Edward Ellington, United States Bankruptcy Judge.
On January 29, 2013, Patricia L. Smith (Debtor) filed a petition for relief under
On April 10, 2013, Mr. Barkley filed a Notice and Motion to Dismiss because the Debtor was behind in her plan payments in the amount of $19,161.00. On May 9, 2013, an Agreed Order was entered granting the Chapter 13 Trustee's Notice and Motion to Dismiss.
A little more than two (2) months after her First Petition case was dismissed, the Debtor filed the above-styled Chapter 13 case on June 21, 2013 (Second Petition). James L. Henley, Jr. was appointed the Debtor's Chapter 13 Trustee (Trustee). At the time she filed her petition, Mr. Spotswood was once again her attorney of record.
On Amended Schedule D — Creditors Holding Secured Claims (Dkt. # 24) (Amended Schedule D), the Debtor lists ten (10) separate pieces of real property. Trustmark National Bank (Trustmark) is listed as having a mortgage in the amount of $425,000.00. A piece of real property located in Santa Rosa Beach, Florida, is listed as the security for Trustmark's mortgage.
On January 27, 2014, the Debtor filed another Amended Schedule D — Creditors Holding Secured Claims (Dkt. # 110-1) (Second Amended Schedule D). On Second Amended Schedule D, Trustmark is again listed with a secured claim for $425,000.00, however, Trustmark's claim was amended to state that the nature of the lien was a "Mortgage/Personal Guarantor Only."
On July 15, 2013, W. Jeffrey Barnes filed a Motion for Admission to Practice Pro Hac Vice in the U.S. Bankruptcy Court for District of Mississippi (sic) (Dkt. # 30). An order granting the motion was eventually entered on August 1, 2013. In the meantime, Mr. Barnes filed an Adversary Complaint
On November 12, 2013, Trustmark filed two (2) separate Proofs of Claim. Claim Number 4-1 is for an unsecured debt which is based upon the Debtor's personal guaranty. Claim 4-1 was filed in the amount of $816,905.12. Claim 5-1 is a secured debt
The Debtor filed a Motion to Amend Chapter 13 Plan (Dkt. # 106) (Motion to Amend) on January 27, 2014. In her Motion to Amend, the Debtor states:
The Debtor noticed out the Motion to Amend to all creditors for twenty-one (21) days. Trustmark filed its Objection to Motion to Amend Chapter 13 Plan (Dkt. # 123). Trustmark alleges that contrary to what is stated in the Motion to Amend, Trustmark has an unsecured claim well in excess of the $383,175.00 debt limits, and therefore, the Debtor is not eligible to be a debtor under Chapter 13. The Trustee filed Trustee's Objection to Debtor's Motion to Amend Plan (Dkt. # 106) (Dkt. # 126). In his objection, the Trustee also alleges that the Debtor is not eligible to be a debtor under Chapter 13 because on the date the Debtor filed her Second Petition, the Debtor exceeded the debt limits. The Trustee further states that without strict proof evidencing the ownership of the properties being abandoned and the properties being retained, the Debtor's Motion to Amend should be denied. The Motion to Amend and the objections were set for trial for April 4, 2014.
During this time period, James G. McGee, Jr. entered his appearance on behalf of the Debtor in the Trustmark Adversary (see Adv. Dkt. # 39). On April 3, 2014, Mr. McGee filed his Disclosure of
The Trustee filed Trustee's Motion to Dismiss (Dkt. # 133) (Trustee's Motion to Dismiss) on March 5, 2014. In the Trustee's Motion to Dismiss, the Trustee alleges that the Debtor's case should be dismissed under several grounds. First the Trustee alleges that the Debtor's case should be dismissed because pursuant to § 109(e) the Debtor did not qualify to be a debtor under Chapter 13 because "[o]nly an individual with regular income that owes, on the date of the filing of the petition... unsecured debts of less than $383,175.00 and secured debts of less than $1,149,525.00 ... may be a debtor under chapter 13 of this title. (emphasis added)"
A few days before the trial on the Motion to Amend and the Trustee's Motion to Dismiss, the Debtor filed a Motion for Continuance (Dkt. # 137) of the April 4, 2014, trial due to the health of the Debtor's mother-in-law. The trial was continued to a later date. The Trustee's Motion to Dismiss was reset, however, the Motion to Amend and the objections were never reset for a preliminary hearing or a trial. The Motion to Amend and the objections are still pending.
