Opinion
Case No. 95-15419-SSM, Adversary Proceeding No. 96-1047
October 31, 1996
Joel Steinberg, Esquire, Fairfax, VA, of counsel for the debtor
James La Femina, c/o Macdonald Associates, Fairfax, VA, plaintiff, pro se
Gerald M. O'bonnell, Esquire, Alexandria, VA, standing chapter 13 trustee
MEMORANDUM OPINION
This matter is before the court on the debtor's oral motion, made at a pretrial conference on October 8, 1996, to dismiss this adversary proceeding as moot, and on two motions by the plaintiff to compel discovery that had been scheduled to be argued at the pretrial conference. The mootness issue arises because the debtor, immediately prior to the pretrial conference, filed a motion to convert her case from chapter 7 to chapter 13. The debtor argued that the plaintiff's complaint — which seeks the denial of discharge under § 727, Bankruptcy Code, and a determination of dischargeability under D 523, Bankruptcy Code D simply has no applicability in chapter 13. The plaintiff, representing himself pro se, objected, claiming that conversion would enable the debtor to abuse the bankruptcy process. After hearing the contentions of the parties, this Court took all pending motions under advisement to permit the parties to file briefs. The parties have done so, and the court must now determine whether it has any discretion to prevent the debtor from converting her case to one under chapter 13, or if she may do so as a matter of right. If she may convert her case, then the court must decide whether the conversion to chapter 13 moots the plaintiff's pending adversary complaint.
The debtor filed for relief under chapter 7 of the Bankruptcy Code in this court on December 6, 1995. The plaintiff filed his complaint commencing the present adversary proceeding on February 12, 1996. The complaint, while inartfully drafted, contains a mixture of allegations asserting causes of action to determine dischargeability under §§ 523(a)(2)(A) and (B), Bankruptcy Code, and to deny the debtor a discharge under § 727(a)(4)(A) of the Code. The plaintiff alleges that he is the holder of a promissory note originally made by ATB Mortgage Corporation on January 20, 1993, and secured by a second deed of trust. ATB Mortgage then sold the property to the debtor on April 14, 1993, with the debtor expressly assuming the obligations under the note. Around January 1, 1994, the debtor defaulted on her payments under the note, and the plaintiff brought suit in the Circuit Court for Fairfax County. On March 27, 1995, the plaintiff was awarded a default judgment. The plaintiff alleges that the debtor submitted false financial information at the time of the loan assumption and that the debtor has "perjured herself either in her schedules or in loan documentation submitted to [the plaintiff]" and that the "[d]ebtor's Petition and schedules are not a true and accurate reflection of [the debtor's] assets and liabilities."
In a chapter 7 case, a creditor may, bring two conceptually quite distinct challenges to the debtor's discharge. One, under § 727, Bankruptcy Code, seeks to deny the debtor any discharge whatsoever, based, for example, on an assertion that the debtor has concealed assets. The other type of challenge seeks a determination that the particular debt owed to the creditor falls within one of the 16 categories of debts which are excepted from discharge under §§ 523(a)(1) through (a)(16), Bankruptcy Code. Twelve of these categories do not require that the creditor take any action during the bankruptcy case, and the issue of whether the debt has been discharged may be raised and determined in subsequent litigation. With respect to four of the categories, however D those set forth in § 523(a)(2), (a)(4), (a)(6), and (a)(15), Bankruptcy Code D the creditor must obtain a determination of nondischargeability during the bankruptcy case. D 523(c), Bankruptcy Code; F.R.Bankr.P. 4007(c). If both types of discharge challenges are brought in a single adversary proceeding, they should, as a matter of good pleading, be set forth in separate counts, since they are distinctly separate causes of action. Fed.R.Civ.P. 10(b). The plaintiff in this case has not done so, but given the traditional latitude extended to pro se pleadings, the plaintiff's complaint is not fatally defective on that account.
The court notes, however, that the note by its express terms "MAY BE ASSUMED ONE TIME UPON SALE OF THE PROPERTY SECURED HEREBY WITHOUT THE CONSENT OF THE CURRENT NOTEHOLDER." Thus, it is difficult to see how the plaintiff can prevail on an argument that the debtor obtained a financial accommodation from the plaintiff, who was the noteholder, based on a false financial statement.
The plaintiff has attached a number of exhibits to his brief in opposition to the motion to dismiss. In general, these reflect a disturbing number of inconsistent representations by the debtor as to her income and assets. However, these exhibits are not determinative of the motion before the court nor have they been admitted into evidence; consequently, the court refrains from extensive discussion of them at this time.
