Opinion
No. 13-03-10123 MA.
July 9, 2004
William F. Davis, Albuquerque, NM, Attorney for Debtor.
Jennie Deden Behles, Albuquerque, NM, Attorney for BMSI.
Kelley L. Skehen, Albuquerque, NM, Chapter 13 Trustee.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER is before the Court on Creditor BMSI's Alternative Motion to Dismiss ("Motion") filed by Brake Masters Systems, Inc. ("BMSI"), by and through its attorneys of record, the Behles Law Firm, P.C. (Jennie Deden Behles and Leigh Higgins). The Court held a final hearing on the Motion on April 26, 2004, at which time the Court took the matter under advisement. Also pending before the Court is the [Chapter 7] Trustee's Motion to Sell Assets of the Estate Free and Clear of Liens ("Motion to Sell"), which the Court took under advisement pending resolution of the Debtor's motion to convert his Chapter 7 proceeding to Chapter 13, and pending resolution of BMSI's Motion. An Order Granting Debtor's Motion to Convert Chapter 7 Proceeding to Chapter 13 was entered on March 26, 2004. BMSI's Motion asserts that cause exists to dismiss the Debtor's bankruptcy proceeding in accordance with 11 U.S.C. § 1307(c), and requests that this proceeding be reconverted to Chapter 7. After reviewing the documents in the case file, considering the testimony and evidence from the final hearing on BMSI's Motion, and being otherwise sufficiently informed, the Court finds that sufficient cause exists to reconvert this Chapter 13 proceeding to Chapter 7. In reaching this conclusion, the Court enters the following findings of fact and conclusions of law:
An Order Converting Debtor's Chapter 7 Proceeding to a Case Under Chapter 13 (1st Conversion Order") was entered on November 4, 2003. BMSI filed a motion to set aside the 1st Conversion Order, asserting, among other things, that the Debtor failed to comply with the noticing requirements for conversion from Chapter 7 to Chapter 13. The Court entered an order setting aside the 1st Conversion Order on December 19, 2003.
FINDINGS OF FACT
1. Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on January 8, 2003. Michael J. Caplan was appointed as the Chapter 7 Trustee.
2. Debtor owned an operated a franchise business called Brake Masters of Santa Fe, Inc. Debtor listed his interest in Brake Masters of Santa Fe, Inc. on his Schedule B with a value of $1.00. He also listed an interest in "Counterclaims against Brake Masters Franchise" on his Schedule B with a value of $1.00. Debtor listed the Internal Revenue Service as a creditor holding an unsecured priority claim in the amount of $32,398.22 for 941 payroll taxes for Brake Masters of Santa Fe, Inc. See Schedule E.
3. Debtor subsequently amended his Statements and Schedules to reflect a value of $6,000 for his interest in Brake Masters of Santa Fe and to reflect that he had retained attorney Anthony Jeffries to represent him, but paid him no retainer fee. Debtor continued to value his counterclaims against BMSI at $1.00.
4. Debtor failed to list BMSI as a creditor in his Statements and Schedules.
5. Debtor failed to disclose in his initial statements and schedules an interest in real property located in Mora County that Debtor asserts is his daughter's property.
6. Following the § 341 meeting, the Chapter 7 trustee filed a Report of No Distribution and Abandonment of Assets. (Docket #14.).
7. Debtor later amended his Schedule A and B to reflect a fee ownership interest in 13.94 acres of land located in Los Chupaderos, Mora County, valued at $28,000.00. (Docket # 27).
8. BMSI filed a Complaint against the Debtor on or about June 26, 2003 seeking to deny the Debtor's discharge under 11 U.S.C. § 727. See Adversary No. 03-1265 M.
9. Upon the motion of BMSI to set aside the Report of No Distribution and Abandonment of Assets and following a final hearing on the motion, the Court set aside the Report of No Distribution and Abandonment of Assets, finding, among other things, that at the time Debtor filed his voluntary petition, he had entered into arbitration proceedings with BMSI that included counterclaims against BMSI for which the Debtor sought $300,000.00 in damages, and that the Debtor failed to inform the Chapter 7 Trustee either of his potential liability to BMSI or of the potential value of his claim against BMSI. See Memorandum (Docket # 40), Order Setting Aside No Asset Report (Docket #32), and Order Granting Motion to Set Aside Notice of Abandonment of Assets (Docket #41).
10. The Chapter 7 Trustee negotiated a settlement with BMSI to purchase the Debtor's counterclaim against BMSI and the Debtor's stock in Brakemasters of Santa Fe, Inc. for $25,000.00, and filed his Motion to Sell on October 15, 2003. (Docket # 47).
11. Before the expiration of the notice period on the Trustee's Motion to Sell, Debtor filed his Motion to Convert Case from Chapter 7 to Chapter 13.
12. Debtor then objected to the Motion to Sell, asserting that the Motion to Sell became moot upon the conversion of this proceeding to Chapter 13. See Debtor's Objection to the Trustee's Motion to Sell Assets of the Estate Free and Clear of Liens (Docket # 53).
13. Debtor's Chapter 13 plan of reorganization proposes to pursue his counterclaim against BMSI and "contribute $16,500 from the recovery to fund the plan." Debtor also proposes to make monthly payments of $500.00 for a period of sixty months, and contribute any net tax refunds for tax years 2003, 2004, and 2005 to the plan. See Chapter 13 Plan (Docket # 61).
