Michael E. Romero, United States Bankruptcy Judge
This matter comes before the Court on the Motion to Reconsider Order Dated May 13, 2013 to Convert to Chapter 7, and/or to Compel Production of Documents (the "Second Motion to Reconsider"), filed by administrative priority creditor Allen & Vellone, P.C. ("A & V") and counsel for former Chapter 7 trustee Jeffrey A. Weinman ("Weinman"). David McDonald and Julie McDonald (collectively, the "Debtors") never filed a formal written response to the Second Motion to Reconsider. However, the Debtors opposed reconversion at a hearing on the matter. At the same hearing, the Chapter 13 Trustee joined in the request to reconvert this case to Chapter 7.
In part one of this saga, the Court concluded the Debtors were eligible under 11 U.S.C. § 109(e)
The Court has jurisdiction over the Second Motion to Reconsider under 28 U.S.C. §§ 1334(a) and (b) and 28 U.S.C. §§ 157(a) and (b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) because it concerns the administration of the estate.
David McDonald ("David") and John P. Kozlowski ("Kozlowski") each own 50% of The Colorado Agency, Inc., a business selling insurance products.
David's employment with The Colorado Agency is the Debtors' sole source of income,
On October 31, 2011, the Debtors filed their voluntary Chapter 7 petition through their initial counsel, Atom Ariola-Tirella ("Tirella"). Weinman was appointed as the Chapter 7 trustee of the Debtors' bankruptcy estate ("Estate"). As a result of filing for bankruptcy relief, David's interest in his book of business and his 50% interest in The Colorado Agency became property of the Estate.
Following the initial meeting of creditors, Weinman filed his Notice of Possible Dividends, and hired A & V as special counsel to investigate assets and alleged transfers involving David and The Colorado Agency. On March 9, 2012, Weinman, through A & V, filed ex parte Motions for Orders Authorizing Rule 2004 Examinations of David and The Colorado Agency, and Compelling Production of Documents by David and The Colorado Agency.
After receiving the subpoenas in connection with the 2004 examinations, the Debtors hired new bankruptcy counsel. On April 23, 2012, William A. Morris ("Morris")
Eight days after Weinman filed his Motion to Compel, on July 10, 2012, the Debtors filed the following pleadings: 1) Objection to the Motion to Compel; 2) Amended Schedules A, B, C, I and J; 3) Motion to Convert Case from Chapter 7 to Chapter 13 ("Conversion Motion"); and 4) a proposed Chapter 13 Plan.
On July 20, 2012, Weinman (through his counsel A & V) filed the First Motion to Reconsider, seeking reversal of the Court's Conversion Order, reconversion to Chapter 7, and authorization for Weinman to pursue claims against David to recover property of the Estate; or in the alternative, seeking reconversion of the case to Chapter 7 pursuant to § 1307(c). Following an evidentiary hearing held May 13, 2013, the Court entered its Order Denying First Motion to Reconsider.
In that order, the Court noted the Debtors' initial Schedules and Statement of Financial Affairs contained several inaccuracies and omissions, and the Debtors were not cooperative with document production while represented by Tirella. After hiring Morris, the Debtors took steps to amend their initial disclosures and produce some documentation to Weinman. In weighing the evidence presented at the time, the Court determined the Debtors were eligible under § 109(e) to convert their case to Chapter 13, and found as follows regarding bad faith:
The day after the Court issued its Order Denying First Motion to Reconsider, Morris filed a Certificate of Non-Contested
The Debtors proposed four different Chapter 13 plans during their bankruptcy case, but as set forth below, none of the plans were confirmable as a matter of law. As it relates to the reconversion issues, the Court believes a brief review of each proposed plan and the intervening dispute regarding document production is instructive.
The Debtors' initial Chapter 13 plan ("Initial Plan") proposed to pay unsecured creditors (owed more than $170,000) the total amount of $51,313 over five years. The Initial Plan also contained the following representations:
The Chapter 13 Trustee filed an objection to confirmation of the Initial Plan.
