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Bank of Commerce & Trust Company v. Schupbach et al, 12-05047 (Bankr. D. Kan. Jun. 8, 2012) Doc. # 11
SIGNED this 7th day of June, 2012.
Designated for print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
JONATHAN I. SCHUPBACH and
AMY M. SCHUPBACH,
BANK OF COMMERCE & TRUST CO.,
JONATHAN I. SCHUPBACH and
AMY M. SCHUPBACH,
CASE NO. 11-13633
ADV. NO. 12-5047
MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN PART
DEBTORS' MOTION TO DISMISS
Case 12-05047 Doc# 11 Filed 06/07/12 Page 1 of 13
Debtors Jonathan I. Schupbach and Amy N. Schupbach (Debtors) move to dismiss
Bank of Commerce & Trust Co.'s (Commerce) Complaint to Determine Dischargeability
of Debt and Request to Determine Amount of Debt (Motion). Commerce opposes
dismissal. The Court has jurisdiction.1
The Applicable Standard.
Debtors move to dismiss the claims against them under Bankruptcy Rule 7012(b),
incorporating Civil Rule 12(b)(6), which provides for dismissal if the complaint fails to
state a claim upon which relief can be granted. Debtors contend the allegations fail to
satisfy the standard adopted by the Supreme Court in Twombly2 and Iqbal.3 Under that
standard, the motion to dismiss tests the legal sufficiency of the allegations — are they “a
short and plain statement of the claim showing that the pleader is entitled to relief,” as
required by Bankruptcy Rule 7008(a), which incorporates Civil Rule 8(a)(2). Satisfaction
of this standard gives “the defendant fair notice of what the . . . claim is and the grounds
upon which it rests.”4 Further, to withstand a motion to dismiss, a complaint must contain
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of
Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (B). There is no objection
to venue or jurisdiction over the parties.
2 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).
3 Ashcroft v. Iqbal, 556 U.S. 662 (2009).
4 Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).
Case 12-05047 Doc# 11 Filed 06/07/12 Page 2 of 13
enough allegations of fact, “accepted as true, to ‘state a claim to relief that is plausible on
its face.’”5 “A claim has facial plausibility when the pleaded factual content allows the
court to draw the reasonable inference that the defendant is liable for the misconduct
Debtors filed for relief under Chapter 13 on July 16, 2011. Commerce was listed
as an unsecured creditor on Schedule F and included in the mailing matrix. Notice was
given that the meeting of creditors would be held on August 18, 2011, and that the
deadline to object to Debtors' discharge or to challenge the dischargeability of certain
debts was October 17, 2011. One creditor filed a motion to extend time to object to
discharge and/or to assert a dischargeability complaint on October 17, 2011. Commerce
did not file a dischargeability compliant or move to extend the time to do so on or before
October 17, 2011.
During August 2011, two creditors and the Chapter 13 Trustee filed motions to
dismiss, premised at least in part upon the allegations that Debtors' unsecured claims
exceeded the limits for Chapter 13 eligibility. Debtors filed a motion to convert to
Chapter 11 on September 27, 2011. On October 24, 2011, Commerce filed a proof of
secured claim for $748,748.72. A review of the attachments show that loans were made
5 Iqbal, 556 U.S. at 663 (quoting Twombly, 550 U.S. at 570).
Case 12-05047 Doc# 11 Filed 06/07/12 Page 3 of 13
to Schupbach Investments, LLC, personally guaranteed by Debtors, and secured by life
insurance, mortgages, rents, and other collateral.
The motion to convert to Chapter 11 was granted on November 14, 2011. On
December 2, 2011 the clerk gave notice of the Chapter 11 case, of the meeting of
creditors to be held on January 6, 2012, and of the March 6, 2012 deadline to file a
complaint to determine dischargeability of certain debts. Commerce filed the Complaint
on March 6, 2012.
Allegations of the Complaint.
Schupbach Investments, LLC has been engaged in the purchase, ownership, and
sale of rental homes in low income areas of Wichita. Debtor Jonathan Schupbach has
been the manager and owner of Schupbach Investments, and Debtor Amy Schupbach has
been an officer and employee.
