In re Szostek
| Decision Date | 12 December 1988 |
| Docket Number | Bankruptcy No. 87-03425F. |
| Citation | 93 BR 399 |
| Parties | In re Fred J. SZOSTEK, Denise M. Szostek, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Jonah D. Levin, Norristown, Pa., for movant, The Kissell Co.
David A. Searles, Community Legal Services, Inc., Philadelphia, Pa., for debtors/movants, Fred J. Szostek and Denise M. Szostek.
Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.
I have before me two motions, the first brought by the debtors, Fred and Denise Szostek, for an award of attorneys' fees and the second brought by a creditor, The Kissell Company, which seeks to have the debtors' confirmed chapter 13 plan either dismissed, revoked or modified.1
The debtors filed their bankruptcy petition on July 7, 1987. On August 3, 1987, notice was issued scheduling the meeting of creditors and a hearing on confirmation of the plan. The notice stated that the confirmation hearing would be held on December 15, 1987 and that objections to confirmation shall be filed no later than ten days before that hearing. Bankr.Rule 3020(b)(1). Kissell filed a secured claim in the amount of $29,242.41 on August 18, to which the debtors objected on September 4, 1987. An "amended" proof of claim subsequently was filed, which was in the amount previously requested (i.e., $29,242.41). The debtors then amended their objection, seeking a determination of the amount of Kissell's security interest pursuant to 11 U.S.C. § 506(a), (d), and relief pursuant to the Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq. The hearing on the objection to Kissell's claim was scheduled to be heard on December 15, 1987, the same date as the confirmation hearing. At some point prior to the December 15 hearing, the attorneys had a conversation in which counsel for Kissell requested a continuance of the objection so that he could obtain an appraisal of the debtors' real property. Counsel part company on the significance of this request. Kissell's counsel apparently assumed that counsel for the debtors thereby agreed to a postponement of both matters to a new date. Counsel for the debtors understood the continuance request to apply only to the objection to the proof of claim.
On December 15, 1987, the debtors appeared but Kissell did not. A confirmation hearing was held and, as no objection was then filed, the debtors' plan was confirmed upon recommendation of the standing chapter 13 trustee. In re Hines, 723 F.2d 333 (3d Cir.1983). The hearing on the objection to Kissell's claim was continued to January 25, 1988. By letter dated December 16, 1987, counsel for Kissell confirmed a telephone call to his office from the debtors' counsel, which advised that the hearing on the objection to the proof of claim had been so postponed.2
On December 18, 1987, three days after confirmation and 13 days after the deadline for filing objections to the plan, Kissell filed a pleading entitled "Objection to Debtors' First Amended Chapter 13 Plan and Answer of The Kissell Company to Debtors' Objection to Proof of Claim."
The hearing on the debtors' objection was held January 25, 1988; it was at that hearing that Kissell first learned that the plan had been confirmed. N.T. at 19. The court heard argument on the objection to the claim and on March 21, 1988 issued a memorandum3 and order determining Kissell's secured claim to be $25,110.00 and its unsecured claim to be $3,132,41.4 This order was in part based upon the parties' agreement that the creditor, Kissell, had violated the Truth-in-Lending Act and that therefore a $1,000.00 recoupment was appropriate. The parties disagreed on how the $1,000.00 recoupment should be applied, and the March 21 order reflects my decision that the recoupment had to be apportioned between the secured and unsecured claims.
Having prevailed on the TILA objection, debtors' counsel then sought attorneys' fees for the time spent on the apportionment issue and the Truth-in-Lending issue. The creditor argues that, as part of the parties' agreement that there was a Truth-in-Lending violation, debtors' counsel agreed to waive counsel fees, and thus arose the second dispute before me now.
I will first address the creditor's motion to revoke confirmation of the plan, dismiss the petition, or modify the confirmed chapter 13 plan.