Before a confirmation hearing could be held, on June 4, 2013, the pro se Debtors filed an Amended Chapter 13 Plan ("First Amended Plan"). The First Amended Plan reduced the distribution to unsecured creditors from $51,313 to $3,065 and reduced the commitment period from five years to five months. The Debtors also indicated for the first time they intended to surrender their residence. The First Amended Plan also contained the following representations:
On July 8, 2013, the Court held the first evidentiary confirmation hearing in this case. As set forth in the Court's Minute Order dated July 8, 2013, the Court determined the First Amended Plan was not
In addition, at the July 8th hearing, A & V raised concerns about the Debtors dissipating assets to the detriment of the Estate. In order to protect the Estate from the alleged dissipation of assets, the Court ordered the Debtors to provide to the Chapter 13 Trustee and A & V copies of "all bank statements for any accounts opened post-petition by David McDonald, Julie McDonald and/or The Colorado Agency from the date any such account was opened through July 9, 2013."
Despite the clear language in the Court's Order dated July 8, 2013, requiring "all bank statements for any accounts opened post-petition by David McDonald, Julie McDonald and/or The Colorado Agency from the date any such account was opened through July 9, 2013," and an accounting of any and all post-petition funds payable from The Hartford, the Debtors only provided bank statement summaries for a single account. Further, in lieu of an accounting, the Debtors requested A & V and the Trustee review David's commission statements from The Hartford. In response, A & V filed its Motion to Compel Debtors to Comply with July 8, 2013 Order and Produce Documents.
Rather than comply with the Court's Order Granting Motion to Compel dated July 31, 2013, the Debtors filed a Motion for Extension of Time to Respond to the Motion to Compel on August 5, 2013. The Debtors provided no explanation for failing to produce the Court-ordered documentation and accounting in the interim period, and only stated they needed the extension
On August 19, 2013, A & V filed its Response to Debtors' two motions.
Two days later, the Court held an evidentiary hearing, and denied the Debtors' Motion for Extension of Time and Motion to Reconsider. Further, the Court,
August 23rd came and went, and the Debtors did not produce the Court-ordered documents and accounting. Instead, on August 26, 2013, the Debtors filed a pro se Motion to Extend Time to File Amended Plan because they hired new counsel, Stephen E. Berken ("Berken"). Because the Debtors were allegedly represented by counsel, the Court denied this motion without prejudice for Berken to file a motion seeking an extension of time as the Debtors' new counsel. Two days later, on the extended date the second amended Chapter 13 Plan was due, Berken filed a motion on behalf of the Debtors seeking another extension of time to file the second amended plan. The Court, weary of the Debtors' gamesmanship, granted the Debtors a final extension of time over A & V's objection, and set a final deadline of September 11, 2013, to file the notorious second amended plan.
In response to the Debtors' third failure to comply with Court's previous orders to produce certain documents and accounting, on September 6, 2013, A & V filed its Second Motion to Reconsider. The Second Motion to Reconsider detailed the unproduced documents and accounting, sought another order compelling the Debtors to produce the same, and sought reconversion of this case to Chapter 7 based on the Debtors' repeated violations of Court orders to produce documents and failure to file a confirmable Chapter 13 plan. The Debtors never filed a response to the Second Motion to Reconsider.
On September 9, 2013, the Court entered another Order, setting a hearing on the Second Motion to Reconsider for September 13, 2013, and finding as follows:
At the hearing held September 13, 2013, the Court granted A & V's request for production of documents, and David tendered two sets of un-redacted copies of Guaranty Bank and Trust bank statements for two separate accounts ending in "1975" and "1496." Berken confirmed on the record the Debtors only opened those two accounts post-petition. The Court held the Second Motion to Reconsider in abeyance until further order of the Court, pending the confirmation hearing set for October 17, 2013, regarding the Debtors' Second Amended Chapter 13 Plan ("Second Amended Plan") filed September 11, 2013.
The Debtors' Second Amended Plan increased the distribution to unsecured creditors from $3,065 to $87,766 and increased the commitment period from five months to three years. This Second Amended Chapter 13 Plan also contained the following representations:
The Debtors also indicated they surrendered their residence on January 1, 2012, and surrendered their timeshare on October 1, 2013. The Second Amended Plan improperly states Debtors are eligible for a discharge.
