In re: LEE J. BUIVIDAS, Chapter 13, Debtor.

Case No. 04-14280-RGM.United States Bankruptcy Court, E.D. Virginia, Alexandria Division.
January 21, 2005

MEMORANDUM OPINION AND ORDER CONTINUING MATTERS
ROBERT MAYER, Bankruptcy Judge

This case is before the court on the objections Samuel L. Velasquez and the chapter 13 trustee to the confirmation of the debtor’s chapter 13 plan (Docket Entry 37 and 38, Velasquez’ objection and memorandum in support; and Docket Entry 39, chapter 13 trustee’s objection) and the motion to dismiss this case filed by Samuel L. Velasquez (Docket Entry 29).

The matters raised are inextricably intertwined with the ownership of a house that Velasquez asserts that he owns and that the debtor asserts Velasquez owns in constructive trust for the debtor. The parties raise other issues related to the house. An evidentiary hearing was held on the various matters on December 22, 2004, and December 23, 2004, and was continued for a further evidentiary hearing on March 3, 2005, with an interim status hearing set for February 16, 2005. The resolution of the objections to the confirmation of the debtor’s proposed chapter 13 plan depends in large measure on the outcome of the ownership issue. Those matters should be heard together with those set for hearing on March 3, 2005.

Velasquez also argues in his motion to dismiss that the debtor’s chapter 13 plan does not provide for payments to the chapter 13 trustee to commence within 30 days after the filing of the

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plan as required by § 1326(a)(1) and must, therefore, be dismissed.[1] Section 1326(a)(1) contains no remedy for nonpayment. However, § 1307(c)(4) does permit the court to convert or dismiss the chapter 13 case for failure to make the § 1326(a)(1) payment. Dismissal for failure to make the first plan payment is discretionary with the court. In re Smith, 85 B.R. 729 (E.D.Va. 1988). This court strictly enforces § 1326(a)(1) See Local Bankruptcy Rule 3070-1(C) providing that upon certification by the chapter 13 trustee of nonpayment of the first plan payment, the clerk will dismiss the case unless the time has been extended by the court.[2] Local Bankruptcy Rule 3070-1(C) substantially increased compliance with § 1326(a)(1) and assists in moving cases toward confirmation. However, blindly enforcing the rule in every case without considering the particular circumstances of the case is not the exercise of discretion but the administration of a per se rule. Such an enforcement policy runs afoul of this court’s obligation to exercise its discretion in such matters as required by § 1307(c). Id. at 731.

The circumstances of this case make strict enforcement of the rule inequitable and provide a potential windfall for Velasquez at the expense of all other creditors and the debtor. The debtor’s chapter 13 plan as explained in his motions and in court seeks to assume a lease with Velasquez and to exercise an option to buy the house. The debtor contemplated prompt confirmation and consummation. The plan envisions full payment to all creditors by January 31, 2005, about 63 days after the plan was filed. A contested hearing on the various motions was commenced on December 22, 2004. On the second day of the hearing, the debtor was granted leave to amend his

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motions to conform to the evidence, that is, to allege a constructive trust, an allegation that could plainly be made in good faith in light of the testimony of third parties on December 22, 2004. In order to allow full discovery and a fair opportunity for all parties to present their cases, the evidentiary hearing was continued to March 3, 2005.

If the constructive trust is established, Velasquez will suffer no loss. He will be made whole for his out-of-pocket expenditures. The debtor will realize significant proceeds from the sale of the house. If Velasquez prevails, he will realize a significant profit from the house. Plan payments by comparison to the proceeds of sale are not substantial. The rights and remedies of the parties may be altered if the case is dismissed. Indeed, the debtor may be denied a remedy, certainly a prompt remedy.

No distributions will be made to creditors until the plan is confirmed so the absence of the initial payment, or the late payment of it, will have no impact on them. Confirmation must still await the outcome of the motions set for hearing on March 3, 2005.

The court is unwilling to permit the § 1326(a)(1) payment to effect a non-merits based determination when a merits based determination can be and will be made in the near future. The debtor acted promptly to bring this case to a confirmation hearing and was prevented in doing that by the complexities that he faced and the insufficient time for both parties to prepare for a relatively complex hearing. At this time, any delay appears based on the nature of the case and not the debtor’s misconduct.[3]

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The better course of action is to continue the motion to dismiss and consolidate it for hearing with the other motions and objections. Unlike many other bankruptcy cases which are tried piecemeal, this case can and ought to be tried as a unified whole. One central issue pervades the case and the relationship between the debtor and Velasquez. The resolution of the case should flow from the resolution of that issue.

ORDER
It is ORDERED:

1. The objections Samuel L. Velasquez and the chapter 13 trustee to the confirmation of the debtor’s chapter 13 plan (Docket Entry 37 and 38, Velasquez’ objection and memorandum in support; and Docket Entry 39, chapter 13 trustee’s objection) and the motion to dismiss this case filed by Samuel L. Velasquez (Docket Entry 29) are continued from January 26, 2005, to March3, 2005, at 9:30 a.m. for final hearing.

2. Local Bankruptcy Rule 3070-1(C) is suspended and the procedures in Local Bankruptcy Rule 1017-3 shall apply in the event of a certification of nonpayment by the chapter 13 trustee.

2. A status hearing on the matters will be held on February16, 2005, at 10:30 a.m.

[1] The argument is coupled with other arguments for dismissal, including, inter alia, lack of good faith based on a review of Schedules I and J and the absence of feasibility. Those arguments are closely related to confirmation and should be considered in connection with confirmation.
[2] There are exceptions to the rule. See LBR 1017-3.
[3] This does not excuse the debtor from complying with § 1326(a)(1), although at this time, the trustee has not certified noncompliance. A determination of misconduct or bad faith by the debtor is the subject matter of other motions. A separate hearing on it at this time does not contribute to judicial economy or a rational development of this case. Certainly, the failure to make the first payment timely may be evidence of the absence of good faith, but at this stage would not seem likely to be sufficient evidence itself to support a finding of bad faith. It may. Only a full development of the evidence can resolve that issue and such a full development should be a part of the development and trial of all.