At various times, from September 2007 through April 2010, Debtors on behalf of
Schupbach Investments, borrowed funds from Commerce for the purpose of renovating,
modifying, and improving six particular homes which the Debtors were interested in
acquiring and renovating on behalf of Schupbach Investments. Each loan was made after
Debtors met with Commerce’s appraiser and informed him of the particular modifications
and repairs planned for the specific property. The Debtors personally guaranteed the
Commerce alleges that contrary to Debtors’ representations, none of the loan
proceeds were used by the Debtors or Schupbach Investments to renovate the particular
Case 12-05047 Doc# 11 Filed 06/07/12 Page 4 of 13
properties. Count I alleges a claim under § 523(a)(2)7 for excepting the loans from
discharge based upon false pretenses, false representation, and actual fraud. Count II
alleges a claim under § 523(a)(6) for excepting the loans from discharge for willful and
malicious intent to injure Commerce. Count III requests judicial determination of the
amount of nondischargeable debt under §§ 105 and 502.
A. Count I - The § 523(a)(2) claim was not timely filed and must be dismissed.
Debtors move to dismiss Count I as untimely filed more than 60 days after the date
first set for the meeting of creditors, contending that the date of the meeting set in the
Chapter 13 case controls. Commerce responds that the date first set for the meeting in the
converted Chapter 11 case controls, and the Complaint was therefore timely.
The Bankruptcy Code does not address the time for filing an objection to
dischargeability of a particular debt. The time is set by Bankruptcy Rule 4007(c). It
provides that, except for complaints under § 523(a)(6) in Chapter 13 cases,
a complaint to determine the dischargeability of a debt under
§ 523(c) shall be filed no later than 60 days after the first date
set for the meeting of creditors under § 341(a). The court
shall give all creditors no less than 30 days’ notice of the time
so fixed in the manner provided in Rule 2002. On motion of a
party in interest, after hearing on notice, the court may for
cause extend the time fixed under this subdivision. The
motion shall be filed before the time has expired.
7 11 U.S.C. § 523(a)(2). All references in the text to title 11 shall be to the section only.
Case 12-05047 Doc# 11 Filed 06/07/12 Page 5 of 13
It is uncontroverted that Commerce did not file the Complaint or move to extend the time
for doing so within 60 days of the first date set for the meeting of creditors in the Chapter
13 case but did file the Complaint within 60 days the first date set for the meeting on
creditors in the Chapter 11 case.
The issue presented by the Motion to dismiss the § 523(a)(2) claim is whether, in a
case which has been converted from a Chapter 13 to Chapter 11, a complaint to except a
debt from discharge is timely if filed within 60 days after the first date set for the meeting
of creditors in the converted case. There is no rule addressing this issue. There is no case
law from Tenth Circuit or other courts. Perhaps this is because “[p]rior to BAPCPA, §
523(a)(2) and (a)(4) were not exceptions to discharge in a Chapter 13 case at the
completion of payments under § 1328(a) and there was no reason to wonder whether the
deadline for filing a complaint under Bankruptcy Rule 4007 would restart at conversion
from Chapter 13 to Chapter 11."8 To resolve the question, the Court considers general
principles regarding conversion and objections to dischargeability.
Commerce suggests that the Court should follow the decision of the Eight Circuit
Court of Appeals in F & M Marquette National Bank,9 which held that the conversion of
8 Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 536.1, at ¶ 26 (4th ed.
2006), available at www.Ch13online.com.
9 F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24 (8th Cir. 1985). Commerce also cites
Goralnick v. Bromberg (In re Goralnick), 81 B.R. 570 (9th Cir. BAP. 1987) and Gen. Elec. Credit Corp.
v. Watts (In re Watts), 59 B.R. 779 (Bankr. N.D. Ala. 1986), but both of these cases, like F & M
Marquette Nat’l Bank, hold there is a new time limit for dischargeability complaints after conversion to
Chapter 7 and not conversion from Chapter 13 to Chapter 11.
