Court Opinion

ID: 4692774
Source: CourtListenerOpinion
Date Created: 2021-06-03 23:01:13.280778+00
Date Added: 2024-06-11T08:05:18.060324
License: Public Domain

FILED
                                                                                    JUN 3 2021
                           NOT FOR PUBLICATION                                SUSAN M. SPRAUL, CLERK
                                                                                 U.S. BKCY. APP. PANEL
                                                                                 OF THE NINTH CIRCUIT
          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                             BAP No. NC-20-1274-BSG
CHUAN MIN CHANG and CHIU
CHUAN WANG,                                        Bk. No. 19-51152-MEH
            Debtors.

CHIU CHUAN WANG,
            Appellant,
v.                                                 MEMORANDUM1
JAMES HWANG; DEBRA WU,
            Appellees.

              Appeal from the United States Bankruptcy Court
                    for the Northern District of California
              M. Elaine Hammond, Bankruptcy Judge, Presiding

Before: BRAND, SPRAKER, and GAN, Bankruptcy Judges.

                               INTRODUCTION

      Chiu Chuan Wang ("Alice") 2 appeals an order converting her and Jack's

chapter 133 case to chapter 7 under § 1307(c). 4 The bankruptcy court

      1  This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
       2
         For clarity, we refer to debtors Mr. Chuan Min Chang and Ms. Chiu Chuan Wang
by their American first names – Jack and Alice. We refer to Alice's daughter Ms. Chialo
Wang as Carol and to Alice's son Mr. Daniel Wang as Daniel. No disrespect is intended.
       3 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101–1532, and all "Rule" references are to the Federal Rules
                                               1
determined that Jack and Alice had filed their petition in bad faith due to

some prepetition property transfers, conduct surrounding their homestead

exemption, the hiding of assets, and the timing of the bankruptcy filing.

Seeing no error by the bankruptcy court, we AFFIRM.

                                     FACTS

A.    Prepetition events

      1.    State court litigation

      Jack, a licensed contractor, and Alice, a retired food service worker, sold

a home to appellees James Hwang and Debra Wu ("Creditors") in 2011.

Creditors later discovered defects in the home which caused damages in

excess of $100,000. In late 2016, Creditors sent a construction defect notice to

Jack and a mediation demand to Jack and Alice.

      In February 2017, Creditors filed suit against Jack and Alice over the

home defects. Creditors prevailed in binding arbitration and were awarded

close to $177,000 for damages and attorney's fees. At a hearing on June 6,

2019, the state court orally granted Creditors' petition to confirm the

arbitration award and ordered them to submit a written order and judgment.

About 90 minutes later, Jack and Alice filed for bankruptcy.

      2.    Prepetition property transfers

      In or about 2013, Alice purchased a four bedroom rental home in

Patterson, California as her sole and separate property (the "Property"). In

January 2017, Alice transferred a 50% interest in the Property to her daughter,

of Bankruptcy Procedure.
                                        2
Carol, for no consideration. In June 2018, Alice transferred her remaining 50%

interest in the Property to Carol for no consideration. In April 2019, Carol

transferred her 100% interest in the Property back to Alice for no

consideration. Neither Alice nor Carol explained the reason for these multiple

transfers, but the transfers all took place during Jack and Alice's state court

litigation with Creditors.

B.    Postpetition events

      In their joint chapter 13 petition filed on June 6, 2019, Jack listed his

address as an apartment in San Jose; Alice listed her address as the Property.

Jack and Alice claimed a homestead exemption of $170,350 for the Property,

which they valued at $367,655. The Property was subject to a lien of $185,000.

In addition to $1,200 from social security, Alice represented in Schedule I that

she received monthly rental income of $1,800 from the Property. An amended

Schedule I was filed in August 2019, reducing the monthly rental income to

$1,000. Jack and Alice each filed a Schedule J to reflect their separate monthly

household expenses.

      In their chapter 13 plan, Jack and Alice proposed to make 60 monthly

plan payments of $1,375 and to provide a 20% dividend to unsecured

creditors. Monthly mortgage payments of $1,624.39 for the Property would be

paid outside of the plan. Creditors argued that the proposed plan was

infeasible given Jack and Alice's income. No plan was ever confirmed.

      Jack later moved to be dismissed from the chapter 13 case under

      4
          Jack has not appealed the order converting the case to chapter 7.
                                              3
§ 1307(b). Creditors opposed Jack's individual dismissal and filed a cross-

motion to convert the entire case to chapter 7 under § 1307(c).

