Opinion
Case No. 96-11976-SSM
November 15, 1996
John E. Smircina, Esquire, Wade, Hughes, Smircina, P.C., Alexandria, VA, of Counsel for the debtor
Donald Fishman, Esquire, Wolpoff and Abramson, LLP, Fairfax, VA, of Counsel for the Hassan Abrishamian
MEMORANDUM OPINION
This matter is before the court on the objection of an unsecured creditor, Hassan Abrishamian ("Abrishamian"), to confirmation of the debtor's second amended plan and upon Abrishamian' motion to dismiss the case. A confirmation hearing was held on October 8, 1996, at which time counsel for the debtor argued that Abrishamian had no standing to object to confirmation as he had failed to file a proof of claim. The court noted that no proof of claim had been filed by Abrishamian and that the time to file one had elapsed. The court took the matter under advisement to determine whether the court could consider other pleadings filed in the case by Abrishamian as an "informal" proof of claim, and "assuming Abrishamian were entitled to participate as a creditor" whether the plan meets the good faith requirement of § 1325(a)(3), Bankruptcy Code.
This argument had been first raised in a reply memorandum filed by the debtor the day prior to the hearing. The debtor, however, had not served the memorandum on Abrishamian, who first learned of the argument at the hearing.
On October 17, 1996, Abrishamian filed a written motion to treat his objection to confirmation and motion to dismiss as an informal proof of claim and to allow the late filing of a formal proof of claim.
To set these issues in perspective requires going back approximately ten years. The only debt being treated under the plan is a judgment D which this court has previously determined to be nondischargeable "held by Abrishamian against the debtor. This judgment, upon which there is now due $245,143.22, was entered by the United States District Court for the Eastern District of Virginia in 1985 in the amount of $172,400, and was affirmed by the Fourth Circuit Court of Appeals in 1987.
The amount owed on the filing date, $245,143.22, represents the original judgment plus accrued interest, less a $20,000 credit, as determined by this court at an August 19, 1996, evidentiary hearing.
The District Court judgment was entered on a complaint alleging that Abrishamian, a citizen of Iran, had entrusted the debtor (his nephew) and the debtor's wife with the management of certain bank accounts and certificates of deposit while he was out of the United States and that he had given the debtor a power of attorney for that purpose. The complaint further alleged that, using the power of attorney, the debtor had fraudulently withdrawn and converted $165,720 from Abrishamian's bank accounts; had kept and converted to his own use $21,000 that Abrishamian had sent to him to deposit in a bank account; and had converted $2,750 worth of Iranian rugs that Abrishamian had left with the debtor for safekeeping. The jury returned a general verdict in favor of the plaintiff for $172,400.
After obtaining this judgment, Abrishamian apparently took no steps to enforce it until 1995. The reasons are not entirely clear, but the most likely explanation is that, until early 1994, the salary of a Federal employee, such as the debtor, could not be garnisheed except for support obligations. That restriction was removed with the enactment of 5 U.S.C. § 5520a. It was not long after the new law became effective that Abrishamian sought to garnish the debtor's pay. The debtor responded by filing a voluntary petition under Chapter 7 of the Code in this court on May 26, 1995, primarily, if not solely, to discharge Abrishamian's judgment.
The debtor asserts that the real reason is because Abrishamian knew that the debtor really did not owe him any money, and that the only reason the judgment is being pursued now is that Abrishamian assigned the judgment to an attorney to whom he owed substantial legal fees arising from unrelated litigation. There is no evidence in the record to support this assertion.
See § 9 of the Hatch Act Reform Amendments of 1993, Pub.L. 103-94, 107 Stat. 1007. The effective date of the act was February 3, 1994
Abrishamian filed a timely complaint in the chapter 7 case to determine the dischargeability of the debt under §§ 523(a)(2)(A) and (a)(4) of the Code. A summary judgment motion was argued on November 21, 1995, and on December 1, 1995, this court entered an order excepting the debt from discharge under Code §§ 523(a)(2)(A) and (a)(4). In an accompanying memorandum opinion, this court concluded that, under principles of collateral estoppel, the issues of fraud and conversion raised in the dischargeability complaint had been fully litigated and determined in the U.S. District Court action, and were therefore binding in the nondischargeability action. No appeal was taken from this ruling.
