In re: Aaron Jean

FILED NOV 21 2014 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-14-1198-KuPaJu ) 6 AARON JEAN, ) Bk. No. 13-12072 ) 7 Debtor. ) ______________________________) 8 ) MICHAEL JABLONOWSKI; ) 9 CATHERINE DALE-JABLONOWSKI, ) ) 10 Appellants, ) ) 11 v. ) MEMORANDUM* ) 12 AARON JEAN, ) ) 13 Appellee. ) ______________________________) [14] Argued and Submitted on October 23, 2014 15 at San Francisco, California 16 Filed – November 21, 2014 17 Appeal from the United States Bankruptcy Court for the Northern District of California [18] Honorable Alan Jaroslovsky, Chief Bankruptcy Judge, Presiding [19] 20 Appearances: Peter Goldstone argued for appellants Michael Jablonowski and Catherine Dale-Jablonowski; Brian 21 Anthony Barboza argued for appellee Aaron Jean. [22] Before: KURTZ, PAPPAS and JURY, Bankruptcy Judges. [25] 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1. 1 INTRODUCTION 2 Michael Jablonowski and Catherine Dale-Jablonowski are 3 judgment creditors of the debtor, Aaron Jean. They challenged 4 Jean’s chapter 131 bankruptcy petition and his proposed plan, 5 claiming that both the petition and the plan were filed in bad 6 faith. After an evidentiary hearing, the bankruptcy court found, 7 based on the totality of the circumstances, that Jean’s petition 8 and plan were both filed in good faith. Accordingly, the court 9 denied the Jablonowskis’ motion to dismiss Jean’s case and 10 overruled their objection to his plan. 11 On appeal, the Jablonowskis attempt to characterize their 12 issues with the bankruptcy court’s rulings in a number of 13 different ways. However, at bottom, the Jablonowskis’ appeal is 14 nothing more than their disagreement with the bankruptcy court’s 15 good faith findings. Because those findings are not clearly 16 erroneous, we AFFIRM. 17 FACTS 18 In 2007, Jean purchased from the Jablonowskis a parcel of 19 residential real property located on Cavedale Road in Glen Ellen, 20 California, for $500,000. Jean paid $75,000 in cash and financed 21 the balance by executing a $425,000 note in favor of the 22 Jablonowskis. The note was secured by a first trust deed against 23 the property. [25] 26 1 Unless specified otherwise, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 , and all "Rule" references are to the Federal Rules of Bankruptcy 28 Procedure, Rules 1001-9037. [2] 1 In 2011 and early 2012, Jean and the Jablonowskis engaged in 2 negotiations for the potential payoff or restructuring of the 3 loan. During those negotiations, Jean’s father-in-law Paul Belo 4 sometimes negotiated on Jean’s behalf. The parties’ testimony 5 regarding these negotiations differed significantly. The 6 Jablonowskis testified that both Jean and Belo threatened that 7 Jean would file bankruptcy if the Jablonowskis did not agree to 8 the restructuring or payoff terms that Jean and Belo were 9 proposing. For his part, Jean denied that he ever threatened to 10 file bankruptcy. Belo did not testify in the bankruptcy court 11 proceedings, but the record does include a letter that Belo sent 12 the Jablonowskis during the course of negotiations in which Belo 13 pointed out that, if the negotiations turned out to be 14 unsuccessful, Jean likely would commence a bankruptcy case, which 15 would increase the time and expense for the Jablonowskis to 16 recover the property. 17 According to the Jablonowskis, both Belo and Jean also 18 threatened to “remove fixtures, plumbing, copper wiring, drywall, 19 and cabinetry from the improvements” on the property. The 20 Jablonowskis further claimed that Jean “self-reported” to county 21 officials certain unpermitted improvements he made to the 22 property essentially to punish the Jablonowskis for refusing to 23 accept his debt restructuring or payoff proposals. 24 At some point, Jean stopped making his mortgage payments and 25 negotiations between the parties broke down. The Jablonowskis 26 thereafter filed a lawsuit in the Sonoma County Superior Court 27 (Case No. SCV-251584) for breach of the promissory note, for 28 judicial foreclosure, and for waste of the real property [3] 1 collateral securing the loan. The parties stipulated to a 2 judgment entitling the Jablonowskis to foreclose, but the waste 3 cause of action only was resolved by judgment after a jury trial. 