HECTOR MANUEL DIAZ BETANCOURT and JUANA BORIA QUINONES

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Case:04-11052-MCF13 Doc#:62 Filed:08/05/09 Entered:08/05/09 10:23:53 Desc: Main

AUTHENTICATED /
U.S. GOVERNMENT
INFORMATION
GPO

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FILED & ENTHRED

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

AUG 5 - 200

IN THE MATTER OF

‘SAN JUAN, PUEATO

HECTOR MANUEL DIAZ BETANCOURT : CASE NO. 05-11052
AND JUANA BORIA QUINONES, o-
DEBTORS : CHAPTER 13

OPINION AND ORDER
The Trustee filed a motion to dismiss the case claiming
that, as of January 9, 2009, Debtors owed $236,700, the lump sum
payment due on the 36 month of their confirmed plan. Debtors
answered by filing a post confirmation modification pursuant to §
1329.* For reasons that follow, we deny Debtors’ request for
approval of the modified plan and grant the Trustee’s motion to
dismiss.
Undisputed Facts
On October 12, 2005, Hector Manuel Diaz Betancourt and his
wife Juana Boria Quifiones (“Debtors”) filed a voluntary Chapter
13 petition for bankruptcy together with a payment plan. Under
this plan, the Trustee would receive a total of $16,225.00 to be
distributed according to the plan’s provisions. After various 341
meetings of creditors, Debtors filed an amended plan on January
3, 2006. This plan differed from the former one in that it
provided that upon the successful conclusion of pending claim on

or before the 36° month of the payment plan, debtors would

1 All references to the “Bankruptcy Code”, “Code”, or to
specific sections are to the Bankruptcy Reform Act of 1978, as
amended prior to April 20, 2005, 11 U.S.C. §101 et seg.

os a

CLEAK
‘gS. BANKRUPTCY COURT

AICS

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“modify plan to pay to extent of non-exempt of the judgment to
all unsecured creditors”. The Trustee did not recommend this
plan, arguing that it was insufficiently funded to pay 100% of §
507 of priority claims pursuant to § 1322(a) (6), and it failed
creditors’ best interest test of § 1325(a) (4). Debtors then filed
another plan dated April 21, 2006. Here, Debtors increased the
base to $16,360 and modified their statement under “Other
Provisions”. They now stated in very small print that:

Upon successful completion of the complaint #EDP2000-

0245 on or before the 36° month of plan, debtors would

pay a lump sum of $236,700; in defect of success of

lawsuit, or that it is not concluded on or before the

36" month, suit is deemed abandoned & liquidation ©

value is reduced accordingly to zero.

During the June 27, 2007 hearing to consider the
confirmation of this plan, the Trustee acknowledged that the
estimated liquidation value for the pending suit, if successful,
was $236,700. Debtors’ attorney also stated that the complaint
was a tort action against Berrios Development Corp., and the
trial was scheduled to begin on March 2008, at Caguas’s State
Court. We confirmed the plan and the order confirming the plan
was entered.

All went well until the 36° month of the plan when the
Trustee did not receive the lump sum payment. He filed the motion
to dismiss. Debtors objected to the dismissal of the case. They
filed a motion for post-confirmation modification of the

confirmed plan affirming that they had “made their best effort

under the confirmed plan and now wish to modify their plan base

Case:0

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to complete pursuant to § 1329 of the Bankruptcy Code. Debtors
have paid $16,360 into their plan during 36 months.” They
attached a modified plan reflecting this change. Two days later,
the Trustee filed an “Unfavorable Report on Proposed Post
Confirmation Plan Modification” requiring that the Debtors
provide proof that the personal suit was still pending, and that
they had not been awarded any amount as of the date of the
objection. This was followed by the Trustee’s pending motion to
dismiss.

Debtors claimed they had already submitted evidence to the
Trustee showing the suit was still pending in the local courts.
Hence, they contended that the motion for dismissal of the case
was filed by mistake, given their request for approval of a
pending post-confirmation modified plan. Debtors then asked that
we approve the modified plan, enter the discharge and deny the
Trustee’s motion to dismiss. The Trustee submitted a favorable
recommendation for the post-confirmation modification of the plan
dated October 28, 2008 and we scheduled all matters for a
hearing.

During the April 21, 2009 hearing, the Trustee acknowledged
that the Debtors made all payments in the proposed plan, except
the lump sum as the lawsuit had been abandoned. Debtors’ attorney
had informed the Trustee that the local courts rescheduled the
trial for May, 2009. At this hearing we did not approve the
modified plan. Since Counsel for the Debtors’ was excused from

attending this hearing, and the Trustee stated that he was going

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to withdraw the favorable recommendation, we rescheduled the
hearing for June 23, 2009. On that date, Debtors did not propose
any change to their modified plan, insisting that the cause of
action had been abandoned under the terms of the confirmed plan,
allowing them to reduce both the liquidation value of the estate

and payments to their creditors.

Discussion
I. Did provisions in the confirmed plan result in the abandonment
of the state tort suit pending in the local courts?