On April 17, 1996, approximately four months later, the debtor filed a voluntary petition under Chapter 13 of the Code in this court. The original plan proposed by the debtor was dated May 2, 1996. The debtor subsequently filed a first amended plan on July 3, 1996, and a confirmation hearing was held on August 19, 1996. At that hearing, the court was required to decide whether a debt in fact still existed, as the debtor alleged that he had paid $20,000 to Abrishamian as an accord and satisfaction of the debt.
There is no plan dated May 2, 1996 in the case file, nor is the filing of such a plan reflected on the docket. However, it appears that counsel for Abrishamian and the Chapter 13 trustee both received copies of this plan, as both parties filed objections to the Plan. Additionally, the court was supplied with a copy of the May 2, 1996 plan, although not date stamped by the clerk of the court, as Exhibit C to the creditor's objection to confirmation of the first amended plan.
At the conclusion of the hearing, this court made findings of fact and conclusions of law orally on the record. This court found that $20,000 had in fact been paid by the debtor to Abrishamian, but that the payment had been accepted only to reduce the amount owed, not as an accord and satisfaction of the debt. Taking into account the $20,000.00 credit, the court found that the amount of the claim was $245,143.22.
Next, this court considered whether the amended plan filed by the debtor met the good faith requirement for confirmation under § 1325(a)(3) of the Code. As required by the controlling cases of Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982) and Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986), the court considered a multitude of factors in determining that the debtor had not proposed his plan in good faith. The court found that while the debtor had stable employment with the federal government and had no unusual financial demands other than the judgment debt to Abrishamian, the debtor's minimal proposed payment" both in percentage terms (at 5.6% of the debt owed) and in gross amount (approximately $13,000) "coupled with the fact that all of the debt being compromised was nondischargeable in chapter 7, militated against a finding of good faith. Moreover, the court was not convinced of the debtor's candidness while testifying, as he was quick to defend himself and accuse others while demonstrating at best only a grudging willingness to pay even a fraction of the judgment D and even then only after being threatened with a wage garnishment. Accordingly, the court denied confirmation but did not dismiss the case, instead giving the debtor the opportunity to file a modified plan.
The debtor filed a second amended plan on August 28, 1996, and a confirmation hearing was held on October 8, 1996. The standing chapter 13 trustee has submitted a report recommending confirmation. No new evidence was presented, and both Abrishamian and the debtor essentially repeated their prior arguments regarding confirmation of the plan. The only change the second amended plan makes to the first amended plan is to increase the proposed payments to the trustee from $225.00 per month for 60 months to $545.65 per month for 60 months. The result would be to pay Abrishamian 13% of his unsecured claim as opposed to 5.6% under the first amended plan. Under the first amended plan, the debtor had purported to dedicate all disposable income to the plan. Consequently, to come up with the additional money under the second amended plan, the debtor took a 10% across the board "voluntary reduction" in his controllable expenses (i.e., his mortgage payment was not included in this 10%). As this court found that the debtor's previous plan was not filed in good faith, the narrow issue before the court with regards to confirmation of the "debtor's second amended plan is whether the debtor can transform a plan proposing to pay 5.6% of a nondischargeable claim, and found not to have been filed in good faith, to one filed in good faith by merely raising the percentage payout to 13%.
As noted above, counsel for the debtor in open court pointed out in closing argument that Abrishamian had failed to file a proof of claim and that the time to do so had expired. The court took the matter under advisement to consider whether other pleadings in the case could serve as an "informal" proof of claim, and if so, whether the debtor's plan should be confirmed.
I.
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
As is apparent from a review of the case file, no proof of claim has been filed by Abrishamian. Thus, as a threshold matter, this court must determine whether pleadings filed by the creditor in this case prior to the bar date can be considered as an "informal" proof of claim sufficient to permit the filing of a formal proof of claim.