4 The jury found that Jean was liable for bad faith waste on two 5 separate grounds. First, the jury found that Jean committed bad 6 faith waste in the amount of $9,263.37 by failing to pay real 7 property taxes on the property even though he had the financial 8 means to do so. And second, the jury found that Jean also 9 committed bad faith waste by making unpermitted improvements to 10 the property, which diminished the property’s value by $35,000. 11 Based on the jury’s findings that Jean had committed bad faith 12 waste, the state court entered judgment in favor of the 13 Jablonowskis and against Jean for $44,263.37 on the waste cause 14 of action. 15 The Jablonowskis then sought to recover their fees and costs 16 of roughly $130,000. After the state court issued a tentative 17 ruling indicating that it would grant the Jablonowskis’ request 18 for fees and costs but before entry of a final order granting the 19 request, Jean commenced his chapter 13 bankruptcy case. 20 In response to Jean’s petition filing and his proposed 21 chapter 13 plan, the Jablonowskis filed both an objection to 22 Jean’s plan and a motion to dismiss his bankruptcy case. The 23 Jablonowskis contended that the bankruptcy petition was filed in 24 bad faith and that the plan was not proposed in good faith. In 25 support of these contentions, the Jablonowskis relied in part on 26 Jean’s pre-bankruptcy conduct, particularly the state court 27 findings of bad faith waste and the threats to file bankruptcy 28 Jean allegedly had made. [4] 1 The Jablonowskis further claimed that Jean intentionally 2 filed inaccurate schedules, omitting the $130,000 owed to their 3 counsel for fees and costs and including $75,000 allegedly owed 4 to Belo, which the Jablonowskis asserted was actually a gift. 5 The Jablonowskis acknowledged that Jean listed their counsel as a 6 creditor but pointed out that Jean scheduled their counsel’s fees 7 and costs claim in the amount of “$0.00" and listed the claim as 8 contingent, disputed and unliquidated even though Jean had done 9 nothing to challenge the fees and costs claim in the state court, 10 which had issued a tentative ruling indicating that it was 11 prepared to grant in full the request for fees and costs. 12 The Jablonowskis also took issue with Jean’s valuation of 13 the real property subject to the foreclosure proceedings. The 14 Jablonowskis argued that Jean in his Schedule A undervalued his 15 “current interest” in the property at $0 because the property had 16 not yet actually been foreclosed upon. The Jablonowskis 17 additionally argued that Jean overvalued the property in his 18 Schedule D at $350,000 given that the Jablonowskis’ appraiser had 19 testified during the state court trial that the property only was 20 worth $270,000. 21 The Jablonowskis presented as their most compelling argument 22 their claim that Jean filed the petition to “defeat” their state 23 court litigation. To support this claim, they pointed out that 24 Jean commenced his bankruptcy case just before the state court 25 finalized its award of fees and costs. They also pointed out 26 that, aside from the $75,000 “phantom” debt owed to Belo and the 27 debts owed to the Jablonowskis and their counsel, Jean’s debts 28 were relatively minimal and his creditors were few. The [5] 1 Jablonowskis further posited that, in a chapter 7 case, the 2 judgment debt for bad faith waste would be nondischargeable under 3 § 523(a)(6) as a debt arising from a willful and malicious 4 injury. Finally, they opined that Jean’s proposed plan payments 5 to unsecured creditors of $500 per month for sixty months were 6 unrealistic, given that Jean had calculated his disposable income 7 as $371.73 per month. 