Chapter 20 Fails on Bad Faith

Posted by NCBRC - October 13, 2016

The bankruptcy court did not abuse its discretion in dismissing the debtor’s chapter 13 case for bad faith filing. The fact that the chapter 13 was filed while the debtor’s chapter 7 was still pending was a factor to be considered in the bad faith analysis but was not dispositive. Cuevas v. Chandler (In re Cuevas), No. 15-1032 (B.A.P. 9th Cir. Oct. 5, 2016) (unpublished).

When he filed for chapter 7 bankruptcy relief, Ruben Cuevas was living in a house owned by the Juliana Cuevas Living Trust of which Mr. Cuevas, his sister Grace Dibble, and his brother were beneficiaries. Ms. Dibble was named trustee for the Trust. Prior to Mr. Cuevas’s bankruptcy, Ms. Dibble obtained a court order entitling her to possession of the house on behalf of the Trust. Upon the filing of the chapter 7 petition, Ms. Dibble obtained relief from stay permitting the ongoing state court litigation over ownership of the house, but putting a halt to the eviction process. In light of delays in the state court ownership litigation and dubious actions on the part of Ms. Dibble, the bankruptcy court granted the trustee’s motion to appoint Stevan Chandler as successor probate trustee.

The bankruptcy court then rejected Mr. Cuevas’s attempt to claim a homestead exemption in the house based on the fact that the Trust, rather than Mr. Cuevas, was the owner. Mr. Chandler recovered title to the home and commenced an unlawful detainer action against Mr. Cuevas. While that action was pending, but after he received his chapter 7 discharge, Mr. Cuevas filed a chapter 13 petition.

The bankruptcy court issued a sua sponte show cause order why the chapter 13 should not be dismissed. After a hearing, the court dismissed the case and sanctioned Mr. Cuevas’s attorney, Philip E. Koebel.

On appeal, the bankruptcy appellate panel found that the bankruptcy court correctly applied the four factors set forth in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999) to the issue of bad faith. Having found bad faith under the correct legal standard, the panel went on to find that the bankruptcy court did not abuse its discretion in dismissing the chapter 13 case or sanctioning the debtor’s attorney. The court’s factual findings were supported by the record and were not “illogical or implausible.”

Specifically, the bankruptcy court found there were no significant post-chapter 7 debts to be dealt with in chapter 13, no source of income to pay debts in any case, and little chance of a chapter 13 discharge. Mr. Cuevas’s desire to protect his home could not be addressed in chapter 13 because he was not the owner of the property. As to Mr. Koebel, the court found subjective bad faith and objectively unreasonable conduct in filing the chapter 13 for the sole purpose of delaying eviction and increasing the costs to Mr. Chandler. The court sanctioned Mr. Koebel $15,346.30 in fees and costs owed to Mr. Chandler and $2,110.60 in fees and costs owed to the chapter 7 trustee. The court also referred the case to the Central District of California disciplinary panel.

The appellate panel found sufficient support in the record for these actions.  Importantly, the panel noted that, contrary to Mr. Cuevas’s contention, the bankruptcy court did not dismiss the chapter 13 case on the basis of a per se rule against filing chapter 13 while a chapter 7 is pending. The dual filings were relevant because “it was appropriate for the bankruptcy court to consider the history, the status and the interrelationship of the two cases in rendering its bad faith determination.”


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