Case 12-05047 Doc# 11 Filed 06/07/12 Page 6 of 13
a case from Chapter 11 to Chapter 7 generated a new time period for filing
dischargeability complaints. The court reasoned that a new meeting of creditors is
required upon conversion from Chapter 11 to Chapter 7. Since that meeting under
Chapter 7 is a separate and distinct meeting unrelated to the meeting under Chapter 11, it
held that the first date set for the Chapter 7 meeting of creditors was the relevant date
under Rule 4007(c). The court observed that creditors are less likely to file
dischargeability complaints in Chapter 11 than in Chapter 7 cases, since in a Chapter 11
proceeding a reorganization plan may provide for payment in full of their claims. Finding
that the period to file complaints started anew after conversion from Chapter 11 to
Chapter 7 avoided the possibility that a Chapter 11 debtor, knowing that creditors had not
timely objected to discharge of particular debts, could then convert to a Chapter 7 case
and obtain a full discharge.
Rule 1019, which addresses conversion of a Chapter 11, Chapter 12, or Chapter 13
proceeding to a Chapter 7 liquidation, was amended in 1987 to be consistent with the
“holding and reasoning” of F & M National Bank.10 As to such Chapter 7 cases
converted from Chapters 11, 12, or 13, subsection (3) of Rule 1019 was amended to
provide that a new time period commences under Rule 4007 for filing a complaint to
determine dischargeability, unless the case had previously been converted from Chapter 7
to Chapter 11, 12, or 13 and then reconverted to Chapter 7. Rule 1019(3) does not apply
10 Fed. R. Bankr. P. 1019 advisory committee note to 1987 amendments to Rule 1019.
Case 12-05047 Doc# 11 Filed 06/07/12 Page 7 of 13
to this case since it is a conversion from Chapter 13 to Chapter 11. And, as stated above,
the Rules are silent as to the time limits after conversion from Chapter 13 to Chapter 11.
Commerce argues that Rule 1019(3) should apply by analogy. The Court declines
to do so. The rationale justifying for a new period to file a complaint in a converted
Chapter 7 proceeding is not present when a Chapter 13 proceeding is converted to a
Chapter 11 proceeding. A creditor has the same motivation to file an objection to
discharge of a particular debt in the Chapter 13 proceeding as in the converted individual
Chapter 11 proceeding. To hold that Rule 1019(2) applies by analogy and that the Rule
4007(c) time limit runs from both the first date set for the meeting of creditors in the
Chapter 13 proceeding and in the Chapter 11 proceeding would give the creditor a
“second bite at the apple” when there has been no change in the relevant discharge rights.
Under § 348, “[c]onversion of a case from a case under one chapter . . . to a case
under another chapter . . . constitutes an order for relief under the chapter to which the
case is converted, but, except as provided in subsections (b) and (c) of this section [which
do not address §523], does not effect a change in the date of filing of the petition, the
commencement of the case, or the order for relief.” Hence, conversion does not create a
new case, but it does require a new § 341 meeting, which shall be noticed within “a
reasonable time after the order for relief.”11 The Court disagrees with the Eight Circuit as
to the impact of § 548(a). Although the meetings of creditors held in the Chapter 13
11 11 U.S.C. § 341.
Case 12-05047 Doc# 11 Filed 06/07/12 Page 8 of 13
proceeding and the subsequent Chapter 11 proceeding are distinct, it does not follow that
there are two “first dates” for purposes Rule 4007(c). In this Court’s view, the plain
meaning of the reference in Rule 4007(c) to the “first date set for the meeting of
creditors” is to the first date set in the case. The conversion does not create a new case.
In a case converted from Chapter 13 to Chapter 11, the first date set is the date initially
set for the meeting in the Chapter 13 proceeding.
Debtors cite Citizens First National Bank12 which held that there is not a new
period for filing dischargeability complaints in a case converted from Chapter 7 to
Chapter 11. In that case, the creditor had urged the court to follow the rationale of F & M
Marquette National Bank and Rule 1019(3), discussed above, but the court declined. It
reasoned that the expectation of payment through a reorganization plan which may lull
Chapter 11 creditors into not filing a complaint has no applicability when a case was
commenced under Chapter 7 and then converted to Chapter 11. “Any failure to file such
complaint, or to obtain an extension of time, during the pendency of the original Chapter
7 case results solely from creditor inaction. The fortuitous conversion of the Debtor’s
Chapter 7 case to Chapter 11 after the time for objecting to dischargeability has expired is
no substitute for Plaintiff’s failure to act timely.”13
12 Citizens First Nat’l Bank v. Kirkpatrick (In re Kirkpatrick), 120 B.R. 309 (Bankr. S.D.N.Y.
13 Id. at 312.
Case 12-05047 Doc# 11 Filed 06/07/12 Page 9 of 13
The Court agrees with this reasoning. The fortuitous conversion of Debtors’
Chapter 13 case to Chapter 11 should not give Commerce a second chance to timely
object to discharge under § 523(a)(2). Such debts are excepted from discharge under both
Chapter 1314 and Chapter 11.15 Both chapters provide an expectation of repayment
through a court approved plan.