      Creditors argued that Jack and Alice had engaged in bad faith conduct

warranting conversion. First, they argued that Jack and Alice were falsely

claiming a homestead exemption in the Property when they did not live

there, and had no intention of living there, when they filed their petition. The

tenant at the Property on the petition date was a family of four who had lived

there since 2016. At some point in 2019, Alice's son, Daniel, approached the

tenants, told them that Jack and Alice were having some legal troubles, and

asked if Alice could move into one of the four bedrooms at the Property with

the tenants. In exchange, Alice would pay half the rent. Faced with moving

out or staying with reduced rent, the tenants agreed to allow Alice to move in

with them. Creditors argued that this was a "fake" attempt to make it appear

as though Alice lived there so that she and Jack could claim the homestead

exemption.

      Alice testified that she initially paid $900 of the $1,800 monthly rent.

However, in late July 2019, she asked the tenants to pay $1,000 per month

beginning in August 2019. Alice testified that she moved into the Property

prior to the petition date of June 6, 2019. Jack testified that Alice moved into

the Property in June 2019. The tenants testified that they were not sure when

Alice moved in, but they thought it was in August 2019. The tenants testified

that Alice brought only a few personal items, such as toiletries, linens,

clothes, and luggage. The tenants testified that Alice lived at the Property for

                                        4
four months – from August 2019 through November 2019 – and that she

stayed there a total of only five or six nights. A private investigator reported

that, during the months of December 2019 and January 2020, he never located

Alice's car at the Property. However, he did see it multiple times at Carol's

home and Jack's apartment.

      Creditors also cited Alice's multiple transfers of the Property between

her and Carol as evidence of bad faith conduct supporting conversion. Alice's

first transfer of 50% of her interest in the Property to Carol in January 2017

occurred on the eve of Creditors' filing of the complaint against Jack and

Alice; the transfer of Alice's remaining 50% interest in the Property to Carol in

June 2018 occurred one month after the parties had attended a case

management conference in that litigation; and Carol's transfer of her 100%

interest in the Property back to Alice in April 2019 occurred after Creditors

sued Alice and Carol in August 2018 to set aside the alleged fraudulent

transfers to Carol.

      Third, Creditors cited Jack and Alice's omission and concealment of

assets as evidence of bad faith conduct supporting conversion. During his

Rule 2004 examination, Jack revealed that he had a secret bank account with

his friend, Humphrey Shen, which was not disclosed in the initial bankruptcy

schedules but was later disclosed in an amendment. Jack testified that the

purpose of this account was to hide money from Alice. Mr. Shen confirmed

the existence of the joint bank account and that it was used primarily by Jack.

Mr. Shen also produced documents demonstrating that Jack used a credit

                                        5
card in Mr. Shen's name to buy items at Home Depot and other construction-

related stores and that the joint bank account was used to pay these bills.

Creditors argued that it was reasonable to infer Mr. Shen was assisting Jack in

hiding money Jack made in his construction business. Alice testified that she

knew about the Shen account but that she did not know the extent to which

Jack used it. 5

      Lastly, Creditors argued that the timing of the bankruptcy filing was

further evidence of Jack and Alice's bad faith supporting conversion. The

petition was filed on the same day as the hearing to confirm the arbitration

award, which prevented entry of the judgment until Creditors got relief from

stay. Creditors argued that they were the only bona fide creditor in the case;

every other unsecured creditor was a family member or other close relation.

Creditors questioned the veracity of the proofs of claim filed by these

persons. For example, Mr. Shen said he had no memory of filing a claim, even

though one for $20,000 had been filed on his behalf. Creditors argued that the

clear purpose behind Jack and Alice's bankruptcy filing was to avoid paying

Creditors' judgment.

      Jack and Alice opposed Creditors' cross-motion. They argued that Jack's

misdeeds could not be imputed to Alice and should not affect her right to

continue in chapter 13. Except for the homestead exemption, they argued,

Creditors had not alleged that Alice engaged in any wrongful conduct in

      5
        The evidence established yet another secret checking account that Jack used to
fund his business while in bankruptcy. About $62,000 was deposited into this account
during the time it was open. Alice testified that she had no knowledge of this account.
                                               6
connection with the chapter 13 case. Jack and Alice also argued that Creditors

could not collaterally attack the homestead exemption, which had been

allowed without objection. As for the Property transfers, Jack and Alice

argued that bringing the Property back into the estate prior to the bankruptcy

filing was not evidence of bad faith conduct. Finally, Jack and Alice argued

that the bankruptcy case was not filed to thwart litigation. The arbitration

award had been made before the filing, and entry of an order confirming the

award was only a ministerial act. Jack and Alice maintained that the purpose

of the filing was to stave off Creditors' filing of a judicial lien against the

Property. That the filing and the hearing to confirm the award occurred on

the same day, they argued, was merely coincidental.

