Opinion
Bankruptcy Case No. 03-43814-H2-13, CIVIL ACTION NO. 4:06-CV-00613.
August 15, 2006
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
Before the Court is an appeal of the Judgment entered by the United States Bankruptcy Court of the Southern District of Texas granting judgment against the appellants debtors Donald Raye Thomas, Pamela Jean Pipkins-Thomas and their attorney, David W. Barry. The appellants filed a Statement of Issues pursuant to Fed.R.Bankr.P. 8006 (FRBP), seeking relief from the dismissal of the order that vacated confirmation of their Chapter 13 plan, and imposing sanctions under FRBP 9011. The appellee, the United States of America (IRS) filed a timely response, and all matters before the Court are appropriate for review. Upon full and careful review of the briefs and the record, this Court determines that the Judgment of the Bankruptcy Court should be affirmed.
II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The essential facts to this Court's determination are not in dispute. This is the second appeal to this Court involving the same parties but on different issues. In April 2002, the debtors filed their individual tax returns for 2001 showing that they owed $4,661.00 in taxes. In May 2003, the IRS informed the debtors that they were selected for audit. Immediately thereafter, the IRS proposed adjustments to the 2001 tax return that resulted in the debtors owing $34,812.98. The IRS informed them that they could provide supporting documentation to refute the amount. However, the debtors never responded to the IRS. Hence, September 4, 2003, the IRS issued a Statutory Notice of Deficiency showing additional taxes of $27,109 and penalties of $5,421.80 were due.
On October 1, 2003, the debtors filed a Chapter 13 petition listing the IRS as a creditor. However they stated that they owed the IRS no taxes. A few weeks later, the debtors filed a sworn statement indicating that the IRS had an unsecured claim of $20,000. Yet, the debtors failed to indicate whether the claim was disputed, liquidated or contingent. The IRS received timely notice of the debtors' bankruptcy.
On November 26, 2003, the debtors filed an amended Chapter 13 Plan that proposed to pay the IRS $20,000. Two weeks later, the debtors amended the bankruptcy schedule noting that they owed the IRS $5,000 instead of the $20,000 as originally stated. Furthermore, the amended scheduled was not verified as required by the Federal Rules of Bankruptcy Procedure (FRBP) 1008. On December 18, 2003, the IRS issued a statutory notice of default to the debtors indicating that they owed $5,421.80 in penalties and $27,109.00 in taxes for the 2001 tax year. On January 13, 2004, the debtor's Plan was confirmed without objection from the IRS.
On February 3, 2004, the debtors filed a proof of claim on behalf of the IRS, showing that the IRS had an unsecured claim of $5,000. March 24, 2004, was the deadline for the IRS to file its proof of claim. The IRS failed to file its proof of claim by the deadline. However, on December 21, 2004, the IRS filed its proof of claim indicating that the debtors owed $5,524.47 in unsecured non-priority claims and $29,724.20 in unsecured priority claims. On the same day, the debtors filed an objection to the IRS' proof of claim. On March 22, 2005, the debtors filed an unopposed motion to sever.
Based on the foregoing facts, the Bankruptcy Court found that "the tardy proof of claim filed by the IRS on December 21, 2004, [was to be] treated as an amendment of the timely proof of claim filed by the Debtors (through Counsel) on February 3, 2004." Additionally, the Bankruptcy Court found that Barry intentionally drafted a vague proof of claim to avoid disclosing what was truly owed to the IRS. Furthermore, the court was concerned that Barry did not file the amended Plan in good faith and that he violated FRBP 9011 and other rules and statutes. The court ordered the Chapter 13 Trustee to investigate the circumstances related to the changes in the debtor's schedules. The debtors appealed the Bankruptcy Court's order to this Court for review.
The questions on the first appeal to this Court was: whether the appellants are precluded, as a matter of law, from appealing an agreed order, and whether the appellants' appeal of the order was timely. On November 17, 2005, this Court dismissed the appeal with prejudice. The appellants filed a notice of appeal to the Fifth Circuit Court of Appeals on December 28, 2005. That appeal is pending.
Meanwhile, after the Bankruptcy Court's ruling, the debtors filed an objection to the late IRS proof of claim. On August 17, 2005, the IRS files an unopposed motion for summary judgment regarding the correct amount of its claim. One month later the parties signed an agreed order indicating that the IRS claim is $34,822.67, which includes the $5,453.47 unsecured non-priority claim and the $29,369.20 unsecured priority claim. The court held two hearings concerning whether the debtors and Barry intentionally filed vague, misleading and false documents. The court deferred ruling at the first hearing, however, the debtors and Barry declined to offer any evidence in support of their objections and consented to the IRS claim as issued.
The Bankruptcy Court held a final hearing on November 1, 2005. It concluded that the bankruptcy schedules and proof of claim, which was signed and prepared by counsel, presented intentional false statements. The court concluded that the petition and Plan were designed to mislead the court. Accordingly, the court held that the Plan should be vacated and that sanctions should be levied for violation of FRBP 9011(b). This appeal followed.