The Chapter 13 Trustee filed an objection to confirmation of the Debtors' Second Amended Plan.
The Debtors received their discharge under Chapter 7 on March 15, 2012. A year and a half later, after filing their Second Amended Plan, the Debtors filed a Motion to Vacate Discharge, seeking to set aside the Chapter 7 discharge in order to be eligible for a discharge in their Chapter 13 bankruptcy, since this case was converted post-discharge. The Debtors cited no authority for such relief and, after hearing arguments, the Court denied the Debtor's Motion to Vacate Discharge.
Two days before the scheduled confirmation hearing on the Debtors' Second Amended Plan, the Debtors filed their third Amended Chapter 13 Plan ("Third Amended Plan"), which reduced the distribution to unsecured creditors from $87,766 to $406 over five years. This Third Amended Chapter 13 Plan also contained the following representations:
While the Second Amended Plan indicated the Debtors surrendered their residence on January 1, 2012, and surrendered their timeshare on October 1, 2013, the Third Amended Plan indicated they surrendered their residence and their timeshare on September 1, 2012. The Third Amended Plan also improperly states Debtors are eligible for a discharge. On October 24, 2013, the Debtors voluntarily withdrew their Third Amended Plan.
At the confirmation hearing, the Court denied the Debtors' Motion to Vacate Discharge.
The issue before the Court is whether the Debtors' bankruptcy case should be reconverted from Chapter 13 to Chapter 7. As set forth herein, the Court holds this case should be reconverted for three independent reasons.
First, the Court finds the Debtors violated multiple Court orders, establishing cause to reconvert this case to Chapter 7. Following the withdrawal of Morris, the Debtors, acting pro se, repeatedly evaded orders of this Court requiring the Debtors to propose a Chapter 13 plan that could be confirmed on its face. At the eleventh hour, and through their third attorney, the Debtors still failed to propose a legitimate Chapter 13 plan that could be confirmed as a matter of law.
Second, in weighing the applicable factors, the Court finds the Debtors filed their Conversion Motion in bad faith under § 1307(c).
Third, in weighing the applicable factors, the Court finds the Debtors filed their Second Amended Plan in bad faith under § 1325(b).
On a related note, the Court is compelled to provide its assessment of credibility. Mrs. McDonald has not appeared in Court since this case was converted to Chapter 13, yielding to David who has appeared in Court and filed pleadings, both on his own and through counsel. Importantly, the Court finds David was evasive and uncooperative with the Court while appearing pro se at each hearing held after the Order Denying First Motion to Reconsider.
As a threshold matter, the Court must dispose of the Debtors' challenge to the standing of A & V to object to confirmation and participate in the Chapter 13 plan confirmation process. Section 1324(a) provides "[a] party in interest may object to confirmation of the plan."
After denying confirmation of the Debtors' initial Plan and First Amended Plan, the Court required the Debtors "to propose and file a plan which is confirmable on its face and in full compliance with the Bankruptcy Code, failing which
The operative Chapter 13 plan is the Debtors' Second Amended Plan filed September 11, 2013.
First, the Second Amended Plan states the Debtors are "eligible for a discharge[.]"
Second, the Second Amended Plan fails the "best-interest-of-creditors" test under § 1325(a)(4).
In contrast, A & V asserts the value of the book of business is at least $117,000 (not the $92,100 listed in the Second Amended Plan) based on the Guaranty Bank & Trust bank account statements provided by the Debtors and the gross commissions received by David. The Court finds A & V's valuations credible, and thus, the Debtors have understated the value of the book of business in their Second Amended Plan. Combined with other assets, A & V asserts creditors
Third, the Second Amended Plan fails to fully provide for the Department of Education/Federal Loan Servicing student loan claim, or A & V's administrative priority claim. The Department of Education/Federal Loan Servicing filed a proof of claim in the unsecured amount of $4,320.32 for an unpaid student loan.
Fourth, the Second Amended Plan cannot be administered as written because the plan provides for payments over five years, but the number of payments listed only covers 59 months.