On April 7, 2014, Trustmark filed its Motion to Convert Under 11 U.S.C. § 1307(C)(sic) (Dkt. # 142) (Motion to Convert). In its Motion to Convert, Trustmark alleges that the Debtor's case should be converted for cause because the Debtor failed to disclose assets and failed to disclose $357,644.48 in litigation settlement proceeds which were paid to the Debtor's wholly owned corporation, Stone Source. Some four (4) months after Trustmark filed its Motion to Convert, the Debtor filed her Memorandum in Opposition to Trustmark National Bank's Motion to Convert Under 11 U.S.C. § 1307(C)(sic) (Dkt. # 192) (Memorandum Opposing Conversion).
The next day, on April 8, 2014, the Debtor filed a Motion to Dismiss Case Under Section 1307(b) (Dkt. # 144) (Motion to Dismiss). In her Motion to Dismiss, the Debtor asserts that she wants her Chapter 13 case dismissed because she "is no longer able to comply with her Chapter 13 plan and does not desire to modify the plan."
Trustmark filed its Response to Motion to Dismiss Case Under Section 1307(B)(sic) (Dkt. # 152) (Response). In its Response, Trustmark cites case law from the Court of Appeals for the Fifth Circuit and case law from this Court which hold that a debtor does not have an absolute right to dismiss his/her case if the debtor has acted in bad faith. Trustmark asserts that the Debtor has acted in bad faith, and therefore, her case should be converted to a Chapter 7 and not dismissed.
Eventually, on January 8, 2015, a trial was held on the Trustee's Motion to Dismiss, the Motion to Convert filed by Trustmark, and the Motion to Dismiss filed by the Debtor. At the trial, the Trustee announced that he would withdraw the Trustee's Motion to Dismiss. At the conclusion of the trial, the parties were instructed to submit a briefing schedule. The Court then took the matters under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(A) and (O).
Section 1307 provides for the conversion or dismissal of a Chapter 13 case. Section 1307 provides in pertinent part:
11 U.S.C. § 1307(b).
As noted above, the Debtor states in her Motion to Dismiss that pursuant to § 1307(b), she is "entitled to have this Chapter 13 case dismissed at any time."
In In re Seneca McField, this Court also had before it a creditor's motion to convert, and the debtor's motion to voluntarily dismiss his Chapter 13 case. Without precedent in the Fifth Circuit, this Court found Molitor v. Eidson (In re Molitor), 76 F.3d 218 (8th Cir.1996) to be persuasive. Following Molitor, the Court found that a debtor does not have an absolute right to dismiss his case when a motion to convert is pending or when there are allegations of bad faith or fraud.
Subsequently, in In re Jacobsen, the Fifth Circuit was faced with an identical set of facts as in McField and as is before this Court in the case at bar. In Jacobsen, a party filed a motion to convert, and in response, the debtor filed a motion to voluntarily dismiss.
Jacobsen filed a petition for relief under Chapter 13 of the bankruptcy code. With the help of angry creditors who alleged that Jacobsen had defrauded them, the
After reviewing the split in the circuits and in bankruptcy courts, the Fifth Circuit addressed the United States Supreme Court's opinion in Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). In Marrama, the debtor filed a Chapter 7. His schedules were inaccurate and misleading. When the Chapter 7 trustee informed the debtor that he would be seeking to recover assets for the benefit of the estate, the debtor filed a motion to convert his case to a Chapter 13 pursuant to § 706(a). The Supreme Court found that § 706(a) was subject to an exception for bad faith.
In affirming the conversion, the Fifth Circuit followed the Supreme Court's decision in Marrama, and held "that a bankruptcy court has the discretion to grant a pending motion to convert for cause under § 1307(c) where the debtor has acted in bad faith or abused the bankruptcy process and requested dismissal under § 1307(b) in response to the motion to convert."
