A bankruptcy trustee could not reopen three Chapter 13 cases and convert them to Chapter 7 in order to administer undisclosed assets for the benefit of creditors years after each debtor had completed their plan and received a discharge, a U.S. Bankruptcy Court judge has ruled in a case of first impression.
In each of the three unrelated cases, the asset in question was a personal injury claim the debtor did not disclose when filing for Chapter 13.
Apparently none of the debtors knew they had a cause of action when they filed for bankruptcy or during the pendency of their proceedings. None, in fact, brought personal injury claims until after their bankruptcies had closed.
The Chapter 13 trustee argued in each case that the asset arose pre-petition and remained property of the estate since it had not been disclosed. Accordingly, the trustee moved for each case to be converted to Chapter 7 to allow a Chapter 7 trustee to investigate and distribute any proceeds to creditors.
But Judge Janet E. Bostwick denied the motion.
“When a debtor completes the payments under a Chapter 13 plan and a discharge is entered, the case is fully administered,” Bostwick wrote. “In these cases, as provided in the confirmation orders, all property of the estate, including any undisclosed assets, was administered and vested in the debtors upon entry of their discharges. As a result, there is no property of the estate to be administered if the cases were reopened and converted to cases under Chapter 7.”
The 11-page decision is In re: Gillis Adele F.; In re: Perry, Donald R. Jr., et al.; In re: Richter, Kenneth L., Lawyers Weekly No. 04-012-24.
Source of comfort
Nina M. Parker, who represented Adele Gillis, one of the debtors, said the ruling should give debtors like her client comfort in knowing that should there be some future event that was not discoverable before they filed, it will not be subject to challenge or reopening of the case.
In this instance, Parker said, when Gillis filed for bankruptcy nearly a decade ago, she had non-Hodgkin’s lymphoma and had undergone treatment but did not know there was any possible type of action.
In 2019, three years after she completed the payments under her plan and received her discharge, a class action was filed over the link between exposure to the weed killer Roundup and cancer. It was not until that point that Gillis became aware she might have a claim.
“This was an inherently unknowable situation,” Parker said. “The Bankruptcy Code distinguishes when you can revoke a Chapter 13 plan or discharge for fraud, but those are not the facts here.”
Barnstable attorney J. Alexander Watt, who represented debtors Kenneth and Janet Richter, was also happy with the decision.
“The Richters can finally move forward with their lives, particularly Mr. Richter whose health issues formed the basis for the personal injury claim first discovered by him in 2019,” Watt said. “The Richters’ Chapter 13 case originated in 2007, and they received their discharge in 2011, eight years before Mr. Richter’s discovery of his personal injury claim.”
Richard D. Smeloff of Milton was counsel for debtors Dawn and Donald Perry and could not be reached for comment prior to deadline.
Chapter 13 trustee Carolyn A. Bankowski, who had moved to reopen the three bankruptcies, noted that it was an issue of first impression in the 1st Circuit.
“It’s helpful to have judicial guidance on the issue so parties will know how to navigate this type of issue going forward,” Bankowski said.
Watertown bankruptcy attorney Dmitry Lev said that while the debtors did not know they even had a claim to disclose, the ruling raises questions about the possibility of unintended windfalls for those seeking to game the system.
This is not the first time when a seemingly counterintuitive outcome based on the plain text of the Bankruptcy Code left the bankruptcy bar wondering whether this is what the Legislature intended, or whether this is sloppy legislative drafting.
“Given the unambiguous statutory language of §1327 and the confirmation orders in this district, the policy of desiring finality in Chapter 13 cases appears to outweigh maximizing return to creditors or even concerns about potential fraud,” Lev said, referencing both the U.S. Bankruptcy Code provision that states that “all of the property of the estate” vests in the debtor upon confirmation of a Chapter 13 plan, as well as language in the standard confirmation order in the District of Massachusetts that all property of the estate vests in the debtor on discharge.
“This is not the first time when a seemingly counterintuitive outcome based on the plain text of the Bankruptcy Code left the bankruptcy bar wondering whether this is what the Legislature intended, or whether this is sloppy legislative drafting,” Lev said.
