THOMAS J. TUCKER, Bankruptcy Judge.
This case came before the Court for two hearings on confirmation of the Debtor's proposed Chapter 13 plan (Docket # 12, the "Plan"). The Court then held an evidentiary hearing regarding the objection to confirmation of the unsecured creditor Summit Group Holdings, LLC ("Summit Group"), that the Debtor's Plan is not proposed in good faith as required by 11 U.S.C. § 1325(a)(3).
The Court has considered all of the testimony and exhibits admitted into evidence at the evidentiary hearing, as well as the arguments of counsel. This opinion states the Court's findings of fact and conclusions of law.
For the reasons stated in this opinion, the Court finds and concludes that the Debtor's Plan is not proposed in good
This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr.E.D.Mich. 2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," including Bankruptcy Code §§ 109(e) and 1325(a)(3). And this is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases."
The Debtor, David J. Kwiatkowski, filed his voluntary Chapter 13 bankruptcy petition in this case on October 12, 2010. He filed his schedules and Statement of Financial Affairs on October 19, 2010,
The Chapter 13 Trustee and Summit Group each filed objections to confirmation of Debtor's Plan.
In its objection to confirmation, and later in its oral arguments and brief, and then in the evidentiary hearing, Summit Group made numerous arguments and allegations against Debtor, to try to demonstrate that the Debtor had not proposed his Plan in good faith. Summit Group's bad-faith-related allegations included allegations that the Debtor had failed, in several specific ways, to fully and honestly disclose his assets, income, and other information about his financial affairs.
The Chapter 13 Trustee's written objections to confirmation also raised the issue of Debtor's eligibility to be a Chapter 13 debtor. The Trustee objected to confirmation on the following ground, among others:
Bankruptcy Code § 109(e) limits who is eligible to be a debtor in Chapter 13, as follows:
11 U.S.C. § 109(e) (emphasis added). The § 109(e) issue in this case is whether the Debtor owed, on the date of his bankruptcy petition, "noncontingent, liquidated, unsecured debts" totaling $360,475 or more. If he did, then he is ineligible to be a Chapter 13 debtor.
This issue has come before the Court in a somewhat roundabout way. This issue was first raised by the Chapter 13 Trustee's written objections to confirmation, quoted above. It is not entirely clear, but it appears that the Chapter 13 Trustee has abandoned this objection. In the two non-evidentiary hearings on confirmation that preceded the evidentiary hearing, the Trustee did not argue that the Debtor is ineligible under § 109(e), and when recounting the Trustee's unresolved objections to confirmation, Trustee's counsel did not mention the § 109(e) issue. And the Trustee did not participate in the evidentiary hearing.
Summit Group, by contrast, did not raise any § 109(e) eligibility objection in
At the evidentiary hearing, the Debtor did not argue either (1) that Summit Group had waived the eligibility argument by not making it sooner; or (2) that the eligibility argument was not relevant to Summit Group's "good faith" objection to confirmation. Rather, Debtor argued only the merits of Summit Group's arguments — i.e., Debtor argued that he is eligible for Chapter 13, and that he did properly disclose his unsecured debts in his Schedule F.
Under the circumstances, the Court will not ignore the evidence that the Debtor is ineligible for Chapter 13, which is discussed below. In this case, such evidence is relevant to, and part of, Summit Group's timely objection to confirmation, that the Debtor's Plan is not proposed in good faith. And the Debtor's eligibility to be a Chapter 13 debtor is an issue of fundamental importance. For these reasons, the Court finds good cause to consider the eligibility issue, even though Summit Group did not raise the issue until the evidentiary hearing.
In determining whether a Chapter 13 debtor's debts exceeds the § 109(e) debt limitations, the focus is on the amount of the secured and unsecured debts as of the petition date. With respect to the nature and amount of the Debtor's secured and unsecured debts, the Court must look first to the Debtor's schedules. As the United States Court of Appeals for the Sixth Circuit has held, "Chapter 13 eligibility should normally be determined by the debtor's schedules checking only to see if the schedules were made in good faith." Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 757 (6th Cir.1985); see also Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 982 (9th Cir.2001) (same).
