Aurora Tolentino Cortez and Jonathan Ocera Cortez

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26 1 All title, chapter, and section references are to title 11
of the United States Code unless otherwise indicated.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 05-48495
Chapter 13
JOHNATHAN OCERA CORTEZ and
AURORA TOLENTINO CORTEZ,
Debtors
____________________________/
MEMORANDUM OF DECISION RE
MOTION TO DISMISS CASE WITH PREJUDICE
On May 26, 2006, debtors Johnathan and Aurora Cortez
(“Debtors”) moved to dismiss the above-captioned chapter 13 case. 1
At that time, creditor Cedar Associates (“Cedar”) filed a response
in which it urged the Court to dismiss the case with prejudice. 	In
order to give the Debtors an adequate opportunity to respond to
Cedar’s request, the Court granted the Debtors’ motion to dismiss
on May 31, 2006, but retained jurisdiction to consider a motion
Signed: September 08, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 11, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 05-48495 Doc# 66 Filed: 09/08/06 Entered: 09/11/06 16:08:38 Page 1 of
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filed by Cedar or the chapter 13 trustee (“Trustee”) within thirty
days, requesting that the dismissal be made with prejudice.
The Trustee subsequently made a timely motion to dismiss the
case with prejudice, and Cedar joined in the motion. 	Having
considered the papers and arguments submitted, the motion to
dismiss the case with prejudice is granted.
BACKGROUND
Prior to October 15, 2004, Debtors owned their residence
located at 3254 Ursa Way in Hayward, California (the “Residence”)
as joint tenants. 	On October 15, 2004, Debtors executed a grant
deed, which transferred a joint tenancy interest in the Residence
to their son Eric Cortez (“Eric”), in order to qualify for
refinancing.
In November of 2004, Mr. Cortez transferred his interest in
the Residence to Eric. 	Debtors testified that the second transfer
was made for “estate planning” purposes because Mr. Cortez was in
bad health and wanted to ensure that Eric eventually received the
Residence. 	Debtors also testified that they understood that, under
a joint tenancy, the Residence would pass to the surviving joint
tenants.
In December of 2004, a refinancing agreement was entered into
with Countrywide Home Loans (“Countrywide”). 	Although the
promissory note has never been produced, both Eric and Mrs. Cortez
were named as borrowers on an Alliance Title closing statement, and
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2 Evidence was presented at trial that, after the meeting of
creditors, counsel for Cedar wrote to Debtors’ counsel, asking
if they maintained a check register for the Technology
Account. 	Debtors’ counsel responded that they did not.
3
they both signed, as borrowers, documents giving Countrywide first
and second deeds of trust on the Residence.
The proceeds of the refinance amounted to $138,000. 	A check
for that amount was issued in Eric’s name only. 	Eric opened a
checking account in his name at Technology Credit Union (the
“Technology Account”), into which he deposited the check. 	Debtors
testified that they did not put the check into their own account in
part because the check was in Eric’s name and in part to avoid the
levies of their creditors.
Nevertheless, Eric testified that he considered the funds in
the Technology Account to belong to the Debtors. 	Mrs. Cortez
maintained possession of the Technology Account’s check register in
which she made all of the entries; 2 she wrote the checks on the
Technology Account and presented them to Eric for his signature.
The money in the Technology Account was used to pay the
Debtors’ bills, including the mortgage payments, property taxes,
and a judgment awarded against the Debtors. 	Debtors loaned about
$60,000 to Compleat Visions Unlimited, Inc. (“Compleat”), the
business owned and operated by the Debtors. 	Additionally, the
Debtors spent approximately $43,000 to remodel the kitchen of the
Residence. 	The remodeling began in July of 2005 and was completed
pre-petition. 	On the petition date, $20,136 remained in the
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3 Debtors also claimed a homestead exemption in the Residence
under Cal. Civ. Proc. Code § 704.730(a)(3) in the amount of
$113,000. 	On March 3, 2006, Debtors amended schedule C to
increase the amount of the claimed homestead exemption to
$131,000.
4 Debtors amended Schedule F to add several unsecured
creditors on December 12, 2005.
4
Technology Account. 	However, Mrs. Cortez wrote at least one check
to a contractor and one check to an appliance store post-petition
to pay for the pre-petition remodeling.
