Opinion
Case No. 95-14790-AM
March 3, 1996
Bryan K. Selz, Esquire, Overby, Hawkins Selz, Rustberg, VA, OF Counsel for Brookneal Milling Co., Inc., Mays Farmers Service Co., and Bryan K. Selz, Special Commissioner
MEMORANDUM OPINION
A hearing was held on February 27, 1996, on (1) the debtor's motion to extend the time for filing his chapter 12 plan and (2) the motion of Brookneal Milling Company, Mays Farmers Service Company, and Bryan K. Selz, Special Commissioner, to dismiss the debtor's case. At the conclusion of the hearing, the court took the matter under advisement. Having considered the exhibits and the entire record in this case, the court concludes that sufficient cause has not been shown to justify extending the time to file a plan, and that, based on the debtor's failure to file a plan, the chapter 12 case should be dismissed.
No formal testimony was taken, but the debtor, his parents (who are chapter 7 debtors in this court), and counsel for the creditors seeking dismissal made extensive oral representations on the record concerning the facts of the case, and each side, without objection, offered numerous exhibits for the court's consideration. The court also has taken judicial notice of the docket entries in this court with respect to the prior chapter 12 filing by the debtor's father and the docket entries of the United States Bankruptcy Court for the Western District of Virginia with respect to the chapter 12 filings in that court by the debtor and his parents. While a number of issues are hotly-disputed by the parties, none of those affect the motions presently before the court. For the purpose of ruling on the present motion, I have considered all the offered documents as authentic and have assumed the truth of the factual representations made by the debtor, and, where not contradicted by the debtor, those of the creditor's attorney.
Findings of Fact
The debtor, Gary Edgar Newton, filed a voluntary chapter 12 petition in this court on October 27, 1995. His mother and father, Charles Edgar Newton and Janet Newton, had previously filed a joint voluntary chapter 7 petition in this court on August 18, 1995. The parents received a discharge on December 14, 1995; however, their case is still open because the chapter 7 trustee is exploring whether to bring a fraudulent conveyance action to recover, for the benefit of the parents' bankruptcy estate, a farm in Charlotte County, Virginia, that they conveyed to their son.
The debtor previously filed a chapter 12 case jointly with his wife, Carol Lynn Newton, in the Western District of Virginia on December 22, 1992 (Case No. 92-02251-WA1-12). That case was subsequently consolidated with the separate chapter 12 cases of his father, Charles Edgar Newton (Case No. 92-01940-WA1-12), and his mother, Janet B. Newton (Case No. 93-00002-WA1-12). No chapter 12 plan was filed, and the debtor's counsel eventually moved for leave to withdraw. On June 8, 1993, the court entered an order dismissing the debtor's case, together with that of his parents, with prejudice to refiling under any chapter of the Bankruptcy Code in the Eastern or Western Districts of Virginia for a period of 120 days. The debtors appealed to the United States District Court for the Western District of Virginia. On November 4, 1993, the District Court affirmed the bankruptcy court.
Case No. 95-13 669-AT. The papers were apparently prepared by their son.
The debtor's schedules reflect an ownership interest in three parcels or tracts of real estate. One, at 324 Brooke Road, Falmouth, Virginia, is apparently his residence and is listed as being owned as tenants by the entirety with his wife. The second is described as "170 Camp Selden Farm," Falmouth, Virginia, and the debtor's ownership interest is described as "corporate." The third is the farm in Charlotte County, Virginia, and is apparently titled solely in the debtor's name. The value of all three parcels is listed as "unknown." The other assets are a checking account, household goods and furnishings valued at $500, books, pictures, and collections valued at $50, life insurance, an annuity, stock in three businesses (including Camp Selden Farm, Inc. and Woodburn Farm, Inc.), a lawsuit against Ownby Associates valued at "[in] excess of one million [dollars]", a 1982 Suburban automobile, 60 head of cattle, something described as "2,000 J Gilliam" and a "Flood Loss." Five secured creditors are listed, all with "unknown" claim amounts. Among these are Brookneal Milling and Mays Farm Service. The schedules also list as priority debts (although no basis for priority is apparent) 14 claims totalling $13,351.25, and as general unsecured debts another 16 claims, all with "unknown" claim amounts. In his schedules and statement of financial affairs, the debtor describes himself as a self-employed farmer earning $20,000 yearly but also states that he is disabled as a result of an automobile accident and received approximately $20,000 last year in "insurance money."