Fifth, the Debtors filed a Third Amended Plan to fix some of the issues with the Second Amended Plan. The Debtors stated the Third Amended Plan made the following changes:
Thus, through their Certificate and Motion to Determine Notice filed with this Court through counsel, the Debtors effectively admitted the Second Amended Plan was not confirmable on its face. The deficiencies in the Second Amended Plan necessitated filing the Third Amended Plan,
The Court's record does not reveal that anyone other than the Debtors are culpable for their failures to comply with the Court's orders to file a confirmable Chapter 13 plan. The Debtors have never apologized for their failures to comply with Court orders, or even offered a reasonable explanation as to why they were unable to perform their obligations in this case. The Debtors received ample notice from this Court, and were fully warned of the possibility of reconversion of this case to Chapter 7 for failure to comply with the written Order dated July 8, 2013, and the Order and Notice of Continued Hearing dated July 25, 2013. The Debtors also failed to heed the Court's warnings at the hearings held August 21, 2013 and September 13, 2013. The Debtors' repeated failures to comply with Court orders supports the conclusion that sufficient cause exists to reconvert this case to Chapter 7. Other than reconversion of this case, the Court believes there is no lesser sanction available under the circumstances, as it would be pointless to impose a financial sanction on these Debtors. Reconversion is appropriate to enforce this Court's own orders, as well as to protect the integrity of the judicial process.
For these reasons, the Court finds the Debtors failed to propose a plan that is confirmable on its face, in violation of the Court's previous orders. The Debtors have been on notice for months that failing to file a confirmable plan will establish immediate cause to reconvert this bankruptcy case. Accordingly, the Court finds cause exists to reconvert this case from Chapter 13 to Chapter 7.
The Court must re-examine whether the Debtors sought conversion of this case in bad faith under § 1307(c) and whether the Debtors filed their Second Amended Plan in good faith under § 1325(a)(3). As set forth below, the Court finds bad faith on both counts, resulting in two more independent grounds warranting reconversion of this case to Chapter 7. The Court set forth the framework for the Marrama analysis in great detail in its Order Denying First Motion to Reconsider, and does not find a compelling reason to repeat the entire analysis here.
A party may seek relief from an order or judgment under FED. R. CIV. P. 59 or 60(b).
FED. R. CIV. P. 59 and 60 apply to cases under the Bankruptcy Code pursuant to FED. R. BANKR. P. 9023 and 9024. Although FED R. CIV. P. 59(e) provides a motion to alter or amend a judgment must be filed within 28 days of the entry of the judgment, FED. R. BANKR. P. 9023 shortens the deadline to file motions under Rule 59 to "no later than 14 days after entry of judgment."
The Second Motion to Reconsider was filed on September 6, 2013, almost four months after entry of the Order Denying First Motion to Reconsider, and over a year after the Conversion Order. Based on the deadlines described above by the Tenth Circuit Court of Appeals, the Court must evaluate the Second Motion to Reconsider under FED. R. CIV. P. 60(b).
Rule 60(b) provides in pertinent part:
Relief from judgment under Rule 60(b) falls within the discretion of the Court, but such relief is extraordinary, and should only be granted in exceptional circumstances.
Another division of this Court recently examined the issue of whether a debtor converted his case in bad faith under Rule 60(b)(6) to prevent injustice.
The Court agrees with this analysis, and, within the Rule 60(b)(6) context, the Court will reconsider the bad faith portion of its Order Denying First Motion to Reconsider.
As this Court previously noted, after Marrama, eligibility for conversion from Chapter 7 to Chapter 13 under § 706(a) "is dependent on two things: first, whether the debtor is eligible to be a debtor under chapter 13 under 11 U.S.C. § 109(e); and second, whether the case, if converted, would be dismissed under 11 U.S.C. § 1307(c)."
Here, the Debtors' eligibility under § 109(e) is not at issue, and the Court previously found the Debtors met their burden of proving they are eligible
"The Tenth Circuit has evaluated the determination of good faith at two different stages of a Chapter 13 proceeding: the filing of a Chapter 13 petition and the filing of a proposed Chapter 13 plan."