On August 1, 2005, Compleat filed a chapter 11 petition.
Debtors filed a chapter 13 petition on October 14, 2005. 	In the
petition, they indicated that neither they nor any affiliates had a
previous or pending bankruptcy case.
On October 31, 2005, Debtors filed Schedules A through J. 	In
their schedule of real property, Debtors listed a fee interest in
the Residence. 3 	They valued this interest at $113,000, and did not
list any encumbrances against the property. 	In their schedule of
personal property, Debtors listed two accounts at Bank of the West,
one account at East Bay Postal Credit, two IRA accounts, two
vehicles, household goods and furnishings, and clothing. 	Debtors
scheduled two secured creditors (each with a security interest in
Debtors’ vehicles), no priority creditors, and a number of
unsecured creditors (including Cedar). 4 	Debtors did not list any
co-debtors on Schedule H. 	Finally, Debtors’ schedule of income
indicated that Mr. Cortez received disability income in the amount
of $1,505 per month, and Mrs. Cortez received $1,800 per month from
her wages as a bookkeeper for Compleat. 	Their expense schedule,
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5 Debtors amended their plan three times, eventually providing
for a sixty-month plan paying unsecured creditors pro tanto.
6 Debtors subsequently testified that none of the funds in the
Technology Account were used to pay medical bills.
5
which did not include mortgage payments, taxes, or insurance,
listed $2,242 in expenses, leaving excess income of $1,063.
Along with their schedules, Debtors filed a Statement of
Financial Affairs; however, sections nineteen through twenty-five
were missing. 	In the section titled “Nature, location and name of
business,” Debtors indicated that they operated and received wages
from Compleat. 	In the section titled “Other Transfers,” Debtors
indicated that they had transferred one half of their interest in
the Residence to their son Eric Cortez (“Eric”) on December 1,
2004, for no value.
Also on October 31, 2005 Debtors proposed a plan, pursuant to
which they would make forty-two monthly payments in the amount of
$1,050, paying 10% on unsecured claims. 5 	Mr. Cortez filed a
declaration in support of this plan. 	He explained that the
Residence had been refinanced in December of 2004, and the Debtors
received proceeds in the amount of $125,000, which they used to pay
medical bills and general creditors and funded Compleat. 6 	Mr.
Cortez stated neither his nor Mrs. Cortez’s name was on the
mortgage – the new first and second deeds of trust 	were in Eric’s
name only. 	Eric made the mortgage payments in lieu of paying rent.
Mr. Cortez expressly stated that the Debtors considered all of the
equity in the property to be theirs.
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7 VW Credit, Inc. objected to confirmation on other grounds
but later withdrew its objection. 	Cedar also objected to
Debtors’ claimed homestead objection.
6
In December of 2005, Mr. Cortez’s mother gave Debtors a check
for $25,000 as a gift. 	Mrs. Cortez deposited this sum into the
Technology Account.
The Debtors attended the initial meeting of creditors on
December 29, 2005. 	Debtors did not volunteer any information
regarding the Residence or the refinance at the meeting. 	They did,
however, respond to questions from Cedar’s counsel. 	The Trustee
learned of the refinance for the first time at this meeting.
Debtors subsequently amended their schedules. 	On March 3,
2006, they amended schedule A to list themselves as co-owners of
the Residence, to increase the value from $113,000 to $650,000, and
to include an encumbrance in the amount of $519,000. 	On April 12,
2006, Debtors amended schedule B to include the Technology Account
with a balance of $20,136. 	They amended schedule D to include
Countrywide as a secured creditor. 	They also amended schedule I to
provide that Mrs. Cortez received net wages of $1,000 per month as
bookkeeper for an accountant named Raymond Young and that Mr.
Cortez received a contribution of $800 per month from his mother.
The Trustee and Cedar objected to confirmation of the plan on
grounds of bad faith and feasibility. 	They requested that the case
be converted to chapter 13. 7 	The Court conducted an evidentiary
hearing on the issue of bad faith at which the Debtors and Eric
testified.
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Based on the evidence presented, the Court concluded that
Debtors had acted in bad faith, and consequently, cause existed
under section 1307(c) to convert the case to chapter 7. 	However,
before converting the case, the Court gave the Debtors seven days
to request that the case be dismissed.