The § 109(e) debt limits apply only to debts that are "liquidated" and "noncontingent" as of the petition date. In In re Redburn, 193 B.R. 249, 259 (Bankr. W.D.Mich.1996), the court discussed the meaning of "noncontingent" under 11 U.S.C. § 109(e):
Id. (italics in original) (citations omitted); see also In re Tabor, 232 B.R. 85, 89 (Bankr.N.D.Ohio 1999) ("[I]t is well settled that a debt is noncontingent if all events giving rise to liability occurred prior to the filing of the bankruptcy petition.")(internal quotation marks and citations omitted).
Noting that the term "liquidated" is not defined by the Bankruptcy Code, the Sixth Circuit has held that a debt is "liquidated" if it "`can be determined by mathematical computation.'" See Pearson, 773 F.2d at 754 (citations omitted). In the Pearson case, the Sixth Circuit observed that the "courts are in disagreement as to whether the debt is unliquidated when there is a substantial dispute regarding liability or amount." Id. After discussing the conflicting cases, the Pearson court did not take a position on this issue. See id. at 754-55. But if a debt is unliquidated on the date of the petition, it does not count toward the § 109(e) debt limits, even if events after the petition date convert the debt into a liquidated debt. See id. at 758. Rather, the bankruptcy court should "look realistically to the state of the debtors' affairs as it reasonably appeared on the date of filing." Id.
Under § 109(e) and Pearson, therefore, the Court must begin with the Debtor's schedules, to determine the amount of the Debtor's liquidated, noncontingent, unsecured debt in this case, as of the petition date. Debtor's unsecured debts were listed in his Schedules E and F, which Debtor filed on October 19, 2010, seven days after the petition date.
Thus, the total of the unsecured debts quantified on Debtor's Schedules E and F was $282,145.00, and none of this unsecured debt was designated by Debtor as being contingent, unliquidated, or disputed. While this sum is below the § 109(e) limit of $360,475.00, it does not include two claims that were listed but not quantified on Debtor's Schedule F. The creditor listed for each of those unquantified claims is BAC Home Loans Servicing, LP ("BAC Home Loans"). Each claim was described only as "Possible deficiency," and as having been incurred in 2005. The amount of each claim was not stated; instead Debtor stated only that the amount was "Unknown." Debtor did not designate either of these claims as being contingent, unliquidated, or disputed.
The foregoing findings are supported by the following evidence:
The Debtor testified as follows. He owned a home located at 477 Thetford Lane, Bloomfield Hills, Michigan, which he bought in 2004. He originally obtained a mortgage loan for approximately $496,000, which was 80% of the $620,000 purchase price. He later refinanced his mortgage loan "a couple of times," and the mortgage loan balance "finally got up to probably $570,000" or $575,000.
In the evidentiary hearing, Debtor first testified that he did not know what the foreclosure sale price was. But after being confronted with his earlier deposition testimony, he admitted knowing that the sale price was about $300,000.
There is no doubt that the Debtor both knew and had reason to know what the foreclosure sale price was, before he filed his schedules in this bankruptcy case. As noted above, Debtor filed his schedules, including his Schedules E and F, seven days after filing his bankruptcy petition. Debtor testified that when he filed his bankruptcy case, he obtained a copy of the sheriff's deed from the foreclosure sale,
This evidence shows that when he filed his Schedules E and F, Debtor knew that the foreclosure sale price was $301,877.50. And this number is roughly consistent with the deposition testimony that Debtor gave on December 28, 2010, a little more than two months after he filed this case and his schedules, that the home sold for $300,000.
