A BANKRUPTCY debtor can start out with a Chapter 13 case and end up with a Chapter 7 case, or vice-versa. For instance, debtor seeks to save his residence with a Chapter 13 case but finds out later that he cannot afford to make the monthly plan payments to save his house, so decides to convert his Chapter 13 case to Chapter 7 to get rid of his credit card debts of $100,000. In this example, the head case is the Chapter 13 case while the tail case is the Chapter 7 case. The question that is posed here is are the two cases connected to each other such that debtor’s misconduct in the head case may be used to deny bankruptcy discharge in the tail case. This is an interesting question because some debtors may intentionally act in a bad way while on Chapter 13 because they know they have the almost absolute right to convert to Chapter 7. They think they can get away with their bad conduct in the head case while still being able to get a discharge in the tail case. This is the same as asking if you can go to heaven in the next life if you were bad in your earthly life, or will you get reborn as someone’s asshole?
In Re Standiferd, debtors’ chapter 13 plan was confirmed on January 15, 2002. It required the debtors to provide the trustee with copies of their timely filed tax returns, and to file monthly operating reports if they were engaged in business. 6 months after the plan was confirmed, the debtor husband formed a partnership with his employer. He reported $70,000 in income from the partnership on his 2003 tax returns, but did not file monthly operating reports or send a copy of his tax returns to the trustee. So, the trustee asked the court to dismiss the case for failure to comply with the confirmation order. The court denied the request, and allowed the debtors to modify their plan. The modification did not alter the requirements of filing operating reports and providing copies of tax returns to the trustee. The partnership continued to generate income for debtors who continued to ignore their obligations to file operating reports and tax returns.
In October 2006, the trustee again asked the court to dismiss debtors’ case for failing to provide copies of their tax returns. The debtors responded by converting their case to Chapter 7. The US Trustee then asked the court to deny debtors’ discharge pursuant to Section 727(a)(2)(B) and (a)(6)(A). (a)(2)(B) provides for denial of discharge to a debtor who intentionally hinders, delays, or defraud a creditor or an officer of the estate charge with custody of property after the date of the filing of the petition. (a)(2)(B) allows bankruptcy courts to deny discharge to debtors who have refused to obey any lawful order of the court other than an order to respond to a material question or to testify.
The court said that a “lawful order of the court” is “any command, direction, or instruction issued by a court which is permitted by law.” “Here, the relevant provisions of the confirmation order cannot be read as anything other than the bankruptcy court’s command that the debtors provide the trustee with monthly operating reports and tax returns,” the 10th Circuit said. Debtors argued that because they had the right to convert or dismiss their chapter 13 case at anytime, a confirmation order could not lawfully or meaningfully require them to do anything they didn’t want to do. At this point, we can see that debtors are opting to be reborn as someone’s asshole instead of going to heaven. The 10th Circuit did not buy the argument and said that the confirmation order is a lawful court order. Then, debtors argued that what they did in the chapter 13 case had nothing to do with their chapter 7 case. This argument again reinforced their option to be reborn as someone’s asshole. DISCHARGE DENIED.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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