William R. Sawyer, United States Bankruptcy Judge.
This bankruptcy case came before the Court for an evidentiary hearing on May 27, 2015, on Oliver Fulmer's objection (Doc. 26) to Sharon Fulmer's motion to convert her Chapter 7 bankruptcy case to a case under Chapter 13. (Doc. 21). For the reasons set forth below, Oliver Fulmer's objection is OVERRULED and Sharon Fulmer's motion to convert is GRANTED.
The Court will divide its discussion into four parts. In this Part, the Court will discuss the divorce agreement and bankruptcy proceedings that led to this dispute. In Part II, the Court will discuss the applicable law and the burden of proof. In Part III, the Court will analyze Oliver Fulmer's written objection and the evidence presented at the May 27 hearing in light of the applicable law. In Part IV, the Court will announce its legal conclusion and order.
The Fulmers were divorced on August 13, 2012.
The parties entered into a Modification Agreement on August 26, 2014. (Oliver Exhibit 4). In general terms, the Modification Agreement provides that the parties are to split the costs of maintaining the RV and paying the indebtedness until the RV can be sold. Paragraph 5 of the Modification Agreement provides, in part, that "[t]he parties shall continue to cooperate towards the mutual goal of selling the RV in order to pay off the loan. The selling price of the RV shall be the amount necessary to pay off the loan on the RV."
This provision demonstrates the naivete of the parties and shows why there has been so much unnecessary discord. The amount of the debt owed to USAA has nothing to do with the sales price of the RV. To state what should be obvious to all, and which seems to have escaped not only the parties but their lawyers as well, the fact that the parties have not been able to sell the RV, for the amount owed to USAA, for 3 years or more means that it is not worth as much as the debt owed against it. That the parties have failed to grasp this simple but important fact is the cause of all the discord here.
Sharon filed a petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code on December 16, 2014. (Doc. 1). On March 4, 2015, Oliver filed a complaint, seeking a determination that Sharon's obligation under the Modification Agreement to hold him harmless for her half of the RV debt should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(15).
This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a), and the District Court's General Order of Reference dated April 25, 1985. Venue is proper under 28 U.S.C. § 1408(1). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). This is a final order.
Section 706(a) of the Bankruptcy Code provides that "[t]he debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this
The debtor in Marrama fraudulently transferred a house seven months before he filed a petition in bankruptcy pursuant to Chapter 7, failing to disclose the transfer in his schedules. The Chapter 7 Trustee discovered Marrama's ruse and stated that he would take action to recover the property. In response, Marrama moved to convert his case to a case under Chapter 13. The Bankruptcy Court denied the motion and the Supreme Court ultimately held that a Bankruptcy Court may, in its discretion, deny a debtor's motion to convert upon a finding that the motion was filed in bad faith. This power flows from "the inherent power of every federal court to sanction `abusive litigation practices.'" Marrama, 549 U.S. at 376, 127 S.Ct. at 1112.
The questions becomes: What is "bad faith" such that a bankruptcy court should deny a motion to convert? The Supreme Court stated in Marrama that:
Marrama, 549 U.S. at 375 n. 11, 127 S.Ct. 1105, 1112.
In a case handed down by the Bankruptcy Court in the Middle District of Florida shortly after the Supreme Court decided Marrama, conversion was denied after a finding that the debtors acted in bad faith when they converted nonexempt property into exempt property and failed to make accurate disclosures. See In re Mercado, 376 B.R. 340 (Bankr.M.D.Fla. 2007). In another case from the Southern District of Florida, a Chapter 7 Trustee moved to vacate a Chapter 7 discharge after he learned that the debtor had concealed valuable jewelry. See In re Alvarez, No. 10-45709, 2011 WL 5593176 (Bankr.S.D.Fla. Oct. 25, 2011). In response, the debtor moved to convert the case to a case under Chapter 13. The court in Alvarez denied the debtor's motion to convert, finding that the debtor had made misleading statements in an effort to defraud creditors. Mercado and Alvarez provide useful examples of the kind of conduct that will result in the denial of a motion to convert. The Court is looking for proof of a materially false statement made with the purpose of defrauding creditors.
It is well established that when a debtor seeks to confirm her Chapter 13 Plan, the burden is on her to prove her good faith. 11 U.S.C. § 1325(a)(3); In re Smith, 328 B.R. 797, 801 (Bankr.W.D.Mo. 2005) (holding that while the creditor has
Oliver's objection to Sharon's motion to convert is 31 pages long, including 83 numbered rhetorical paragraphs followed by a memorandum of law. (Doc. 28). The objection is prolix, rambling, and confused. Oliver's argument may fairly be summarized in three points, which cover the substance of his objection: (1) that Sharon acted in bad faith with respect to Oliver concerning the RV; (2) that Sharon's motivation to convert is in bad faith; and (3) that Sharon's statements and schedules are inaccurate and fraudulent.
Having heard the evidence, the Court is convinced that the discord between the parties centers on the now despised RV. As stated in Part I(A) above, the Marital Settlement Agreement made no mention of the RV and its disposition. The Modification Agreement purports to cure that deficiency and make provision for the disposition of the RV. However, the Modification Agreement is inherently unworkable. That the parties would agree to an order decreeing that "[t]he selling price of the RV shall be the amount necessary to pay off the loan on the RV," is ample evidence of how poorly the divorce has been handled to date. It should stand without saying that no prospective purchaser will be bound by the Modification Agreement. An unrelated purchaser, acting at arm's length, will offer no more than market value for the RV. Three years of experience demonstrates that the market value of the RV is something less than the amount of the indebtedness owed to USAA and is depreciating faster than the indebtedness is being paid off, leaving the parties like two parched travelers in the desert walking towards a mirage that they can never reach. Sharon's desire to rid herself of this albatross is not bad faith.