Except for certain scheduled debts in chapter 11 cases which are deemed filed, a creditor in a bankruptcy case must file a proof of claim in order to receive distributions. F.R.Bankr.P. 3002(a). The claim, once filed, is deemed allowed unless objected to. Bankruptcy Code, D 502(a). Under Bankruptcy Rule 3002(c), a proof of claim in a chapter 13 case must be filed within 90 days after the first date set for the meeting of creditors under § 341. If a proof of claim is not timely filed, the claim will not be allowed. Bankruptcy Code, § 502(b)(9). In the present case, it is clear that no proof of claim, as such, was filed by Abrishamian prior to the bar date. The meeting of creditors in this case was originally scheduled for May 20, 1996. Since the 90 day period for filing claims expired on August 19, 1996, and no proof of claim was filed within that time, ordinarily Abrishamian's claim would be barred.
A "governmental unit" is given until 180 days after the filing of the bankruptcy petition to file a proof of claim. § 502(b)(9), Bankruptcy Code.
Because of the sometimes harsh result in not allowing a claim that is not timely filed, courts have invoked fairness and equitable principles and looked at other documents filed in the case and other circumstances of the case to find that a creditor has filed an "informal" proof of claim prior to the bar date so as to permit an amended formal proof of claim to be filed after the bar date. It has long been held that a late-filed amended proof of claim should be allowed if it is "in furtherance of justice." Dabney v. Addison, 65 B.R. 348 (E.D. Va. 1985) (quoting Fyne v. Atlas Supply Co., 245 F.2d 107, 108 (4th Cir. 1957)). Such an amended claim may be allowed if there is evidence of [s]ufficient notice of the claim [being] given in the course of the bankruptcy proceeding." Davis v. Columbia Construction Co. (In re Davis), 936 F.2d 771, 775 (4th Cir. 1991) (quoting Fyne, 245 F.2d at 107). The Davis court reasoned that an amended claim may be allowed, even in the absence of a prior written "informal" document, if the creditor has "undertake[n] some affirmative action to constitute sufficient notice that [the creditor] has a claim against the estate." Id. at 776. Such action would include participating in the case and increasing the value of the estate. Id.
In the Davis case, however, the court did not allow the amended claim as the claim was never asserted against the debtor in the bankruptcy proceeding prior to the expiration of the 90 day period. Davis, 936 F.2d at 776.
The Dabney case, mentioned above, sets forth a list of representative, but not exhaustive, activities of the creditor that would be considered sufficient notice of the creditor's claim against the estate. These include: sending bills to a trustee demanding to be paid, filing an objection to a trustee's motion to sell property containing evidence of the creditor's security interest in the property to be sold, attending and being an active party at the meeting of creditors, and an exchange of letters between the trustee and the creditor seeking payment from the estate. Dabney, 65 B.R. at 351. However, the court did caution that notice of the creditor's claim would not be found merely by proving knowledge on the part of the trustee of the asserted claim or a mere listing of the claim by the debtor in the debtor's schedules. Id. Rather, the essence of being able to find an "informal" proof of claim is that there must be some evidence that the creditor has made a demand on the debtor and which "manifests the creditor" intention to hold the debtor liable." In re A.H. Robins Company, Inc., 118 B.R. 436 (Bankr. E.D. Va. 1990) (Shelley, J.) (quoting In re Middle Plantation of Williams burg, Inc., 48 B.R. 789, 795 (E. D. Va. 1985)).