The immediate impetus for the debtor's bankruptcy filing was two chancery suits in which he was a defendant. One, in Stafford County, Virginia, sought to quiet title in his grandmother's estate to the Camp Selden Farm property, despite a recorded writing that purported to convey title to the debtor. The other, in Charlotte County, Virginia, sought to subject the debtor's interest in Woodburn Dairy Farm to the payment of judgments that had been entered against the debtor in favor of Brookneal Milling Co., Inc. ("Brookneal Milling") and Mays Farmers Service Co., Inc. ("Mays").
A final decree entered after the debtor filed his petition quieted title in the grandmother's estate. This court on January 25, 1996, found that the decree had been entered in violation of the automatic stay and entered an order declaring it to be null and void, without prejudice to the right of the grandmother's estate to move for relief from the automatic stay, including annulment of the stay. Such a motion has been filed and is currently set for a hearing.
The judgment in favor of Brookneal Milling was entered on May 8, 1992, by the Circuit Court of Campbell County, Virginia, in the amount of $36,607.72, with interest from the date of judgment at 18% per annum, plus prepetition interest of $2,972.67. The judgment was docketed in Charlotte County on May 8, 1992. Although the debtor's parents were also named as defendants, judgment was not entered against them, apparently because at that time the father was a chapter 12 debtor in this court. On March 7, 1994, the plaintiff nonsuited its claims against the parents. The judgment in favor of Mays was entered by the Circuit Court of Amherst County, Virginia, on December 23, 1991, against the debtor and his parents in the amount of $11,262.02, with interest at 18% from September 3, 1991. The judgment was docketed in Charlotte County on January 7, 1992.
The court record reflects that the debtor was personally served with the motion for judgment but did not file responsive pleadings.
In re Charles E. Newton, No. 92-11614-AB (Bankr.E.D.Va.). The chapter 12 petition was filed on April 2, 1992. No chapter 12 plan was ever filed, and on September 28, 1992, an order was entered closing the case.
On March 4, 1994, the debtor had moved the Campbell County Circuit Court to set aside the default judgment; that motion was denied on March 7, 1994, as part of the order granting Brookneal Milling's motion to nonsuit its action against the parents.
As with the other action, the debtor was personally served with the motion for judgment and did not file responsive pleadings.
In September 1993, a chancery suit was brought by Brookneal Milling and Mays in the Circuit Court of Campbell County to subject Woodburn Farm (which the parents had conveyed to their son in 1991) to the payment of the two judgments. The matter was referred to a commissioner in chancery, who filed his report on March 31, 1995. The commissioner reported that the liens against the farm consisted of a 1990 deed of trust in the original amount of $249,600, the judgment liens in favor of Mays and Brookneal Milling, and a 1992 deed of trust upon which there was a small balance owing of approximately $9,845. The commissioner reported that the rents from the property would not be sufficient to pay the judgment within five years and recommended that the property be sold. The commissioner further reported that there was a valid purchase contract, which the debtor had wrongfully repudiated, between the debtor and one G. D. Gilliam to purchase a one-half interest in the property in exchange for paying the liens against the property, up to a maximum of $250,000. The debtor filed exceptions to the commissioner's report, but on September 19, 1995, the Circuit Court overruled the exceptions and appointed special commissioners to sell the property at public auction. Further proceedings have been stayed as a result of the debtor's chapter 12 filing. The debtor represented at the hearing that the property is environmentally contaminated and, for that reason, "unloanable." He also vigorously denied that Brookneal Milling had a valid claim against him and asserted that he was only a salaried employee of Woodburn Farm, and not an owner, at the time the debt that resulted in the default judgment was incurred.
The parents were not parties to this suit.
Mr. Gilliam did purchase the note (previously held by the Bank of Charlotte County) which was secured by the first deed of trust. However, he never paid the Brookneal Milling and Mays judgment liens.
In their chapter 7 case, the parents brought a motion (drafted by their son) seeking an order declaring the September 19, 1995 decree void as a violation of the automatic stay in the parents case, notwithstanding that they were not parties to the suit and did not claim an ownership interest in the land. By separate memorandum opinion and order, the court has ruled that the September 19, 1995 decree was not entered in violation of the automatic stay.
The debtor filed a notice of appeal to the Supreme Court of Virginia. The appeal is still pending.
Evidence was offered in the form of two letters, one from the Bank of Charlotte County, and the other from Crestar Bank, in which the former declined to extend any further advances on its credit line deed of trust, and the latter declined to make a loan, based in part on environmental problems with the property.
The debtor offered as an exhibit what appears to be the farm's payroll record, or a summary of it, for 1990, reflecting a gross salary of $19,150.00 paid to him, less $1,524.58 in Social Security deductions.
