Court Opinion

ID: 37826
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:58:51+00
Date Added: 2024-06-11T17:15:48.482975
License: Public Domain

United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
               IN THE UNITED STATES COURT OF APPEALS
                                                              March 4, 2005
                         FOR THE FIFTH CIRCUIT
                         _____________________           Charles R. Fulbruge III
                                                                 Clerk
                              No. 04-40573
                         _____________________

In the matter of: JUAN PEQUENO
               Debtor
JUAN PEQUENO

                Appellant-Cross-Appellee

          v.

MICHAEL B SCHMIDT, Trustee

               Appellee-Cross-Appellant
_________________________________________________________________

          Appeals from the United States District Court
                for the Southern District of Texas
                          No. 1:03-CV-29
_________________________________________________________________

Before KING, Chief Judge, and GARZA and BENAVIDES, Circuit
Judges.

PER CURIAM:*

     This is a bankruptcy appeal in which the debtor initially

filed under Chapter 7, but petitioned several months later to

convert to Chapter 13.    Soon after he filed for bankruptcy, the

debtor was awarded a substantial judgment in a suit against his

former employer.   In the bankruptcy proceedings, he attempted to

characterize the judgment as being for lost future wages, and

     *
       Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

                                 - 1 -
thus exempt from bankruptcy.   The bankruptcy court denied both

the debtor’s petition to convert from Chapter 7 to Chapter 13 and

his attempt to characterize the judgment as exempt.   He appealed

to the district court, which affirmed the bankruptcy court on the

exemption issue but reversed on the conversion issue.    The debtor

now appeals as to the exemption issue, and the Chapter 7 trustee

cross-appeals as to the conversion issue.   We AFFIRM on both

issues.

                          I.   BACKGROUND

A.   The Lawsuit Against Brownsville, Texas

     Although this appeal directly concerns Appellant-Cross-

Appellee Juan Pequeno’s petition for bankruptcy, it is

intricately connected to another case.   Pequeno’s main asset in

bankruptcy is a judgment against his former employer, the City of

Brownsville, Texas.   To contextualize properly the bankruptcy

issues in this appeal, it is first necessary to trace briefly the

history of Pequeno’s suit against Brownsville.

     In November 1998, Pequeno’s employment with Brownsville was

terminated.   He subsequently filed suit against Brownsville in

the United States District Court for the Southern District of

Texas (the “§ 1983 district court”).   Bringing his suit under 42

U.S.C. § 1983, Pequeno alleged that he was terminated in

retaliation for exercising his First Amendment rights when he

spoke publicly in opposition to the city’s plans to purchase a

                               - 2 -
particular computer software program.    The case went to a jury,

and on March 26, 2002, the jury awarded Pequeno a judgment for

$400,359.    He was also awarded $20,385 in attorney’s fees.      On

April 5, 2002, Pequeno filed a motion to amend the judgment to

include additional compensation for future lost wages.     In

support of his motion, Pequeno cited statements from jurors to

the effect that they would have included compensation for future

wages if they had known that Pequeno would not get his job back

as a result of the verdict.2    Pequeno also cited these statements

in a letter he wrote to Appellee-Cross-Appellant Michael B.

Schmidt dated June 7, 2002, in which he requested Schmidt not to

oppose the motion to amend the judgment.3    Pequeno’s motion to

amend the judgment was denied in August 2002.

B.   Bankruptcy Court Proceedings

     As a result of losing his job, Pequeno suffered financial

difficulties.    To forestall what he thought was the imminent

     2
            Specifically, Pequeno wrote that:

                 Plaintiff also found that jurors were not
                 aware that under [§ 1983] since Defendant had
                 not   protected   Plaintiff’s   previous   job
                 position and, in fact Defendant had filled in
                 the position with someone else, and because
                 placing Plaintiff back in his employment
                 position would be infeasible because of the
                 hostile, political environment, then aggrieved
                 Plaintiff is entitled to recover front pay as
                 appropriate remedy.

     3
          In his letter to Schmidt, Pequeno stated: “[b]y their
own testimony front-pay was not awarded by the jurors because
they believed that I was going to get my job back.”
                              - 3 -
foreclosure on his home, on December 31, 2001, Pequeno filed a

pro se petition for bankruptcy protection under Chapter 7 of the

Bankruptcy Code.   On January 4, 2002, the bankruptcy court

appointed Schmidt as the Chapter 7 trustee.