In order to determine whether a Chapter 13 plan was filed in good faith under § 1325(a)(3), the Tenth Circuit historically applied the following non-exhaustive list known as the Flygare factors:
Almost thirty years after Flygare was decided, the Tenth Circuit in Cranmer noted the Bankruptcy Code was amended to include § 1325(b), which subsumed most of the Flygare factors and gave the good faith inquiry "a more narrow focus."
In the Second Motion to Reconsider, A & V seeks reconversion to Chapter 7 primarily because the Debtors did not file their Second Amended Plan in good faith as required under § 1325(a)(3). A & V also asserts reconversion to Chapter 7 is proper "for cause" because the Debtors filed their Conversion Motion in bad faith under § 1307(c). In this Court's view, a comprehensive approach to the second Marrama prong makes the most sense in the instant matter because both the Conversion Motion and the Second Amended Plan have been challenged as being filed in bad faith. Thus, the Court will follow, the approach of the Norwood court, and apply the factors as set forth in Flygare, Cranmer and Gier as appropriate to determine whether the Debtors filed their Conversion Motion and Second Amended Plan in good faith.
Marrama's pragmatic approach permits the Court to consider non-exhaustive factors "for cause" under § 1307(c).
Here, the Debtors received their discharge during their Chapter 7 case, and no adversary proceedings have been filed seeking to revoke the discharge under § 727, or seeking to except any debts from discharge under § 523. Although the Debtors sought to vacate the discharge — without any authority supporting their position — this request was denied. Moreover, the Debtors' student loan debt owed to Department of Education/Federal Loan Servicing is not dischargeable by operation of § 523(a)(8). The Court also looks to the nature of the Debtors' debt owed to A & V as allowed administrative priority claim under § 503(b)(1)(A) and (b)(2), and § 507(a)(1)(C). But for the efforts of A & V, the Debtors would not have been forced to amend Schedules to reflect proper values and disclose assets not preciously listed.
The Debtors filed their Conversion Motion within one month after Weinman conducted the 2004 examinations of David and The Colorado Agency. Furthermore, the Conversion Motion came only eight days after Weinman filed his Motion to Compel, seeking the turnover of 1) certain documents not produced at the 2004 examinations, 2) the non-exempt portion of all Renewal Commissions, New Business Commissions, and Endorsement Commissions on work performed by David pre-petition but received by the Debtors post-petition and/or payable in the future, and 3) David's share of his interest in The Colorado Agency and the book of business so both could be sold for the benefit of the Estate. Thus, the timing of the Conversion Motion indicates the motion was filed to avoid turning over this information and these assets, and therefore, was filed in bad faith.
The subject debt owed to A & V arose from the pursuit of assets for the benefit
The timing of Debtors' Conversion Motion is suspicious, particularly in conjunction with the Debtors' post-petition conduct of repeatedly violating Court orders requiring the Debtors to turnover documents to the Chapter 13 Trustee and A & V. As of September 9, 2013, the Court had "ordered the Debtors to produce copies of all detailed bank statements for all accounts on three separate occasions.... The Debtors failed to comply with the first two orders, and according to A & V, the Debtors have not complied with the latest order."
There is no question the Debtors' conversion to Chapter 13 increased the expenses of this proceeding and created a substantial delay in any recovery to creditors. A & V's administrative priority claim in the amount of $44,388.56 only reflects its fees and costs incurred from the date A & V was hired through the date the Court issued its Order Denying First Motion to Reconsider. This claim reflects the thousands of dollars in legal expenses and hundreds of hours dealing with Debtors' failure to adequately disclose assets,
Treatment of creditors greatly worsened after conversion of this case to Chapter 13 and return of control of the Estate to the Debtors. Before the Debtors filed their Conversion Motion, Weinman had filed a Notice of Possible Dividends and had taken appropriate actions to pursue assets for the benefit of the Estate. Based on the documents finally produced to A & V and the Chapter 13 Trustee, A & V believes the minimum distribution to creditors would have been $152,000 in a Chapter 7 within one year. After payment of any administrative expenses and priority claims, A & V asserts unsecured creditors would have received an approximate $70,000 distribution for the benefit of unsecured nonpriority claims in the aggregate amount of $170,514.