Applying the Fifth Circuit's holding in Jacobsen to the case at bar, the Court finds that the facts are comparable, and therefore, the Debtor does not have an absolute right to dismiss her case because Trustmark's Motion to Convert was filed before the Debtor filed her Motion to Dismiss. Consequently, the Court must determine whether the Debtor "has acted in bad faith or abused the bankruptcy process"
Section 1307(c) provides for the conversion or dismissal of a Chapter 13 bankruptcy case. Section 1307(c) provides in pertinent part:
11 U.S.C. § 1307(c).
In addressing the question of conversion under § 1307(c), the Fifth Circuit in Jacobsen once again looked to Marrama for guidance. The Fifth Circuit found:
Using Marrama and Jacobsen as guidance, the Court must now look to the facts of this case to determine if the case before it is an extraordinary case where the Debtor's conduct was atypical and resulted in bad faith.
"In this circuit, courts apply a "totality of the circumstances" test to determine whether a Chapter 13 petition and plan are filed in good faith[
In re Resendiz, No. 12-10603, 2013 WL 6152921, at *4 (Bkrtcy.S.D.Tex. Nov. 20, 2013).
In order to prevail on its Motion to Convert under a § 1307, the burden is on Trustmark to show that the Debtor lacked good faith. Matter of Love, 957 F.2d 1350, 1355 (7th Cir.1992).
In its Motion to Convert, Trustmark alleges that the Debtor exceeded the debt limits under § 109(e) on the day the petition was filed, and therefore, does not qualify to be a debtor under Chapter 13; that the Debtor filed her petition in an attempt to halt the judicial foreclosure sale of Stone Source's property in Florida; and that the Debtor failed to disclose substantial assets.
Pursuant to § 109(e) in order to qualify to be a debtor under Chapter 13 "[o]nly an
The Debtor's Schedules were filed on July 3, 2013, and clearly state that the Debtor had secured claims of $1,841,716.60 which exceeds the $1,149,525.00 limit of § 109(e). See Summary of Schedules, Dkt. 11, July 3, 2013.
As noted above, Trustmark was not attempting to foreclose on property owned by the Debtor. Rather, Trustmark was attempting to foreclose on property located in Florida which was owned by Stone Source. Florida is a judicial foreclosure state. Trial Exhibit 13 is a composite exhibit of documents filed in Trustmark's judicial foreclosure action in the circuit court in Walton County, Florida. On April 23, 2013, the state judge issued its Final Summary Judgment granting Trustmark request to foreclose on Stone Source's property. The judgment further stated that the foreclosure sale was to take place on June 24, 2013.
As Trial Exhibit 13 shows, Stone Source, the Debtor and her husband, Rodney Woodruff, (Woodruff) then filed various pleadings in their attempts to halt the foreclosure sale. Essentially in their pleadings, they argued to the Florida court that because Patricia Smith owned Stone Source, her individual bankruptcy filing should halt the foreclosure sale on Stone Source's property.
Trustmark alleges that the Debtor's schedules are inaccurate. Trustmark alleges that the Debtor attempted to defraud her creditors by alleging property that she had previously listed in her First Petition as being unencumbered, were now encumbered with deeds of trust in favor of her husband. Trustmark further alleges that the Debtor failed to disclose checking accounts; that she failed to disclose rental income she had received; and that she failed to disclose funds she received from the settlement of a lawsuit.
In her First Petition, the Debtor lists three pieces of property on Schedule A — Real Property (Schedule 1-A) as unencumbered: Pass Christian Lot, Pascagoula Lot, and Fable Street Lot. Since the Debtor stated that these pieces of property were unencumbered, these three pieces of property are not listed on Schedule D — Creditors Holding Secured Claims (Case 1300238EE; Dkt. # 3).
In the Schedules filed with her Second Petition, the Debtor states on Schedule A — Real Property (Schedule A), that all three pieces of property are encumbered. Amended Schedule D
The charts below show the differences in the secured claims of Woodruff on the two sets of schedules filed by the Debtor:
FIRST PETITION — SCHEDULE D
SECURED CLAIMS OF RODNEY WOODRUFF
Property Lien Holder Amount
Greenville Rodney Woodruff $175,000.00
Hwy. 1 S.
Chotard Rodney Woodruff $78,500.00
Chotard Landing
Schedule D — Creditors Holding Secured Claims, Case No. 1300238EE, Dkt. # 3, p. 10, January 29, 2013.
