Schlegel v. Billingslea (In re Schlegel)
| Decision Date | 25 February 2015 |
| Docket Number | BAP No. SC–14–1132–KiKuJu.,Bankruptcy No. 08–13539–PB13. |
| Citation | 526 B.R. 333 |
| Parties | In re Steven Patrick SCHLEGEL; Joanne Marie Schlegel, Debtors. Steven Patrick Schlegel; Joanne Marie Schlegel, Appellants, v. Thomas H. Billingslea, Jr., Chapter 13 Trustee, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Daniel J. Winfree, San Diego, CA, on brief for appellants Steven Patrick Schlegel and Joanne Marie Schlegel; Jenny Judith Hayag, San Diego, CA, on brief for appellee Thomas H. Billingslea, Jr., Chapter 13 Trustee.
Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges.
Appellants Steven Patrick Schlegel and Joanne Marie Schlegel (“Schlegels”) appeal an order dismissing their chapter 132 case for failing to complete plan payments within the applicable five-year commitment period. This appeal raises for the first time whether a confirmed chapter 13 plan may be dismissed for the debtors' failure to pay both the required plan payment and the approved percentage dividend to unsecured nonpriority creditors during the applicable commitment period. We AFFIRM.
The Schlegels, as above median income wage earners, filed a chapter 13 bankruptcy case on December 31, 2008. Their Schedule A identified a fee interest in a residence on Casita Way in San Diego, California (“Residence”) with a value of $274,500 and secured claims against it totaling $434,053. Their Schedule D identified a junior lien on the Residence held by CitiMortgage, Inc. (“CitiMortgage”) in the amount of $156,348. The claims bar date expired on April 30, 2009. CitiMortgage did not file a proof of claim by the claims bar date.
In their original chapter 13 plan filed on January 15, 2009, Schlegels proposed monthly plan payments of $963 for 60 months and a 24% dividend to unsecured nonpriority creditors. The original plan provided in Paragraph 19:
VALUATION AND RECLASSIFICATION OF LIENS ON REAL PROPERTY The following creditors are anticipated by this plan to be deemed unsecured creditors by operation of 11 USC §§ 506(a) and 1322(b) and Federal Rule of Bankruptcy Procedure § [sic] 3012, and will be subject to motion to that end under Federal Rule of Bankruptcy Procedure § [sic] 9014: [CitiMortgage] Heloc on 3957 Casita Way in approximate amount of $156,500....
The chapter 13 trustee, Thomas H. Billingslea (“Trustee”), objected to the original plan and moved to dismiss the case, contending that: “Feasibility of plan at 24% dividend requires evaluation whether to-be-stripped creditors file proof of claim.” Ultimately, the bankruptcy court denied confirmation of the original plan.
On April 8, 2009, Schlegels filed an amended Motion to Avoid Lien and Reclassify Loan3 with respect to CitiMortgage's junior lien on the Residence (“Motion to Value”). Schlegels sought to value the Residence at $266,500, which would leave CitiMortgage's junior lien wholly unsecured. After proper service of the Motion to Value, CitiMortgage did not respond.
The bankruptcy court revised its tentative ruling4 on August 28, 2009, entered its order granting the Motion to Value on October 22, 2009 (“Valuation Order”) and valued the Residence at $266,500. The Valuation Order also provided:
The Court determines that the Second Trust Deed of Citibank (West) ... is entirely unsecured under 11 U.S.C. Section 506(a) given the value of the property and the amount of liens senior to Citibank's (West) lien secured thereby, and avoids Citibank's (West) lien under 11 U.S.C. Section 1322(b), contingent on entry of a confirmation order so providing, and completion of Debtor's [sic] Chapter 13 Plan and Debtors' resultant discharge.
On October 12, 2009, after the bankruptcy court orally granted the Motion to Value, but before it entered the Valuation Order, CitiMortgage filed a secured proof of claim for its junior lien in the amount of $155,246.17, which the bankruptcy court rendered unsecured by its Valuation Order, pursuant to § 506(a). Schlegels did not object to CitiMortgage's judicially-determined unsecured claim.
Meanwhile, on July 1, 2009, Schlegels had filed an amended chapter 13 plan in which they proposed monthly plan payments of $812 for 60 months and a 48% dividend to unsecured nonpriority creditors.5 The amended plan provided the same “Paragraph 19” as did the original plan, wherein Schlegels stated that CitiMortgage would be treated in their plan as an unsecured creditor.