8 In response to the Jablonowskis’ allegations of bad faith, 9 Jean declared that he never intended to harm the Jablonowskis by 10 not paying the real property taxes or by making unpermitted 11 improvements to the property. He further claimed that his 12 schedules were accurate and complete, and that he believed that 13 his proposed plan payments of $500 per month for five years were 14 feasible if he remained frugal and organized over that time 15 period. He also denied that the $75,000 loan from Belo was 16 spurious. Finally, Jean disputed the notion that he filed the 17 petition in order to avoid the consequences of the Jablonowskis’ 18 state court litigation. Rather, Jean insisted, he filed his 19 chapter 13 bankruptcy case because he did not have the means to 20 pay all of his debts and because, given his age and financial 21 condition, he would never be able to pay his debts in full. 22 After an evidentiary hearing, the bankruptcy court ruled 23 against the Jablonowskis on both their plan objection and on 24 their motion to dismiss. The court apparently accepted as true 25 most of the Jablonowskis’ account of Jean’s pre-bankruptcy 26 conduct regarding the property, the loan restructuring [6] 1 negotiations, and the state court lawsuit.2 Nonetheless, the 2 court determined that these pre-bankruptcy events carried 3 relatively little weight in considering whether Jean’s petition 4 and chapter 13 plan were filed in good faith. The court also 5 indicated that there were no material inaccuracies or omissions 6 in Jean’s bankruptcy schedules. 7 What the court considered most critical in assessing Jean’s 8 good faith was Jean’s proposal to make plan payments of $500 per 9 month for sixty months. The court found that the proposed plan 10 payments were substantial and represented a significant recovery 11 for Jean’s creditors. The court further indicated that, while 12 the proposed monthly payments exceeded his disposable income, the 13 payment amount was still feasible and reflected an earnest 14 attempt by Jean to pay his creditors as much as his finances and 15 the chapter 13 process permitted. 16 Rather than abusing the bankruptcy process by using it to 17 avoid the consequences of the state court litigation, the court 18 concluded that Jean was properly using his chapter 13 case to pay 19 as much as he could to his creditors, including the Jablonowskis, 20 for the maximum period of time permitted for a chapter 13 plan. 21 The bankruptcy court entered orders on April 3, 2014, 22 denying the Jablonowskis’ motion to dismiss and confirming Jean’s 23 plan, and the Jablonowskis timely appealed. [2] The bankruptcy court did not find that Jean personally 25 threatened to file for bankruptcy relief. Instead, the court 26 seemed to accept Jean’s testimony that any comments regarding his potential bankruptcy filing were attributable to others. In 27 addition, the court referred to the $75,000 that Belo gave Jean for the down payment on the real property as a loan rather than a 28 gift. [7] 1 JURISDICTION 2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A) and (L). We have jurisdiction under [4] 28 U.S.C. § 158 . 5 ISSUE 6 Did the bankruptcy court err when it confirmed Jean’s 7 chapter 13 plan and denied the Jablonowskis’ dismissal motion? 8 STANDARDS OF REVIEW 9 We review the bankruptcy court's order denying the 10 Jablonowskis’ dismissal motion for an abuse of discretion. See 11 Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), [12] 455 B.R. 904, 914 (9th Cir. BAP 2011). 13 We also review for an abuse of discretion the bankruptcy 14 court’s order confirming Jean’s chapter 13 plan. See de la Salle 15 v. U.S. Bank, N.A. (In re de la Salle), 461 B.R. 593, 601 (9th 16 Cir. BAP 2011). 17 In considering whether the bankruptcy court abused its 18 discretion, we first determine de novo whether the bankruptcy 19 court “identified the correct legal rule to apply to the relief 20 requested.” United States v. Hinkson, 585 F.3d 1247 , 1261–62 21 (9th Cir.2009) (en banc). And if it did, we next determine 22 whether the bankruptcy court's factual findings were illogical, 23 implausible or “without support in inferences that may be drawn 24 from the facts in the record.” Id. at 1262 . 25 To the extent the bankruptcy court’s rulings turned on its 26 assessment of Jean’s good faith, we review that assessment under 27 the clearly erroneous standard. In re de la Salle, 461 B.R. at 28 601; In re Ellsworth, 455 B.R. at 914 . The bankruptcy court’s [8] 1 factual findings are not clearly erroneous unless they are 2 “illogical, implausible, or without support in the record.” Retz 3 v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). 