Kestell, In re

• Decision Date: 31 October 1996
• Docket Number: No. 95-2925,95-2925
• Citation: Kestell, In re, 99 F.3d 146 (4th Cir. 1996)
• Parties: 36 Collier Bankr.Cas.2d 1713, Bankr. L. Rep. P 77,159 In Re Robert J. KESTELL, Debtor. Robert J. KESTELL, Plaintiff-Appellant, v. Janet A. KESTELL, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 146

99 F.3d 146

36 Collier Bankr.Cas.2d 1713, Bankr. L. Rep. P 77,159

In Re Robert J. KESTELL, Debtor Robert J. KESTELL, Plaintiff-Appellant, v. Janet A. KESTELL, Defendant-Appellee.

No. 95-2925.

United States Court of Appeals Fourth Circuit.

Argued Sept. 25, 1996.

Decided Oct. 31, 1996.

ARGUED: Edward Malcolm Kimmel, Hambright & Kimmel, Washington, D.C., for Appellant. Irving Edward Walker, Miles & Stockbridge, P.C., Baltimore, Maryland, for Appellee. ON BRIEF: Lisa B. Tancredi, Miles & Stockbridge, P.C., Baltimore, Maryland, for Appellee.

Before WILKINSON, Chief Judge, and WILKINS and WILLIAMS, Circuit Judges.

Affirmed by published opinion. Chief Judge WILKINSON wrote the opinion, in which Judge WILKINS and Judge WILLIAMS joined.

OPINION

WILKINSON, Chief Judge:

Appellant Robert Kestell was denied a discharge in bankruptcy. The bankruptcy court found that Kestell had failed to list assets that were property of the estate and that such failure constituted a fraudulent concealment under 11 U.S.C. § 727. We need not decide whether the assets at issue were property of the estate because the bankruptcy court's findings amply support the conclusion that Kestell attempted to abuse the bankruptcy process so as to ensure that his former wife, appellee Janet Atkinson, could not collect a debt Kestell owed her. See 11 U.S.C. §§ 105, 707. Because we believe that both the bankruptcy court and district court acted properly to protect the integrity of the bankruptcy process, we affirm the judgment.

I.

On December 3, 1993, Janet Atkinson was granted a divorce, on grounds of desertion, from her husband of 27 years, Robert Kestell. The divorce judgment required Kestell to pay Atkinson alimony, support for three of the couple's five children, a lump-sum award, attorney's fees, and a share of profits from a rental property. Kestell earned $193,000 in 1993.

Thirteen days after the divorce judgment, Kestell filed for Chapter 7 bankruptcy relief. At a meeting of creditors held a month later, Kestell stated that he intended to reaffirm all of his debts except the dischargeable portion of his debt to Atkinson and a small credit card debt. Kestell also declared, "I don't want [Atkinson] to have anything." He swore under oath that to the best of his knowledge he had listed all of his assets and all of his debts on the bankruptcy schedules.

Kestell did not list, however, his anticipated receipt of an income tax reimbursement from his employer, Inter-American Development Bank. Nor did he amend the schedule to add the reimbursement of approximately $13,000 when it was paid to him postpetition. Kestell also did not report or turn over to the bankruptcy trustee accrued sick leave benefits of $33,511.09 paid to him in March 1994. At the time of Kestell's bankruptcy petition, these sick leave benefits were available only upon retirement or resignation, but a change in company policy in March 1994 allowed Kestell to cash in the benefits he had earned up to that point. He first picked up the check, then tried to return it so he could cash the benefits later, then retrieved it and deposited the check in his checking account in Jamaica.

After a one-day trial, the bankruptcy court reached two conclusions. First, it determined that Kestell's interest in the sick leave benefits and tax reimbursement were property of the bankruptcy estate, and that Kestell should have amended his asset schedules accordingly and turned the money over to the trustee when he received it. Second, the court found that Kestell's choice not to list or turn over the assets evinced an intent to defraud a creditor, namely his ex-wife. Based on these findings, the bankruptcy judge found fraudulent concealment in violation of 11 U.S.C. § 727(a)(2)(B) and denied Kestell's petition. Kestell appealed to the United States District Court, which affirmed the bankruptcy judge's ruling.

II.

Kestell claims on appeal that the bankruptcy court committed a great injustice in his case. The court, he argues, penalized him either for legally correct conduct or for entirely innocent mistakes. It should be possible, he says, "to have an honest disagreement, even with a bankruptcy judge, about what is property of the estate." Above all, he insists, a court's bankruptcy powers must be exercised "liberally in favor of the debtor" and strictly against objections to a discharge. See Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915) (bankruptcy process designed "to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh").