Christopher M. Lefebvre, a bankruptcy lawyer in Pawtucket, Rhode Island, said he thought the decision was correct given the clear, unambiguous language of generally uniform confirmation orders.
He added that he would expect a similar result in Rhode Island since Chapter 13 confirmation order language is similar in both states.
At the same time, however, Lefebvre said that even though the asset may revert back to the debtor, remaining beyond the trustee’s control, it is not necessarily a “home run” for the debtor in every circumstance.
“There’s always the concept of judicial estoppel, and the judge made reference to that,” Lefebvre said, referring to a defendant’s ability to get a civil action dismissed based on a plaintiff’s bad-faith failure to disclose the claim in a bankruptcy filing. “That can be very problematic for a debtor.”
John S. Simonian, also a Pawtucket attorney who handles bankruptcies in Rhode Island and Massachusetts, said the decision could cause debtors with pending personal injury claims unlikely to be resolved within three years to file for Chapter 13 rather than Chapter 7.
“That’s because the Chapter 13 bankruptcy may close before the personal injury claim is resolved and wouldn’t be part of the bankruptcy estate, whereas if they filed a Chapter 7, that claim is part of the Chapter 7 estate no matter how long it takes to resolve,” he said. “They would still have to disclose the claim as an asset, but if it’s not liquidated by the end of the plan term, you get the discharge of your debts.”
Attempt to reopen
Gillis filed her petition on Jan. 5, 2011. Her plan, which provided for 60 months of payments, was confirmed a month later.
Having made all payments, Gillis’ bankruptcy was discharged in May 2016. Neither her discharge order nor any other order in the case provided an exception to the vesting of “all property in the estate” upon discharge.
In re: Gillis Adele F.; In re: Perry, Donald R. Jr., et al.; In re: Richter, Kenneth L.
THE ISSUE: Could a bankruptcy trustee open three Chapter 13 cases and convert them to Chapter 7 in order to administer undisclosed assets for the benefit of creditors years after each debtor had completed their plan and received a discharge?
DECISION: No (U.S. Bankruptcy Court)
LAWYERS: Nina M. Parker of Madoff & Khoury, Foxboro; Richard D. Smeloff of Milton; J. Alexander Watt of Barnstable (debtors)
Carolyn A. Bankowski of the Office of the Chapter 13 Trustee, Boston (trustee)
On Nov. 1, 2021, the trustee, having learned of a personal injury claim held by Gillis, moved to reopen the case, asserting that the claim arose pre-petition and remained property of the estate because Gillis had not disclosed it. The trustee also requested in her motion that the case be converted to Chapter 7 for administration of the undisclosed asset.
In opposition, Gillis argued that the claim did not arise pre-petition because it was unknown at the time of her filing. She also argued that even if her claim arose pre-petition, it vested in her upon discharge.
The Richters and the Perrys received discharges of their respective Chapter 13 bankruptcies in 2011 and 2016, respectively.
The trustee moved to reopen the Perrys’ bankruptcy in 2021 on similar grounds as Gillis and did the same with the Richters in 2022. The Perrys opposed on the same grounds as Gillis.
The Richters did not oppose the motion, but given the similarity of the issues being raised, the Bankruptcy Court considered their case along with the other two.
Fully vested
Bostwick ruled in favor of the debtors.
In doing so, she rejected the trustee’s argument that even if the assets in the cases were not intentionally undisclosed, other debtors might intentionally fail to disclose assets that should be considered in determining plan payments.
“[T]here are consequences for a debtor who intentionally fails to disclose an asset,” she said. “First … [i]f such assets are discovered [during the plan], the trustee or a creditor may seek a modification of the plan or conversion of the case. Second, if a debtor intentionally fails to disclose an asset, the debtor may face potential criminal sanctions, since the schedules are executed under the pains and penalties of perjury. A debtor also runs the risk that they may be judicially estopped from pursuing the cause of action if they intentionally failed to disclose the asset in their bankruptcy.”
Meanwhile, Bostwick said, given Congress’s clear policy regarding time limits in a Chapter 13 case, “the Court should not abandon the finality and fresh start of Chapter 13 to impose additional burdens on debtors that are not in the plain text of the statute.”