14. At the final hearing on BMSI's Motion, Debtor testified that he converted his proceeding to Chapter 13 when he became aware that he would be personally liable for federal taxes incurred in connection with his operation of Brake Masters of Santa Fe, Inc. He also testified that he converted to Chapter 13 in order to save the real property in Mora County, and so that he can continue the litigation against BMSI in order to repay his creditors. Debtor continues to assert that the real property in Mora County, which he failed to disclose on his initial statements and schedules, is his daughter's property. Debtor also testified that his agreement with attorney Anthony Jeffries is to pay him an hourly rate.
CONCLUSIONS OF LAW
Section 1307 governs conversion or dismissal of Chapter 13 proceedings, and provides that "on request of a party in interest . . . the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause . . ." 11 U.S.C. § 1307(c). The statute then contains a nonexhaustive list of causes for conversion or dismissal. See In re Armstrong, 303 B.R. 213, 221 (10th Cir. BAP 2004) ("The examples of cause listed in this subsection are not exclusive . . ."). Lack of good faith in filing a petition can constitute sufficient cause to dismiss or convert in accordance with 11 U.S.C. § 1307(c). Id. (". . . good faith inquiries have traditionally been encompassed by § 1307(c)."); Molitor v. Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996) (affirming bankruptcy court's conversion of case under to chapter 7 pursuant to § 1307(c) based on finding of bad faith). Evaluation of the Debtor's good faith requires the Court to consider the totality of circumstances. Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326 (10th Cir. 1993). Once cause has been demonstrated, the Court must determine whether dismissal or conversion is in the best interest of creditors and the estate. 11 U.S.C. § 1307(c); Blaise v. Wolinsky (In re Blaise), 219 B.R. 946, 950 (2nd Cir. BAP 1998) ("[T]he consideration whether to dismiss or convert under section 1307(c) requires the court further to determine whether the best interests of the estate and its creditors dictate conversion or dismissal.").
Relevant factors include:
the nature of the debt, including the question of whether the debt would be dischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.
Gier, Id., 986 F.2d at 1329 (quoting In re Love, 957 F.2d 1350, 1357 (7th Cir. 1992).
Under the circumstances present in this case, the Court finds that sufficient cause exists to convert or dismiss in accordance with 11 U.S.C. § 1307(c), and that conversion, rather than dismissal is in the best interest of the bankruptcy estate and its creditors. Debtor's actions throughout the history of this case indicate that he has not been completely forthcoming about the nature of his assets. See Banks v. Vandiver (In re Banks), 248 B.R. 799, 803 (8th Cir. BAP 2000) ("The relevant inquiry regarding good faith is `whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.'") (quoting Educ. Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987)). Debtor initially filed his petition under Chapter 7, and failed to list his interest in certain real property located in Mora County, New Mexico. Failure to schedule assets is some evidence of bad faith in filing the petition. Cf. 8 Collier on Bankruptcy, ¶ 1307.04[10] (Alan N. Resnick and Henry J. Sommer, eds., 15th ed. rev. 2003) (listing "whether the debtor `misrepresented facts in his [petition or] plan'" as a factor relevant to the evaluation of the totality of circumstances) (quoting In re Leavitt, 171 F.3d 1219, 1224 (9th Cir. 1999)). Only after this error was pointed out to the Debtor did he amend his schedules. And only after this asset was included did Debtor determine the need to convert to Chapter 13 in an effort to save this property. Debtor also initially failed to list BMSI as a creditor in his statements and schedules, and valued his counterclaim against them at $1.00, yet he continues to pay the attorney representing him to pursue this litigation against BMSI at an hourly rate. If the Debtor truly believed his potential claim was worth only $1.00, he would not be willing to pay counsel to represent him at an hourly rate.
Moreover, the Court finds Debtor's testimony regarding his reason for converting to Chapter 13 not credible. Debtor testified that he decided to convert to Chapter 13 after he became aware that he could be personally liable to the Internal Revenue Service ("IRS") for taxes incurred in connection with his business. Yet, Debtor scheduled IRS with a priority claim for 941 payroll taxes in his initial Schedule E. Clearly Debtor knew of his potential tax liability when he filed his petition under Chapter 7.
Finally, Debtor's Chapter 13 plan proposes to pay only $16,500.00 from any recovery in his litigation against BMSI, while the Trustee's Motion to Sell would have compromised this claim for $25,000.00. At a minimum, these figures demonstrate that Debtor's proposed Chapter 13 plan likely fails to meet the best interest of creditors test. See 11 U.S.C. § 1325(a)(4) (requiring that a chapter 13 plan pay no less to unsecured creditors than what they would receive in a chapter 7 liquidation proceeding). Debtor's motivation for converting to Chapter 13 is to regain control over his potential claim against BMSI, and thwart the prior case trustee's settlement of this litigation. Debtor believes the value of his claim against BMSI is significantly greater, yet he proposes to contribute less to a Chapter 13 plan of reorganization than the settlement amount negotiated by the Chapter 7 Trustee. Conversion for this purpose, coupled with the Debtor's lack of candor in initially completing his statements and schedules, is evidence of the Debtor's lack of good faith, and supports a finding of "cause" to reconvert this proceeding to Chapter 7. In re Barnes, 275 B.R. 889 (Bankr.E.D.Cal. 2002) (reconversion appropriate where initial conversion was an attempt to preempt chapter 7 trustee's administration of estate). Based on the foregoing, conversion, rather than dismissal is in the best interest of creditors.
These findings of fact and conclusions of law are entered in accordance with Rule 7052, Fed.R.Bankr.P. An appropriate order will be entered.