     Under FED. R. BANKR. P. 1007(c), a debtor filing under

Chapter 7 has fifteen days from the time of filing his petition

to file a schedule of his assets and debts.    Pequeno failed to

make such a filing.    In response to a motion from Schmidt, in

June 2002, the bankruptcy court ordered Pequeno to file his

schedule of assets and debts, as well as his statement of

financial affairs.    On June 17, Pequeno filed both documents.

Pequeno failed to list both his cause of action against

Brownsville and a $61,000 payment from Brownsville’s retirement

fund in his schedule of assets and debts.    He did, however, list

these assets in his statement of financial affairs.    Further, in

February 2002, Brownsville’s attorneys informed Schmidt of

Pequeno’s pending cause of action against the city.    So, from an

early point in the proceedings, Schmidt had actual notice of the

suit against Brownsville.

     On June 14, 2002, Pequeno attended the first meeting of

creditors as required by 11 U.S.C. § 341.    At the meeting, he

requested, and was granted, an adjournment until June 28 so that

he could retain an attorney.    However, Pequeno never retained an

attorney and did not attend the meeting on June 28, so the § 341

meeting was postponed for a second time until September 26, 2002.

                                - 4 -
The day before that meeting was to take place, Pequeno requested

permission to participate in the meeting telephonically, claiming

that car difficulties would prevent him from attending in person.

The bankruptcy court denied this request, and Pequeno did not

attend the meeting.   The meeting was rescheduled a third time for

October 31, 2002.

     On July 18, 2002, Pequeno filed a motion under 11 U.S.C.

§ 706(a) to convert his bankruptcy filing from Chapter 7 to

Chapter 13.   He claimed that he filed for bankruptcy to save his

home from foreclosure.   After reviewing a book about bankruptcy,

he had the mistaken impression that filing under Chapter 7 would

stop the foreclosure.    His attorney in the § 1983 suit informed

him that filing under Chapter 7 was ill-advised.4   Based on this

advice, Pequeno sought to convert his filing to Chapter 13.   On

July 22, Schmidt filed an objection to Pequeno’s conversion

motion.   At a hearing held on August 7, the court orally granted

Pequeno’s conversion motion.   After having already granted

Pequeno’s motion, the Bankruptcy Court scheduled a hearing on the

matter for October 9, 2002.5

     4
          Upon receiving this advice, Pequeno initially moved to
dismiss his bankruptcy filing altogether. He claims that he
initially failed to file his schedules because he planned to
withdraw his bankruptcy petition. Once the bankruptcy court
denied the motion to dismiss, Pequeno filed his schedules and
ultimately filed a motion to convert his filing to Chapter 13.
     5
          One week after this hearing, on August 14, Pequeno
received a discharge of his debts because the automatic discharge
was unopposed. As part of the remand proceedings conducted
pursuant to the district court’s judgment, and at Pequeno’s
                              - 5 -
     On September 3, 2002, Pequeno filed amended schedules in

which he listed his interest in the litigation against

Brownsville.    At that point, he also claimed that because the

judgment was for lost future wages, it was completely exempt from

the bankruptcy estate pursuant to 11 U.S.C. § 522(d)(11)(E).

Three days later, Schmidt responded to Pequeno’s claim of

exemption, arguing that the judgment was for mental anguish and

lost past wages.     Schmidt cited the juror statements that Pequeno

presented in his motion to increase the judgment of the § 1983

district court.     The trustee also offered a proffer from

Alejandro Garcia, Pequeno’s attorney in the § 1983 case.      Garcia

stated that Pequeno told him that the jurors told Pequeno that

they had not awarded him compensation for lost future wages

because they thought he would be reinstated.6     Pequeno never

objected to the presentation of this evidence.     Schmidt also

filed an emergency motion for authority to mediate and settle the

judgment.    On September 10, the bankruptcy court granted Schmidt

authority to mediate a settlement.     At that time, the court

insistence, on October 6, 2004, the bankruptcy court revoked the
discharge that was granted over two years earlier.
     6
            Garcia wrote that:

                  Mr. Juan Pequeno, the Debtor, stated to me
                  that he had spoken with some of the juror(s)
                  after the verdict was received and they asked
                  him if he would be suing to get his job back
                  and he told them “No”.      According to Mr.
                  Pequeno these juror(s) explained that they had
                  not awarded him any future lost wages (“front
                  pay”) for this reason.
                                 - 6 -
scheduled arguments on the exemption issue for the October 9

hearing.