Additional evidence showing that Debtor knew what the foreclosure sale price was when he filed his bankruptcy schedules is the fact that Schedule D of Debtor's 2009 federal income tax return listed a sale amount of $319,974. This sale price number is a bit higher than the sale price shown on the sheriff's deed, and there is no explanation in the record for why this is so. But the existence of this sale price number in Debtor's 2009 federal income tax return shows either that (1) Debtor obtained and provided the sale price amount to his accountant, who prepared his 2009 tax return; or (2) Debtor's accountant obtained the sale price amount and Debtor became aware of it, at the latest, when he reviewed and signed his 2009 federal income tax return. And we know, from Debtor's counsel's certification in the record, that Debtor had a copy of this income tax return; he provided a copy of his 2009 federal income tax return to the Chapter 13 Trustee no later than November 2, 2010,
The Court finds that Debtor knew, and had reason to know, before he filed his Schedules E and F on October 19, 2010, that the foreclosure sale price was $301,877.50. From this, and from Debtor also knowing that his mortgage loan debt was at least $570,000 as of the time of the foreclosure sale in 2009, Debtor and his attorney each could easily have calculated that the deficiency debt owing to the mortgagee was at least the following amount as of the petition date: $570,000 - $301,877.50 = $268,122.50. Or, even if we assume that Debtor may have believed, from the sale price listed in his 2009 federal income tax return, that the foreclosure sale price was $319,974.00, then Debtor and his attorney could easily have calculated that the deficiency debt owing to the mortgagee was at least the following amount as of the petition date: $570,000 - 319,974.00 =
Under the circumstances, it clearly was improper for Debtor to have listed the amount of this debt simply as "Unknown" on his Schedule F that he filed seven days after the bankruptcy petition. Nor was it proper for Debtor to list the amount of this debt as totaling $2.00, as he did in the amended Schedule F that he filed on January 17, 2011.
The Court further finds and concludes that the Debtor's obvious motive in failing to honestly and in good faith state the amount of his mortgage loan debt in his Schedule F and amended Schedule F was to try to reorganize his finances in Chapter 13, rather than having to try to do so in Chapter 11. For a variety of reasons, and as the Sixth Circuit noted in Pearson, "[g]enerally, Chapter 13 is simpler, speedier, and less expensive than Chapter 11." 773 F.2d at 753.
It follows from the foregoing that Debtor's filing this bankruptcy case under Chapter 13, rather than under Chapter 7 or Chapter 11, and in proposing his Chapter 13 Plan, were not done in good faith.
At the evidentiary hearing, Debtor's counsel made two arguments about this mortgage loan deficiency debt. First, he argued that when Debtor filed his petition and schedules, Debtor was not sure if he owed any debt on his mortgage loan after the sheriff's sale, because (1) Debtor testified that he was not sure how a sheriff's sale works;
The first point is supported only by Debtor's testimony, but the Court finds that Debtor's testimony on this point is not credible. First, when cross-examined during the evidentiary hearing about his ability to have calculated the amount of the deficiency owing on his mortgage loan, Debtor admitted that he "assumed that he owed them some money."
But even if Debtor really was unsure about whether he continued to owe a debt for the deficiency after the foreclosure sale, good faith required Debtor to ask his bankruptcy counsel about this; and he then could have and would have learned that he did continue to owe such a debt. Debtor did not testify that he ever asked his attorney about this point, or that his attorney ever told him that the sheriff's sale eliminated all debt on the mortgage loan, even though (as Debtor knew,) the foreclosure sale price was at least $250,000 less than the total mortgage loan debt.
The mere fact that the mortgage loan creditor did not take any steps to try to collect its deficiency from the Debtor after the foreclosure sale, if true, does not mean that the debt did not exist. This is not a valid excuse for Debtor's failure to list the deficiency balance owing on the mortgage loan in his Schedule F.
The second line of argument by Debtor's counsel concerning the mortgage loan debt relates to the proof of claim that was filed in this case on such debt. As noted earlier, a proof of claim based on the mortgage loan debt was filed on February 8, 2011, by Dyck, O'Neal, Inc., of Arlington, Texas, Claim No. 11. Dyck, O'Neal apparently was an assignee of the mortgage
The fact that this claim was disallowed, by default, based on the Debtor's stated ground of objection, does not mean that Debtor did not owe an unsecured deficiency claim on the mortgage loan of at least $250,000 as of the petition date. At most, it means that the Dyck, O'Neal claim was disallowed, and therefore will not be entitled to any distribution in this bankruptcy case, not because no debt was owing as of the petition date, but rather because the claim as filed failed to credit (reduce) the debt amount by the proceeds of the foreclosure sale (i.e., by the amount of the foreclosure sale price.) And in any event, this claim disallowance, which occurred some seven months after the bankruptcy petition was filed, does not mean that no debt was owed as of the petition date. Consistent with the Sixth Circuit's requirement in the Pearson case, quoted above, the Court must "look realistically to the state of the debtor['s] affairs as it reasonably appeared on the date of filing."
