Duran v. Gudino (In re Duran) (9th Cir. BAP)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:

In a meticulous journey through sections of the Bankruptcy Code and due process rights, the Bankruptcy Appellate Panel of the Ninth Circuit (the BAP) in a recent opinion described how a dishonest debtor’s request for a voluntary dismissal of his chapter 13 “as a matter of right” under section 1307(b) properly turned into a dismissal with prejudice under section 349(a). Duran v Gudino (In re Duran), 2021 WL 3186117 (9th Cir. BAP, July 27, 2021).

To view the opinion, click here.

Facts

Debtor F.A. Duran filed a chapter 13 case in October, 2018. His initial verified schedules were false, portraying him as a farmhand employee of Rancho Bonita Farms earning $4300 per month, owning a fractional interest in a home, and having priority and unsecured debts of $105,000. Under pressure from Luz Gudino, who had a pending unscheduled $141,000 lawsuit against him, the Debtor amended his schedules three times. Those amendments showed the true facts to be that the Debtor had operated a farming business with annual income exceeding $1 million for several years until a year before the filing, when he transferred the business assets to insider Clara Galvan, the mother of his five children. Galvan then operated the farm under the name of Rancho Bonita Farms and was nominally the Debtor’s employer.

Under pressure from Gudino, the Debtor’s efforts at plan confirmation were soundly defeated at every turn, but Gudino never moved for dismissal or conversion of the case to chapter 7. Even after it became clear from a plan confirmation evidentiary hearing that the filing was arguably in bad faith and the plan had been proposed in bad faith, no party filed a motion to dismiss. In addition to the facts adduced at the confirmation hearing, the IRS unexpectedly filed a federal tax claim for $638,000, easily putting the Debtor over the eligibility limit for chapter 13. The IRS then also opposed confirmation, suggesting dismissal, but it also failed to filed an affirmative motion.

In the face of the tax claim, the Debtor filed his own motion to dismiss as a matter of right under section 1307(b), following the procedures set forth in Bankruptcy Rules 1017(f)(2) and 9013 and setting the matter of hearing. Gudino opposed, citing the evidence of bad faith and dishonesty and asking that the dismissal be with prejudice under section 349(a). After the hearing, at which Debtor did not ask to present additional evidence, the bankruptcy judge first ruled that the proposed plan could not be confirmed, then applied the “totality of circumstances” standard to determine that the case should be dismissed with prejudice, which means that any debt which existed on the petition date could not be discharged in any bankruptcy proceeding. The bankruptcy court so ruled despite the fact that the only pending motion to dismiss was the Debtor’s.

Debtor appealed the dismissal with prejudice to the BAP, which affirmed.

Reasoning

Had Gudino or any other creditor moved to dismiss under section 1307(c) or (e), the bankruptcy court’s consideration of section 349(a)’s provisions in order to make the dismissal with prejudice most likely would not have resulted in a published opinion. Applying section 349(a)’s test for cause to a request for voluntary dismissal, however, was the twist which makes this case unique and the published opinion important.

The key to the BAP’s ruling was that due process for the Debtor was served. At every turn, Gudino and later the IRS had threatened dismissal, often with prejudice, as the dishonesty and bad faith tactics of the Debtor became apparent. An evidentiary hearing had been held on plan confirmation, at which time the Debtor was able to try to justify his plan and his thrice amended schedules to his heart’s content. That hearing resulted in the court contemplating whether the filing and plan were in bad faith, only to have a definitive ruling delayed by the Debtor’s voluntary motion to dismiss.

At the dismissal hearing, the bankruptcy court carefully applied the proper measure for cause under section 349(a) – the totality of circumstances test – and made necessary factual findings and conclusions which flowed from those findings. It considered the Ninth Circuit’s four objective factors for dismissal with cause as set forth in Leavitt v Soto (In re Leavitt), 171 F. 3d 1219 (9th Cir. 1999), and concluded they had all been satisfied by the evidence.

Because due process had been served, the BAP concluded the procedures employed were proper. The BAP then ruled that the language used in section 349(a) made it applicable to any motion to dismiss, no matter by whom nor under what section filed. Therefore, the dismissal with prejudice was upheld.

Author’s Comments

What makes the BAP unique is these jurists are sitting bankruptcy judges with their own trial calendars, who live with the daily flow of bankruptcy proceedings. In consumer cases such as chapter 13’s, not every procedural rule is followed to the T if doing so would slow down the necessary efficiency and speed with which matters need to be resolved. In addition, what a judge learns from one motion becomes part of the record which informs that judge’s decisions on other matters in that same case. So long as the matter is not a separate adversary, where the record is contained by the four corners of a “lawsuit”, whatever the judge learns in one hearing is part of the main case record for subsequent hearings. The BAP judges understand this and how that knowledge is applied in subsequent rulings.

Based on the record, they knew the bankruptcy judge’s decision to dismiss this egregious filing with prejudice was the right ruling. Once they construed the words of section 349(a) to apply to any type of motion to dismiss, all they needed to decide was whether due process rights had been satisfied. Here, that was an easy finding. The Debtor had early and often notice that dismissal with prejudice was sought by the creditors and had ample opportunity to present his own version of the facts, none of which helped him. The bankruptcy court was right. The BAP was right. Beware dishonest debtors who try to sneak out of a bankruptcy without a consequence.

This submission was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.) a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.