     With his authority to mediate, Schmidt quickly negotiated a

settlement with Brownsville for $140,000 in exchange for

Brownsville agreeing not to appeal the § 1983 district court’s

judgment.   On September 25, 2002, the bankruptcy court approved

the settlement subject to a final ruling on Pequeno’s motion to

convert.7   As scheduled, on October 9, the bankruptcy court heard

arguments about Pequeno’s conversion and exemption motions.    A

month later, on November 7, the bankruptcy court denied Pequeno’s

motion to convert and held that none of the judgment represented

compensation for lost future wages.

C.   District Court Proceedings

     Pequeno promptly appealed the bankruptcy court’s November 7

ruling to the United States District Court for the Southern

District of Texas.   On April 1, 2004, the district court issued

its ruling.   Pequeno v. Schmidt, 307 B.R. 568 (S.D. Tex. 2004).

It reversed the bankruptcy court’s judgment on the conversion

issue, finding that the right to convert from Chapter 7 to

Chapter 13 is absolute.   It affirmed the bankruptcy court’s

determination on the exemption issue, holding that the juror

statements Pequeno cited in his motion to amend the judgment of

     7
          Such a conditional ruling was necessary because if the
bankruptcy court determined that Pequeno should be allowed to
convert to Chapter 13, then as debtor-in-possession, he, and not
Schmidt, would have the right to make any settlement decisions.
                              - 7 -
the § 1983 district court constituted a judicial admission on his

part that the jury did not award any damages for future wages.

Pequeno now appeals the district court’s ruling on the exemption

issue, and Schmidt cross-appeals on the conversion issue.

                    II.     STANDARD OF REVIEW

     In this case we are called upon to review the district

court’s decision reviewing the bankruptcy court.    In such

circumstances, we review the bankruptcy court’s findings of fact

for clear error and we review legal issues de novo.    Milligan v.

Evert (In re Evert), 342 F.3d 358, 363 (5th Cir. 2003).

                          III.   DISCUSSION

A.   The Right to Convert Under § 706(a)

     On appeal, we must consider two questions: (1) Does a debtor

have an absolute right to convert from Chapter 7 to Chapter 13?;

and (2) If there is no absolute right to convert, did the facts

and circumstances of this case warrant denial of Pequeno’s motion

to convert?

     As to the first question, the district court found that

Martin v. Martin (In re Martin), 880 F.2d 857 (5th Cir. 1989),

mandates that a debtor who initially files under Chapter 7 has an

absolute one-time right to convert to Chapters 11, 12, or 13.     In

Martin, the bankruptcy court denied a debtor’s motion to convert

from Chapter 7 to Chapter 13.    The debtor appealed to the

district court, which held that the Bankruptcy Code places no

restrictions on the right to convert.
                                 - 8 -
     In reviewing the district court, the Martin court began by

considering the relevant statutory text, which states:

          The debtor may convert a case under this chapter
          to a case under chapter 11, 12, or 13 of this
          title at any time, if the case has not been
          converted under section 1112, 1208, or 1307 of
          this title. Any waiver of the right to convert
          a case under this subsection is unenforceable.

11 U.S.C. § 706(a).   The court found that the text of § 706(a)

represents an unequivocal statement of the right to convert.

Martin, 800 F.2d at 858.    The court also cited the legislative

history, which states that § 706(a) “gives the debtor the one-

time absolute right of conversion of a liquidation case to a

reorganization or individual repayment plan case.”    S. Rep. No.

989, 95th Cong., 2d Sess. 380, reprinted in 1978 U.S. Code Cong.

& Admin. News 5787, 5880.

     Finally, the Martin court cited several cases which support

the notion that a “court does not have the discretion to block

the conversion[,]” Martin, 880 F.2d at 859, and that “a debtor’s

right to convert under section 706(a) is, as indicated by the

statute and its legislative history, an absolute one.”    Id.

The district court noted Martin’s mention in dicta of exceptional

circumstances,8 but focused on the fact that “in at least five

     8
           The court noted that “[t]here are, however, some cases
which block the conversion, but only in extreme circumstances . .
. .” Id. at n.2. The court further stated:
          The courts refuse to interfere with [a right of
          conversion] in the absence of extreme
          circumstances. Because Martin does not allege
          facts which if true would provide an adequate
          ground to deny the debtor’s motion to convert,
                              - 9 -
different places [Martin] states that the right to convert is

absolute (or uses words to that effect).    A statutory right that

is absolute cannot have court-made exceptions.”    Id. at 579

(footnote omitted).    On appeal, Schmidt contends that this

resolution is flawed since it ignores the clear import of

Martin’s statements acknowledging the need to consider the

circumstances before granting a conversion motion.

