Matter of Jones ( 1992 )


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  •                                   United States Court of Appeals,
    
                                                Fifth Circuit.
    
                                                No. 92–2044
    
                                            Summary Calendar.
    
                     In the Matter of Donald E. JONES and Eileen V. Jones, Debtors.
    
                           NCNB TEXAS NATIONAL BANK, Etc., Plaintiff,
    
            Federal Deposit Insurance Corporation in Its Corporate Capacity for National Bank,
    Plaintiff–Appellee,
    
                                                     v.
    
                     Donald E. JONES and Eileen V. Jones, Defendants–Appellants.
    
                                               July 14, 1992.
    
    Appeal from the United States District Court for the Southern District of Texas.
    
    Before JOLLY, DAVIS, and SMITH, Circuit Judges.
    
           E. GRADY JOLLY, Circuit Judge:
    
           Donald and Eileen Jones, the debtors in a bankruptcy proceeding, appeal the bankruptcy
    
    court's grant of NCNB's summary judgment motion denying them a discharge. During the course of
    
    the bankruptcy proceedings, the bankruptcy court issued several orders directing the debtors not to
    
    use insurance proceeds without approval of the court. Notwithstanding these orders, however, the
    
    debtors assigned a third party an interest in the proceeds.
    
    
    
           The bankruptcy court denied the debtors a discharge on the grounds that the debtors
    
    transferred the proceeds with an intent to hinder or defraud NCNB. The district court affirmed on
    
    the grounds that the debtors refused to obey a lawful court order.
    
    
    
           On appeal, the debtors argue that NCNB filed its objection to discharge out of time, that the
    
    court issued its order prohibiting the use of the CDs after they had already assigned the interest to
    
    a third party, that the court was not authorized to issue the orders, and that NCNB did not have a
    
    security interest in the insurance proceeds. We hold that all of the debtors' arguments are meritless
    and therefore affirm the bankruptcy's denial of discharge.
    
    
    
                                                       I
    
            Donald and Eileen Jones instituted a Chapter 11 proceeding in bankruptcy on May 1, 1984.
    
    At that time, the Joneses were indebted to Interfirst Bank Nassau Bay, N.A., the FDIC's predecessor
    
    in interest. Two months after the Joneses filed for bankruptcy, a fire destroyed a variety of the
    
    Joneses' personal property located on a tract of land in Houston, Texas. The property was insured
    
    by Highlands Insurance Company. An adversary proceeding between the Joneses and Highlands was
    
    instituted to resolve the coverage issue.
    
    
    
            In August 1987, the debtors filed a Motion to Compromise Controversy to Settle the
    
    Insurance Adversary Proceeding. The debtors proposed to settle with Highlands for $130,000.00.
    
    Prior to approval of the settlement, NCNB filed an application for turnover of cash collateral in which
    
    it asserted a security interest in the settlement proceeds. On September 22, 1987, the bankruptcy
    
    court entered its Order to Prohibit the Use of Cash Collateral and Turnover of Cash Collateral. The
    
    order states in part:
    
    
    
            Ordered, adjudged and decreed that the debtor is pro hibited from using income, insurance
            proceeds, profits or rents generated and collected from the operation of the property without
            the provision of adequate protection of the lien interest, or without further order of this
            Bankruptcy Court. And the same is to be held by debtor until a hearing is held on the 9th of
            October.
    
    On October 4, 1987, the court entered an order compromising the insurance controversy. The order
    
    directed Highlands to pay the debtors $130,000.00. The order al so stated that "the debtor shall
    
    deposit such sums into insured interest bearing accounts ... and shall [sic] expend such funds nor any
    
    part thereof without further order of this court." On December 1, 1987, the bankruptcy court entered
    
    an order indefinitely continuing the hearing and directing the debtor to "maintain a separate account
    
    for income and cash and insurance proceeds from the Property until such time as the parties are heard
    
    on the application," and prohibiting the debtor from using "such income and proceeds without prior
    approval of First Republic Bank or order of this Court." On February 9, 1988, the debtors filed a
    
    notice informing the court that they had received the $130,000.00 and had deposited $90,000.00 in
    
    a Certificate of Deposit at one bank and the remaining $40,000.00 in a CD at another bank. The
    
    notice states that the proceeds were deposited in accordance with the court's October 4, 1987 order.
    
    
    
           On May 29, 1989, the bankruptcy court partially allowed the claim of NCNB in the amount
    
    of $183,000.00. In August 1989, Houston Sea Packing Company, Inc., a corporation wholly owned
    
    by the debtors, executed two notes payable to Fidelity National Bank, one for $80,000.00 and one
    
    for $90,000.00. Both notes were guaranteed by Mr. Jones and secured by the CDs. The debtors did
    
    not request or obtain permission from the bankruptcy court to make these assignments.
    
    
    
           At a hearing on September 11, 1989, NCNB expressed concern that the debtors would not
    
    abide by the court's orders regarding the insurance proceeds. At the close of the hearing, the court
    
    enjoined the debtor from using, transferring or encumbering the $130,000.00 of insurance proceeds
    
    or any interest earned thereon without an order of the court.
    