Finally, the Court holds that the notice date included in the Notice of Chapter 11
Bankruptcy Case,16 prepared by the clerk’s office when Debtors converted their case from
Chapter 13 to Chapter 11, does not change the foregoing. It states, “Deadline to File a
Complaint to Determine Dischargeability of Certain Debts: 3/6/12.” The notice is
ambiguous. It states the deadline for objecting to “certain debts,” without defining what
debts are included and without reference to debts for which timely objections had not
been filed in the Chapter 13 case. The notice is included in a bankruptcy form sent by the
clerk under Rule 2002(f) and did not enlarge Commerce’s rights.17 It was not the purpose
of the notice of the bar date as to “certain debts” to revive dischargeability claims which
were time barred in the Chapter 13 case. Commerce’s complaint objecting to discharge
14 11 U.S.C. § 1328(a)(2).
15 11 U.S.C. § 1141(d)(2).
16 Dkt. 120, case no. 11-13633.
17 See 28 U.S.C. § 2075 (bankruptcy rules shall not “abridge, enlarge, or modify any substantive
Case 12-05047 Doc# 11 Filed 06/07/12 Page 10 of 13
of its claims is not timely because it was filed within the date set by the Notice of Chapter
11 Bankruptcy Case.
For the foregoing reasons, the Court finds that the Complaint objecting to
discharge of Commerce’s claim under § 523(a)(2) is untimely and therefore must be
B. Count II - The § 523(a)(6) claim satisfies the applicable pleading standard.
Debtors move to dismiss the § 523(a)(6) claim for failure to state a claim under the
Iqbal and Twombly standard discussed above.18 Debtors argue that the allegations are
mere formulaic recitations of the elements of a claim and lacks sufficient factual
The Complaint in Count II incorporates the factual allegations stated above and
alleges: that Debtors knew the loan proceeds were to be used on the specific homes; that
they knowingly, intentionally, wrongfully, and without justification used the loan
proceeds for their benefit and enjoyment; that they injured Commerce when doing so; and
that Debtors’ acts were willful, intentional, and malicious. The Court finds that Count II
states a claim that is plausible on its face. “[T]he conversion of another's property without
the owner's knowledge or consent, done intentionally and without justification and
excuse, is a willful and malicious injury within the meaning of the [523(a)(6)]
18 Debtors do not argue that Count II was filed after expiration of the bar date. Rule 4007(c)
applicable to the § 523(a)(2) claim does not apply to the § 523(a)(6) claim. Under Rule 4007(d), the bar
date for filing objections to discharge under § 523(a)(6) in an individual’s Chapter 13 case is set after the
debtor moves for discharge under § 1325(b). In this case, no such bar date was set before conversion to
Case 12-05047 Doc# 11 Filed 06/07/12 Page 11 of 13
exception.”19 The factual allegations are sufficient to give Debtors notice of the claims
The Motion to dismiss is denied as to Count II.
C. Count III - The request for judicial determination of amount owed will not
In its last Count, Commerce seeks a judicial determination of the amount which is
nondischargeable. Debtors move to dismiss the count as unnecessary, arguing that
Commerce has filed a proof of claim for $748,748.72 and the amount owed will be
determined in the claims allowance process.
The Court will not dismiss the count. The Court reads the Complaint as seeking a
determination of the amount which is nondischargeable, not the entire claim. This matter
is properly determined in the adversary proceeding challenging dischargeability.
Count I, the § 523(a)(2) claim was filed after expiration of the bar date set in the
Chapter 13 case, which passed before the conversion to Chapter 11. Count I is dismissed.
The motion to dismiss is denied as to Count II, objection to dischargeability under
523(a)(6), and Count III, for determination of the amount excepted from discharge.
19 4 Collier on Bankruptcy ¶ 523.12 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 16th
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The foregoing constitute Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this proceeding.
IT IS SO ORDERED.
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