Under the Code a trustee, or in this case the Debtors, may
abandon scheduled estate property when it is burdensome to the
estate, or when its value is inconsequential to the estate.’ The
“fa]bandonment can occur only after a notice and a hearing, which
assures the interested parties have an opportunity to object toa
proposed abandonment” .? The Code defines the phrase “‘after a
notice and a hearing’” as,

(A)...such notice as is appropriate in the particular

circumstances, and such opportunity for a hearing as is

appropriate in the particular circumstances; but

(B) authorizes an act without an actual hearing if such

notice is given properly and if--

(i) such a hearing is not requested timely by a
party in interest; or
(ii) there is insufficient time for a hearing to

be commenced before such act must be done, and the
court authorizes such act.*

2-11 U.S.C. § 554(a).

> 5 Collier on Bankruptcy, 9554.01, p. 554-2 (15° Ed. rev.).

* 11 U.S.C. § 102(1).

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The appropriate procedure for abandonment specified in the
bankruptcy procedural rules, requires that a trustee or a debtor
in possession “give notice of a proposed abandonment or
disposition of property to the United States trustee, all
creditors, indenture trustees, and committees elected pursuant to
§ 705 or appointed” so that “a party in interest may file and
serve a timely objection”.°* The wording of § 554 and of Fed.
Bankr. R. P. 6007 makes it clear that proper notice and the
opportunity to object must precede the abandonment of estate
property. |

In Pioneer Investment Services Company v. Brunswick

Associates® the U.S. Supreme Court explored the issue of proper

notice, albeit with respect to the deadline set for filing proofs
of claims in a Chapter 11 case. The Court allowed a tardy proof
of claim by a creditor who raised the defense of “excusable
neglect” because,
the notice of the bar date provided by the Bankruptcy
Court in this case was outside the ordinary course in
bankruptcy cases. ...[O]rdinarily, the bar date ina
bankruptcy case should be prominently announced and
accompanied by an explanation of its significance.
[ecit. omitted]’
The Court agreed that the “‘peculiar and inconspicuous placement

of the bar date in a notice regarding a creditors[’] meeting

> Federal Rules of Bankruptcy Procedure, Rule 6007(a).
®° 507 U.S. 380; 113 S.Ct. 1489; 123 L.Ed.2d 74 (1993).

7 Pioneer Investment Services, 507 U.S. at 398.

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without any indication of the significance of the bar date left a
‘dramatic ambiguity’ in the notification” .* Therefore, a
notification that is not clear and evident will not be considered
a proper notice.

In a recent case, the U.S. Court of Appeals for the First
Circuit held that,

[tlhe general rule is that due process requires:

notice reasonably calculated, under all the

circumstances, to apprise interested parties of the

pendency of the action and afford them an opportunity

to present their objections. The notice must be of such

nature as reasonably to convey the required

information, and it must afford a reasonable time for

those interested to make their appearance.’

That Court also explained that, the statutory command for notice
embodies “‘a basic principle of justice-that a reasonable
opportunity to be heard must precede judicial denial of a party’s
claimed rights’”. (cit. omitted)*

In the present case, Debtors gave no separate notice with an
opportunity to be heard of their intention to abandon the pending
tort claim valued at $236,700 at the conclusion of the 36% month
period, if it was not resolved. We note that it was
inconspicuously placed in small letters, buried at the end of the

plan under “Other Provisions” without any specific reference to

the lump sum payment proposed in the third amended plan filed on

° Ibid.

° Arch Wireless, Inc. v. Nationwide Paging, Inc., (In re
Arch Wireless, Inc.) ,534 F.3d 76, 83 (2008).

*° Id. at 84.

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April 21, 2006. Thus, it could have easily been missed by
creditors. Given expressions of the U.S. Supreme Court and the
U.S. Court of Appeals for the First Circuit in analogous
Situations described above, we find the Debtors did not give
creditors and other parties in interest sufficient notice of the
proposed abandonment. Our ruling here is reinforced by Debtors
own proffer that the suit was already scheduled for trial,
producing the expectancy of its conclusion well before the 36
month time limit.

Moreover, a modification of a confirmed plan is one of the
alternatives debtors have when they encounter circumstances not
foreseen at the time of the confirmation.*? Thus, a confirmed
plan may be modified for certain specific reasons: to “(1)
increase or reduce the amount of payments on claims of a
particular class provided for by the plan; (2) extend or reduce
the time for such payments; (3) alter the amount of the
distribution to a creditor whose claim is provided for by the
plan...; or (4) reduce amounts to be paid under the plan by the
actual amount expended by the debtor to purchase health insurance
for the debtor...”.** None of these situations is present here.

Therefore, we conclude that since there was no adequate
notice of the abandonment and Debtors did not follow the

established procedure for an abandonment, they violated their

2 8 Collier on Bankruptcy, §1329.01, p. 1329-2-3 (15% Ed.
rev. 1979).

% 11 U.S.C. § 1329(a).

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creditors and parties in interest right to due process embodied
in § 554 and Fed. R. Bankr. P. 6007. Hence, we find the pending
suit or tort claim has not been abandoned.

