Mary D. France, Bankruptcy Judge.
Before the Court is Richard Hackerman ("Hackerman")'s Motion to convert the Chapter 13 case of Donald Demeza ("Debtor") to Chapter 7 (the "Motion"), and Debtor's Answer thereto as well as the record and exhibits from the hearing conducted on December 6, 2016. For the reasons set forth below, the Motion will be denied.
Debtor filed a Chapter 13 petition and plan on July 5, 2016. The Chapter 13 Trustee filed an objection to the plan and subsequently withdrew it on November 15, 2016. Hackerman also objected to Debtor's plan alleging that it was filed in bad faith. On September 4, 2016, Hackerman filed the Motion alleging that Debtor's bankruptcy petition itself was filed in bad faith and requested that the case be converted to Chapter 7. Debtor filed the Answer on September 16, 2016. An evidentiary hearing was held on December 6, 2016. The parties have submitted briefs, and the matter is ready for decision.
Debtor resides at 500 Orrtanna Road, Orrtanna, Adams County, PA (the "Property"). Debtor works as a horse trainer. In 2012 Debtor, through his company Toledo Racing Stables, LLC., agreed to board Hackerman's pregnant mare.
On November 26, 2013 Hackerman sued Debtor for gross negligence in the District Court for the Middle District of Pennsylvania. The suit was pending in the District Court when Debtor filed his bankruptcy petition. On June 15, 2016, Hackerman filed a second suit in District Court, this time asserting a fraudulent conveyance action against Debtor and his daughter. Debtor filed his bankruptcy petition shortly thereafter on July 5, 2016. Debtor first discussed the possibility of filing for bankruptcy with his attorney in April or May, 2016.
In his schedules, Debtor listed the Property as a single family home. The parties agreed that the Property is more properly characterized as a farmette. The Property was titled in Debtor's name alone when it was acquired, but it was transferred into joint names with his daughter shortly before
Debtor's schedules indicate that the value of the Property is $160,000 and that Debtor's equity interest is $80,000. U.S. Bank National Association has filed a proof of claim in the secured amount of $117,979.27 with an arrearage amount of $321.21. As of the date of the hearing, the cash payout Debtor received from the mortgage transaction had been depleted. Debtor's daughter does not live on the Property, and Debtor makes all the mortgage payments.
Other than his interest in the farmette, Debtor's only other significant assets are his interest in Toledo Racing Stables, LLC, valued at $4400, a 25% interest in FDO Holdings, LLC, valued at $57,000, two thoroughbred horses having a value of $2000, and two thoroughbred horses owned jointly with another party having a value of $1500.
Debtor's income from Schedule I is listed as $2132.33 per month. Debtor testified that his father lives on the Property and pays rent in an amount between $300 and $400 per month. He also has a roommate who pays approximately $400 per month in rent. When Debtor filed his petition, his monthly mortgage payments were $877, including the escrow for taxes and insurance.
Debtor's schedules show that he owes a total of $417,305 to secured creditors, including a judgment that was entered in Franklin County in the amount of $241,103.
At the hearing date, Debtor had made all payments required under the proposed Chapter 13 plan and was current on all mortgage payments.
Hackerman argues that Debtor's case should be converted to one under Chapter 7 because creditors will receive a larger payout under Chapter 7 than under Chapter 13. He also argues that by paying the entire mortgage payment when his daughter has a one-half interest in the Property, Debtor is benefitting his daughter to the detriment of his creditors. Hackerman also alleges that Debtor has not been candid with the Court. He further argues that Debtor should not be in a Chapter 13 case because he does not have regular income.
Some of Hackerman's arguments relate to whether Debtor's Chapter 13 petition was filed in good faith, others relate to whether the proposed plan was filed in good faith. A debtor must file a Chapter 13
On request of a party in interest, a Chapter 13 bankruptcy case may be converted to a case under Chapter 7 of the Bankruptcy Code or dismissed "for cause." 11 U.S.C. § 1307(c). "`A Bankruptcy Court has considerable discretion in determining whether `cause' exists....'" In re Monteleone, 553 B.R. 288, 293 (Bankr. W.D. Pa. 2016) (citing in re Orawsky, 387 B.R. 128, 137 (Bankr. E D. Pa. 2008)); In re Soppick, 516 B.R. 733, 745 (Bankr. E D. Pa. 2014).