This statement of the Code's objectives is correct as far as it goes, but it does not go far enough. In particular, it overlooks the fact that bankruptcy courts have traditionally drawn upon their powers of equity to prevent abuse of the bankruptcy process and to ensure that a "case be commenced in 'good faith' to reflect the intended policies of the Code." 2 L. King, Collier on Bankruptcy § 301.05, at 301-5 to 301-7 (1996). Such a good faith requirement

prevents abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefiting them in any way or to achieve reprehensible purposes. Moreover, a good faith standard protects the jurisdictional integrity of the bankruptcy courts by rendering their powerful equitable weapons (i.e., avoidance of liens, discharge of debts, marshalling and turnover of assets) available only to those debtors and creditors with "clean hands."

In re Little Creek Development Co., 779 F.2d 1068, 1072 (5th Cir.1986).

Indeed, Congress has made it clear within the Bankruptcy Code itself that misuse of the bankruptcy process should not be countenanced. Specific provisions throughout the Code provide remedies for abuses in each of the types of bankruptcy proceedings. In some Code provisions, enumerated circumstances of abuse are addressed. In others, general phrases such as "for cause" provide broad coverage for unenumerated instances of misuse.

Chapter 7, for example, affords a court the discretion to dismiss sua sponte a consumer debtor's case "if it finds that the granting of relief would be a substantial abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b). Further, section 727 lists ten specific grounds on which the judge should deny a Chapter 7 debtor discharge from his debts. These include situations in which the debtor has "with intent to hinder, delay, or defraud a creditor ... transferred, removed, destroyed, mutilated, or concealed [property]"; "knowingly and fraudulently ... made a false oath or account"; "failed to explain satisfactorily ... any loss of assets"; or refused "to obey any lawful order of the court." 11 U.S.C. § 727(a)(2), (4), (5), (6).

Similarly, Chapter 11 bankruptcy cases may be dismissed for a lack of good faith, a requirement this court has found to be "implicit in § 1112(b)." Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir.1989).

On the basis of the soundly reasoned decisions of other courts, the clear purposes of the bankruptcy code and our reading of the relevant statutory provisions and rules, we hold that petitions for protection under the reorganization provisions of Chapter 11 must be filed in "good faith." If properly found not to have been, they may be summarily dismissed for that reason.

Id. at 700. Section 1112(b) also lists ten explicit grounds for dismissal or conversion to Chapter 7 of a Chapter 11 petition, including "inability to effectuate a plan," "unreasonable delay by the debtor that is prejudicial to creditors," and "material default by the debtor with respect to a confirmed plan." 11 U.S.C. § 1112(b)(2), (3), (8).

Good faith is also necessary for a Chapter 13 plan to be confirmed under section 1325(a). In re Solomon, 67 F.3d 1128 (4th Cir.1995); Neufeld v. Freeman, 794 F.2d 149 (4th Cir.1986). That section provides that plans may be confirmed only if "proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1325(a)(3). Additionally, under section 1307, bankruptcy petitions filed under Chapter 13 may be dismissed or converted to Chapter 7 "for cause." Reasons constituting "cause" for dismissal include enumerated ones, such as unreasonable and prejudicial delay by the debtor or material default by the debtor, 11 U.S.C. § 1307(c)(1),(6), as well as judicially construed ones such as bad faith, In re Love, 957 F.2d 1350 (7th Cir.1992).

Finally, overlaying these specific provisions is the broad grant of judicial power set forth in 11 U.S.C. § 105(a). That section authorizes bankruptcy courts to:

issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

A leading commentator on bankruptcy law characterizes section 105 as "an omnibus provision phrased in such general terms as to be the basis for a broad exercise of power in the administration of a bankruptcy case. The basic purpose of section 105 is to assure the bankruptcy courts power to take whatever action is appropriate or necessary in aid of the exercise of its jurisdiction." 2 L. King, Collier on Bankruptcy § 105.01, at 105-3 (1996). The second sentence of section 105(a), added in 1986, was expressly intended to broaden the authority of bankruptcy courts to act, sua sponte, to promote the Code's provisions. See 132 Cong. Rec. S15074-05 (Oct. 3, 1986); In re Haddad, 68 B.R. 944, 949 (Bankr.D.Mass.1987).

Section 105 is not, of course, unlimited. It cannot be invoked, for example, to achieve ends contrary to other specific Code provisions. Section 105 states, after all, that it empowers the court to "carry out the...