Conclusions of Law and Discussion I.
This court has jurisdiction of this action 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)(I) and (J).
II.
As a threshold issue, this court must determine whether it has any discretion to prevent the debtor from converting her case from chapter 7 to chapter 13, or if she may do so as a matter of right. Under § 706(a), Bankruptcy Code, a "debtor may convert a case under [chapter 7] to a case under chapter . . . 13 of this title at any time, if the case has not been previously converted [from chapter 11,12, or 13]." There is no requirement for notice and a hearing. The legislative history to this section indicates that conversion under § 706(a) "gives the debtor the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case" as long as the case had not previously been converted from chapter 11 or 13 to one under chapter 7. S. Rep., No. 989, 95th Cong., 2d. Sess. (1978).
In Finney v. Smith (In re Finney), 992 F.2d 43 (4th Cir. 1993), the Fourth Circuit examined the right to convert given to debtors under § 706(a) in the similar context of a conversion to chapter 11. In that case, the debtor had made post-petition transfers of real estate which, the bankruptcy court found, were made with the "intent to hinder, delay, and defraud his creditors." Id. at 44. The Fourth Circuit held that a debtor indeed has the absolute right under § 706(a) to convert his or her case to one under chapter 11, 12, or 13. Id. However, the court explicitly left open the issue of under what circumstances the court may invoke its equitable powers under D 105(a), Bankruptcy Code to deny conversion because of a debtor's egregious actions. Id. at 45. The court concluded, however, that the circumstances in that case were not sufficiently egregious to warrant invocation of such equitable powers. Id. Instead, the court reasoned that certain actions by a debtor may warrant immediate reconversion under § 1112(b) by the court on its own motion. Id. At 45. The court, however, remanded the case to the bankruptcy court for a factual determination of whether the debtor's chapter 11 reorganization was objectively fufile so as to warrant reconversion under § 1112(b), as this matter had not been addressed by the bankruptcy court. Id. At 46. Consistent with Finney, other courts within this district have assumed without discussion that a debtor possesses the absolute right to convert a case under chapter 7 to one under chapter 13. In re McNallen, 197 B.R. 215, 219 (Bankr. E.D. Va. 1995) (Tice, J.); In re Sensibaugh, 9 B.R. 45, 46 (Bankr. E.D. Va. 1981) (Shelley, J.); Johnson v. Seely (In re Seely), 6 B.R. 309, 310 (Bankr. E.D. Va. 1980) (Bonney, J.).
Although the exhibits proffered by the plaintiff in opposition to the motion to dismiss raise serious issues as to the debtor's truthfulness, such issues are more appropriately addressed in the context either of a motion to reconvert the case to chapter 7 or an objection to confirmation of the debtor's plan, when one is proposed. In any event, even granting the truth of all that the plaintiff alleges, the debtor's conduct is no more `egregious' than the debtor's in Finney, which the Fourth Circuit held was not sufficient to justify the exercise of the court's equitable powers under D 105(a) to deny conversion. Accordingly, no sufficient basis exists to deny the debtor's motion to convert her case to one under chapter 13.
In Finney, the bankruptcy court, when it denied the motion to convert, had already held evidentiary hearings and had made findings sufficient to support a denial of discharge. An evidentiary hearing has not yet been held in the present case.
While this court will convert the case to one under chapter 13, the plaintiff is not precluded from filing a motion for reconversion to chapter 7 should the available evidence indicate that such reconversion may be warranted.
III.
In view of the court's ruling on the motion to convert, the present adversary proceeding is mooted inasmuch as it seeks relief that is ordinarily not relevant in chapter 13. See 3 LAWRENCE P. KING, COLLIER ON BANKRUPTCY, — 523.05B (15th ed. 1996) (stating that D 523(a) actions, other than those seeking to prevent the discharge of a debt based upon alimony, child support, student loans and for personal injury caused by an intoxicated driver, "will not usually be maintained in chapter 13 cases"). With respect specifically to the § 727 cause of action, the language of D 103(b), Bankruptcy Code, makes it clear that the grounds for denial of discharge in § 727 only apply in chapter 7 cases. The situation with respect to the D 523 cause of action is somewhat more complicated, since there are two types of discharge that may be granted in a chapter 13 case: a "super discharge" under § 1328(a), Bankruptcy Code, and a `hardship discharge' under § 1328(b).