The Bankruptcy Code permits the court to revoke an order confirming a chapter 13 plan where that order was procured by fraud. 11 U.S.C. § 1330(a).5 Section 1330 is derived from § 671 of the former Bankruptcy Act (former 11 U.S.C. § 1071). Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93rd Cong.1st Sess. Pt. II, at 210 (1973). As analyzed by various courts, the fraud referred to in § 1330(a) is the equivalent of common law fraud. That is, the plaintiff alleging fraud under § 1330(a) must prove each of the elements of a traditional cause of action for deceit: that the debtor made a representation that was materially false; that the misrepresentation was either known by the debtor to be false, or was made without belief in its truth, or was made with reckless disregard for the truth; that the representation was made to induce the court's reliance; that the court relied on the representation; and that as a consequence of such reliance the confirmation order was entered. See In re Hicks, 79 B.R. 45, 48-49 (Bankr.N.D.Ala. 1987); In re Moseley, 74 B.R. 791, 803 (Bankr.C.D.Cal.1987); In re Edwards, 67 B.R. 1008, 1010 (Bankr.D.C.Conn.1986). See also In re Cleveland, 64 B.R. 810 (Bankr.S.D.Cal.1980), rev'd on other gnds, 89 B.R. 69 (9th Cir.BAP 1988).6 The burden rests upon the moving party, Kissell, to show by clear and convincing evidence that the debtors intended to commit a fraud upon the court in obtaining confirmation. In re Scott, 77 B.R. 636, 638 (Bankr. N.D.Ohio, 1987).
The Moseley court points out that the difficulties inherent in showing such fraud result in few such findings under § 1330, 74 B.R. at 803; indeed my research reveals very few cases in which revocation was deemed appropriate under § 1330(a). Confirmation was fraudulently procured in In re Powers, 48 B.R. 120 (Bankr.M.D.La. 1985) where the debtor failed to disclose assets, listed valuable assets as valueless, sold undisclosed assets and then used the proceeds to go scuba diving. A fraud had been perpetrated in In re Scott, where the debtor failed to list certain known creditors, deliberately failed to provide the court with required addresses and aliases used, and utilized multiple Social Security account numbers in various bankruptcy filings. Compare, e.g., In re Torres, 15 B.R. 794 (Bankr.E.D.N.Y.1981) ().
It is not exactly clear to me which representation made to this court is to be considered the one (or ones) that procured confirmation by fraud. The creditor argues in part that since the chapter 13 plan provides no funding for its unsecured creditors (claims in Class 3 under the plan), it should be viewed as inherently unfair and, therefore, fraudulently obtained. I cannot agree with Kissell's conclusions that the plan provides for zero funding to Class 3 creditors. It appears from the debtors' confirmed plan Exhibit 3 that the allowed unsecured claimants (including Kissell) will be paid a large percentage of their claims,7 and Kissell has offered no evidence to the contrary. I find here no fraudulent misrepresentation.8
Kissell apparently further argues that, since the plan does not provide for payment to Kissell for interest on its allowed secured claim, in compliance with 11 U.S.C. § 1325, confirmation may be revoked. Section 1325 does require that the court shall confirm a plan if, with respect to each allowed secured claim provided for by the plan, the value of property to be distributed on account of such claim is not less than the allowed amount of such claim. However, § 1325 is inapposite to Kissell's argument for revocation. Kissell's proper remedy under this section would have been to file a timely objection pursuant to Bankruptcy Rule 3020(b)(1), and litigate the issue of present value, under § 1325(a)(5)(B)(ii), prior to confirmation. See, e.g., In re Bonanno, 78 B.R. 52 (Bankr.E.D.Pa.1987); In re Torres; 5 Collier on Bankruptcy ¶ 1325.012 at 1325-4 (15th ed. 1988). This is the procedure that was followed in In re Mitchell, 77 B.R. 524 (Bankr.E.D.Pa.1987), and in other cases where present value was at issue. See, e.g., In re Fisher, 29 B.R. 542 (Bankr.D. Kan.1983). Clearly, determination of what interest rate satisfies the present value test is a matter that must be resolved through the confirmation process. Thus, a creditor seeking interest on its claim may not do so post-confirmation.
Finally, Kissell argues that confirmation was procured by the debtors' counsel's fraudulent misrepresentation in obtaining confirmation in the face of an agreement to postpone.9 Kissell does admit that, in a telephone conversation with debtors' counsel, it requested a continuance of the objection to claim only, and specifically did not request a continuance of confirmation.10 As Kissell had not objected to confirmation prior to the court mandated deadline, and as there were funds sufficient to pay Kissell's entire claim had the debtors lost their objection to Kissell's proof of claim,11 I cannot see how debtors' counsel should have clearly known from the conversation that both hearings were to be postponed. I find that Kissell's allegation of fraud is not supported by its evidence and, as the elements of fraud under § 1330(a) have not been shown, confirmation should not be revoked. See e.g., In re Edwards; In re Torres. See also In re Longardner & Assocs., Inc. 855 F.2d 455 (7th Cir.1988). Cf. In re Stern (...
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