The Fourth Circuit recently addressed this issue in an unpublished opinion on facts very similar to those before this court. See Hardgrave v. La Rock (In re Hardgrave), No. 94-4832, 59 F.3d 166 (table), 1995 WL 371462 (4th Cir. Jun. 21, 1995). While the opinion, because it is unpublished, is not binding as precedent, this court nevertheless finds it instructive and its reasoning persuasive. The debtor in that case filed a petition under chapter 13 after his only unsecured creditor had obtained a libel judgment against him. Id. at * 1. However, the creditor failed to file his proof of claim by the required deadline. Id. The court held that the creditor had filed an "informal" proof of claim and permitted him to amend his claim after the permitted time period. Id. at *3-4. The court found that, if the creditor had made some informal claim during the requisite period, the creditor then should be able to file a late proof of claim as "perfecting" its claim. Id. at *2 (citing with approval Davis and Dabney). Moreover, the court cited several appropriate factors to consider in determining whether an informal proof of claim has been timely filed: whether the creditor has actively participated in the bankruptcy proceedings, whether the creditor attended the meeting of creditors, whether the creditor's actions have increased the value of the estate, and finally whether "the bankruptcy proceeding itself resulted from the creditor's attempt to enforce the claim through legal proceedings." Id. at *3. The court cautioned, however, that the documents or occurrence relied upon as constituting an informal proof of claim must be filed or occur within the 90 day period provided by Bankruptcy Rule 3002(c). Id. at *2.
Turning to the present case, numerous factors lead this court to the conclusion that the creditor here has sufficiently put the debtor on notice that the creditor has a claim against the bankruptcy estate. First, and most fundamentally, there would have been no chapter 13 filing at all but for Abrishamian's claim, and no other claims are to be paid through the plan. The debtor testified at the August 19, 1996, evidentiary hearing that he only filed for bankruptcy, first under chapter 7, then under chapter 13, when Abrishamian sought to enforce the judgment by instituting wage garnishment proceedings. Thus it is this creditor, and only this creditor, that forced the debtor into bankruptcy, a factor considered important by the Fourth Circuit in Hardgrave.
The plan acknowledges three mortgage debts "two on the debtor's residence and one on a rental house" but provides for all of them to be paid directly by the debtor outside the plan.
Abrishamian's objection filed on June 14, 1996 "well within the bar date" to the debtor's original chapter 13 plan contains detailed references to the district court judgment and the subsequent nondischargeability determination by this court and clearly and unambiguously asserts the existence of a right to payment on account of the judgment. In addition, Abrishamian, through his attorney, actively participated in questioning the debtor at the 341 meeting of creditors that took place on May 20, 1996. Finally, the validity and the amount of Abrishamian's claim was an issue expressly raised by the debtor himself well prior to the bar date.
As noted above, Abrishamian's objection to confirmation of the original plan recited the District Court judgment and this court's nondischargeability determination in the chapter 7 case. A hearing on Abrishamian's objection was set for July 9, 1996. At the hearing, the debtor offered exhibits that he contended proved he had paid his uncle $20,000 following the chapter 7 case in full satisfaction of the judgment debt. The debtor asserted that he could bring witnesses from Iran to prove the payment. In effect, the debtor orally objected to Abrishamian's claim (in response to Abrishamian's objection to confirmation), even though a formal proof of claim had not yet been filed. The court then set the confirmation hearing over to August 19, 1996" coincidentally, the last day for filing a proof of claim" at which the court heard the evidence of the parties as to the amount of the claim. There was no dispute as to the amount of the judgment itself or the fact that a $20,000 payment had been made. The only issue was whether the $20,000 payment had been accepted in full satisfaction of the judgment. The court ruled from the bench that the debtor had not carried his burden of proving an accord and satisfaction and that the balance due on the judgment, after application of the $20,000 credit, was $245,143.22. Debtor's reliance on § 502(b)(9), Bankruptcy Code, is misplaced. This subsection was added to the Code by the Bankruptcy Reform Act of 1994 in response to cases such as In re Hausladen, 146 B.R. 557 (Bankr. D. Minn. 1992) and In re Lang, 196 B.R. 528 (Bankr. D. Az. 1996), which permitted late filings of proofs of claim without the requisite findings of an informal filing prior to the bar date. Its purpose was to prevent the allowance of a proof of claim filed after the filing period, not the finding of an informal proof of claim during the 90 day period.
(b) . . . .if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that —
* * *
(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for reliefer such later time as the Federal Rules of Bankruptcy Procedure may provide.
See, 140 Cong. Rec. H 10,768 (daily ed. Oct. 4, 1994) (statement of Rep. Brooks).