Conclusions of Law
Chapter 12 of the Bankruptcy Code provides a mechanism by which a financially-strapped family farmer with a regular annual income can propose, and obtain confirmation of, a plan to restructure and pay his or her debts. In order to qualify as a "family farmer," an individual debtor must have no more than $1,500,000 in aggregate debts, of which no less than 80% (excluding debt on a personal residence) must arise from a farming operation owned or operated by the debtor, and the debtor must receive more than 50% of his or her income from farming operations. § 101(18), Bankruptcy Code. Either with the petition or not later than 90 days of the filing of the petition, the debtor must file a plan. § 1221, Bankruptcy Code; F.R.Bankr.P. 3015(a). The time cannot be reduced. F.R.Bankr.P. 9006(c)(2). The court may, however, extend such period "if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable." § 1221, Bankruptcy Code. Ordinarily, the request for the extension should be made before the 90-day period has already run; however, the court may grant a motion made after the period has run "where the failure to act was the result of excusable neglect." F.R.Bankr.P. 9006(b)(1). The debtor's petition was filed on October 27, 1995, and the 90-day period therefore ran through January 25, 1996. The debtor's motion to extend the time was not filed until January 31, 1996, some six days later. Therefore, the court must find not only that "the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable," but that the failure to move for an extension prior to the expiration of the period "was the result of excusable neglect."
Since the bulk of the debts listed on the debtor's schedules are shown with a claim amount of "unknown," the court is unable to determine whether the debt limitations of § 101(18) are satisfied. The standing chapter 12 trustee advised the court at the hearing that the debtor had not, despite his request, furnished a copy of the most recent tax return to establish that he met the income test.
With respect to the issue of timeliness, the debtor, who is representing himself in this case, explained that he that he has been unable to obtain a lawyer to represent him and was not familiar with all the bankruptcy rules and was not aware of the 90-day requirement until after the time had run. The Supreme Court, however, has explained that "ignorance of the rules, or mistakes construing the rules do not usually constitute `excuseable' neglect." Pioneer Inv. Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 1496, 123 L.Ed.2d 74 (1993). Moreover, the debtor is no stranger to the chapter 12 process and was represented in his prior case by counsel. It is difficult to believe that he was not, by virtue of that experience, aware that a deadline existed. Additionally, the court notes that on November 7, 1995, the debtor filed with the clerk a hand-written statement declaring, "A chapter 12 plan will be timely filed . . . within forty-five days after 341 hearing or a motion for extension of time." Since the meeting of creditors under § 341 of the Bankruptcy Code was held on December 4, 1995, the self-imposed 45-day deadline would have expired on January 18, 1996, which would have been well within the period specified in § 1221, Bankruptcy Code.
Even if this court were to find excusable neglect, however, the debtor has not established that he was unable to file a plan within the 90-day period mandated by § 1221, Bankruptcy Code, "due to circumstances for which [he] should not justly be held accountable." The problem of the two judgments has been around for a long time, and was apparently the major reason for the prior chapter 12 filing in the Western District of Virginia. The debtor has not provided the court with financial records that would reflect any ability whatsoever to fund a realistic plan for the repayment of his debts. He claims income of approximately $20,000 per year from operation of his dairy herd, but the court is unable to determine whether that figure represents gross or net income, and, in either event, what other living expenses he has. From comments made by the debtor at the hearing, a central feature of any plan would be to strip off the judgment liens and deeds of trust from Woodburn Farm under § 506(a) and (d), Bankruptcy Code, based on the premise that the property presently has no value. Beyond that, the debtor has articulated no clear basis for how he would restructure and pay his debts.
The debtor presented at the hearing an incomplete and disorganized jumble of papers reflecting income and expenses from the farming operation in various years. For 1995, those records reflect crop insurance payments of $17,159, U.S. Department of Agriculture feed grain deficiency payments of $5,331, and net proceeds from cattle sales of $3,908.68. In 1994, there were gross proceeds from cattle sales of $674.76. There is no information concerning expenses for either year. Included among the papers are what appear to be work papers for the 1991 tax year reflecting gross receipts from milk sales of $82,214.49, expenses in the same amount, and "none" for "Farm Profit or Loss."
In his motion, the debtor sets forth a number of specific factors that he contends constitute reasons why he cannot realistically propose a plan at this time. First, because of the possible action by the chapter 7 trustee in his parents' case, he cannot know whether Woodburn Farm will be available as an asset in his chapter 12 case. Second, there are pending suits in the Charlotte County Circuit Court which he alleges "could be a valuable part of my Plan," but he needs the assistance of this court in having the records of those cases transferred to this court. Third, he claims some sort of abatement, the precise nature of which the court is unable to discern, with respect to his obligations on account of the Camp Selden Farm; in any event, he represents that he will pay $20,000 — which is apparently what he thinks he owes — over a period of five years. Finally, he states that he has not been able to obtain information from his creditors as to the amount they are owed "due . . . to some kind of reluctance on their part," and therefore cannot intelligently file a plan until after the time for filing proofs of claim has expired, so that he can get the claim amounts from the court file.
