Opinion
Case No.: 1-01-02033
October 16, 2002
Craig A. Diehl, Esquire, for the Movant.
Dennis E. Boyle, Esquire, Jodi A. Beiershmitt, Esquire, for the Respondent.
Drafted with the assistance of John Kelly, Law Clerk.
Before me is a Motion to avoid a judgment lien, a Motion to dismiss the bankruptcy case and an Objection to a Chapter 13 Plan. The facts leading up to these pleadings are as follows.
In 1985, Kenneth K. Kelley (Debtor) and Vincent C. McCue (McCue) formed a corporation, Capitol Keystone Agency, Ltd. (CKAL), to sell individual life and health insurance policies issued by Capital American Life Insurance Co. (CALIC). Debtor and McCue were equal shareholders in CKAL. Debtor was its President.
A "Memorandum of Understanding" between the parties indicates that they had agreed, in forming CKAL, that Debtor's compensation from CKAL should exceed McCue's for an indeterminate period. Testimony indicated that McCue agreed to allow this because of familial obligations of Debtor's. The Memorandum anticipated, however, that compensation would eventually be equal and that, should the business terminate prior to the point where equality was reached, the shortfall would be made up as follows:
The party who is owed money shall receive all renewal premium commissions generated by policies sold during the existence of [CKAL], until the shortfall is paid in full. Subsequent thereto, all earned premium commissions shall be split equally between the parties.
Commissions on the policies were paid back through an account CKAL had with CALIC. Debtor also had his own account, separate from CKAL's, with CALIC.
CKAL did business until 1989. A falling out between Debtor and McCue caused its dissolution. Between 1985 and 1989, CKAL sold insurance contracts valued at some $1.5 million.
The dissolution of the business did not affect CKAL's customers' continuing ability to renew their policies. Commissions remained payable to CKAL for those policies. Debtor, McCue and CALIC had, however, entered into an agreement by which no further business would be transacted under CKAL's account number. McCue believed that this agreement would prevent commissions from being paid to CKAL on policies that he had sold. However, on June 4, 1990, Debtor wrote to CALIC on CKAL letterhead, stating that he was the President and sole shareholder of CKAL and that all renewal checks payable to CKAL's account number were to be forwarded to CKAL. Apparently, CALIC complied with the demands of this letter.
No copy of this agreement was submitted into evidence.
At some point thereafter, McCue filed a lawsuit in a Pennsylvania state court. The record lacks the state court Complaint and an indication of the kinds of relief it sought. On June 30, 1994, the state court issued an order finding that Debtor and McCue "are equal shareholders in the corporation, CKAL."
On February 25, 1998, the state court entered a Verdict in favor of McCue in the amount of $237,000.00. No opinion or findings accompanied the Verdict. The record of the instant case discloses very little about how the verdict amount was calculated, or even the exact nature of the damages (i.e. compensatory, statutory, or punitive).
Testimony did show, however, that the following amounts have been received by McCue toward payment of the Verdict.$ 12,960.71
$108,563.53 from the CKAL account between 7/2/99 and 11/20/01 $ 40,980.60 from Debtor's personal account between 7/2/99 and 11/20/01 $ 16,676.19 from Debtor's personal account between 11/21/01 and the date of the bankruptcy hearing from Debtor's prior Chapter 13 case $179,181.03 TOTAL At some point in the course of these events, Debtor apparently moved to the state of Indiana. After McCue continued to pursue his case there, an Indiana court entered an agreed upon Order, on July 9, 1999, which provided that the CKAL account would be assigned to McCue "effective immediately", and that Debtor's personal account would belong exclusively to Debtor until January 10, 2000, after which it would be evenly divided by Debtor and McCue. This division would be accomplished by an "irrevocable assignment".The dispute now before me centers on the intent of these state court orders. Specifically, Debtor contends that the irrevocable assignment to McCue was intended to be irrevocable only until the sum of $237,000.00 had been paid to McCue in full, after which Debtor should receive all of the renewal funds from his personal account as well as one-half the renewals from CKAL's account.
To illustrate his argument, Debtor relies on McCue's testimony that the renewals on the policies from both accounts amount to some $50,000.00 per year. Debtor postulates that if these renewals continued to be paid for the next 20 years, then McCue will have received $1,000,000.00 on a $237,000.00 no-interest debt.
For his part, McCue uses these facts to aver that the Debtor has hidden or failed to account for all of his assets in his bankruptcy schedules, that he has the ability to pay McCue's unsecured debt in full, but that his Plan would pay McCue nothing. McCue argues that these averments make out a case for dismissal of Debtor's bankruptcy Petition, pursuant to 11 U.S.C. § 1307. As dismissal of the case would render the other Motions moot, I will address it first.
