2d 918 (5th Cir.1931), the court recognized that the underpinnings of the Freshman decision rested on the proposition that failure of a debtor to apply for a discharge within the statutory time "gives rise to a judgment by default equal to one of express denial of the discharge." 52 F.2d at 919.
Perhaps the best explanation of Freshman v. Atkins was given by the Ninth Circuit Court of Appeals in Holmes v. Davidson, 84 F.2d 111 (1936). The court wrote:
The Supreme Court in Freshman v. Atkins (citation omitted) had under consideration the effect of a failure to apply for discharge in a pending bankruptcy proceeding upon a subsequent proceeding in bankruptcy. The Supreme Court in that case stated: "Denial of a discharge from the debts provable, or failure to apply for it within the statutory time, bars an application under a second proceeding for discharge from the same debts. . . . "
84 F.2d at 112. The court noted:
It is clear from cases cited above that if the bankrupt in a pending bankruptcy proceeding fails to apply for a discharge within the statutory time, he cannot be discharged in a subsequent proceeding from the debts scheduled and provable in the first proceeding from which he might have secured a discharge if he had made timely application therefor.
84 F.2d at 113. The court then explained the provisions of the applicable law.
The right to discharge in bankruptcy is not an unqualified right. It depends upon a compliance by the bankrupt with the statute which authorizes the discharge. One of the requirements is that he must present his application for discharge after the adjudication in bankruptcy, and within the twelve months\' period thereafter or within an extension of that period not exceeding six months (11 U.S.C.A. § 32). It is uniformly held that a bankrupt cannot extend his time for making his application for discharge by the mere device of filing a second voluntary petition in bankruptcy. He cannot allow the time to file his petition for discharge to expire, and then file a new petition in bankruptcy and by so doing extend his time for making such application for an additional twelve months as to a debt scheduled in the first bankruptcy proceeding. (Citation omitted) In the application of this rule it is immaterial whether he filed an application for discharge in the first proceeding which was dismissed (citations omitted), or whether he failed to do so (citations omitted), for in any event, the legal effect on his right to a discharge as to debts...
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