In contrast, after converting the case, the Debtors have offered the following to unsecured creditors in their proposed plans based on their misstated and fluctuating values of assets:
There is no question if the Debtors had their way, creditors would receive far less under their proposed Chapter 13 plans than in Chapter 7. The Debtors' Second Amended Plan provided for over $70,000 for Class 4, only because the Debtors had switched positions, claiming David owned 100% of The Colorado Agency. The Debtors then reversed this position yet again at the last hearing held in this matter on October 17, 2013. Thus, the Court finds the Debtors' creditors are worse off in a Chapter 13 than if the case were reconverted to Chapter 7.
The Debtors have been anything but forthcoming with the Court, the Chapter 13 Trustee, Weinman, and A & V. As noted, the Debtors have changed positions on asset values and percentage ownership, income, and expenses countless times. The Debtors have shown their statements made under the penalty of perjury in pleadings and on the record are unreliable and cannot be trusted. Further, the Debtors
During their investigation, Weinman and A & V discovered multiple issues with the Debtors' initial filing. As set forth in the Court's Order Denying First Motion to Reconsider, the Debtors previously attributed to their former counsel the inaccuracies and omissions, and their failure to respond adequately to Weinman's document requests. The Court gave the Debtors the benefit of the doubt, and accepted the Debtors' scapegoat argument based on the evidence before it at the time.
The investigation during the Chapter 7 case revealed the Debtors undervalued assets and income that could be administered for the benefit of creditors. Rather than cooperate with the investigation, the Debtors moved to convert this case to Chapter 13. The Debtors have continued to misstate their income and expenses, and undervalue assets, directly affecting the proposed return to creditors. For example, the Debtors have repeatedly changed positions on the value of the book of business, the percentage ownership in The Colorado Agency, the costs of sale for the book of business, and David's earnings from monthly commissions (the Debtors' sole source of income). The Debtors have amended their Schedules on three different occasions, with the most recent amendments filed in October, 2013, containing inconsistent valuations. In addition, post-conversion, the Debtors knowingly delayed the production of documents and full financial disclosure, citing no legitimate reason for their delays. The Court finds the Debtors have been anything but honest and transparent throughout this bankruptcy case and are undeserving of continuing in Chapter 13.
Moreover, the Debtors' conduct exhibited after the Order Denying First Motion to Reconsider further supports the conclusion the Debtors are to blame for initially understating asset values, incorrectly stating income and expenses, omitting assets of the Estate, and concealing documentation they were ordered to produce. During the time the Debtors proceeded pro se, without counsel to blame, the Debtors offered no viable explanation for their continued inconsistent statements before this Court or their failure to comply with Court orders. Creditors have already waited far too long for a distribution in this bankruptcy case. The Court will not allow the Debtors to continue to delay a distribution to creditors.
In weighing the Gier factors, and based on the totality of the circumstances in this case, the Court concludes A & V has satisfied their burden of showing the Debtors filed their Conversion Motion in bad faith pursuant to § 1307(c). Therefore, the Court will reconvert this case to Chapter 7.
The Court further finds reconversion appropriate because, after conversion to Chapter 13, the Debtors began exhibiting conduct before this Court resembling that of an "atypical" debtor, undeserving of relief afforded to good faith debtors. After considering the arguments of counsel, the evidence presented and the Court's records, the Court finds the Cranmer and
The Debtors amended their Schedules on three different occasions after their initial filing, and only when represented by counsel.
The four different proposed Chapter 13 plans also offer little help for the Debtors. The Debtors' Chapter 7 Reconciliation shows Class 4 general unsecured creditors would receive $87,530 if Debtors' case was a Chapter 7 case. However, the Second Amended Plan only proposes to pay these claims $43,377. The Debtors' Second Amended Plan also fails to provide for the Department of Education/Federal Loan Servicing student loan claim, or properly provide for A & V's administrative priority claim. These claims must be properly addressed and accounted for in the Second Amended Plan, or there is no adequate means for unsecured creditors to calculate their pro rata distribution in Class 4. As a result, the Second Amended Plan fails to disclose the resulting adverse effect on unsecured, and possibly other, creditors. The Debtors cannot simply ignore the existence of these claims. The Second Amended Plan's statements of debts, expenses and percentage repayment of unsecured debt remain inaccurate. The Court therefore finds that this factor weighs against the Debtor.