A debtor who completes all payments under a confirmed plan is entitled under § 1328(a), Bankruptcy Code, to a discharge that is much broader than a chapter 7 discharge. Such a discharge D sometimes termed a `super discharge' — is the norm in chapter 13. Of the 16 categories of nondischargeable debts listed in D 523(a), only three are nondischargeable when the debtor receives a discharge under § 1328(a). There is, however, a second type of discharge available in chapter 13, sometimes referred to as a "hardship" discharge. This type of discharge may be granted under § 1328(b), Bankruptcy Code, where the debtor fails to complete payments under a plan, provided certain conditions are met. A hardship discharge, however, is subject to all the exceptions of D 523(a), Bankruptcy Code, and is in effect no different than a chapter 7 discharge. D 1328(c)(2), Bankruptcy Code.
These include alimony and child support, certain student loans, and death or injury claims resulting from driving while intoxicated. § 523(a)(5), (8), and (9). Additionally, certain long term debts and criminal restitution payments or fines are nondischargeable in chapter 13. D 1328(a)(1) and (3); § 1322(b)(5).
The plaintiff alleges that his claim is nondischargeable under D 523(a)(2), Bankruptcy Code. This is not one of the special categories of debts that are excepted from the super discharge of D 1328(a). Accordingly, unless the debtor were, at some future time, to seek a hardship discharge under § 1328(b), a determination of nondischargeability, as such, is simply not relevant, since debts of the type described in D 523(a)(2) may be discharged under D 1328(a).
Accordingly, given the conversion to chapter 13, and given that the debts described in D 523(a)(2) are ordinarily dischargeable in chapter 13, the present adversary proceeding seeks relief that the court simply cannot decree unless the debtor, in the future, seeks a hardship discharge or reconverts to chapter 7. For that reason, the court will dismiss the complaint without prejudice.
Under F.R.Bankr.P. 4007(d), if the debtor files a motion for a hardship discharge under D 1328(b), the court is required to fix a time for the filing of complaints to determine dischargeability and to give creditors not less than 30 days — notice of the time so fixed. To avoid the injustice of requiring the plaintiff to pay a new filing fee if the debtor ultimately seeks a hardship discharge or reconverts her case to chapter 7, the court would consider at that time a motion under F.R.Bankr.P. 9024 to vacate the order dismissing the adversary complaint.
IV.
None of this is to say that the allegations raised in the plaintiff's complaint would not be relevant in a chapter 13 case. Among the factors that a court may consider in determining whether a debtor's plan satisfies the "good faith" requirement of D 1325(a)(3), Bankruptcy Code, are the debtor's honesty in representing facts and whether debts sought to be compromised under the plan would be nondischargeable under chapter 7. Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982); Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986). Accordingly, dismissal of the adversary complaint does not prevent the plaintiff from raising the same factual issues in the context of an objection to confirmation.
The plaintiff's two pending discovery motions — one a show cause order and the other a motion to compel discovery — have been filed in this adversary proceeding, not in the main bankruptcy case. An adversary proceeding, although associated with the bankruptcy case to which it is related, is procedurally an independent lawsuit. Consequently, since the adversary proceeding is being dismissed, it will be necessary to re-file and re-serve the discovery requests in the main case. Accordingly, the pending discovery motions will be dismissed, but without prejudice to plaintiff's right to seek and compel appropriate discovery in the main bankruptcy case in connection with any objection to confirmation.
With respect to the order to show cause against Angela Nuckols, the debtor's daughter, it does not appear that the subpoena that is sought to be enforced was properly served. Although F.R.Bankr.P. 7004(b) permits a complaint in an adversary proceeding to be served by first-class mail, Fed.R.Civ.P. 45(b), made applicable to bankruptcy proceedings by F.R.Bankr.P. 9016, requires that a subpoena be served "by delivering a copy thereof to such person" (emphasis added). Additionally, such service must be made by a person — who is not a party.D See, also, Local Rule 110(C) ("[A]ll subpoenas shall be served by a person who is not a party . . . Service of a subpoena shall be made by delivering a copy thereof to such person . . ."). The return of service on the subpoena to Angela Nuckols reflects that the only service was (1) made by certified mail, not personal delivery and (2) was made by the plaintiff himself, who is by definition a party.
Separate orders will be entered consistent with this opinion converting the debtor's case to chapter 13, dismissing the complaint in this adversary proceeding without prejudice, and denying the discovery motions without prejudice.