Motion to Dismiss
Chapter 13 petitions must be filed in good faith. In re Lilley, Jr., 91 F.3d 491, 496 (3d Cir. 1996); In re Pakuris, 262 B.R. 330, 335 (Bankr.E.D.Pa. 2001). Failure to file in good faith can constitute grounds for dismissal of a case pursuant to Section 1307(c). Lilley, at 496. The party in interest who files a Motion to dismiss a Chapter 13 case under Section 1307(c) bears the burden of proof by a preponderance of evidence. In re Lancaster, 280 B.R. 468, 474 (Bankr.W.D.Mo. 2002), citing, In re Love, 957 F.2d at 1350, 1357 (7th Cir. 1992); In re Virden, 279 B.R. 401, 407 (Bankr.D.Mass. 2002); In re Fretwell, 281 B.R. 745, 750 (Bankr.M.D.Fla. 2002); In re McNichols, 249 B.R. 160 (Bankr.N.D.Ill. 2000). Lilley held that the issue of good faith must be examined on a case-by-case basis in light of the totality of the circumstances. The circumstances to be examined include: the nature of the debt; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors. Lilley, at 496, citing, Love, 957 F.2d at 1357.
I will apply the factors set forth in Lilley to the evidence presented by McCue to determine whether Debtor's Petition should be dismissed for failure to file in good faith.
The nature of the debt
The debt is a business-related debt that has been reduced to judgment in state court. The nature of the debt is of little help in this case in determining whether Debtor's Petition was filed in good or bad faith.
The timing of the Petition
The Petition was filed on April 10, 2001. The last state court order prior to the filing was entered in July, 1999. It does not appear that the Petition was filed in response to any particular event in state court, or any particular action by McCue. The timing of the Petition is also of little help in determining good or bad faith.
How the debt arose
The debt at issue in this case is the $270,000.00 Verdict. It resulted from a state court Complaint, the text of which is not of record. Without the Complaint, and without specific findings from the state courts, it is not possible for this Court to make more findings, in the context of good or bad faith, about how the debt arose.
The debtor's motive in filing the Petition
McCue does not make any specific averment about the Debtor's motive in filing the Petition. His case is not based on events that immediately precede the filing, or on imminent actions that Debtor's Petition sought to avoid. The Petition was not filed for the sole purpose of discharging the debt to McCue. See, In re Burrell, 1998 WL 411287, *7 (Bankr.E.D.Va. 1998); In re Brooks, 216 B.R. 838 (Bankr.N.D.Okla. 1998)(bad faith may be evident from debtor's attempt to discharge only one debt among many). Debtor's schedule of unsecured, non-priority debts include numerous credit card debts. There are no Reaffirmation Agreements of record. Thus, it appears that Debtor's motive in filing the Petition was to discharge substantial credit card debt, as well as McCue's debt. Such a motive does not show bad faith.
The Plan proposes to pay $310.00 per month for thirty-six months, for a total of $11,160.00. Debtor has unsecured non-priority debts totaling $49,367.79.
How the debtor's actions affected creditors
The specific actions brought to issue by the pleadings are those undertaken by the Debtor to divert to himself certain commissions. This action obviously had an adverse affect on McCue, but little effect on other creditors.
The debtor's treatment of creditors both before and after the petition was filed
Again, McCue's case has little to do with Debtor's treatment of creditors as a group; McCue's concern is with Debtor's treatment of McCue. This provides no guidance regarding good or bad faith in the actual filing of the Petition.
Whether the debtor has been forthcoming with the bankruptcy court and the creditors
McCue's Motion to Dismiss alleges that Debtor improperly valued or failed to account for certain assets. McCue's Brief contains no argument on this allegation. Rather, it argues that res judicata and collateral estoppel apply to prevent Debtor from changing, through Bankruptcy Court, the state court determinations that McCue was the fully-vested, rightful owner of the accounts on the date of the Petition. There is, in fact, no evidence that the Debtor was not forthcoming with this Court in his Schedules.
The Lilley factors do not compel a conclusion that the instant Petition should be dismissed for having been filed in bad faith. Therefore, the Motion to Dismiss shall be and hereby is DENIED.
Motion to avoid judgment lien
The next matter for consideration is Debtor's Motion to avoid a judgment lien. Debtor relies on 11 U.S.C. § 522(f)(1), which allows judgment liens to be avoided to the extent they impair an exemption to which a debtor is entitled. McCue responds that he does not hold a judgment lien against property that belongs to the Debtor. Rather, he asserts, he owns outright the property that Debtor is seeking to claim as exempt. He relies on the language of the state court orders themselves, which provide as follows:
1) Account #07878 [CKAL's account] shall be transferred and assigned from CKAL and or Kelley to McCue effective immediately.