       After a hearing and further briefing, the bankruptcy court entered an

order converting the case to chapter 7 for "cause" under § 1307(c), finding that

Jack and Alice had filed their petition in bad faith. Alice timely appealed.

                                 JURISDICTION

       The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

                                      ISSUES

1.     Did the bankruptcy court abuse its discretion in converting the case to

chapter 7?

2.     Did the bankruptcy court abuse its discretion by not conducting an

evidentiary hearing even though the record was already closed?

////

                                          7
                           STANDARDS OF REVIEW

      We review the bankruptcy court's decision to dismiss or convert a

chapter 13 case under § 1307(c) for abuse of discretion. de la Salle v. U.S. Bank,

N.A. (In re de la Salle), 461 B.R. 593, 601 (9th Cir. BAP 2011) (citing Ellsworth v.

Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP

2011)). The existence of bad faith is a factual determination reviewed for clear

error. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1222-23 (9th Cir. 1999).

      We review the bankruptcy court's decision whether to hold an

evidentiary hearing for abuse of discretion. Zurich Am. Ins. Co. v. Int’l

Fibercom (In re Int’l Fibercom), 503 F.3d 933, 939-40 (9th Cir. 2007).

      A bankruptcy court abuses its discretion if it applies the wrong legal

standard, or misapplies the correct legal standard, or if it makes factual

findings that are illogical, implausible, or without support in inferences that

may be drawn from the facts in the record. United States v. Hinkson, 585 F.3d

1247, 1261-62 (9th Cir. 2009) (en banc).

                                  DISCUSSION

A.    The bankruptcy court did not abuse its discretion in converting the
      case to chapter 7.

      Section 1307(c) authorizes a party in interest to request conversion or

dismissal of a chapter 13 case for "cause" and provides a non-exclusive list of

grounds constituting cause. Although not specifically listed in the statute,

"bad faith" is "cause" for dismissal or conversion under § 1307(c). See In re

Leavitt, 171 F.3d at 1224 (citing cases).

                                            8
      Factors for determining whether a case was filed in bad faith include:

      (1) whether debtors misrepresented facts in the petition or plan,
      unfairly manipulated the Bankruptcy Code, or otherwise filed the
      chapter 13 petition or plan in an inequitable manner;
      (2) debtors' history of filings and dismissals;
      (3) whether debtors only intended to defeat state court litigation; and
      (4) whether egregious behavior is present.

Id.; Ho v. Dowell (In re Ho), 274 B.R. 867, 876 (9th Cir. BAP 2002). No one factor

is determinative. Rather, bad faith is determined by examining the "totality of

the circumstances." Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994)

(citation omitted); In re Ho, 274 B.R. at 876. A finding of bad faith does not

require fraudulent intent by the debtor, nor is evidence required of the

debtor's ill will directed at creditors, or that the debtor was affirmatively

attempting to violate the law – malfeasance is not a prerequisite to bad faith.

In re Leavitt, 171 F.3d at 1225 (citing cases).

      After applying the Leavitt factors and considering the totality of the

circumstances, the bankruptcy court concluded that Jack and Alice filed their

petition in bad faith, thereby constituting "cause" under § 1307(c). As to Alice

on the first and fourth Leavitt factors, the court questioned the veracity of her

statements that she lived at the Property on the petition date when other

evidence appeared to the contrary, and it found that Alice's unexplained

prepetition transfers of the Property to Carol indicated her willingness to

transfer property to hinder Creditors' collection efforts. The court found that

the third Leavitt factor also supported a bad faith finding; the bankruptcy

filing was timed to avoid entry of judgment, and the amount of Creditors'
                                          9
claim was not disputed. The second Leavitt factor was not implicated, since

this was Alice's (and Jack's) first bankruptcy filing.

      Alice argues that the bankruptcy court erred by considering the

prepetition transfers of her interest in the Property to Carol and finding that

they suggested bad faith. Alice cites First Beverly Bank v. Adeeb (In re Adeeb),

787 F.2d 1339 (9th Cir. 1986), and argues that the only type of prepetition

transfer that the court could have considered was a transfer where her

property remained transferred at the time the bankruptcy petition was filed.

Because the transfers to Carol were undone prior to the bankruptcy filing,

Alice argues that they should have little or no bearing on the question of her

bad faith. We disagree.

      Alice's reliance on Adeeb is misplaced. First, Adeeb dealt with a denial of

discharge under § 727(a)(2)(A), which requires evidence of the debtor's

fraudulent intent. No such intent is required for a finding of "bad faith" under

§ 1307(c). In re Leavitt, 171 F.3d at 1224. Second, even if Adeeb did apply, Alice

interprets its narrow holding far too broadly.