As noted above, Debtors moved to dismiss the case. 	Cedar
filed a “response” in which it requested that the dismissal be
granted with prejudice. 	The Court granted the dismissal but gave
the Trustee and Cedar thirty days to file a motion to order the
dismissal with prejudice. 	The Trustee filed such a motion, and
Cedar joined in the motion. 	A hearing was held on August 18, 2006,
and the Court took the matter under submission.
DISCUSSION
The dismissal of bankruptcy cases with and without prejudice
is authorized by section 349(a). 	Leavitt v. Soto (In re Leavitt),
171 F.3d 1219, 1223 (9th Cir. 1999). 	Section 349 provides:
Unless the court, for cause, orders otherwise, the
dismissal of a case under this title does not bar the
discharge, in a later case under this title, of debts
that were dischargeable in the case dismissed; nor does
the dismissal of a case under this title prejudice the
debtor with regard to the filing of a subsequent petition
under this title, except as provided in section 109(g) of
this title.
11 U.S.C. § 349(a). 	Consequently, unless a court orders otherwise,
dismissals are ordered without prejudice. 	Id.; Leavitt, 171 F.3d
at 1223.
“A dismissal with prejudice bars further bankruptcy
proceedings between the parties and is a complete adjudication of
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the issues.” 	Leavitt, 171 F.3d at 1223–24. 	“Cause” for dismissal
with prejudice under section 349(a) is not defined by the
Bankruptcy Code. 	Id. at 1224. 	In Leavitt, the Ninth Circuit held
that “bad faith is ‘cause’ for a dismissal of a Chapter 13 case
with prejudice under § 349(a) and § 1307(c).” 	Id. 	The court
reasoned that, under section 1307(c), bad faith is “cause” for
dismissal. 	Id. (citing In re Eisen, 14 F.2d 469, 470 (9th Cir.
1994)). 	“Therefore, it follows that a finding of bad faith based
on egregious behavior can justify dismissal with prejudice.” 	Id.
Determining whether bad faith exists “involves the application
of the ‘totality of the circumstances’ test.” 	Id. 	A bankruptcy
court should consider the following factors:
1. 	Whether the debtor misrepresented facts in his
petition or plan, unfairly manipulated the
Bankruptcy Code, or otherwise filed his chapter
13 petition or plan in an inequitable manner.
2. 	The debtor’s history of filings and dismissals.
3. 	Whether the debtor only intended to defeat
state court litigation.
4. 	Whether egregious behavior is present.
Id. 	A finding of bad faith does not require fraudulent intent,
malice, or malfeasance on the part of the debtor. 	Id. at 1224–25.
In Leavitt, the first factor was satisfied when the debtor
failed to fully disclose his assets and financial dealings;
undervalued some assets; inflated his expenses; offered nothing to
the largest unsecured creditor in his first plan; ignored the
bankruptcy court’s order to amend the plan to include at least a
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thirty percent payment to creditors; and failed to disclose the
receipt of $36,000 and his purchase of a new home during the case.
Id. at 1225. 	With respect to the second factor, the debtor had
filed two bankruptcy cases in six years, and he went on to file
three more with the goal of avoiding the judgment of his largest
unsecured creditor. 	Id. 	This motive and the timing of the
debtor’s first filing – within two weeks of a judgment being issued
against him – satisfied the third factor. 	Id. 	Finally, the court
concluded that the debtor’s behavior was egregious because he
offered no excuse for his actions, and his clear intention was to
use bankruptcy to avoid payment of the judgment. 	Id. at 1226.
The Ninth Circuit also noted that less offensive conduct had
constituted grounds for dismissal with prejudice. 	For example, in
In re Morimoto, 171 B.R. 87 (9th Cir. BAP 1994), the debtor, a tax
protestor, filed her petition with the intent of avoiding payment
of federal income taxes. 	In In re Hopkins, 201 B.R. 993, 995 (D.
Nev. 1996), the debtors failed to file proper income tax returns,
and indicated zero taxable income despite W-2 forms showing
substantial wages earned. 	In In re Tomlin, 105 F.3d 933 (4th Cir.