SECOND PETITION — SCHEDULE D
SECURED CLAIMS OF RODNEY WOODRUFF
Property Lien Holder Amount
Greenville Rodney Woodruff $175,000.00
Hwy. 1 S.
Pass Christian Rodney Woodruff $25,000.00**
Henderson Ave.
Meraux, LA Rodney Woodruff $25,000.00**
Fable St.
Chotard Rodney Woodruff $78,500.00
Chotard Landing
Pascagoula Rodney Woodruff 125,000.00**
Front St.
Amended Schedule D — Creditors Holding Secured Claims, Case No. 1301920EE, Dkt. # 24, p. 1-2, July 11, 2013.
The Court notes that while the Debtor's Amended Schedule D — Creditors Holding Secured Claims (Dkt. # 24) shows that Rodney Woodruff has a deed of trust for $25,000.00 on the Meraux, Louisiana, Fable St., property, this alleged deed of trust was not introduced into evidence at trial because it was never produced to Trustmark. (Transcript at 25-6). In her Federal Rule of Bankruptcy Procedure 2004 Examination
At the trial, the Debtor was questioned extensively about the differences in her two schedules regarding the real property she owned. With regard to the deeds of trust held by her husband, the Debtor testified that she executed the deeds of trust because her husband had loaned her money. She further testified that there were no written loan documents for any of the loans and that she was unaware of what any of the money her husband had given to her was for.
When asked why the deeds of trust were not disclosed in Schedules 1, the Debtor answered:
Transcript at 17-19.
As to whether she had reviewed and signed Schedules 1 before they were filed, the Debtor's answer varied. When asked at trial if she had reviewed Schedules 1 before they were filed, the Debtor stated that she could not remember exactly, "but I'm sure I did.... I mean I think I did." (Transcript at 56). When asked the same question by Mr. Spotswood on cross-examination, the Debtor stated that "I'm sure I signed them." (Transcript at 64). However, when questioned by her attorney, Mr. McGee, at her Rule 2004 examination, the Debtor denied that she had reviewed her schedules and denied that she had signed the schedules.
In his Rule 2004 examination, Mr. Spotswood also testified as to the differences between the Debtor's two sets of schedules. Mr. Spotswood testified:
As to the remaining previously undisclosed deeds of trust on the Debtor's properties, Mr. Spotswood's testimony was the same: his client did not tell him about the deeds of trust when he prepared Schedules 1, but she told him about the deeds of trust when he was preparing the Schedules for her Second Petition.
The chart below shows when the various deeds of trust were executed and when they were recorded with the chancery clerk's offices.
DEEDS OF TRUSTS
Submitted into Evidence
Property Date Executed Date Recorded Pre-Petition Post-Petition
Exhibit #
Pass Christian 06/08/2012 09/26/2013 ✓
Henderson Ave. (both cases)
Trial Exhibit #2
Pascagoula 06/08/2012 09/26/2013 ✓
Front St. (both cases)
Trial Exhibit #3
Chotard 09/06/2011 01/24/2013 ✓
Chotard (5 days prior to
Landing First Petition)
Trial Exhibit #4
Greenville 11/05/2012 01/24/2013 ✓
Hwy. 1 S (5 days prior to
Trial Exhibit #5 First Petition)
At her Rule 2004 Examination, the Debtor was questioned about the why the deeds of trusts were recorded years after she had executed the deeds of trust. The Debtor testified that she did not have any knowledge as to when the deeds of trust were recorded or why the deeds of trust were recorded when they were.
At trial, Woodruff's attorney, Travis T. Vance, Jr., testified as to why the deeds of trust were not recorded shortly after they were executed. Basically, he blamed his secretaries for failing to have the deeds of trust recorded:
As to the remaining three (3) deeds of trust (Pass Christian Lot, Pascagoula Lot and Greenville Property), Mr. Vance's testimony as to why these deeds of trust were filed of record years after they were executed is the same as his testimony as to the Chotard Landing property-it was the fault of his secretaries. See Transcript at 123-126.
The Debtor admitted that she was the president and sole member of a company called Advanced Modular Homes & Developments, LLC. (Advanced Modular). The Debtor testified that Advanced Modular had not been in business since around the time of Hurricane Katrina (August of 2005). The Debtor further testified that she individually shared a joint checking account with Advanced Modular (Advanced Modular Account). (Transcript at 34).