4 DISCUSSION 5 A chapter 13 petition which is filed in bad faith may 6 constitute “cause” for dismissal under § 1307(c). See Leavitt v. 7 Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999); Eisen 8 v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (per 9 curiam). “To determine if a petition has been filed in bad faith 10 courts are guided by the standards used to evaluate whether a 11 plan has been proposed in bad faith.” In re Eisen, 14 F.3d at 12 470. In making both determinations, a bankruptcy court needs to 13 review the “totality of the circumstances.” Id. 14 In In re Leavitt, the Ninth Circuit held that, when 15 considering whether a chapter 13 case should be dismissed because 16 it was filed in bad faith, the bankruptcy court should consider, 17 among other factors: 18 (1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy 19 Code, or otherwise filed his chapter 13 petition or plan in an inequitable manner; 20 (2) the debtor's history of filings and dismissals; (3) whether the debtor intended to defeat state court 21 litigation; and (4) whether egregious behavior is present. [22] 23 In re Leavitt, 171 F.3d at 1224 (citations and internal quotation 24 marks omitted).3 [3] 26 The record reflects that the bankruptcy court placed the burden of proof on Jean to demonstrate his good faith for 27 purposes of both plan confirmation and the Jablonowskis’ dismissal motion. In In re Ellsworth, we acknowledged that the 28 (continued...) [9] 1 The Jablonowskis claim that the bankruptcy court did not 2 properly apply In re Leavitt’s totality of the circumstances 3 test. We disagree. In denying the Jablonowskis’ dismissal 4 motion and in confirming Jean’s plan, the bankruptcy court 5 considered all relevant factors as presented by the parties. It 6 weighed the evidence presented and inferred from the totality of 7 the circumstances that Jean’s bankruptcy petition and plan were 8 filed in good faith. It is implicit in the court’s written 9 decision, and in the comments it made during the evidentiary 10 hearing, that the court found no material omissions or 11 misrepresentations in Jean’s filings, no unfair manipulation of 12 the Code, no inequity in Jean’s petition or plan, and no 13 egregious behavior. Nor did Jean have a history of prior 14 bankruptcy filings or dismissals. 15 As for the relationship between Jean’s petition filing and 16 the state court litigation, the bankruptcy court inferred from 17 the entirety of the circumstances that Jean did not file for 18 bankruptcy relief to “defeat” the state court litigation. 19 Instead, the court found that Jean’s chapter 13 petition and plan [20] 21 3 (...continued) debtor bore the burden of proof on the good faith issue for plan [22] confirmation purposes, but we questioned (without deciding the 23 issue) whether for purposes of a case dismissal motion the movant or the debtor should bear the burden of proof regarding good 24 faith. See In re Ellsworth, 455 B.R. at 918-919 . In any event, because the bankruptcy court held that Jean bore the burden and 25 had met this burden, any error by the court in placing the burden 26 of proof on Jean as the debtor would not aid the Jablonowskis’ case for reversal on appeal. In other words, for purposes of 27 this appeal, any error regarding the burden of proof was harmless, and we must ignore harmless error. Van Zandt v. Mbunda 28 (In re Mbunda), 484 B.R. 344, 355 (9th Cir. BAP 2012). [10] 1 constituted an earnest and good-faith attempt to deal with the 2 judgment debt resulting from the state court litigation. The 3 court found particularly persuasive that Jean had proposed to 4 make plan payments of $500 per month – more than the amount of 5 his disposable income – for sixty months (the maximum time period 6 permitted for a chapter 13 plan). In the parlance of In re Retz 7 and Hinkson, we cannot say that the bankruptcy court’s inferences 8 or its findings were illogical, implausible or without support in 9 the record. Consequently, we have no basis to overturn these 10 inferences and findings. 11 The Jablonowskis further contend that the bankruptcy court 12 disregarded the evidence they presented, which they believe was 13 sufficient to support a finding that Jean filed his petition and 14 plan in order to defeat the Jablonowskis’ state court litigation. 