Although the Bankruptcy Code does not explicitly require that a Chapter 13 petition be filed in good faith, the Court of Appeals for the Third Circuit recognizes the absence of good faith or presence of bad faith as grounds for dismissal. Myers, 491 F.3d at 125. However, "good faith is a term incapable of precise definition. [T]he good faith inquiry is a fact intensive determination... [which] ... must be assessed on a case-by-case basis in light of the totality of the circumstances." In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996). A bankruptcy court must assess a debtor's good faith based on the facts of each case, "considering the `honest intention' of the debtor and `whether the debtor has abused the provisions, purpose, or spirit of bankruptcy law.'" Perlin v. Hitachi Capital Am. Corp. (In re Perlin), 497 F.3d 364 (3d Cir. 2007) (quoting Frank v. Tamecki (In re Tamecki), 229 F.3d 205, 207 (3d Cir. 2000)). Dismissal or conversion should be reserved for "`those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.'" Id. (quoting In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991)); cf. Perlin at 497 F.3d at 375 (holding that debtors with substantial income who filed bankruptcy after creditor requested default judgment against them did not display bad faith); In re Dahlgren, 418 B.R. 852, 856-57 (Bankr. D.N.J. 2009) (holding that debtor filing bankruptcy on eve of sale in lieu of partition of real property, while "suspicious," was insufficient to warrant dismissal of case).
When analyzing whether a petition was filed in good faith, once a creditor makes a prima facie showing that a case was filed in bad faith, the burden shifts to the debtor to prove by a preponderance of the evidence that the Chapter 13 case was filed in good faith. Alt v. U.S. (In re Alt)., 305 F.3d 413, 420 (6th Cir. 2002); In re Scotto-Diclemente, 459 B.R. 558, 562 (Bankr. D. N.J. 2011) (citing Tamecki, 229 F.3d at 207).
The Third Circuit has adopted the following factors when considering whether a Chapter 13 case should be dismissed
Lilley, 91 F.3d at 496 (citations omitted), quoted in Myers, 491 F.3d at 125. However, the Third Circuit also has made it clear that "no list is exhaustive of all the factors which could be relevant when analyzing a particular debtor's good faith." 15375 Mem'l Corp. v. Bejco, LP. (In re 15375 Mem'l Corp), 589 F.3d 605, 618 n. 8 (3d Cir. 2009).
Debtor's schedules indicated that he owes $417,305 to secured creditors, including a judgment in the amount of $241,103 that was entered on April 18, 2016; that he owes $5547.70 to priority unsecured creditors; and that he owes $49,784.23 to non-priority unsecured creditors.
Hackerman argues that Debtor filed his bankruptcy petition in order to avoid liability on his claim. He states that Debtor planned to file for bankruptcy once he was notified that Hackerman intended to file a lawsuit against him. This assertion is not supported by the record. Hackerman's claim arose in the spring of 2012, four years before Debtor filed his bankruptcy petition. Debtor testified that he first discussed the possibility of filing a bankruptcy case with his attorney in April, 2016. Debtor first contacted bankruptcy counsel at the time a judgment was entered against FDO Holding, LLC and Debtor in Franklin County. This judgment, rather than Debtor's claim, along with mounting tax liabilities, precipitated the Chapter 13 filing. See In re Zaver, 520 B.R. 159, 167 (Bankr. M.D. Pa. 2014) (finding that even
Hackerman argues that creditors will receive a larger payout if Debtor's case is converted to one under Chapter 7 allowing the trustee to pursue a fraudulent conveyance action. This argument is premised on the assumption that the student loan paid with the proceeds of the refinancing benefitted Debtor's daughter rather than Debtor. The evidence at trial did not support this conclusion. Hackerman also asserts that because Debtor's daughter is a joint owner, she should be paying one half of the $877 monthly mortgage payment because she has a one-half interest in the Property. First, this conclusion is unmerited because Debtor's daughter does not reside in the Property. But even if she did, Debtor receives approximately $800 in rents monthly from his father and roommate that he does not share with his daughter. Thus, the rents received significantly offset the $877 monthly mortgage expense. Debtor's daughter would be entitled to share in the rents if she were required to contribute to payment of the mortgage.