As previously discussed in connection with the seventh Gier factor, the Debtors made fraudulent misrepresentations to this
On August 12, 2013, the Debtors clearly misstated they had complied with the Court's Order dated July 8, 2013, and produced the requested bank statements and The Hartford accounting to the Chapter 13 Trustee and A & V. This statement was not true, as evidenced by the need for several orders and hearings on this issue. The Court finds the Debtors were not honest with the Court, the Chapter 13 Trustee, Weinman, or A & V regarding the state of their financial affairs. These Debtors violated three orders compelling the production of documents to protect creditors for the Debtors dissipating assets. The Court was forced to intervene and compel the Debtors to comply with the requested document production. For these reasons, and the reasons discussed above, the Court finds the Debtors have not been forthcoming during their Chapter 13 case.
The Court has noted on the record the Debtors have engaged in gamesmanship during their Chapter 13 case. The Debtors' post-conversion antics in this case, including the willful failure to comply with Court orders, and the Debtors' inaccurate statements regarding asset values, income, and expenses, reflect a conscious disregard for the authority of this Court and a recalcitrance and lack of respect for the bankruptcy process. The Court has provided more than enough opportunity for these Debtors to propose a confirmable Chapter 13 plan, but the Debtors continue to file plans fraught with inconsistency, which cannot be confirmed.
Notably, on March 21, 2014, the Chapter 13 Trustee also filed a motion seeking reconversion of this case to Chapter 7 for cause under § 1307(c)(4).
In this Court's view, the Debtors' conversion to Chapter 13 was nothing more than a hollow attempt to regain control over assets of the Estate, with no honest effort to use these assets to repay their creditors. The Debtors' conduct has substantially
The Debtors filed their most recent Amended Schedule J and their Second Amended Plan on September 11, 2013. The Debtors claimed a surplus of $750.11 per month and committed to make 59 tiered monthly plan payments ranging from $107.14 per month to $865.00 per month. Even ignoring the fact the Debtors have included a monthly house expense of $1,700 for property they surrendered, the Second Amended Plan failed to provide for all of David's projected disposable income to be applied to paying unsecured creditors as required by § 1325(b)(1)(B). Given the Debtors' inconsistent representations throughout this case, the Court cannot determine Debtors' actual income and expenses with any certainty. Further, the Second Amended Plan fails to account for a significant unpaid administrative priority claim (in excess of $44,000), or for student loans (in excess of $4,000) that must eventually be repaid.
The Debtors' sole source of income is David's employment with The Colorado Agency. If, in a Chapter 7, Weinman successfully sold the Debtors' book of business and his 50% interest in The Colorado Agency, the Debtors ability to fund a Chapter 13 plan would not exist. In addition, David has maintained throughout this case that the value of his book of business is declining. If this assertion is true, then the Court could not find David has a reasonable likelihood of a future increase in income.
The duration of the Second Amended Plan is not easily determined. As previously discussed, the Second Amended Plan provides for payments over 60 months, but the number of payments listed only covers 59 months. The Second Amended Plan only provides for a 36 month commitment period for payments to Class 4 creditors. This is inconsistent with a five-year plan, and the duration and expected distribution under the Second Amended Plan is inadequate to satisfy the requirements of § 1325. Further, the Debtors' inaccurate valuation of assets and the $44,153 shortfall between the Debtors' Chapter 7 Reconciliation and proposed payments to Class 4 in the Second Amended Plan cause concern. The Court finds the Second Amended Plan does not provide a larger distribution to creditors than they would receive under Chapter 7 as required by § 1325(a)(4).
This factor was subsumed by the first and second Cranmer factors discussed above. The Court incorporates those findings for this factor.
As drafted, the Second Amended Plan discloses the administrative priority claim for A & V, but treats this claim as an unsecured Class 4 claim to share in any distribution to Class 4. This alone reflects an unfair preferential treatment for the other administrative claimants (i.e. Debtors' counsel).
This factor is inapplicable because the Second Amended Plan does not provide for any secured claims.