15 The record reflects that the court did not ignore the 16 Jablonowskis’ evidence, but rather chose to give it little 17 weight. The court found Jean’s evidence more persuasive and 18 ultimately chose to credit Jean’s account of his reasons for 19 filing his petition and plan over the account offered by the 20 Jablonowskis. The bankruptcy court’s choice between these two 21 accounts does not constitute reversible error. As the Supreme 22 Court aptly put it: “[w]here there are two permissible views of 23 the evidence, the fact finder's choice between them cannot be 24 clearly erroneous.” Anderson v. City of Bessemer City, N.C., [25] 470 U.S. 564, 574 (1985). 26 The Jablonowskis’ remaining arguments on appeal hinge on 27 their assertion that the judgment debt Jean owed them would be 28 nondischargeable in a chapter 7 bankruptcy case. The [11] 1 Jablonowskis contend that the judgment against Jean for bad faith 2 waste qualifies as a nondischargeable debt under § 523(a)(6). 3 That section excepts from discharge debts arising from willful 4 and malicious injuries. We are skeptical that the Jablonowskis' 5 contention is correct. The elements necessary to establish bad 6 faith waste are insufficient by themselves to support a 7 nondischargeability claim under § 523(a)(6). Section 523(a)(6) 8 requires a very specific mental state on the part of the debtor – 9 intent to injure or actual knowledge that injury is substantially 10 certain to occur. See Kawaauhau v. Geiger, 523 U.S. 57 , 61-62 11 (1998); Petralia v. Jercich (In re Jercich), 238 F.3d 1202 , 1208 12 (9th Cir. 2001). In contrast, a cause of action for bad faith 13 waste does not require any particular state of mind. See Fait v. 14 New Faze Dev., Inc., 207 Cal.App.4th 284, 299 (2012) (holding 15 that bad faith waste occurs “whenever the owner's impairment of 16 the value of the security is not caused by the economic pressures 17 of a market depression, whether the owner acts recklessly, 18 intentionally, maliciously, or with some other mental state.”). 19 Moreover, it is clear from the record that the state court 20 jury verdict did not include any findings regarding Jean’s mental 21 state. Thus, the Jablonowskis’ assertion that the judgment debt 22 would be nondischargeable under § 523(a)(6) is entirely 23 speculative, and hence it offers little or no support for their 24 claim that Jean filed his chapter 13 petition and plan in bad 25 faith. 26 Even if the judgment debt would be nondischargeable in a 27 chapter 7 case, Jean’s attempt to discharge that debt in a 28 chapter 13 case does not, by itself, constitute bad faith. See [12] 1 Nelson v. Meyer (In re Nelson), 343 B.R. 671 , 677 & n.10 (9th 2 Cir. BAP 2006). To the contrary, the Code expressly provides for 3 a broader discharge in chapter 13, including some debts that 4 would be nondischargeable in a chapter 7 case. Compare § 523(a) 5 with 1328(a). Therefore, it makes little sense for the 6 Jablonowskis to complain, as they do, that Jean should not be 7 permitted to use chapter 13 to obtain this broader discharge, as 8 Congress clearly contemplated. As one leading treatise explains: 9 The Code invites debtors to use Chapter 13 to manage the effects of prepetition misconduct. Chapter 13 10 allows an eligible individual to discharge . . . debts that would be nondischargeable in a Chapter 7 case. 11 That Chapter 13 debtors propose to compromise claims that would be nondischargeable in a Chapter 7 case is 12 consistent with the statutory scheme and demonstrates that counsel has done what Congress contemplated – 13 informed the debtor of the advantages of Chapter 13. 14 * * * 15 § 1328(a) unambiguously permits Chapter 13 debtors to discharge claims that would be nondischargeable in a 16 Chapter 7 case. The design of the Code supports the argument that the management and discharge of claims 17 that would be nondischargeable in a Chapter 7 case is mainstream Chapter 13 practice – a use of Chapter 13 18 consistent with congressional intent and not bounded any more or less than other uses by the good-faith test 19 for confirmation. 20 Keith M. Lundin & William H. Brown, CHAPTER 13 BANKRUPTCY, at 21 § 183.1[1], [2] (4th Ed. June 15, 2004). 22 In short, we decline the Jablonowskis’ invitation to reverse 23 the bankruptcy court for permitting Jean to do in his chapter 13 24 case that which Congress explicitly entitled him to do. 25 CONCLUSION 26 For the reasons set forth above, we AFFIRM the bankruptcy 27 court’s orders confirming Jean’s chapter 13 plan and denying the 28 Jablonowskis’ dismissal motion.