The Debtor admitted that she did not disclose the Advanced Modular Account in her Schedules: "Q. And only one checking account was disclosed on your schedules, correct? A. Yeah, my personal. That's what I thought I had to disclose was personal." (Transcript at 35).
Each version of the Debtor's schedules lists a property located at 612 Magnolia Drive, Destin, Florida (Magnolia House). At the trial, the Debtor was questioned about the Magnolia House. While there was/is apparently some dispute as to what ownership interest the Debtor has in the Magnolia House (see Transcript at 75-76), the Debtor admitted that she received rental income from the Magnolia House and that she failed to disclose the rental income on her Schedules:
Transcript at 28-9.
E.L. "Skip" Lloyd also testified about the Magnolia House. Mr. Lloyd is a Certified Public Accountant who has been working for Woodruff and for Stone Source. Mr. Lloyd testified that the Debtor had received approximately $90,000.00 in rental income from the Magnolia House. Of that number, Mr. Lloyd testified that the Debtor had received approximately $60,000.00 after she had filed bankruptcy. (Transcript at 101).
On Schedule B — Personal Property (Dkt. # 11-2) (Schedule B), line 21, the Debtor lists as a contingent and unliquidated claim "Possible BP Settlement"
As for her individual claim against BP, the Debtor testified that "[m]ine is in the Appeals Court, the Fifth Circuit something or other, you know, and it's — and I'm never getting anything on mine." (Transcript at 68). She further testified that the same attorneys who handled Stone Source's BP claim, the law firms of Herman Herman & Katz and Travis Vance, were also handling her personal claim. (Transcript at 68).
Within two (2) months of the filing of the Debtor's Second Petition, in August of 2013, Stone Source received a check in settlement (BP Settlement) of its lawsuit against BP. (Transcript at 30-31). The Debtor testified that a week or two before Stone Source received the check, she had been informed that Stone Source would be receiving a settlement from BP. (Transcript at 68-69).
Trial Exhibit 6 is a copy of the Form 1099-Misc Stone Source received from the BP Economic and Property Damages Settlement Trust. The gross settlement
Mr. Lloyd testified that the loans from Woodruff to Stone Source were not on Stone Source's books at the time the loans were made. He also testified that he was not aware of any loan documents nor had he seen any documents to evidence any of the loans. (Transcript at 98-99; Transcript 114-15). As to who would receive Stone Source's BP Funds, Mr. Lloyd testified that "[i]t was agreed that [Woodruff] would get the check to repay him for prior loans."
Mr. Vance testified that it was his understanding that any money Stone Source received from its claim against BP would go to Woodruff to repay Woodruff for the money he had given to Stone Source over the years. (Transcript 131-33). However, Mr. Vance testified that there were no written documents evidencing this agreement: "No, I don't have anything in writing, but I had a verbal commitment from the owner of Stone Source before I ever got involved in the BP claim, I had that agreement with her that those monies we received from the Stone Source (sic) would be repaid to Rodney Woodruff." (Transcript at 133).
Once the funds were deposited into Mr. Vance's trust account, checks were written from that account to the Debtor, Stone Source and Advanced Modular. Mr. Vance testified that "[e]very check that was written out of my trust account was written at the direction and instant (sic) and instruction of Rodney Woodruff." (Transcript at 132).