     As to the question of whether the circumstances of the

instant case warrant the denial of Pequeno’s motion to convert,

the district court recognized that its answer was moot based on

its finding that the right to convert is absolute.    Nevertheless,

it stated that even if exceptions were allowed under exceptional

circumstances, the facts of this case presented nothing

exceptional.

     On appeal, Schmidt argues that Pequeno’s conduct throughout

the bankruptcy proceeding evinces considerable bad faith.      As

evidence of bad faith, Schmidt cites Pequeno’s: (1) failure to

file initially the required schedules; (2) concealment of his

§ 1983 case and retirement fund payout when he did file his

schedules; (3) failure to attend the § 341 creditors meetings;

and (4) waiting until the last minute to claim an exemption for

his § 1983 judgment.    Thus, Schmidt argues, allowing Pequeno’s

          we agree with the district court’s conclusion
          that the bankruptcy court erred in denying the
          conversion.
Id. at 859.

                               - 10 -
conversion would sanction an abuse of the bankruptcy process.

     We agree with the district court’s read of Martin. The

statutory language makes it clear that the right to convert is

absolute and unqualified.   Even were that not so, however, the

exceptional circumstances contemplated by the two bankruptcy

court cases cited in Martin are not present in this case.     In re

Straugh, 41 B.R. 757 (Bankr. W.D. Pa. 1984), involved a post-

petition preferential transfer.   In re Calder, 93 B.R. 739

(Bankr. D. Utah 1988), the bankruptcy court denied conversion to

a debtor who was a practicing bankruptcy attorney who engaged in

substantial misconduct.

     Schmidt seems to argue that Pequeno’s failure to list

initially the § 1983 suit in his schedule of assets evinces an

intent to shield his assets from the bankruptcy process.    The

facts, however, do not bear out this argument.   As Pequeno

argues, if he were trying to shield this asset, he would not have

listed it in his statement of financial affairs.    The bankruptcy

court specifically declined to find fraud on the part of Pequeno.

     The district court’s reversal of the bankruptcy court’s

denial of Pequeno’s conversion motion in the instant case must be

affirmed.

B.   Exemption of Future Wages Under 11 U.S.C. § 522(d)(11)(E)

     Section 522(d)(11)(E) of the Bankruptcy Code exempts from

the bankruptcy estate any “payment in compensation of loss of

future earnings of the debtor . . . to the extent reasonably
                              - 11 -
necessary for the support of the debtor . . . .”       Under FED. R.

BANKR. P. 4003(c), the party objecting to the exemption “has the

burden of proving that the exemptions are not properly claimed.”

The objecting party must carry this burden by a preponderance of

the evidence.    In re Park, 246 B.R. 837, 840 (Bankr. E.D. Tex.

2000) (citing In re Ciotta, 222 B.R. 626, 629 (Bankr. C.D. Cal.

1998)).

     The district court found that the record supported Schmidt’s

objection to Pequeno’s claimed exemption.       The district court

particularly focused on the juror statements Pequeno presented to

the § 1983 district court in his attempt to increase the jury’s

award.    Those statements reflect that the jury did not intend to

award damages for future wages.   The district court ruled that

Pequeno’s presentation of those statements to the § 1983 district

court constitutes a judicial admission that he cannot now deny.

Further, this evidence was presented in the bankruptcy court

without objection.

     Because Pequeno failed to object to the presentation of the

juror statements in the bankruptcy court, we review the admission

of the statements for plain error.      Permian Petroleum Co. v.

Petroleos Mexicanos, 934 F.2d 635, 648 (5th Cir. 1991).       “Plain

error is error which, when examined in the context of the entire

case, is so obvious and substantial that failure to notice and

correct it would affect the fairness, integrity, or public

reputation of judicial proceedings.”      Id.

                               - 12 -
     On appeal, Pequeno asserts that the bankruptcy court’s

admission of Garcia’s proffer regarding the juror statements

constituted plain error in three ways.   First, Pequeno argues

that any statements he made to Garcia were covered by the

attorney-client privilege.   Second, Pequeno claims that the

statements are inadmissible under FED. R. EVID. 606(b).   Third,

Pequeno avers that the juror statements are inadmissible hearsay.

