Michael Stewart Johnson and Cindy Choi Johnson

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 06-40277 TG
Chapter 13
MICHAEL S. JOHNSON, CINDY
CHOI JOHNSON,
Debtors.
___________________________/
MEMORANDUM AND ORDER VACATING CONFIRMATION ORDER
AND DISMISSING CASE WITH PREJUDICE
The Court previously found, in a related adversary proceeding,
that the above-captioned debtors had obtained confirmation of their
chapter 	13 	plan 	through 	a 	fraud 	on 	the 	Court 	and 	vacated 	the
confirmation 	order. 	Thereafter, 	it 	issued 	an 	order 	to 	show 	cause
(the 	“OSC”) 	why 	the 	case 	should 	not 	be 	dismissed 	with 	prejudice 	on
this account. 	In response to the OSC, the debtors filed a memorandum
attempting 	to 	persuade 	the 	Court 	that 	dismissal 	with 	prejudice 	was
not 	appropriate. 	The 	Court 	finds 	the 	arguments 	made 	therein
unpersuasive. 	The 	history 	of 	the 	case 	and 	the 	reasons 	for 	the
Court’s decision are set forth below.
The 	debtors 	filed 	a 	voluntary 	chapter 	7 	petition 	on 	March 	8,
2006 and converted their case to chapter 13 on March 26, 2006. 	They
Signed: March 17, 2008
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
March 18, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 06-40277 Doc# 122 Filed: 03/17/08 Entered: 03/18/08 15:04:02 Page 1 of
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2
filed their schedules of assets and liabilities (the “Schedules”) and
Statement of Financial Affairs (“SOFA”) on March 23, 2006. 	In their
Schedules, 	they 	listed 	approximately 	$539,000 	of 	secured 	debt 	and
$168,000 	in 	general 	unsecured 	debt. 	Hsiu 	Lin 	Yeh 	(“Yeh”) 	was 	not
listed as a creditor.
The 	debtors 	filed 	a 	chapter 	13 	plan 	April 	5, 	2006 	and 	a 	third
amended plan on August 18, 2006 (the “Plan”). 	On September 23, 2006,
Yeh 	was 	added 	as 	a 	unsecured 	creditor 	with 	a 	disputed 	claim 	in 	the
amount of $9,100. 	On or about December 23, 2006, Yeh filed a proof
of claim in the debtors’ bankruptcy case in the amount of $612,457.
On or about January 9, 2007, the chapter 13 trustee (the “Trustee”)
filed an objection to Yeh’s claim as untimely, in which the debtors
joined. 	On February 2, 2007, Yeh filed a motion to allow her claim
as a late claim.
On February 14, 2007, Yeh filed an adversary proceeding seeking
to revoke the order confirming the Plan and seeking a determination
that her claim was not dischargeable: i.e., A.P. No. 07-4032 AT (the
“Adversary 	Proceeding”). 	A 	hearing 	was 	conducted 	on 	the 	Trustee’s
objection 	to 	Yeh’s 	claim. 	At 	that 	time, 	the 	Court 	found 	that 	the
claim 	was 	untimely 	and 	that 	the 	law 	did 	not 	permit 	the 	filing 	of 	a
late 	claim 	in 	a 	chapter 	13 	case. 	The 	Court 	confirmed 	the 	Plan
without prejudice to a determination that Yeh would not be bound by
the 	Plan 	if, 	in 	the 	context 	of 	the 	Adversary 	Proceeding, 	the 	Court
determined that Yeh had not received notice of the bankruptcy case in
time to file a claim or an objection to the Plan.
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26 1The Court held that the claim was not incurred through fraud.
It was not persuaded that Johnson had no intention of repaying Yeh
when he borrowed the money.
3
A trial was conducted in the Adversary Proceeding on February 11
and 12, 2008. 	At the conclusion of the trial, the Court found that,
prior 	to 	the 	commencement 	of 	the 	bankruptcy 	case, 	Yeh 	advanced 	a
total 	of 	$564,438 	to 	the 	debtor 	Michael 	Johnson 	(“Johnson”),
originally as a short term business loan and later to assist him in
obtaining a windfall profit in a scheme in which he had already begun
to 	invest 	and 	that 	turned 	out 	to 	be 	a 	scam. 	The 	Court 	found 	that
Johnson had promised to share the profits from the scheme with Yeh if
there were any, if not, to repay them what they had advanced to him. 1
The Court did not believe Johnson’s testimony that Yeh had advanced
the money as an independent investor in the scheme. 	Thus, the Court
found 	that 	Johnson 	owed 	Yeh 	a 	debt 	in 	the 	amount 	advanced, 	plus
interest.
The Court found that Yeh knew that Johnson filed for bankruptcy
at 	or 	near 	the 	time 	that 	he 	filed 	in 	March 	of 	2006. 	The 	Court 	was
persuaded that the reason that Yeh did not file a claim at that time
was 	that 	Johnson 	told 	her 	that, 	because 	she 	was 	not 	listed 	as 	a
creditor, 	she 	would 	not 	be 	affected 	by 	the 	bankruptcy. 	The 	Court
found that Johnson warned Yeh not to tell his other creditors about
the 	bankruptcy. 	He 	promised 	to 	sell 	his 	house 	and 	pay 	Yeh 	but 	not
his other creditors. 	Yeh initially relied on this promise. 	However,
she 	became 	Johnson 	sold 	his 	house 	and 	still 	did 	not 	repay 	her. 	At
that 	time, 	she 	went 	to 	the 	police, 	contacted 	an 	attorney, 	and
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appeared 	on 	a 	television 	show, 	exposing 	Johnson’s 	misconduct. 	In
response, 	Johnson 	amended 	the 	Schedules 	to 	list 	Yeh 	as 	a 	disputed
unsecured creditor.
