Summary of a Recent
Judicial Development in
Bankruptcy

Inability to Obtain Plan Confirmation for Five Years Was
Unreasonable Delay Warranting Dismissal

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Kalwitz, Case No. 99-34758 HCD, 2005 Bankr. LEXIS 1832 (Bankr. N.D. Ind. Apr. 28, 2005), the United States Bankruptcy Court for the Northern District of Indiana held that the Debtors had prejudiced their creditors by unreasonably delaying their case for five years without submitting a plan for confirmation, and dismissed their case.

Background

In February 2005, the court dismissed the Debtors' Chapter 12 petition without prejudice, and the Debtors submitted a motion to reconsider. Id. at *1. The Trustee had filed a Motion to Dismiss the case for unreasonable delay pursuant to 11 U.S.C. § 1208(c) because the case had been pending for over five years and the Debtors had failed to obtain confirmation of a plan. Id. at *3. The Trustee admitted that he had received no complaints from creditors, but opined that it was unlikely the Debtors would ever reorganize, and claimed that their continued existence in Chapter 12 was only delaying their creditors. Id. The Debtors argued that their failure to obtain plan confirmation was due to their involvement in ongoing litigation in the state probate court concerning real estate, and assured the court that once the matter was resolved they would be able to file their plan. Id.

Arguments

The Trustee argued that the Debtors' case should be dismissed for unreasonable delay because their five year existence in Chapter 12 was only delaying their creditors, and it was unlikely they would ever obtain confirmation of a plan. Id.

The Debtors argued that the Trustee failed to establish "unreasonable delay" under § 1208(c)(1). Id. at *7.

Analysis and Holdings

The court had previously dismissed the case under § 1208(c)(1), which has three components: (a) delay that was unreasonable, (b) delay that was caused by the debtor, and (c) delay that was prejudicial to creditors. Id. at *12. The Debtors now argued that the third prong was not proven and therefore the dismissal was erroneous. Id. The basis for their argument was that the Trustee admittedly had not received any complaints from their creditors. Id. at *14. The Debtors presented evidence of three creditors whose claims were satisfied or were receiving payments, but there were at least six others whose claims had not been addressed. Id. Several creditors had expressed their dissatisfaction at the hearing and in other related appearances. Id. The court noted that the Debtors had taken advantage of the automatic stay for five years while their creditors were not receiving payments, and that the creditors should not be penalized for waiting without complaint for the Debtors to come up with a solution. Id. The court concluded that "the Debtors' conduct in not proposing a confirmable plan in more than five years has delayed their creditors in the collection of their debts to their prejudice." Id. at *14-15. They therefore affirmed the prior Order of Dismissal. Id. at *20.

The case was decided on April 28, 2005.