Pequeno argues that in the absence of this evidence, there is no

way to tell whether the judgment covered future wages.    Citing In

re Cramer, 130 B.R. 193 (Bankr. E.D. Pa. 1991), Pequeno argues

that such speculation means that Schmidt cannot meet his burden

of proving by a preponderance of the evidence that the exemption

has not been properly claimed.

     Upon review, it is clear that none of Pequeno’s objections

reflects plain error.   Pequeno’s privilege argument fails because

TEX. R. EVID. 511 provides that one who holds a privilege, such as

the attorney-client privilege, waives the privilege when they

disclose the substance of the privileged communication.    Thus, in

disclosing the substance of his conversation with Garcia through

his letter to Schmidt and his motion to amend the judgment,

Pequeno waived whatever privilege he may have held over his

statements to Garcia.

     FED. R. EVID. 606(b) states: “Upon an inquiry into the

validity of a verdict or indictment, a juror may not testify as

to any matter or statement occurring during the course of the

                              - 13 -
jury’s deliberations or to the effect of anything upon that or

any other juror’s mind or emotions.”            In this instance, the

jurors’ statements are being used to determine the harms for

which the jury intended to compensate Pequeno.            This is not an

inquiry into whether the verdict is valid.            Rather, it is an

inquiry into what the verdict actually says.            As such, it is not

within the ambit of Rule 606(b). See 27 CHARLES ALAN WRIGHT & VICTOR

JAMES GOLD, FEDERAL PRACTICE   AND   PROCEDURE § 6074, at 407 (1990) (making

clear that the rule “applies only in a specific procedural

context”).

     As to Pequeno’s hearsay objection, Schmidt responds by

claiming that Garcia’s statement constitutes an admission by a

party opponent under FED. R. EVID. 801(d)(2), and is thus not

hearsay.   Under Rule 801(d)(2), a statement is not hearsay if

“[t]he statement is offered against a party and is . . . the

party’s own statement . . . .”           Here, Garcia’s proffer concerns a

statement Pequeno himself made.           However, that statement was

itself hearsay since it concerned what the jurors had told

Pequeno.   The fact that Garcia’s proffer is covered under Rule

801(d)(2) does not eliminate the need to identify a hearsay

exception to cover the jurors’ original statements to Pequeno.

United States v. Dotson, 821 F.2d 1034, 1035 (5th Cir. 1987).

Finding no exception, we rule that the proffer contains hearsay.

     The next question is whether the court’s admission of this

hearsay constitutes plain error.           We hold that it does not.

                                       - 14 -
Pequeno argues that it taints the integrity of the judicial

proceedings to allow a pro se litigant’s claim to be defeated

where the sole evidence against him is rank hearsay.    This

argument is insufficient to establish plain error.    Garcia’s

proffer is not the sole evidence used to defeat the exemption

claim.   Schmidt also offered the letter Pequeno wrote to Schmidt

as well as Pequeno’s motion to amend the § 1983 district court’s

judgment.    Since Garcia’s proffer was not the sole evidence

offered against Pequeno, Pequeno’s argument essentially becomes

that it is plain error to hold pro se litigants responsible for

making hearsay objections.    This argument is of no moment because

even for pro se litigants, courts are not responsible for making

basic evidentiary objections.

     For the above reasons, we conclude that it was not plain

error for the bankruptcy court and district court to consider

Garcia’s proffer.    Furthermore, even if Garcia’s proffer were

stricken, there would still be ample reason to find that Schmidt

carried his burden of proving that the exemption was not properly

claimed.    Pequeno does not argue that admission of either his

motion to amend the judgment or his letter to Schmidt constituted

plain error.9   The statements in these documents provide a

foundation, independent from Garcia’s proffer, to conclude that

     9
          It would seem that these documents suffer from the same
double hearsay problem as Garcia’s proffer. But since Pequeno
does not argue that admission of these documents constitutes
plain error, we need not consider the issue. Gentry v. Lowndes
County, 337 F.3d 481, 485 n.5.
                              - 15 -
the jury did not award compensation for lost future wages.

                         IV.    CONCLUSION

     For the foregoing reasons we AFFIRM the judgment of the

district court.   Costs shall be borne by Pequeno.   All

outstanding motions are DENIED.

                               - 16 -