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June 27, 2011

Discharge in Chapter 7 Denied for Failure to Comply with Chapter 13 Confirmation Order

Standiferd v. United States Trustee, --- F.3d ----, D. Ct. No. 1:09-CV-00083-RB-RLP (10th Cir., April, 2011)

Issue:               Is denial of the discharge appropriate based on chapter 7 debtor’s pre-conversion failure to obey the Chapter 13 confirmation order.

Holding:          Yes under these facts.   

Appeal from District Court

Ronald and Betty Standifer, filed Chapter 13, obtained confirmation of their Chapter 13 plan, and then violated the confirmation order by failing to update the trustee of their post-petition monthly income report and tax return, as required under their Chapter 13 confirmation order.  The trustee filed a motion to dismiss and the debtors voluntarily converted their case to Chapter 7.  The Chapter 7 trustee then filed a complaint to deny the discharge based on the failure to follow the confirmation order.  The bankruptcy court agreed and denied the discharge.  The District Court affirmed.  

The 10th Circuit affirmed.  Under section 727 (a)(6)(A), the court may deny discharge of a debt if the debtor willfully failed “in this case” to follow any “lawful order of the court.” The debtors argued a confirmation order is not a “lawful order of the court” and cannot require a debtor to do anything because under section 1307(a) and (b), a Chapter 13 debtor has an unwaivable right to either convert his case to a Chapter 7 at any time, or dismiss the Chapter 13 case completely.  In applying the “plain meaning” doctrine to interpret the statue, and attempting to preserve legislative intent, the court held that for the purposes of § 727 (a)(6)(A) a Chapter 13 Confirmation Order is a “lawful order of the court”.  Although the code may permit a Chapter 13 to convert or dismiss his case, and stop complying with the provisions of a confirmation order, “as long as the debtor remains under Chapter 13, however, he must comply with the terms of the bankruptcy court’s confirmation order.”

The debtors further argued that section 727 (a)(6)(A) is only applicable in a case proceeding under Chapter 7 and should not apply because the refusal to obey the confirmation order occurred before the case was converted to Chapter 7 and not “in this case” as required under the statute.”  The debtors relied on section 348(f) in their claim that it is Congress’ intent for the two phases of a bankruptcy case be treated as separate and distinct, upon conversion from Chapter 13 to Chapter 7.  The court held that at the time the discharge was denied under section 727 (a)(6)(A), the case was proceeding under Chapter 7.  Further, rather than applying section 348(f) which focuses on the composition of a converted bankruptcy estate, the court applied section 348(a) stating “the conversion of a case from one chapter to another… does not affect the date of the filing of the petition, the commencement of the case, or the order for relief.”  For purposes of section 727 (a)(6)(A) ““this case” includes proceedings occurring both before and after conversion.”

The court found the denial of discharge to be a proper remedy against this debtor for misconduct. Under the Chapter 13 plan, the debtors proposed to pay 100% of the allowed unsecured which began at upwards of $400,000.  By the time of conversion to Chapter 7, the debtors had nearly tripled their debt.  Instead of the debtor “committing the fruit of his good fortune to his creditors” the court found the debtors’ disregard toward their obligations by spending their increased income on home improvements wrongful and warranting the court’s denial of their discharge.  In this case, the court found the debtors were not entitled to the “extraordinary benefit of discharge” as it should only be available for “the honest but unfortunate debtor”.

By: Carolyn Afari 

June 27, 2011 in Other Circuit Briefs | Permalink

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Comments

I wonder if they were working with a bankruptcy attorney when they filed or not? If so, I'm curious how they missed that and failed to update the trustee.

Posted by: Spencer Hale | Oct 27, 2011 4:09:16 PM

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