Based 	on 	these 	factual 	findings, 	the 	Court 	held 	that, 	because
Yeh had notice of the bankruptcy case in time to file a timely claim
and 	to 	object 	to 	confirmation 	of 	the 	Plan, 	she 	was 	bound 	by 	its
terms. 	However, the Court held that Johnson’s conduct constituted a
fraud on the court as well as on Yeh. 	It found that Johnson knew at
the time he converted his case from chapter 7 to chapter 13 that he
owed more than $564,000 to Yeh, bringing his total unsecured debt to
over 	$720,000. 	As 	applicable 	to 	this 	case, 	an 	individual 	who 	owes
unsecured debts of $307,675 or more is not eligible to be a chapter
13 debtor. 	For this reason, the confirmation order should be revoked
and 	the 	case 	dismissed. 	The 	only 	remaining 	issue 	was 	whether 	it
should be dismissed with prejudice.
Based on its findings, the Court surmised that the case should
be dismissed with prejudice. 	However, because Yeh did not seek this
relief in the Adversary Proceeding, the Court felt compelled to give
the 	debtors 	an 	opportunity 	to 	persuade 	the 	Court 	otherwise.
Accordingly, the Court issued the OSC, directing the debtors to file
any 	evidence 	or 	argument 	they 	deemed 	appropriate 	opposing 	this
disposition. 	The 	Court 	indicated 	that, 	if 	it 	found 	insufficient
merit in the filing, it might rule on the order to show cause without
further hearing.
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2The Memorandum stated that the debtors had finalized a
divorce and that counsel representing the debtors at trial no
longer represented Mrs. Johnson. 	Thus, the Memorandum was filed
only on behalf of Mr. Johnson.
5
On March 12, 2008, Johnson filed a memorandum (the “Memorandum”)
opposing the OSC. 2 	In the Memorandum, Johnson made three arguments,
none of which had any merit. 	First, Johnson noted that the primary
basis 	for 	the 	Court’s 	finding 	that 	he 	had 	committed 	a 	fraud 	on 	the
court was its assumption that, if Yeh’s debt had been scheduled, he
would not have qualified as a chapter 13 debtor because his unsecured
debts would have exceeded the debt limits established by 11 U.S.C. §
109(e). 	He contends that this assumption was in error, because, even
if Yeh had been listed as a creditor in the full amount claimed, her
claim would have been listed as disputed and thus would not have been
included 	in 	the 	calculation 	of 	his 	debts 	for 	debt 	limit 	purposes.
Johnson 	is 	mistaken. 	Section 	109(e) 	does 	not 	exclude 	from 	the
calculation of the debt limits “disputed” debts, only contingent or
unliquidated debts. 	The amount of Yeh’s claim was noncontingent and
liquidated.
Second, 	Johnson 	contends 	that, 	if 	a 	court 	does 	not 	confirm 	a
chapter 	13 	plan 	(or 	vacates 	an 	order 	confirming 	it), 	it 	can 	only
dismiss 	or 	convert 	the 	case. 	There 	is 	no 	statutory 	basis 	for
dismissing 	it 	with 	prejudice. 	In 	support 	of 	this 	contention, 	he
cites a 1981 bankruptcy court case from Illinois. 	More relevant to
this issue is In re Leavitt, 171 F.3d 1219 (9th Cir. 1999), affirming
this 	Court’s 	dismissal 	of 	a 	chapter 	13 	case 	with 	prejudice 	on 	the
basis 	of 	the 	debtor’s 	fraudulent 	conduct. 	See 	also 	In 	re 	Marrama,
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127 S.Ct. 1105, 1112 (2007)(bankruptcy court may, under either § 105
or 	its 	inherent 	powers, 	issue 	appropriate 	sanctions 	in 	response 	to
“abusive litigation practices”)
Finally, Johnson notes that, because the Court determined that
Yeh had notice of the bankruptcy in time to file a claim and that the
claim was dischargeable, Yeh is not a creditor and has no standing to
seek dismissal with prejudice. 	Johnson’s final argument ignores the
fact that at issue at present is the Court’s order to show cause, not
any relief sought by Yeh. 	The Court concludes that Johnson’s conduct
in failing to list Yeh as a creditor by persuading her she would be
paid 	outside 	the 	bankruptcy 	in 	preference 	to 	other 	creditors 	was 	a
fraud on the court. 	Thus, the appropriateness of a dismissal of the
case with prejudice does not turn on Yeh’s standing as a creditor.
Based on the foregoing, it is hereby
ORDERED 	that 	the 	above-captioned 	case 	be, 	and 	it 	hereby 	is
dismissed with prejudice.
END OF DOCUMENT
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COURT SERVICE LIST
Raymond R. Miller
Law Offices of Raymond R. Miller
P.O. Box 2177
Castro Valley, CA 94546
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