Trial Exhibit 8 is a composite exhibit of checks written from Mr. Vance's trust account. Trial Exhibit 8 contains copies of the following checks:
PAYABLE TO: ADVANCED MODULAR Date: Amount: 08/20/2013 $10,000.00 09/03/2013 $15,000.00 10/01/2013 $15,000.00 10/31/2013 $5,000.00 12/10/2013 $10,000.00TOTAL: $55,000.00
PAYABLE TO: STONE SOURCE Date: Amount: 08/20/2013 $10,000.00 09/17/2013 $5,000.00 11/20/2013 $10,000.00 12/18/2013 $20,000.00 01/31/2014 $10,000.00 02/10/2014 $15,000.00 02/21/2014 $5,000.00 03/05/2014 $15,000.00 03/19/2014 $10,000.00TOTAL: $100,000.00
PAYABLE TO: DEBTOR Date: Amount: 11/17/2013 $5,000.00TOTAL: $5,000.00
Trial Exhibits 9, 10 and 11 are copies of bank statements. Trial Exhibit 9 is a composite exhibit of bank statements dated June 7, 2013, to July 9, 2014, of the Advanced Modular/Debtor's bank account (Advanced Modular Bank Statements). Trial Exhibit 10 is a composite exhibit of bank statements dated June 1, 2013, to June 30, 2014, of Stone Source (Stone Source Bank Statements). Trial Exhibit 11 is a composite exhibit of bank statements dated May 16, 2013, to July 16, 2014, of the Debtor, Woodruff and Bridget Hughes-Anderson
The attorney for Trustmark asked the Debtor about the five checks written from Travis Vance's trust account to Advanced Modular and the corresponding deposits shown on the Advanced Modular Bank Statements. The Debtor acknowledged that the five trust checks and the deposits into the Advanced Modular account correlated. (Example, Transcript at 37-38).
In addition, the Debtor was asked about transfers and withdrawals from the Advanced Modular bank account. The exchange below is typical of the Debtor's responses to all questions regarding debits and transfers shown on the Advanced Modular Bank Statements:
(Transcript 38 to 41).
In reviewing the Advanced Modular Bank Statements, there are debits from grocery stores, fast food restaurants, clothing stores, liquor stores, drug stores, restaurants, service stations, dollar stores, and television shopping channels. In addition, there are transfers of funds to the Debtor's personal bank account, Stone Source's bank account, and unidentified bank accounts. (Trial Exhibit 9).
When questioned by her attorney, the Debtor testified that she did not know she was using the Advanced Modular debit card. Instead, she stated that she believed she was using the Stone Source debit card. (Transcript at 63). However, when questioned by the Trustee, the Debtor acknowledged she knew which card she was using:
(Transcript at 87).
As for the Stone Source Bank Statements, the Debtor was questioned about the deposits, transfers, and debits shown on the bank statements. The Debtor was questioned about the nine checks written from Travis Vance's trust account to Stone Source and the corresponding deposits shown on the Stone Source Bank Statements. The Debtor acknowledged that the trust checks and the deposits into the Stone Source account correlated. (Example, Transcript at 45).
As for the transfers and debits shown on the bank statements, the exchange below is typical of the Debtor's responses:
(Transcript 46 to 48).
In reviewing the Stone Source Bank Statements, there are debits from grocery stores, fast food restaurants, clothing stores, liquor stores, drug stores, restaurants, service stations, dollar stores, hair salons, and an anti-aging clinic. In addition, there are transfers to the Debtor's personal bank account, Advanced Modular's bank account, and unidentified bank accounts.
Unlike Advanced Modular's bank account, there does appear to be some debits on Stone Source's Bank Statements that could be legitimate business expenses. For example: Waste Management, Vista
When questioned, the Debtor at one point stated that she could not answer questions about all of the charges because she was not the only person who had debit cards for the Stone Source account:
(Transcript at 54-55).
As noted above, when the Debtor filed her petition on June 21, 2013, and when she filed amended schedules on July 11, 2013, she listed secured debts in the amount of $1,841,716.60. In an attempt to reduce her secured debt, the Debtor filed a Motion to Amend in an attempt to surrender five pieces of real property (Dkt. # 106) to Woodruff, her husband.
Even though an order was never entered allowing the modification, the Court finds that this purported surrendering of property was a sham. The Debtor was "surrendering" the property to her husband so that the Debtor would be below the debt limits. Consequently, on the date she filed her Chapter 13 petition, the Debtor did not qualify to be a debtor under Chapter 13 pursuant to § 109(e). Because she exceeded the debit limits of § 109(e), the Court finds this shows bad faith as it is an attempt by the Debtor "to abuse the spirit of the Bankruptcy Code."
In Investors Group, LLC v. Pottorff, 518 B.R. 380 (N.D.Tex.2014), the debtor was involved in a derivative lawsuit in another forum. On the eve of an important deposition, the debtor filed bankruptcy. The court found that the debtor was not being pressured by creditors and that it was bad faith for the debtor to file bankruptcy in an attempt to gain an advantage in a derivative lawsuit in another forum. Id. at 384. (See also, In re Alexandra Trust, 526 B.R. 668, 680 (Bankr.N.D.Tex.2015)(In lifting the automatic stay, the court found that it was bad faith to file bankruptcy as a litigation tactic.).