      In Adeeb, the debtor was facing financial difficulties, and on the advice

of a non-bankruptcy lawyer transferred significant assets to friends and

associates for no consideration. Adeeb later met with a bankruptcy lawyer

who persuaded him to come clean with his creditors and undo the transfers.

Adeeb informed his creditors of the situation and began the recovery process.

However, before he could recover all of the assets, some creditors filed an

                                        10
involuntary petition against him, and then proceeded to object to his

discharge under § 727(a)(2)(A).

      On appeal, the Ninth Circuit Court of Appeals first interpreted the term

"transferred" under § 727(a)(2)(A) to mean "transferred and remain

transferred." 787 F.2d at 1344. It then went on to conclude that the type of

transfers necessary for purposes of denying discharge under the statute are

prepetition transfers that "remain[] transferred at the time the bankruptcy

petition is filed." Id. at 1345. The court ultimately held that "a debtor who has

disclosed his previous transfers to his creditors and is making a good faith

effort to recover the property transferred at the time an involuntary

bankruptcy petition is filed is entitled to discharge of his debts if he is

otherwise qualified." Id. at 1346 (emphasis added).

      Unlike Adeeb, Alice's case was a voluntary filing. We reviewed Adeeb in

the context of a voluntary filing in Beauchamp v. Hoose (In re Beauchamp), 236

B.R. 727, 733-34 (9th Cir. BAP 1999), aff'd, 5 F. App'x 743 (9th Cir. 2001), and

held that, in cases of voluntary petitions, both "disclosure and recovery" of

the fraudulently transferred asset must occur before the filing. We affirmed

the bankruptcy court's decision to deny discharge in Beauchamp under

§ 727(a)(2)(A), because the debtor did not recover the property prior to his

bankruptcy filing and, more importantly, because he did not disclose it until

a Rule 2004 examination had been scheduled. But for the scheduled Rule 2004

examination, the debtor would not have disclosed the property.

                                        11
      Although Alice recovered the Property before she and Jack filed their

chapter 13 case, nothing in the record shows that she voluntarily disclosed

and unwound the transfers to Creditors prior to the petition date. In fact, the

record reflects that Alice's recovery of the Property from Carol was in

response to Creditors' suit for fraudulent conveyance. Further, Alice did not

disclose the June 2018 transfer of her remaining 50% interest in the Property

to Carol in her statement of financial affairs (or any amendments), even

though that transfer occurred within two years of the petition date.

      Finally, "the recovery requirement under Adeeb means recovery for the

benefit of creditors." A & H Ins., Inc. v. Huff (In re Huff), BAP No. NV-13-1263-

JuKiTa, 2014 WL 904537, at *7 (9th Cir. BAP Mar. 10, 2014) (citing Pac. W.

Bank v. Johnson (In re Johnson), 68 B.R. 193, 199-200 (Bankr. D. Or. 1986)). It

does not appear that recovery of the Property was for the benefit of creditors.

After getting the Property back, Alice promptly filed for bankruptcy and

claimed a $170,350 homestead exemption for it. At the time, the Property was

subject to a lien of $185,000. Together, these obligations total no less than

$355,350. With the value of the Property at $367,655, plus costs of sale of at

least 5%, there clearly would be no value for creditors.

      Accordingly, it was proper for the bankruptcy court to consider the

prepetition transfers of the Property in its bad faith analysis under § 1307(c),

and we see no clear error in its finding that the transfers supported a finding

of bad faith. See In re Caola, 422 B.R. 13, 15 (Bankr. D. N.J. 2010) (court would

consider chapter 13 debtor's prepetition transfer of his one-half interest in

                                        12
property that he jointly owned with his non-debtor wife in its bad faith

analysis for converting case to chapter 7 under § 1307(c)); In re Meredith, No.

03-34018-DOT, 2005 WL 3765473, at *3-*5 (Bankr. E.D. Va. June 20, 2005)

(considering chapter 13 debtor's prepetition transfers of property as part of its

bad faith analysis for converting case to chapter 7 under § 1307(c)); see also

Cook v. Cook (In re Cook), 74 F. App'x 725, 726 n.1 (9th Cir. Aug. 6, 2003) (a

chapter 13 debtor's prepetition conduct is relevant to the bad faith inquiry for

filing the petition or a proposed plan) (citing cases).