Oliver complains that Sharon increased his financial exposure when she evicted a renter out of the RV who, he claims, was paying rent that would have defrayed expenses. Sharon disputed Oliver's testimony, providing an alternative version of the facts. Neither party offered any evidence other then their own unsubstantiated word. Having heard the testimony of the parties, the Court finds that Oliver has failed to prove that Sharon dealt with him in bad faith with respect to the RV.
The predominant motivation for Sharon's conversion of her case to Chapter 13 appears to be to discharge her obligation to Oliver. Even so, this by itself is insufficient as a matter of law to supply the necessary proof of bad faith so as to preclude conversion. If Sharon can seek discharge of her RV debt in good faith, she logically can also seek to discharge her obligation to Oliver in good faith. Sharon's fresh start from discharging the debt
Congress has determined that some debts that will not discharge in a case under Chapter 7 may nevertheless be discharged in a case under Chapter 13. A debt subject to § 523(a)(15) is one such debt. Supra note 2. A debtor, such as Sharon, who lawfully seeks a discharge in bankruptcy is not, by definition, acting in bad faith. See Hardin v. Caldwell (In re Caldwell), 895 F.2d 1123, 1127 (6th Cir. 1990) (stating that "[i]t is not conclusively bad faith for a debtor to seek to discharge a debt incurred through his own criminal or tortious conduct, but that factor may be considered"); In re Griggs, 181 B.R. 111, 115 (Bankr.N.D.Ala.1994) (holding that a debtor was not acting in bad faith when he converted a case under Chapter 7 to a case under Chapter 13 for the purpose of discharging a debt for fraud, but it was a fact which could be considered).
In his objection, Oliver complains that Sharon's Chapter 13 Plan proposes only a zero percent payment to the holders of unsecured claims, yet Sharon had previously reaffirmed a $7,000 debt on a motorcycle. (Doc. 19). The Chapter 13 Trustee and any party in interest, including Oliver, may object to the Plan if it does not comply with the provisions of the Bankruptcy Code. A zero percent plan is not per se bad faith and the Court does not find that Sharon is guilty of bad faith here.
Oliver argues that Sharon's statements and schedules are, in many ways, inaccurate and perhaps even fraudulent. It is incumbent upon Oliver to demonstrate that Sharon's filings are inaccurate in some material way. That is, he may not simply point out a representation that he feels is inaccurate—he must also prove it is so. Taken as a whole, Oliver's claims of misrepresentations fail for three distinct reasons. First, in some instances, the alleged misrepresentation is not in fact a misrepresentation. Second, many of Oliver's alleged misrepresentations are immaterial—consisting of nothing more than petty knit-picking. Third, in those instances
An example of the first kind is at Paragraph 50 of Oliver's objection, where he states as follows:
(Doc. 28, p. 12). Paragraph 8 of Schedule I calls for the debtor to "[l]ist all other income regularly received." Sharon does not receive Oliver's payments to USAA. Payments made by Oliver on a debt owed by him to a third party is in no way, shape, or form the kind of thing which should be listed in Schedule I as income to Sharon. To be sure, Sharon is jointly liable on the debt. Either party benefits any time the other pays USAA. As Sharon proposes to abandon her interest in the RV and discharge her debt to USAA, Oliver's payments are not income to Sharon. Oliver's claim, that Sharon's Schedule I is incorrect, is without merit. Contrary to his claim, there is no misrepresentation.
An example of the second kind may be found in Paragraph 56 of Oliver's objection, where he states:
(Doc. 28, p. 14). Oliver would have Sharon run out of Bankruptcy Court because she stated "ceased" instead of "settled" and because she stated the Elmore County District Court rather than the Elmore County Circuit Court. This is the worst kind of knit-picking.
An example of the third kind may be found in Paragraphs 58 and 59 of the objection, where Oliver lists property that was awarded to Sharon in the Divorce, but is not reflected in her schedules. If Sharon in fact owned a $30,000 motorcycle or a $5,000 zero-turn lawn mower that was not listed in the schedules, then Sharon would be guilty of a material misrepresentation which could well result in the denial of her motion to convert. However, Oliver provides nothing more than a bare allegation. Sharon claimed in her response that the items were sold shortly after the divorce and that they did not have to be listed as property owned, or as property sold within the past two years.
All of Oliver's objections suffer from one of these three deficiencies. On April 17,
Oliver Fulmer objected to Sharon Fulmer's motion to convert her Chapter 7 bankruptcy case to one under Chapter 13, alleging that she is acting in bad faith. Having heard the evidence, the Court concludes that Oliver has failed to prove that Sharon is guilty of bad faith. Many of the allegations in Oliver's objection are nothing more than knit-picking, others are vague or simply incorrect either factually or legally, and still others are unsupported by evidence. Therefore, Oliver's objection is overruled. Sharon Fulmer's motion to convert her case to one under Chapter 13 will be granted by way of a separate order.