II. “Good Faith” and approval of the post confirmation modified
plan.

A modified plan must meet all requirements for confirmation
set in the Code.’ These include that it is “proposed in good
faith ... and not by any means forbidden by law”.™* The term
“good faith is not susceptible of a universally-applicable
definition. Rather, its presence must be determined on a case-by-
case basis.”*° Courts consider various factors when dealing with
good faith: debtor’s motive for filing the petition; how a
debtor's actions affect creditors; whether a debtor has been
forthcoming with the bankruptcy court and creditors.** In other
words, § 1325(a)(3) reflects the intention of Congress

to provide bankruptcy courts with a discretionary means

to preserve the bankruptcy process for its intended

purpose. Accordingly, whenever a Chapter 13 petition

appears to be tainted with a questionable purpose, it

is incumbent upon the bankruptcy courts to examine and

question the debtor’s motives. If the court discovers

unmistakable manifestations of bad faith

confirmation must be denied.

Unmistakable manifestations of bad faith need not be

based upon a finding of fraud, requiring proof of

malice, scienter or an actual intent to defraud. We
simply require that the bankruptcy courts preserve the

8 11 U.S.C. § 1329(b) (1).
“11 U.S.C. § 1325(a) (3).

5 In re Slade, 15 B.R. 910, 911 (9 Cir. B.A.P. 1981).

1% In re Smith, 286 F.3d 461 (7 Cir. 2002).

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integrity of the bankruptcy process by refusing to

condone its abuse.*’
“Only if there has been a showing of serious debtor misconduct or
abuse should a chapter 13 plan be found lacking in good faith. In
examining whether there has been a serious abuse of the Code,
many courts have continued to use the fact-sensitive ‘all of the
circumstances’ type analysis...”** The gist of this inquiry
hinges upon an elemental question: is the debtor “really trying
to pay creditors to the reasonable limit of his ability or is he
trying to thwart them” .*’

Our careful review of facts at hand leads us to conclude
that the Debtors have not met the good faith requirement when
filing their “Request for Modification of Plan Pursuant to §
1329”, The Debtors led creditors, the Trustee and the Court to
believe that a substantial sum would be contributed to the plan
as a result of the successful conclusion of the pending claim
that would most probably be resolved before the end of the 36
month plan. At the very moment that Debtors understood this would
not be possible, they should have notified the Trustee, creditors
and the Court. Debtors should have known this notification was of
utmost importance, since the plan was only approved after Debtors

increased its base by including the estimated value of the

7 In re Waldron,785 F.2d 936, 941 (11th Cir. (1986).

* 8 Collier on Bankruptcy, §1325.04[1], p. 1325-15 (15° Ed.
rev. 1979).

% In re Smith, 286 F.3d 461, 466 (7 Cir. 2002) (citing In
re Schaitz, 913 F.2d at 453 (1990)).

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pending cause of action.

The Court learned that the trial had been rescheduled from
March 2008 to May 2009 during the hearing held on April 21, 2009.
It was the Trustee, not the Debtors, who apparently contacted the
attorney for the pending claim and provided the court with that
information. There was no effort on Debtors’ behalf to maintain
the Court informed of a possible windfall resulting from this
intent of abandonment.

In In re Barbosa, a case in which debtors sold property in

excess of what was required to satisfy their confirmed Chapter 13
plan and were going to receive a discharge while retaining the
excess proceeds of the sale (a significant amount), the
Bankruptcy Court, explained that “congress’s intent in enacting
chapter 13 [was] to encourage debtors to repay their debts to the
best of their ability.”*° Debtors there were engaged in a bad
faith manipulation of the Bankruptcy Code, when they insist on
retaining the excess sale proceeds and obtaining the broad
discharge afforded by § 1328(a). Although the facts here differ,
the end result is similar: Debtors here would pay creditors a
small amount, keep any proceeds from the tort cause of action,
while obtaining the extensive discharge provided to Chapter 13
debtors.

Therefore, we find that Debtors did not propose the post

confirmation modified plan in good faith, as their proposal

20236 B.R. 540, 556 (Bankr. Mass. 1999); aff’d. 235 F.3d 31
(18° Cir. 2000).

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“‘shocks the conscience’” of this Court.*' To us, the proposed
modification is an intent by these Debtors to obtain an
unwarranted windfall through the unfair manipulation of the
bankruptcy process.

WHEREFORE, we deny Debtors’ request for approval of their
post-confirmation modified plan dated October 28, 2008, nullify
the provision concerning abandonment of the tort claim pending in
the local courts contained in the confirmed plan of April 21,
2006, and grant the Trustee’s motion to dismiss.

SO ORDERED, in San Juan, Puerto Rico, on August 5, 2009.

hal

S) DE JE
U.S. Bankruptcy Judge

271 Maldonado v. Fontanés, 568 F.3d 263, 272 (1% Cir. 2009)
(citing Espinoza v. Cabol, 558 F.3d 83 (1% Cir. 2009).

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