Doing this, the Court must conclude that Debtor's liquidated, noncontingent, unsecured debts as of the petition date clearly far exceeded the § 109(e) maximum. As a result, Debtor is not eligible to be in Chapter 13.
The Court cannot confirm Debtor's Chapter 13 Plan, and this case cannot continue under Chapter 13. The case can now take one of only three possible routes — conversion to Chapter 11 under 11 U.S.C. § 1307(d); conversion to Chapter 7 under 11 U.S.C. § 1307(a) or § 1307(c); or dismissal under 11 U.S.C. § 1307(b) or § 1307(c). Summit Group asks the Court to convert this case to Chapter 7. It is unclear what option Debtor will want to take, now that Chapter 13 is not available.
Normally, having found Debtor ineligible for Chapter 13, the Court would allow Debtor to choose which alternative route to take. But in this case, the Court has found that Debtor did not act in good faith in the way he listed his mortgage loan debt in his Schedule F and amended Schedule F, and did not act in good faith in filing this case under Chapter 13. And Summit Group has alleged that Debtor has acted in bad faith and has been dishonest in several additional ways, all of which justifies conversion of this case to Chapter 7, according to Summit Group.
In other cases, this Court has sanctioned debtors for bad faith and for being dishonest with the Court. For example, in In re Mehlhose, 469 B.R. 694, 706-13 (Bankr. E.D.Mich.2012), this Court dismissed a Chapter 13 case, barred the debtors from
Apart from the issue of the Debtor's good faith and honesty related to his eligibility for Chapter 13, discussed in this opinion above, and after carefully considering the evidence, the Court finds and concludes that none of Summit Group's various other allegations of bad faith and dishonesty by the Debtor have been proven. The evidence presented at the evidentiary hearing fails to support these allegations.
What remains is the Debtor's bad faith in the way he failed to properly disclose the amount of the mortgage loan deficiency debt in his Schedule F and amended Schedule F, and relatedly, his filing this case under Chapter 13 in bad faith. Because the Debtor's bad faith and improper conduct here was undertaken for the purpose of trying to reorganize his finances in Chapter 13, rather than having to try to do so in Chapter 11, the Court finds that the appropriate remedy now is to deny the Debtor any opportunity to reorganize in Chapter 11. If Debtor wanted to pursue a reorganization of his finances, rather than a Chapter 7 liquidation, Debtor should have filed a Chapter 11 case to begin with. Instead, Debtor filed under Chapter 13, and pursued confirmation of a Chapter 13 plan, when all the while Debtor knew or should have known that he was not eligible for Chapter 13 relief, under 11 U.S.C. § 109(e). In the exercise of its discretion to fashion appropriate relief for Debtor's bad faith, the Court will now deny Debtor any belated opportunity to reorganize under Chapter 11. To do otherwise would be to allow an abuse of the bankruptcy system, and the Court has authority to prevent such abuse. See, e.g., 11 U.S.C. § 105(a)(under which the bankruptcy court has authority to take any action necessary or appropriate to prevent an abuse of process); see also In re Mehlhose, 469 B.R. at 708-12 and authorities cited therein.
The Court will limit its sanctions for Debtor's bad faith to the foregoing. Under the circumstances, to go further with sanctions would be too harsh. Thus, the Court will not deny Debtor the opportunity to convert this case to Chapter 7, if that is what Debtor decides he now wants to do. Nor will the Court deny the Debtor the opportunity to dismiss this bankruptcy case, if that is Debtor's choice. But if Debtor chooses to dismiss this case, rather than convert it to Chapter 7, the Court will enter an order barring Debtor from filing any new bankruptcy case for one year after the dismissal of this case. This bar to refiling, if Debtor chooses dismissal, is necessary to prevent an abuse of process. If Debtor could simply dismiss this case, then turn around and file a new bankruptcy case right away or in the near future, such a refiling would be an abuse, because it either would be an improper attempt to evade this Court's rulings today (if Debtor refiled under either Chapter 13 or 11); or would serve no legitimate purpose (if Debtor refiled under Chapter 7, having just spurned the opportunity to convert this case to Chapter 7).
Based on the findings of fact, conclusions of law, and the reasons stated in this opinion, the Court will enter an order sustaining Summit Group's objection to confirmation of the Debtor's Plan and denying