    
    
           On September 22, 1989, a Chapter 11 trustee was appointed. The case was converted to a
    
    Chapter 7 case and the trustee was retained as a Chapter 7 trustee. Upon demanding the debtors to
    
    turn over the CDs bought with the insurance proceeds, the trustee discovered Fidelity's purported
    
    interest in them. NCNB then filed an order with the bankruptcy court asking it to hold the debtors
    
    in contempt. On May 10, 1990, the bankruptcy court found Ronald Jones guilty of civil contempt
    
    of court. It held that the CDs were, in whole or in part, property of the estate and subject, in part,
    
    to NCNB's lien.
    
    
    
           On June 25, 1990, NCNB filed a complaint objecting to the debtors' discharge pursuant to
    
    11 U.S.C. § 727(a)(2)(4)(5) and (6). NCNB then filed a motion for summary judgment, seeking the
    
    court to deny the debtors a discharge. The bankruptcy court granted NCNB's motion. The debtors
    appealed to the district court and the district court affirmed the denial of a discharge finding that the
    
    debtors failed to obey a court order.
    
    
    
            The debtors now appeal to this court. NCNB assigned its interest in the note evidencing the
    
    debtors' obligation to the FDIC in its corporate capacity.
    
    
    
                                                       II
    
            On appeal, the debtors argue that NCNB's objection to the discharge was not timely filed, that
    
    the collateral assignment of the CDs occurred after the bankruptcy court's order, that the court's
    
    orders regarding the insurance proceeds were not binding because the proceeds were not property
    
    of the estate, and that NCNB did not prove it had a security interest in the insurance proceeds. On
    
    the other hand, the FDIC argues that the debtors clearly violated the bankruptcy court's orders by
    
    assigning the CDs as collateral and that the bankruptcy court did not err in grant ing summary
    
    judgment and denying the debtors a discharge.
    
    
    
                                                       III
    
                                                       A
    
            Summary judgment is appro priat e if the moving party establishes that there is no genuine
    
    issue of material fact and that it is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c);
    
    Anderson v. Liberty Lobby, Inc., 
    477 U.S. 242
    , 248, 
    106 S. Ct. 2505
    , 2510, 
    91 L. Ed. 2d 202
     (1986).
    
    A bankruptcy court's determination that a debtor should be denied a discharge is reviewed only for
    
    abuse of discretion. In re Cox, 
    904 F.2d 1399
    , 1401 (9th Cir.1990). NCNB, in its motion for
    
    summary judgment, argued that the debtors should be denied a discharge pursuant to 11 U.S.C. §
    
    727(a)(2)(4)(5) and (6). Section 727 provides in pertinent part:
    
    
    
            (a) The court shall grant the debtor a discharge, unless
    
                    (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the
                    estate charged with cust ody of property under this title, has transferred, removed,
                     destroyed, mutilated, or concealed, or has permitted to be transferred, removed,
                     destroyed, mutilated, or concealed ... (B) property of the estate, after the filing of the
                     petition;
    
                     (6) the debtor has refused in the case—
    
                     (A) to obey any lawful order of the court, other than an order to respond to a material
                     question or to testify;
    
    The bankruptcy court granted the motion for summary judgment and denied the debtors a discharge,
    
    finding that they had violated § 727(a)(2). The district court affirmed, finding that the debtors had
    
    violated § 727(a)(6)(A). This co urt can affirm a grant of summary judgment on any grounds
    
    supported by the record. Bernhardt v. Richardson–Merrell, Inc., 
    892 F.2d 440
    , 444 (5th Cir.1990).
    
    
    
                                                        B
    
              First, the debtors argue that NCNB filed an objection to discharge after the deadline set by
    
    the bankruptcy court. The case was originally brought as a Chapter 11 case. On August 1, 1986,
    
    an order converting it to a Chapter 7 case was issued. On January 7, 1987, a notice of conversion
    
    setting March 27, 1987 as the last day to file a discharge was issued. On January 29, 1987, the court
    
    rescinded the conversion order, stating that the court had committed a clerical error. On October 11,
    
    1989, the case was converted to a Chapter 7 case. On March 23, 1990, NCNB filed a motion to
    
    extend time to file complaints. On April 24, 1990, the court granted the motion and extended the
    
    filing period to June 25, 1990. On June 25, 1990, NCNB filed its notice objecting to the debtors'
    
    discharge.
    
    
    
              The debtors argue that the March 27, 1987 deadline set by the court in the first conversion
    
    order expired and that under Bankruptcy Rule 1019(2), there is no new time period to file objections
    
    when the case is converted from a Chapter 7 case to a Chapter 11 case and then back to a Chapter
    
    7 case.1 In the instant case, the filing period in the original Chapter 7 case did not expire because the
    
       1
           Rule 1019(2) provides:
    
                           A new time period for filing claims, a complaint objecting to discharge, or
                     complaint to obtain a determination of dischargeability of any debt shall commence
    court rescinded the conversion order well before the time period expired. Therefore, under Rule
    
    1019(2), when the Chapter 11 case was converted to a Chapter 7 case on October 11, 1989, a new
    
    period for filing objections to discharge began pursuant to Rule 4004. Thus, the debtors' argument
    
    that NCNB filed its objection out of time has no merit.
    