The Second Amended Plan improperly states the Debtors are eligible for a discharge in Chapter 13. As previously discussed, the Debtors received their discharge under Chapter 7 on March 15, 2012. Pursuant to § 1328(f), the Debtors are not eligible for a discharge through the Second Amended Plan. In addition, the Debtors' student loan debt to the Department of Education/Federal Loan Servicing is non-dischargeable, and Second Amended Plan does not fully provide for all administrative expense claims.
This factor is inapplicable to the Debtors' bankruptcy case.
This factor is inapplicable because the Debtors have only filed for relief under the Bankruptcy Code one time.
As set forth in detail above, the Court finds a myriad of evidence supporting the conclusion the Debtors sought conversion of this case to Chapter 13 to stymie efforts of Weinman and A & V to recover assets for the benefit of the Estate. The Debtors have failed to comply with some of the most basic requirements of the Bankruptcy Code, namely filing a Chapter 13 plan that could conceivably be confirmed on its face, and engaging in a meaningful, honest, and transparent process of full disclosure in exchange for a discharge. The negative motives of the Debtors are set forth at length in this Order, and need not be reproduced here.
The Chapter 13 Trustee's objection to confirmation of the Second Amended Plan asserts, inter alia, the Second Amended Plan cannot be administered as written. Further, the Debtors have not made a plan payment since October 2013, and have not demonstrated any genuine effort to propose a confirmable Chapter 13 plan. If the Court were to allow the Debtors to proceed in Chapter 13, the Chapter 13 Trustee would have the same burdensome task of the former Chapter 7 trustee — sifting through financials to rectify the Debtors' inconsistent statements of income and expenses, and valuation of assets. Even if the Debtors suddenly began cooperating with the Chapter 13 Trustee, which this Court doubts the Debtors will do, the Chapter 13 Trustee has already filed a separate motion seeking reconversion of this case for the Debtors' failure to make plan payments in violation of the Bankruptcy Code. In any event, this Court concludes the Chapter 13 Trustee would be substantially burdened in administering this bankruptcy case.
After considering the evidence and the record, the Court finds the applicable Cranmer and Flygare factors as applied to this case are indicative of the Debtors' bad faith in filing the Second Amended Plan. Thus, the Court finds in favor of reconverting this case to Chapter 7 pursuant to § 1325(a).
Based on the totality of the circumstances, the Court shall grant the Second
As set forth herein, the Court finds three independent grounds warranting reconversion of the Debtors' bankruptcy case to Chapter 7. The Debtors are prohibited from proceeding under Chapter 13 of the Bankruptcy Code because 1) they failed to comply with this Court's Orders, 2) the Debtors filed their Conversion Motion in bad faith, and 3) the Debtors filed their Second Amended Plan in bad faith. Accordingly,
IT IS ORDERED the Second Motion to Reconsider (Docket No. 184) is GRANTED. The Court's Order Denying First Motion to Reconsider is hereby superceded by this Order. The Debtors' Motion to Convert Case to Chapter 13 Pursuant to 11 U.S.C. § 706(a) has been reconsidered under Rule 60(b), and is hereby DENIED. A separate order reconverting the case to Chapter 7 will enter.
IT IS FURTHER ORDERED the Debtors shall turnover to Weinman within ten (10) days from the date of this Order, complete and unredacted copies of all detailed bank statements showing itemized monthly transactions for the period from September 1, 2013 through the date of this order, for any and all accounts held by the Debtors, The Colorado Agency, or any other entity which either Debtor has an interest, whether such account are held jointly or separately, including but not limited to the Guaranty Bank & Trust accounts ending in "1975" and "1496."
IT IS FURTHER ORDERED the Debtors shall provide to Weinman within ten (10) days from the date of this Order, an updated accounting showing any and all post-petition funds payable from The Hartford.
IT IS FURTHER ORDERED the Hartford, which is currently holding all funds for The Colorado Agency per this Court's Minute Order dated July 8, 2013 (Docket No. 155), is authorized to disburse any funds held for the Debtors or The Colorado Agency directly to Weinman upon his request for the benefit of the Debtors' bankruptcy estate.