1997), the debtor failed to attend the initial creditors’ meeting
or to timely file schedules. 	The Ninth Circuit expressly noted
these cases would have all been properly dismissed under the
Leavitt standard. 	Leavitt, 171 F.3d at 1226.
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Here, the Court has previously determined that the Debtors
acted in bad faith. 	Application of the Leavitt factors reinforces
this conclusion.
The Debtors have made numerous misrepresentations in their
petition, plan, and schedules. 	First, in their petition, the
Debtors indicated that none of their affiliates were involved in a
pending bankruptcy. 	However, Compleat had filed a chapter 11
petition on August 1, 2005, and that case was still pending as of
the date the Debtors filed their petition, October 14, 2005.
In their original schedule of real property, Debtors listed
themselves as the fee owners of the Residence, which they valued at
$113,000 and they listed no encumbrances. 	However, after Cedar and
the Trustee objected to plan confirmation, the Debtors amended
schedule A to indicate that Mrs. Cortez co-owned the Residence with
Eric; the value of the Residence was at least $650,000; and the
Residence was encumbered to the extent of $519,000. 	Thereafter,
contrary to these amendments, Mr. Cortez indicated in his
declaration accompanying the Debtors’ original chapter 13 plan, he
and his wife considered all of the equity in the Residence to be
theirs.
Debtors did not reveal their interest in the Technology
Account in their schedule of personal property. 	Although it was in
Eric’s name, Eric testified that he considered the money in the
Technology Account to belong to the Debtors. 	The funds in the
Technology Account were used solely to pay Debtors’ bills. 	Mrs.
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Cortez appears to have exercised sole control over the Technology
Account, its checks, and its check register. 	Further, although
Debtors maintained possession of the check register, their counsel
told counsel for Cedar that they did not.
Debtors did not reveal their ownership of any stock in either
their schedule of personal property or Statement of Financial
Affairs. 	However, Debtors own 100 percent of the stock of
Compleat.
Debtors did not originally schedule Countrywide as a secured
creditor. 	Although Debtors claimed they were not obligated on the
debt to Countrywide, evidence has been introduced to the contrary.
Both Mrs. Cortez and Eric were listed as the borrowers on the
Alliance Title closing statement and both signed the documents
granting Countrywide deeds of trust. 	Debtors did not produce the
promissory note to support their contention nor did they explain
their failure to do so.
Debtors did not schedule any priority claims. 	Specifically,
while the Debtors acknowledged liability as guarantors for
Compleat’s debt - including its taxes - Debtors did not schedule
any taxes owed. 	However, the Internal Revenue Service subsequently
filed a priority claim for taxes in the amount of $58,000.
Debtors did not list any co-debtors in schedule H. 	As noted
above, however, the Court believes that both Eric and Mrs. Cortez
are obligated on the mortgage to Countrywide.
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26 	8 Debtors and Eric testified that he contributes $300 per
month from his own funds for household expenses.
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Debtors’ original schedule of income did not accurately
reflect their sources of income. 	Although they first indicated
that Mrs. Cortez was receiving net wages of $1,800 per month from
Compleat, she later revealed that she was actually receiving net
wages of $1,000 per month from another employer. 	Additionally,
Debtors later indicated that they received monthly contributions in
the amount of $800 from Mr. Cortez’s mother. 	Debtors also received
$300 each month from Eric, but never included this amount in their
schedules.
In their schedule of expenses, Debtors did not list any
mortgage payments. 	Debtors contended that Eric made the mortgage
payments in lieu of paying rent. 	However, Debtors and Eric
subsequently testified that Eric did not use his own funds to pay
the mortgage. 8 	Rather, Mrs. Cortez prepared checks from the
Technology Account for Eric’s signature to make the monthly
mortgage payments. 	Tellingly, Mrs. Cortez appeared to be extremely
familiar with the amounts of and recent changes to the mortgage
payments while Eric was completely unfamiliar with these issues.
Debtors’ Statement of Financial Affairs is incomplete.
However, in the portion they provided, Debtors indicated that the
only payments aggregating more than $600 that they had made to
creditors within the ninety days prior to the petition date were to
American Honda Finance and Volkswagen Credit. 	However, Debtors had
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9 Debtors may not have been entirely forthcoming about their
purpose in executing the second transfer. 	They stated it was
done for estate planning purposes. 	However, the Debtors and
Eric held the Residence as joint tenants. 	The Debtors
testified that they realized that a deceased joint tenant’s
interest would pass to the surviving joint tenants. 	Eric is
the natural son of both Debtors. 	Debtors offered no
explanation as to why the transfer was actually necessary to
further their stated goal of estate planning.
