The requirement that courts read statutes literally has resulted in the erosion of the equitable powers of bankruptcy courts. Most notably, the Supreme Court held in Law v. Siegel, 571 U.S. 415 (2014), that equity cannot override a debtor’s statutory homestead exemption, even when the debtor has engaged in egregious misconduct.
A March 30 decision by Bankruptcy Judge Elizabeth E. Brown of Denver demonstrates that the court must grant a discharge even though the chapter 13 debtors improperly (or perhaps fraudulently) failed to disclose property that would have led to a dramatically better recovery by unsecured creditors had the asset been disclosed.
Before bankruptcy, the debtors were in an auto accident. They confirmed a 39-month chapter 13 plan paying about $10,500 to the trustee. After priority taxes, the debtors’ attorneys’ fees and a small secured claim, there was nothing for unsecured creditors.
About one year after confirmation, the debtors’ settled their personal injury claim and received $67,000. In their bankruptcy papers, the debtors disclosed neither the claim nor the proceeds.
About one month before their final plan payment, the debtors disclosed the $67,000 payment to the trustee. Judge Brown said the disclosure may have been inadvertent. A few days after the debtors made their last plan payment, the trustee filed a motion to dismiss the chapter 13 case for nondisclosure of the $67,000.
Constrained by the statute, Judge Brown granted the debtors their discharges and denied the motion to dismiss.
Judge Brown analyzed the sections that would inform the result, Sections 1307(c), 1329, 1330(a) and 1328(a). Beginning with 1307(c), she said that failure to disclose an asset can supply “cause” for dismissal. Furthermore, Section 1307 has no time limit for filing a motion to dismiss.
On the other hand, Section 1330 allows revocation of confirmation but requires that the motion be filed within 180 days of confirmation.
Judge Brown said that Section 1330 was “pertinent” but not dispositive because the trustee had not moved within the six-month window after confirmation. Still, she said, it “lends weight to the view that the Court should consider the overall statutory scheme of chapter 13 in answering the question.”
In Section 1329(a), Judge Brown noted the “principle of finality,” where no one may modify a plan after the last payment has been made. Similarly, she said that the command to enter a discharge in Section 1328(a) “heralds a change in status” after the last payment. She said that Section 1328(a) has “no exception . . . for fraud or bad faith conduct.”
Piecing the statutes together, Judge Brown said that Section 1330 allows revocation of confirmation if fraud was discovered within six months of confirmation, while Section 1328(e) permits revocation of discharge, but only if fraud was discovered within the one-year period beginning with the entry of discharge.
The Bankruptcy Code, Judge Brown said, “leaves a pretty wide loophole for the dishonest debtor.” She explained:
If the chapter 13 trustee . . . learns of a debtor’s fraud during the gap that is more than six months after the confirmation order but before the entry of the discharge order, which may not occur for many months or even years later, then neither form of revocation is possible.
Judge Brown read the statutes to mean “that Congress has determined that, after a certain period of time, the principle of finality must outweigh the policy of rooting out abusers of the bankruptcy system.”
Next, Judge Brown considered the “interplay” between Section 1307 and the “mandatory command” of Section 1328(a). “[A]s soon as practicable after completion by the debtor of all payments under the plan,” Section 1328(a) provides that “the court shall grant the debtor a discharge of all debts provided for by the plan . . . .”
Judge Brown found three decisions on point, where the debtors were in bad faith but had made all payments required by their plans. In those cases, the courts denied motions to dismiss and granted discharges. She found three other cases where the courts had dismissed, but in all of them, she said, the courts did not consider the “mandatory language in Section 1328(a).”
“Granting a discharge to a debtor that has completed plan payments but has failed to disclose income or assets or otherwise acted in bad faith is a difficult pill to swallow,” Judge Brown said. On the other hand, she said that the court “cannot ignore the clear mandate laid out in § 1328(a).”
Judge Brown denied the motion to dismiss and entered discharges because the more general statute, Section 1307, “must give way to the other more specific statute[],” Section 1328(a).
Observations
Has the Supreme Court gone too far in eroding the equitable powers of bankruptcy courts? Is it possible for Congress to craft laws that obviate every conceivable circumstance when a party could abuse the supposedly plain meaning of the statute?
The Constitution made the judiciary one of the three coequal branches of government. In this writer’s opinion, the Constitution does not require judges to leave their brains at the courthouse steps and blindly apply statutes that were not crafted for the circumstance before the court.
When a statute does not explicitly answer a question, this writer believes that federal judges are entitled to answer questions in reference to policies visible in the statute as a whole.
The requirement that courts read statutes literally has resulted in the erosion of the equitable powers of bankruptcy courts. Most notably, the Supreme Court held in Law v. Siegel, 571 U.S. 415 (2014), that equity cannot override a debtor’s statutory homestead exemption, even when the debtor has engaged in egregious misconduct.
A March 30 decision by Bankruptcy Judge Elizabeth E. Brown of Denver demonstrates that the court must grant a discharge even though the chapter 13 debtors improperly (or perhaps fraudulently) failed to disclose property that would have led to a dramatically better recovery by unsecured creditors had the asset been disclosed.