The debtor's original plan in this case took the position that Abrishamian had no claim, or at most only a claim for attorney's fees, based on the alleged $20,000.00 accord and satisfaction occurring between the dischargeability determination in the chapter 7 case and the filing of the chapter 13 petition. Issue was joined on that contention well within the bar date in connection with Abrishamian's objection to confirmation. Extensive evidence was presented concerning the claim, and the court made a ruling as to the amount of the claim. Allowing this informal claim to be perfected by a late-filed formal claim will not delay administration of the estate nor will it adversely affect other unsecured creditors, as there are none.
As debtor's counsel frankly and aptly acknowledged, the debtor's current filing "is a single creditor case." Motion For A Protective Order at 1 (filed Aug. 12, 1996). Wolpoff Abramson, Abrishamian's attorneys, are listed on the schedules as holding a $3,500 unsecured claim but have not filed a proof of claim, nor does it appear that they have an independent claim against the debtor. MBNA America, although not listed as a creditor, evidently learned of the chapter 13 filing by other means and has filed a $75.00 unsecured claim.
Therefore, this court finds that the creditor has timely asserted a claim in this bankruptcy case, and accordingly, will allow Abrishamian to file a late formal proof of claim to perfect his timely informal claim.
II.
Having concluded that the creditor is entitled to assert his claim, this court must consider whether the debtor's plan satisfies the good faith requirement of § 1325(a)(3). Confirmation of an individual debtor's chapter 13 plan of repayment is governed by § 1325 of the Bankruptcy Code, which requires that the court "shall" confirm a plan if certain enumerated requirements are met. Relevant to the present controversy is the requirement of § 1325(a)(3) that "the plan has been proposed in good faith and not by any means forbidden by law." In Deans v. O'Donnell, 692 F.2d 968, 972 (4th Cir. 1982), the Fourth Circuit held that "the totality of circumstance must be examined on a case by case basis" in determining whether a chapter 13 plan meets the general good faith standard of § 1325(a)(3). The Deans opinion set forth a suggested and non-inclusive list of factors to be considered, none of which specifically addressed the non-dischargeability of claims in the chapter 7 context. Id. That issue was squarely raised in Neufeld v. Freeman, 794 F.2d 149, 152 (4th Cir. 1986), in which the Fourth Circuit held that "although the discharge of an obligation which would be nondischargeable in Chapter 7 is not, standing alone, a sufficient basis on which to find bad faith or deny confirmation, it is a relevant factor to be considered in the § 1325(a)(3) good faith inquiry." As the court explained,
Resort to the more liberal discharge provisions of Chapter 13, though lawful in itself, may well signal an "abuse of the provisions, purpose, or spirit" of the Act, especially where a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims under the plan. Similarly, a Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan represents a good faith effort by the debtor to satisfy his creditors' claims.
Id. at 152-153.
Combining the list of suggested factors in Deans and in Neufeld gives the following significant circumstances to be considered by this court in assessing whether the debtor's plan meets the good faith requirement of § 1325(a)(3) of the Bankruptcy Code:
1. The percentage of proposed repayment.
2. The debtor's financial situation.
3. The period of time payment will be made.
4. The debtor's employment history and prospects.
5. The nature and amount of unsecured claims.
6. The debtor's past bankruptcy filings.
7. The debtor's honesty in representing facts.
8. Any unusual or exceptional problems facing the debtor.
9. Whether a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims under the plan.
10. Whether, despite even the most egregious pre-filing conduct, the plan nevertheless represents a good faith effort by the debtor to satisfy creditors' claims.
As noted above, the sole difference between the first amended plan which was denied confirmation on August 19, 1996 as not being proposed in good faith and the one presently before the court is that the debtor has proposed to pay Abrishamian 13% of his allowed claim as opposed to 5.6%. To do so, the debtor has purported to commit all his disposable income to the plan for 60 months, and, in addition, has taken a 10% "voluntary reduction" in his "controllable" expenses (i.e., not including his mortgage) in order to increase the amount paid into the plan.