    
    
            Second, the debtors argue that they assigned the interest in the CDs before the bankruptcy
    
    court issued its September 11, 1989 order specifically directing them not to use, transfer, or encumber
    
    the insurance proceeds. This statement is true, but it does not carry the day. Two years earlier, on
    
    October 4, 1987, the court entered an order directing the debtors to deposit the proceeds in a bank
    
    and further prohibiting the debtors from expending the proceeds without an order from the court.
    
    This order was in effect when the debtors assigned the interest in the CDs. Furthermore, the court's
    
    December 1, 1987 order, prohibiting the debtors from using the insurance proceeds without prior
    
    approval of the bank or the court, was in effect. Thus, the debtors violated, or in the words of the
    
    statute, "refused to obey" both of these orders of the bankruptcy court by granting Fidelity an interest
    
    in the CDs.
    
    
    
            Next, the debtors contend that they were not bound by the bankruptcy court's orders
    
    concerning the insurance proceeds because the insurance proceeds were not property of the estate
    
    because the proceeds were compensation for property they acquired post-petition. "[A]n order issued
    
    by a court with jurisdiction over the subject matter and person must be obeyed by the parties until it
    
    is reversed by orderly and proper proceedings." Maness v. Meyers, 
    419 U.S. 449
    , 459, 
    95 S. Ct. 584
    ,
    
    591, 
    42 L. Ed. 2d 574
     (1975). "If a person to whom a court directs an order believes that order is
    
    incorrect, the remedy is t o appeal, but, absent a stay, he must comply promptly with the order
    
    
    
                    pursuant to Rules 3002, 4004, or 4007, provided that a new time period shall not
                    commence if a chapter 7 case had been converted to a chapter 11, 12, or 13 case
                    and thereafter reconverted to a chapter 7 case and the time for filing claims, a
                    complaint objecting to discharge, or a complaint to obtain a determination of the
                    dischargeability of any debt, or any extension thereof, expired in the original
                    chapter 7 case.
    pending appeal." Id.
    
    
    
            Bankruptcy courts are courts of equity2 and under 11 U.S.C. § 105, they are authorized to
    
    "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of
    
    this title." A bankruptcy court has the "equitable power and the duty "to sift the circumstances
    
    surrounding any claim to see that injustice or unfairness is not done in administration of the bankrupt
    
    estate.' " In re Multiponics, Inc., 
    622 F.2d 709
    , 714 (5th Cir.1980) (quoting Pepper v. Litton, 
    308 U.S. 295
    , 308, 
    60 S. Ct. 238
    , 246, 
    84 L. Ed. 281
     (1939)).
    
    
    
            In its motion for turnover of cash collateral, NCNB asserted a security interest in the property
    
    that was damaged by the fire and requested the court to turn over as cash collateral, the insurance
    
    proceeds. The debtors, in their response, argued that NCNB did not have a security interest in the
    
    proceeds because the proceeds were compensation for property that they bought after they filed for
    
    bankruptcy protection. In other words, they argued that the proceeds were not property of the estate.
    
    The parties made these same arguments again at the September 11, 1989 hearing. The debtors,
    
    however, did not submit evidence proving that all of the insurance proceeds were compensation for
    
    after-acquired property. Irrespect ive of whether the funds ultimately may have been found to be
    
    compensation for after-acquired property, it was clearly within the equitable power of the bankruptcy
    
    court to order the debtor not to use the insurance proceeds without a court order, pending the court's
    
    resolution of this issue. The debtors disobeyed this order by granting Fidelity a security interest in
    
    the CDs. Therefore, the bankruptcy court did not err in granting NCNB's motion for summary
    
    judgment or abuse its discretion in denying the debtors a discharge because the debtors refused to
    
    obey a lawful court order. 11 U.S.C. § 727(a)(6)(A).3
    
       2
        In re Lockard, 
    884 F.2d 1171
    , 1179 n. 14 (9th Cir.1989); A.H. Robins Co. v. Piccinin, 
    788 F.2d 994
    , 1003 (4th Cir.1986), cert. denied, 
    479 U.S. 876
    , 
    107 S. Ct. 251
    , 
    93 L. Ed. 2d 177
    .
       3
         The debtors also contend that they are not bound by the order because NCNB did not prove
    its security interest in the proceeds. The debtors further argue that the guarantee signed by
    Ronald Jones was altered. The bankruptcy court entered an order that was within its equitable
    power. The debtors could have appealed the order, but absent a withdrawal of the order on
                                                     IV
    
           In conclusion, we hold that NCNB filed a t imely objection to the debtors' discharge. We
    
    further hold that it was within the court's equitable power to issue orders directing the debtors not
    
    to use the insurance proceeds without court approval. The debtors clearly disobeyed these orders.
    
    The bankruptcy court's grant of summary judgment and denying the debtors a discharge is therefore
    
    
    
           AFFIRMED.
    
    
    
    
    appeal, the debtors were obligated to obey it.