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paid over $30,000 to Countrywide and for remodeling the kitchen of
the Residence during the ninety-day period.
Also in their Statement of Financial Affairs, Debtors
indicated that they had only made one transfer of property within
one year of the petition date: i.e., a one-half interest in the
Residence to Eric. 	This was both inaccurate and incomplete. 	The
first transfer to Eric was of a joint tenancy interest: i.e., after
this transfer Eric, Mr. Cortez, and Mrs. Cortez each owned an
undivided one-third interest in the Residence. 	The second transfer
to Eric occurred when Mr. Cortez transferred his interest in the
Residence to Eric. 	The result of this transfer was that,
nominally, at least, Eric owned a two-thirds interest in the
Residence and Mrs. Cortez owned a one-third interest. 9 	Finally,
pursuant to the refinancing agreement with Countrywide, Mrs. Cortez
and Eric transferred a first and second deed of trust in the
Residence to Countrywide.
Debtors failed to disclose the receipt of $25,000 as a gift
from Mr. Cortez’s mother in December 2005. 	This money was
deposited into the Technology Account.
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Debtors also dealt unfairly or inequitably with their
Creditors. 	First, Debtors paid at least $38,000 post-petition to
selected creditors for work performed pre-petition. 	Second,
Debtors omitted at least two major creditors from their original
schedules – Countrywide and the IRS. 	Finally, as noted above,
Debtors indicated that one reason for putting the refinance
proceeds into the Technology Account, which was in Eric’s name
only, was to avoid the reach of Debtors’ creditors. 	Debtors
subsequently omitted the Technology Account from their schedule of
personal property. 	For these reasons, the first Leavitt factor
appears to be satisfied: i.e., misrepresentations, manipulation,
and/or inequitable conduct in connection with the bankruptcy case.
The second and third factors do not apply here as Debtors have
not had any prior bankruptcy cases, and Debtors do not appear to
have been motivated to commence the instant case solely to defeat a
state court judgment. 	However, the Court believes that the
Debtors’ behavior is egregious enough to satisfy the fourth Leavitt
factor. 	They made a number of material misrepresentations or
omissions and paid substantial sums of money to selected pre-
petition creditors post-petition without court approval.
Debtors also argue that the case should not be dismissed with
prejudice because the second and third factors are not met. 	All
four factors do not need to be satisfied, however. 	The Ninth
Circuit was clear that the test for determining the existence of
bad faith is a totality of the circumstances test. 	Further, not
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all of the factors were satisfied in the cases cited as examples by
the Ninth Circuit in Leavitt.
Debtors argue that the Debtors’ acts were not as egregious as
those of the debtor in Leavitt. 	There are in fact a number of
similarities between case and Leavitt. 	In both cases, the debtors
failed to fully disclose assets and financial dealings; undervalued
some assets; omitted their largest creditors; and failed to
disclose the receipt of a significant sum of money and the purchase
or, here, the remodeling of a home during the case. 	Nevertheless,
the Ninth Circuit noted in Leavitt that less offensive conduct had
constituted sufficient grounds for dismissal with prejudice. 	In
the Court’s view, this case lies somewhere between Leavitt and the
cases cited therein.
CONCLUSION
For the above reasons, the Court believes that the totality of
the circumstances demonstrate that the Debtors have acted in bad
faith. 	Consequently, Debtors case may and should be dismissed with
prejudice. 	The motion of the Trustee and Cedar is granted.
Counsel for Trustee is directed to submit a proposed form of
order in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Martha Bronitsky
Chapter 13 Standing Trustee
24301 Southland Blvd., Ste. 200
Hayward, CA 	94545-1541
Michael McQuaid
Carr, McClellan, Ingersoll, Thompson & Horn
216 Park Road
P.O. Box 513
Burlingame, CA 94011-0513
David Arietta
Law Offices of David Arietta
700 Ygnacio Valley Road, Ste. 200
Walnut Creek, CA 	94596
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