      Alice also argues that the bankruptcy court erred when it considered

Creditors' collateral attack on her homestead exemption in its bad faith

analysis. Alice argues, because the homestead exemption was allowed, the

court could not consider any of her conduct surrounding it. As the

bankruptcy court correctly observed, Creditors were not challenging the

amount of, or Alice's entitlement to, the homestead exemption. Rather, they

were challenging Alice's credibility and arguing that her deceptive behavior

with respect to the Property and the homestead exemption was evidence of

her bad faith under the first Leavitt factor.

      Alice cites no relevant authority to support her argument that it was

error for the bankruptcy court to consider the homestead exemption in this

limited context, and we located none. Her citations to Law v. Siegel, 571 U.S.

415 (2014), and Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), are inapposite.

This case does not involve a surcharge of, or challenge to, the homestead

exemption. Here, the court only considered Alice's actions and

                                         13
representations about the Property and related homestead exemption as

probative evidence of her bad faith under § 1307(c). Case law indeed supports

the court's action. See Marrama v. Citizens Bank of Mass. (In re Marrama), 313

B.R. 525, 534 (1st Cir. BAP 2004), aff'd, 430 F.3d 474 (1st Cir. 2005), aff'd, 549

U.S. 365 (2007) (considering debtor's misrepresentations about his homestead

exemption in deciding whether bad faith existed to deny his motion to

convert his chapter 7 case to chapter 13).

      Alice next argues that no bad faith was shown by the timing of the

bankruptcy filing. She argues that filing for bankruptcy to prevent Creditors

from recording an imminent judicial lien was a legitimate reason for filing

and does not show bad faith. Whether or not legitimate, the bankruptcy court

was not precluded from considering the suspect timing of the filing in

making a finding of a bad faith filing under § 1307(c). See Chinichian v.

Campolongo (In re Chinichian), 784 F.2d 1440, 1444-46 (9th Cir. 1986) (holding

that strategic filing of a bankruptcy petition to frustrate and to impede a

specific performance action in state court constitutes a bad faith filing).

      In considering the third Leavitt factor, the bankruptcy court found that

the petition, filed just 90 minutes after the state court entered an adverse oral

ruling against Jack and Alice, was timed to avoid entry of Creditors'

judgment. Jack and Alice admitted as much. Further, Creditors' debt was

undisputed, and they were the only party asserting a claim that was not held

by a family member or other close relation. The mortgage payments on the

Property, which had significant equity, were current, and Jack and Alice

                                         14
owned two parcels of land in Arizona free and clear. Given the record, we see

no clear error in the bankruptcy court's finding that Jack and Alice filed their

case solely to impede Creditors' collection efforts, which supported a finding

of a bad faith filing.

      Once the bankruptcy court found cause, it then had to consider whether

conversion or dismissal was in the best interest of creditors and the estate. In

re Ho, 274 B.R. at 877 (citing In re Leavitt, 171 F.3d at 1224). The court decided

that converting the case to chapter 7 was in the best interest of creditors and

the estate. Alice does not challenge this finding on appeal.

B.    The bankruptcy court did not abuse its discretion by not conducting
      an evidentiary hearing.

      Alice argues that, because there were genuine factual disputes about

her entitlement to a homestead exemption, the reason for the Property

transfers, and the timing of the bankruptcy filing, the bankruptcy court

abused its discretion by not granting her request for an evidentiary hearing.

The court did not address this issue. We disagree with Alice for several

reasons.

      First, there was no dispute as to Alice's entitlement to the homestead

exemption; it had already been allowed without objection.6 Second, Alice had

ample opportunity to explain why the transfers to Carol occurred, but she

offered none in her very brief declaration. Her counsel argued that perhaps it

      6
        Once the case was converted, Creditors and the chapter 7 trustee objected to the
homestead exemption. On May 7, 2021, the bankruptcy court entered an order sustaining
their objection.
                                           15
was because Carol was making the mortgage payments, but this was simply

argument. No testimony from Alice or Carol was offered on this point. As for

the timing of the bankruptcy filing, Jack and Alice admitted that it was done

to prevent Creditors from recording a judicial lien against the Property, so

this too was undisputed. Finally, Alice did not request an evidentiary hearing

until after the court had already considered the parties' declarations, heard

oral argument, and taken the matter under submission. The evidentiary

record was closed. She then tardily requested one in her post-hearing brief.

     In light of the foregoing, we find that the bankruptcy court did not

abuse its discretion by denying Alice's belated request for an evidentiary

hearing. Based upon the many uncontested facts, and upon the facts as found

by the bankruptcy court and all reasonable inferences from those facts, a

court could properly find bad faith and cause to convert under § 1307(c).

                               CONCLUSION

     For the reasons stated above, we AFFIRM.

                                       16