Mandatory Discharge Trumps Discretionary Dismissal for Bad Faith

Posted by NCBRC - April 18, 2022

The debtors were entitled to discharge despite their failure to disclose an asset where the trustee moved for dismissal for bad faith after the debtors completed all their plan payments but before they had received their discharge. In re Frank, No. 18-12812 (Bankr. D. Colo. March 30, 2022).

Less than one year after one of the debtors was injured in a car accident, the below-median debtors filed for chapter 13 bankruptcy. The debtors did not inform the trustee of the car accident or list the potential cause of action in their bankruptcy schedules. The debtors’ confirmed 39-month plan committed them to paying a priority tax debt, a small secured debt, trustee fees and their own attorney fees. The plan paid nothing to unsecured creditors. About one year after their plan was confirmed, the debtors received a $67,000 settlement in the personal injury case. They did not amend their schedules or inform the trustee of the settlement. One month before the final payment was due on the debtors’ plan, the trustee asked them whether they had received any payment on a separate wrongful discharge claim that they had listed in their schedules. They then informed the Trustee of the $67,000 payment on the personal injury claim. The debtors made their final plan payment the following month and the trustee then moved to dismiss on the grounds of bad faith for nondisclosure of the personal injury claim. The debtors claimed inadvertence based on their belief that the settlement proceeds were exempt.

The court quickly disabused the debtors of the notion that exempt assets do not need to be disclosed in bankruptcy, emphasizing that nondisclosure amounts to perjury and carries potential civil or criminal consequences. Furthermore, section 1307(c) lists eleven examples of the type of conduct that may result in dismissal of a chapter 13 case. Failure to disclose an asset, while not specifically listed, constitutes such grounds. Unlike other sanctions for debtor misconduct, section 1307 does not include a time constraint.

In the face of section 1307’s permissive provision, however, section 1328(a), provides that “as soon as practicable after completion by the debtor of payments under the plan, . . . the court shall grant the debtor a discharge. . . .” The court found that this provision marks a new stage of the case under which the final payment cuts off any party’s right to seek modification and creates a mandatory obligation on the court to grant discharge. Though there are specified exceptions to that obligation, bad faith is not one of them.

Observing that granting a discharge to a debtor who has failed to disclose an asset is a “bitter pill to swallow,” the court went on to discuss whether principles of finality obligated it to do so nonetheless. It considered other provisions relating to a debtor’s misconduct noting that this case falls into the crack between two relevant statutes. Section 1330 allows a court to revoke confirmation within 180-days of the confirmation date upon a finding of debtor fraud. And section 1328(e) provides for revocation of discharge in the event of debtor fraud so long as the motion is made within one year of discharge. Here, the trustee’s motion was made more than 6 months from confirmation, but before the debtors received their discharge.

The court went on to consider the interplay of section 1307’s treatment of bad faith and section 1328(a)’s mandatory discharge provision, citing the three published opinions addressing the same scenario, In re Parffrey, 264 B.R. 409 (Bankr. S.D. Tex. 2001), In re Holman, 567 B.R. 599 (Bankr. D. Kan. 2017), and Forbes v. Forbes (In re Forbes), 218 B.R. 48 (8th Cir. BAP 1998). Those cases all found that section 1328(a)’s mandatory discharge prevails even where the debtor’s conduct would otherwise have merited dismissal under section 1307(c).

On the other hand, cases dismissing for bad faith after the debtor completed plan payments did so either without addressing section 1328(a) at all, In re Wheeler, 503 B.R. 694 (Bankr. N.D. Ind. 2013), or, found other ways to avoid application of section 1328(a), Dunlap v. Nat’l Bank of Alaska (In re Dunlap), 107 F.3d 15 (Table), 1997 WL 43119 (9th Cir. 1997).

The court here found that it was bound by the mandatory language of section 1328(a) notwithstanding the debtors’ misconduct and the trustee’s due diligence. In so holding, the court found the general circumstances covered by section 1307(c), had to give way to the specific terms of section 1328(a)’s discharge provision, and the permissive “may” of section 1307, cede to the mandatory “shall” of section 1328. The court concluded that the statutory construct indicated that “Congress favors finality over the need to address bad conduct.” It denied the trustee’s motion to dismiss.

Frank Bankr Colo March 2022

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