The debtor's employment situation is stable and he is not faced with any unusual financial demands other than the Abrishamian judgment. Although the debtor and his wife have household income (including rental income) of approximately $95,000 per year, or $8,500 per month, there is no evidence that the debtor is living an extravagant lifestyle or that his budgeted expenses are out of line for a family with three children. Among the debtor's largest monthly expenses are $2,600 a month in home mortgage payments (including real estate taxes and property insurance), $900 a month for child care, $692 a month for a mortgage on a rental property, and $400 a month for food. His car is ten years old.
The debtor's proposed plan payments extend for 60 months, the maximum period permitted under chapter 13 and results in creditors receiving significantly more than they would receive if the debtor merely satisfied the bare minimum standard of § 1325(b)(1)(B), which requires a debtor, if the trustee or an unsecured creditor objects to confirmation, either to pay 100% of the allowed unsecured claims or to pay into the plan all of the debtor's projected disposable income for three years. There is no provision, however, in the debtor's plan that would increase the amount of his plan payments if his income should increase over the 5 year plan period.
As noted above, the debtor has previously filed a chapter 7 bankruptcy case and received a discharge approximately seven months prior to the filing in the current case. The only debt being compromised in this case was adjudicated by this court to be nondischargeable in the prior chapter 7 case as having been procured through fraudulent conversion of money and property. Additionally, as noted above, the court has previously found that the debtor was not candid while testifying concerning the original debt and the claimed accord and satisfaction.
Abrishamian argues that a single-creditor plan is per se proposed in bad faith. The court does not adopt so simplistic a test. Nevertheless, as the Fourth Circuit has pointed out in the context of a chapter 11 plan, ". . . while it is not impermissible to propose a plan which only adjusts the interests of one creditor, this situation certainly must cause a court to scrutinize closely the equities involved." Travelers Ins. Co. v. Bryson Assocs. XVIII (In re Bryson Assocs. XVIII), 961 F.2d 496, 505 (4th Cir. 1992).
Since it is undisputed that all of the debt that the debtor seeks to discharge in this chapter 13 case is nondischargeable under chapter 7, Neufeld requires this court to consider whether the debtor "proposes only minimal repayment" of such claims. Neufeld does not attempt to define what constitutes a "minimal" level of repayment. Here, the amount to be repaid on amount of unsecured claims is 13 percent, or approximately $32,739. Whether such a payment is "minimal" necessarily depends on the surrounding circumstances, including the debtor's income, expenses, and net worth, and this court is not inclined to set a particular percentage figure as constituting a floor below which plan payments would be considered "minimal." In Neufeld, the bankruptcy court had approved a plan that paid 30 percent on account of unsecured claims; the Fourth Circuit remanded for reconsideration. In an unpublished opinion, Provident State Bank v. Hubbard, 900 F.2d 254 (table), 1990 WL 34194 (4th Cir. 1990), the court upheld the confirmation of a three-year 12.4% plan where 86% of the unsecured debt had been held to be nondischargeable based on a false financial statement. The proposed payment on unsecured claims in this case is approximately the same, in percentage terms, and considerably larger in absolute amount (approximately $30,284, as opposed to $3,200), than the payment in Hubbard.
That case had originally begun as a chapter 7 case but was converted by the debtors to chapter 13 after the court had ruled that the objecting creditors' debt was non-dischargeable.
Recognizing that each case must be decided on its own facts, this court is unable, after considering all the circumstances, to conclude that the plan before the court represents a good faith effort by the debtor to square his accounts, to the best of his ability, with the creditor whom he cheated. The plan proposes to pay only 13% on a $245,000 claim which was determined to be nondischargeable in a prior chapter 7 case. The debtor has grudgingly proposed even this minimal payment only after unsuccessfully attempting to discharge the debt in its entirety in his chapter 7 case. Finally, the debtor simply has not been candid with the court in his schedules, statement of financial affairs, and testimony.
The court notes that the debtor has failed to list AbrishamianS claim in his schedules and also failed to disclose the wage garnishment proceedings in his statement of financial affairs. While not determinative of the debtor's lack of good faith, these omissions are indicative of the debtor's attitude toward to the bankruptcy process and his overall lack of candor.
A separate order will be entered denying confirmation, and the court will set a hearing on Abrishamian's motion to dismiss the case.