* * *
3) Account #09662 [Debtor's personal account] shall irrevocably belong to Kenneth Kelley until January 10, 2000; at such time such account shall be split 50/50 and one half shall be irrevocably assigned to Vincent McCue and one half shall be irrevocably assigned to Kenneth Kelley. (Emphasis added.)
An "assignment" amounts to a transfer of ownership "and unless in some way qualified, it extinguishes the assignor's right to performance by an obligor and transfers that right to the assignee." Legal Capital, LLC v. Medical Professional Liability Catastrophic Loss Fund, 750 A.2d 299 (Pa. 2000); Horbal v. Moxham National Bank, 697 A.2d 577 (Pa. 1997). The state court order provides clearly for an assignment. Under Legal Capital and Horbal, this would extinguish Debtor's right to performance by CALIC and transfer it to McCue. Thus, McCue's case finds ample support in state law.
The language of this Order, however, is somewhat at odds with the first Order issued in Pennsylvania. Under that Order, Debtor and McCue were declared to have been equal owners of CKAL. As such, they would have been entitled to receive an equal share of corporate proceeds, but the proceeds of Debtor's personal account would remain unaffected. However, the Indiana Order grants to McCue full and permanent ownership rights in CKAL account proceeds, and half ownership of Debtor's personal proceeds. It is against this situation that debtor seeks to invoke the equitable powers of this Court. Debtor argues that, through the lien avoidance proceeding, this Court should undo the transfers and assignments that were Ordered by the Indiana court.
The filing of a Bankruptcy Petition does not increase a debtor's property rights under state law. In re McQuade, 232 B.R. 810 (Bankr.M.D.Fla. 1999); In re Louisiana World Exposition, Inc., 832 F.2d 1391 (1987). Thus, Debtor filed his Bankruptcy Petition while bearing the rights established by the state court orders. On the date of the Petition, the Indiana Order was the most recent one, and the one establishing Debtor's property rights at that point.
Under these circumstances, there are compelling reasons to deny the Debtor the relief he seeks. First and foremost, Debtor agreed to the Order he is now challenging. Under state law, where a party has agreed to an order, he cannot later reopen the same matter in order to challenge it. Sistrik v. Jones Laughlin Steel Corp., 197 A.2d 44 (Pa. 1964). Second, Athe doctrine of unclean hands requires that one seeking equity act fairly and without fraud or deceit as to the controversy in issue." Terraciano v. Commonwealth Department of Transportation, 753 A.2d 233, 238 (Pa. 2000) (citations omitted); see also Mudd v. Nosker Lumber, Inc., 662 A.2d 660 (Pa.Super. 1995) (unclean hands doctrine forecloses equitable relief when wrongdoing directly relates to matter in controversy, affects relationship between parties, and doctrine can be raised by the court sua sponte).Debtors hands are far from clean in this case. It was his own improper diversion of corporate funds that gave rise to the instant state court judgments.
For these reasons, I must conclude that Debtor came into bankruptcy owning none of the renewal commissions from the CKAL account and one half of the renewal commissions from Debtor's personal account. He cannot avoid a judgment lien held by McCue against those proceeds, since there is no judgment. Therefore, the Motion to avoid lien shall be and hereby is DENIED.
Objection to Plan
The final matter to be addressed is the objection to the Chapter 13 Plan. The basis for that objection is that "Debtor's Plan fails to include over $100,000.00 that the Debtor receives annually on account of insurance policy residuals", and that the Plan therefore did not provide for payment to unsecured creditors of an amount equivalent to that which they would receive if the case were one in Chapter 7. McCue bore "the initial burden of producing evidence that the debtor's plan of reorganization does not contemplate the application of all of his or her disposable income to the plan over the life of the plan." In re Rothman 206 B.R. 99, 104 (Bankr.E.D.Pa., 1997); citing, In re Pellegrino, 205 B.R. 479, 483 (Bankr.E.D.Pa. 1997); In re Navarro, 83 B.R. 348, 355 (Bankr.E.D.Pa. 1988). McCue adduced no specific proof to support his averment of the amount of Debtor's annual income. McCue adduced no specific proof that the amounts of income listed in Debtor's Schedule "I" did not include the residuals to which he was referring. For this reason, the Objection to the Chapter 13 Plan will be overruled, and the Plan shall be, and hereby is CONFIRMED, EXCEPT to the extent that it anticipates the avoidance of a Judgment held by McCue.
An appropriate Order follows.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that the Motion to Avoid Lien is denied; and
IT IS FURTHER ORDERED that the Objection to the Chapter 13 Plan is overruled and the Plan is confirmed, except to the extent that it anticipates the avoidance of a judgment held by the Respondent.