Hackerman also argues that the one-half interest in the Property was transferred to Debtor's daughter fraudulently and that a Chapter 7 Trustee could pursue that claim under the Pennsylvania Uniform Fraudulent Transfers Act ("PUFTA"). Debtor testified that he transferred the Property into joint names to qualify for an equity loan to pay debts. Debtor's daughter was gainfully employed when the Property was refinanced and enabled him to qualify for the loan. Whether a Chapter 7 trustee would regard this conveyance as fraudulent and whether he would pursue an action is speculative. Because good cause for the transfer has been shown, I am not persuaded that it is more likely than not that a fraudulent conveyance action exists to be pursued by a trustee.
While Hackerman objects to Debtor's treatment of creditors, since the filing of the petition Debtor has pursued his plan in good faith. The Chapter 13 trustee withdrew his objection to Debtor's plan and has recommended that it be confirmed. Debtor is current on his mortgage payment as well as on his Chapter 13 plan payments. These factors weigh in favor of finding that Debtor filed his case with the intent to reorganize and to treat his creditors fairly.
Hackerman argues that Debtor has not been candid with the Court by failing to describe the Property as a farm; by undervaluing his horses; by failing to report that his mortgage payments benefit an insider; and by failing to accurately report his income. Debtor testified that a more accurate description of the Property is "farmette" rather than a single family home. However, I do not find the characterization to be materially misleading. In re Manfredi, 434 B.R. 356, 362 (Bankr. M.D. Pa 2010) ("in the absence of any evidence to support that the omission ... was more than an oversight, the omissions are not material to a determination of bad faith") (citing In re Kerschner, 246 B.R. 495, 499 (Bankr.M.D. Pa.2000)).
Debtor testified that he valued his horses based on their age, performance, and his experience. Hackerman did not present any evidence of a value different from that provided by Debtor. Therefore, there is no evidence to support the assertion that Debtor undervalued the horses. See In re
Debtor has argued that even though he transferred a one-half interest in the Property to his daughter, only he derives a benefit from the home and only he pays the mortgage. Furthermore, Debtor has indicated that he is willing to have the Property transferred back into his name only if the lender would agree.
Next, even though there was some confusion related to how Debtor's income was calculated, I disagree that Debtor was deceitful on his schedules with regard to his income. Debtor may have been unclear as to how bankruptcy schedules are generated, but his attorney was able to explain the process to the Court's satisfaction. Moreover, no evidence was provided that Debtor's reported income was materially inaccurate. Thus, I do not find that Debtor has concealed any property or assets or that he has not been candid with the Court or his creditors.
Hackerman raised sufficient issues surrounding the transfer of the real estate to shift the burden to Debtor to demonstrate that the case was filed in good faith. Considering all of the factors above, I find that Debtor has met this burden. One issue not addressed is Hackerman's allegation that Debtor does not have regular income with which to fund a Chapter 13 plan and that Debtor is constantly borrowing funds from friends and family in order to meet his obligations. These allegations are particularly relevant to whether Debtor's plan has been filed in good faith. I will reserve ruling on this allegation until the confirmation hearing to be considered in connection with the feasibility of Debtor's proposed plan.
For the reasons set forth above, and after considering the totality of the circumstances, I find that Debtor has shown that his case was filed in good faith. I further find that the record supports a finding that the Chapter 13 plan was filed in good faith, I reserve a final determination on this latter issue, particularly in regard to Debtor's ability to fund the plan, until the hearing on confirmation. An Order denying the Motion will be entered.