Like the Pottorff case, the Debtor did not file bankruptcy because she was being pressured by her creditors. Instead, Stone Source was being pressured by its creditor, Trustmark. As shown by Trial Exhibit 13, the Debtor attempted to use the filing of her personal bankruptcy petition to halt the foreclosure sale of property owned by Stone Source. The Court finds that it was bad faith for the Debtor to use her personal bankruptcy case in an attempt to stop the foreclosure sale of Stone Source's property.
In considering the deeds of trust to Woodruff, the Court did not find the testimony in regard to the amount of the indebtedness to Woodruff; the testimony regarding the failure to list the deeds of trust in the First Petition; and the testimony regarding the failure of the deeds of trust to be recorded at the time they were executed to be convincing.
The Court is unsure if misrepresentations were made regarding the deeds of trust or if an unfair manipulation of what debt is owed by the Debtor has occurred. Regardless of what has occurred, once the case is converted to a Chapter 7, under the strong-arm powers given to a Chapter 7 trustee under § 544, "the trustee has the rights of a bona fide purchaser of real property `without regard to any knowledge of the trustee or of any other creditor' and without regard to `whether or not such a creditor or purchaser exists.'"
With regard to the BP lawsuits, once the Debtor found out in late July 2013 or early August 2013, and most certainly at the time she received the check on or about August 15, 2013, the Debtor had a duty to disclose that her wholly owned company, Stone Source, had received the BP Funds. "`The duty of disclosure in a bankruptcy proceeding is a continuing one, and a debtor is required to disclose all potential causes of action.' Youngblood Group v. Lufkin Fed. Sav. & Loan Ass'n, 932 F.Supp. 859, 867 (E.D.Tex.1996)"
Not only did the Debtor fail to disclose that her "possible BP Settlement claim" had become a certainty, the Debtor hid the funds when she authorized the BP Funds to be deposited into Mr. Vance's trust account. While the Debtor testified that she had given the BP Funds to Woodruff to repay him for money he had loaned Stone Source, the Debtor failed to produce any evidence to support her position that Woodruff had made loans to Stone Source.
The evidence shows that $55,000.00 was funneled through the bank account of Advanced Modular for the Debtor's personal use. While the Debtor testified that some of the transactions were business related, the Court finds that to be disingenuous. The Debtor testified that Advanced Modular had not conducted any business in almost ten (10) years,
In addition, BP money ($100,000.00) was funneled through Stone Source's bank account for the Debtor's personal use and benefit. As noted, while some of the debits on the Stone Source Bank Statements could arguably be related to Stone Source's business, the vast majority of the debits appear to be for the Debtor and her relatives' personal use.
The Court finds that the Debtor's failure to disclose that she had received over $300,000.00 in BP Funds and that her spending of the BP Funds on personal expenses through the Advanced Modular and Stone Source bank accounts amounts to "evidence of misrepresentation, unfair manipulation, or other inequities."
Additionally, the Debtor has been in bankruptcy for almost two years. While she testified that she wanted to pay her creditors in full,
As noted above, in order to prevail on its Motion to Convert, Trustmark has the burden of proving that this is an extraordinary case and that the Debtor's actions were atypical and resulted in bad faith. The Court finds that Trustmark has met this burden and overwhelmingly proven that the Debtor's actions were atypical and resulted in bad faith. Like the debtors in Marrama and Jacobsen, Trustmark has shown that the Debtor filed "misleading and inaccurate schedules that attempted to conceal assets from creditors."
In Jacobsen, supra note 14, at 8, the Fifth Circuit held that a debtor does not have an absolute right to dismiss when a motion to convert is pending. The Fifth Circuit found that before ruling on the debtor's motion to dismiss its case, a court must first determine if bad faith exists to convert the case to a Chapter 7.
As the Supreme Court noted in Marrama, "[t]he Court notes that the Bankruptcy Code is intended to give a `fresh start' to the `honest but unfortunate debtor.'"
A separate judgment consistent with this Opinion will be entered in accordance with Rule 7054 and Rule 9021 of the Federal Rules of Bankruptcy Procedure.