III. CONTENTION OF THE PARTIES
The debtors filed a Statement of Issues asserting numerous issues for discussion. The debtors contend that the Bankruptcy Court did not have the authority to revoke the Chapter 13 confirmation because the IRS's proof of claim was untimely. They also contend that the Bankruptcy Court did not comply with 11 U.S.C. § 1330, or Bankruptcy Rule 7001(5), when it imposed sanctions without a pending adversary proceeding. Further, they contend that the Bankruptcy Court's order, revoking the confirmation, should not be combined with the sanctions order imposed by the court. The debtors contend that the sanctions imposed are not supported by FRBP 9011. Finally, the debtors contend that the sanctions imposed are excessive and unreasonable. Hence, the Bankruptcy Court's order vacating confirmation of Chapter 13 Plan and imposing sanctions under Rule 9011 should be vacated.
The IRS asserts that the issue of timeliness is not before this Court because this Court has already ruled in favor of the IRS on that matter. Further, the IRS argues that this same issue is on appeal with the Fifth Circuit Court of Appeals. The IRS argues that, pursuant to 11 U.S.C.S 105 of the Bankruptcy Code, the Bankruptcy Court had the authority to sua sponte revoke the confirmation Plan. Furthermore, it argues a pending adversary proceeding is unnecessary to revoke a confirmed Plan. Finally, it argues that the imposition of sanctions is within the discretion of the court, pursuant to FRBP 9011(c)(2).
IV. STATEMENT OF THE LAW
A district court, in reviewing the findings of the bankruptcy court, acts in an appellate capacity. Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103 n1 (5th Cir. 1992). On appeal, a bankruptcy court's findings of fact are not to be set aside "unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." FRBP 8013; Southland Corp. v. Toronto-Dominion, (In re Southland Corp.), 160 F.3d 1054 (5th Cir. 1998). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed. Holloway v. HECI Exploration Company Employees' Profit Sharing Plan, 76 B.R. 563, 573 (N.D. Tex 1987), aff'd, 862 F.2d 513 (5th Cir. 1988). Matter of Fabricators, Inc., 926 F.2d 1458 (5th Cir. 1991).
The district court reviews the bankruptcy judge's conclusion of law de novo. FRBP 8013; Jordan v. Southeast Nat'l Bank, 927 F.2d 221, 223-24 (5th Cir. 1991). As well, questions of law and mixed questions of law and fact are subject to de novo review. In re T.B. Westex Foods, Inc. (T.B. Westex Foods, Inc. v. FDIC), 950 F.2d 1187, 1190 (5th Cir. 1992). When reviewing mixed questions of law and fact the court "must independently determine the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found." In re Bufkin Bros., Inc., 757 F.2d 1573, 1577-78 (5th Cir. 1985).
When a bankruptcy court imposes sanctions, its decision is reviewed under an abuse of discretion standard. See Goldin v. Bartholow, 166 F. 3d 710, 722 (5th Cir. 1999). However, where that decision is premised on "an erroneous view of the law or on a clearly erroneous assessment of the evidence," the imposition of sanctions is "necessarily [an] abuse [of] discretion." Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990).
V. APPLICATION OF THE LAW
Revoking Chapter 13 Plan
The Court need not address the issue of the timeliness of the IRS' claim because that issue is on appeal at this time. The Court, however, notes that the essential facts surrounding the debtors' and, their attorney's actions are not in dispute. Therefore, the factual findings of the Bankruptcy Court are adopted by this Court. This is an appeal from the Bankruptcy Court's order revoking the confirmation Plan and imposing sanctions against Barry for his actions while representing the debtors. Barry argues that the Bankruptcy Court does not have the authority to vacate the confirmation Plan because (1) no party in interest has asked the Bankruptcy Court to do so; (2) the confirmation order had been issued more than 180 days; (3) there was no adversary proceeding pending; and (4) revocation was not in compliance with 11 U.S.C. § 1330 or FRBP 7001(5). These arguments fail.
It is evident from the record that Barry intentionally defrauded the Bankruptcy Court. The court only became aware of Barry's false statement when at a hearing he stated "I was trying to obviously get jurisdiction over [the IRS] to make sure something did not survive the Chapter 13 discharge." Barry intended for the Bankruptcy Court's order to discharge the amount owed to the IRS. Hence, the Bankruptcy Court had the authority to revoke the confirmation Plan, particularly when it is procured by fraud. See 11 U.S.C. § 1330. The court, therefore, rejects the appellants' contentions concerning the revocating of the Plan.
Memorandum Opinion
Sanctions
Barry raises a number of arguments, all centering on the relationship between the events of the case and the imposition of sanctions. This Court, in its reviewing capacity, finds substantial evidence that Barry intentionally prepared and filed false statements to deceive the court and the Chapter 13 trustee. Hence, this Court concludes that under FBRP 9011, the Bankruptcy Court had the authority to impose sanctions. Sanctions imposed pursuant to FBRP 9011 are discretionary and must be "limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated." FBRP 9011(c)(2). There is no evidence that the sanctions are excessive.
The facts indicate that Barry was not forthcoming with the court. Moreover, the documents prepared and signed by his clients under perjury of law represented to the court that the IRS claim was "$0.00" then $20,000, and finally $5,000. Barry admitted that he gave a vague explanation even though he knew the true amount claimed. In fact, the IRS had notified Barry of the amounts claimed, nevertheless, Barry ignored the notices and made false statements to the court. This Court, therefore, affirms the Bankruptcy Court's sanctions award.
VI. CONCLUSION
For the reasons stated, the Bankruptcy Court's Judgment is AFFIRMED.