The bankruptcy court eventually confirmed the Schlegels' amended plan on May 5, 2010 (the “Plan”). The confirmation order drafted by Schlegels' counsel stated that consistent with Paragraph 19 of the Plan dated July 1, 2009, and the Valuation Order entered on October 22, 2009, the wholly unsecured lien of CitiMortgage would be treated and paid as an unsecured claim under the Plan. However, the Plan apparently did not take into consideration CitiMortgage's claim when it promised to pay unsecured creditors a 48% dividend, even though CitiMortgage filed its claim months before Plan confirmation.
On May 14, 2010, nine days after the entry of the confirmation order, Trustee filed a Notice of Claims Filed and Intention to Pay Claims (“Notice of Claims”). The Notice of Claims, which included CitiMortgage's judicially-determined unsecured claim of $155,246.17, showed the aggregate total for all unsecured claims as $219,596. The Notice of Claims also stated: “Pursuant to 11 U.S.C. § 502(a), the claims which have been filed as stated above will be deemed allowed for purposes of distribution and shall be paid unless the debtor or other party in interest files with the court in accordance with Rule 3007, [an] Objection to Claim and Request for Hearing within thirty (30) days of this notice.” The record reflects service of the Notice of Claims on both Schlegels and their counsel. No party filed any claim objections.
On December 13, 2013, on the eve of the sixtieth month of the Plan, Schlegels filed a motion for hardship discharge (the “Hardship Motion”). Schlegels contended that several reasons warranted a hardship discharge: (1) Mrs. Schlegel's recent cancer diagnosis and loss of employment; (2) the need of an additional 96 months of payments to satisfy the percentage dividend payout of the Plan; and (3) the impracticality of plan modification, given the lapse of nearly five years in the plan. The bankruptcy court scheduled a Hardship Motion hearing on March 5, 2014.
Trustee objected to the Hardship Motion, contending that Schlegels had failed to establish the necessary elements to support a hardship discharge for the following reasons: (1) at confirmation, the Plan term approximated 158 months, given the 48% dividend, CitiMortgage's allowed unsecured claim and Schlegels' failure to object to CitiMortgage's claim; (2) Schlegels paid a total of $48,391, approximately 58.5 months of the required 60 Plan payments; and (3) the approximate remaining payoff of $77,780 required an additional 96 months to complete. Under the Plan terms, the Schlegels had provided a 10.8% to 15.42% dividend to unsecured nonpriority creditors.
On January 6, 2014, Trustee moved to dismiss the Schlegels' chapter 13 case for failing to complete plan payments within five years from commencement of the case (“Motion to Dismiss”). The attached notice provided:
You are further notified that IF YOU FAIL TO REQUEST AND SERVE NOTICE OF HEARING within [the] 28 day period provided by this notice, the Trustee will present [an] order dismissing this case to the Court for entry without any hearing or further notice to you.
The Schlegels failed to file any opposition to the Motion to Dismiss by the deadline of February 6, 2014.
On February 20, 2014, Trustee filed a Statement of Case Status re Non–Contested Motion to Dismiss and Opposition to Debtors' Motion for Hardship Discharge. Trustee maintained that Schlegels: failed to timely oppose the Motion to Dismiss; failed to make all Plan payments; failed to pay off the remaining balance of $76,960; and failed to pay the percentage dividend, all within the Plan term. Accordingly, he requested the court to enter a non-contested dismissal order. Trustee noted that his periodic and annual reports sent to Schlegels throughout the case from 2009 to 2013 should have alerted them to the percentage dividend deficiency.
On February 22, 2014, Schlegels' counsel filed a responsive Declaration re Status, asserting that filing an opposition to the Motion to Dismiss would have been redundant considering the pending Hardship Motion. Nonetheless, he asserted that the Schlegels' inability to perform the Plan requirements arose from the allowance of CitiMortgage's claim filed after the claims bar date.
The bankruptcy court held a hearing on the Hardship Motion on March 5, 2014. Although Schlegels failed to file any written opposition or to request/obtain a hearing date on the Motion to Dismiss, the transcript of the hearing confirms that the court also considered the parties' arguments on the Motion to Dismiss.
At the hearing, Schlegels' counsel did not dispute the court's statements that they knew by at least May 2010, based on Trustee's Notice of Claims, that with the monthly payments and the 48% dividend required by their Plan, 96 additional monthly payments would be required to complete their Plan given CitiMortgage's unsecured claim. Thus, Schlegels had known for nearly four years that they could not fully perform under the terms of the confirmed Plan. Hr'g Tr. (March 5, 2014) 3:13–3:24. Schlegels' counsel stated that they were hoping to secure a financing arrangement during the applicable commitment period to complete all financial obligations of their Plan, but Mrs. Schlegel's health, her loss of employment and the foreclosure of their rental...
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