California Court Discusses Litigation Post Chapter 13 Filings

Bankruptcy cases often involve overlapping legal proceedings in state court and federal bankruptcy court, and debtors must take care that their actions do not run afoul of the confirmed Chapter 13 plan. A recent decision by a California court highlights that even when post-confirmation developments raise questions about debtor conduct, a bankruptcy court retains discretion to determine whether those actions warrant dismissal. If you are considering seeking debt relief and you have questions about your rights before, during, and after bankruptcy proceedings, you should speak with a Sacramento bankruptcy attorney as soon as possible.

Factual and Procedural Background

It is reported that the debtor filed a Chapter 13 petition in October 2022 while her residence remained encumbered by a deed of trust in favor of a secured lender. The debtor had previously lived in the property with her then-husband, who was the son of the creditor seeking dismissal. It is alleged that the creditor, who continued residing at the property after the debtor’s divorce, had acquired a judicial lien on the property and was listed in the bankruptcy schedules as holding a secured claim of approximately $185,000. The debtor proposed an initial plan that included efforts to cure mortgage arrears and strip judicial liens, including the creditor’s, as impairing the homestead exemption.

It is further reported that both the creditor and the mortgage lender moved for relief from the automatic stay. After obtaining in rem stay relief, the lender foreclosed on the property and took title through a credit bid in early 2023. Despite the creditor’s failure to timely file a proof of claim, the bankruptcy court treated her stay relief motion as an informal proof and allowed her claim as unsecured. The debtor then amended her plan to remove treatment of secured claims, treating all previously secured debts as unsecured due to the foreclosure. The amended plan was confirmed over the creditor’s objection in April 2023.

It is alleged that following confirmation, the debtor challenged the foreclosure in state court, asserting she had not received proper notice. A stipulated judgment was entered in June 2024, declaring that the debtor’s interest in the property was not extinguished and that the deed of trust remained in full effect. The foreclosure sale remained valid as to all other parties. The creditor responded by filing a motion to dismiss the bankruptcy case, arguing that the stipulated judgment created a new debt obligation without court or trustee approval and constituted a material default under the confirmed plan.

It is reported that the bankruptcy court denied the motion to dismiss at an August 2024 hearing, finding that the stipulated judgment did not alter the debtor’s financial position as of the petition date and that the debt had been fully disclosed in the original schedules. The court also rejected a renewed motion for reconsideration, determining that it simply restated prior arguments without demonstrating legal error, newly discovered evidence, or an intervening change in law. The creditor appealed both rulings to the Bankruptcy Appellate Panel.

Post-Bankruptcy Litigation

On appeal, the court reviewed the orders for abuse of discretion. The court first addressed the denial of the motion to dismiss under 11 U.S.C. § 1307(c), which permits dismissal for cause, including material default under the confirmed plan. The creditor argued that the stipulated judgment reinstating the mortgage was a new obligation incurred in violation of the plan’s terms, which prohibit post-confirmation debt absent trustee consent or court approval.

However, the court concluded that the stipulated judgment merely restored the parties’ legal positions to what they had been at the time of filing. Because the original mortgage obligation was disclosed in the schedules, the judgment did not constitute new debt. Therefore, no material default occurred.

The court also rejected the creditor’s argument that the debtor acted in bad faith by failing to notify the court or creditors of the stipulated judgment. Citing 11 U.S.C. § 1325(a), the court explained that any allegations of pre-confirmation bad faith were precluded by the confirmation order, which is res judicata as to all matters that could have been raised at the confirmation hearing. Moreover, the panel found no evidence that the debtor’s efforts to preserve her interest in the property post-confirmation, especially while experiencing financial difficulty, constituted post-confirmation bad faith.

Turning to the renewed motion to dismiss, which the bankruptcy court treated as a motion under Federal Rule of Civil Procedure 59(e), the appellate panel emphasized that reconsideration is not warranted merely to reargue previously rejected points. Because the creditor presented no new evidence, change in law, or legal error, the panel affirmed the denial of the motion.

Work with a Trusted California Bankruptcy Attorney

Bankruptcy courts carefully examine alleged defaults and scrutinize whether a debtor’s post-confirmation actions warrant dismissal under the law. If you are interested in learning more about your options with regard to bankruptcy, you should contact an attorney. Matthew D. Roy of The Law Offices of Matthew D. Roy, is a skilled Sacramento bankruptcy attorney who provides advise to debtors and creditors in Chapter 13 and other bankruptcy matters, and if we represent you, we will help you get the results you deserve.  To set up a meeting with Mr. Roy, you can reach out by using our form online or calling us at (916) 361-6028.