The background of the cases, as related to the court by the debtor's parents, is that Woodburn Dairy Farm was originally acquired as part of a tax free exchange. When originally acquired, the property had no debt. Shortly after the parents took title, they discovered that the property was contaminated by various kinds of toxic and medical waste. According to the debtor's parents, the cattle herd has become infected as a result of the contamination. Exhibits were offered reflecting that local banks would not make operating loans for the farm because of the contamination. While the debtor's motion does not specify which litigation the debtor wishes to transfer, the proposed order he tendered granting (an apparently indefinite) extension of time to file a chapter 12 plan refers to his "request . . . for permission to bring a case to federal court that is now in Charlotte Circuit Court . . . styled as such, Charles, Janet, and Gary Newton [v.] Ownby Ass. Reality [sic]." According to the debtor "This case could play out the plan and relieve the environmental contamination problem, and other warrantys [sic] of the contract." The language of the proposed order would also allow the debtor to "enjoin" — the court assumes the debtor means "join" — another suit described as "Charles and Janet Newton [v.] Vega," which the debtor represents is "in the chain of title" to Woodburn Dairy Farm.
The deadline for creditors other than governmental units to file a proof of claim is March 4, 1996, and for governmental units the deadline is April 24, 1996. As of the date of this opinion, only five creditors have filed proofs of claim.
The problems here are legion. The debtor's schedules are, to put it charitably, a shambles — skeletal, essentially incomplete, and entirely lacking in the kind of detail suggestive that the debtor has any real grip on his financial situation. Without that kind of knowledge, the debtor will never be in a position to propose a realistic plan. The proposal to fund the plan from the proceeds of various lawsuits now pending in the state courts — in all of which he is apparently representing himself — is simply unrealistic. Without the assistance of counsel, the likelihood of success is remote, not because the suits themselves are necessarily without merit — the court simply does not have sufficient information concerning them to make an informed judgment — but because the general nature of the litigation as described by the debtor would require considerable experience and legal skill to present in any event. Even were the debtor ably represented by counsel in those suits, litigation is inherently uncertain, and the outcome of the suits would be speculative under the best of circumstances. At the hearing, the debtor expressed the view that he and his family could not obtain justice in the courts of Charlotte County, and it is clear that a large portion of the debtor's agenda is to bring all the pending litigation concerning him and his parents into this court, which he apparently perceives as a friendlier forum.
Unquestionably, this court has broad jurisdiction under 28 U.S.C. § 1334, not only over bankruptcy cases themselves and the controversies spawned by them, but also over proceedings "related to" a bankruptcy case. That does not mean, however, that Congress intended to permit unrestricted forum shopping by defendants unhappy with the courts where their actions were already pending. Essentially what the debtor wants is to bring in this court, either by way of direct action or by removal from the state court, his and his parents' causes of action against the persons they believe responsible in connection with their purchase of the Woodburn Farm Property, and, if successful in the litigation, to base a plan on whatever is recovered. The debtor, in short, really does not have a plan and will not be in a position to formulate one any time in the immediate future; at best, he has a plan for devising a plan.
A proceeding is "related to" a case under the Bankruptcy Code if the outcome could in some way alter the parties' rights in bankruptcy or affect the administration of the estate. Lux v. Spotswood Construction Loans, 176 B.R. 416, 418 (E.D.Va. 1994) (affirming bankruptcy court's sua sponte dismissal of adversary proceeding).
The argument that the debtor should be allowed an extension until the time for filing proofs of claim has expired is not wholly without force of logic. However, there are so many creditors with respect to whom the debtor has scheduled an "unknown" claim amount, that the court can only conclude that the problem in large measure lies with the debtor's failure to maintain adequate records. Moreover, the court simply cannot ignore the fact that the debtor previously had over six months while a chapter 12 debtor in the Western District of Virginia (before the bankruptcy court entered the order dismissing his case) to formulate a plan, and he has had over three months in his current case. The only reasonable inference the court can draw is that the debtor either has filed his petition solely for the purpose of delay or forum-shopping, or is simply unable, for whatever reason, to propose a plan within a realistic time frame.
Congress clearly expected that debtors seeking relief under chapter 12 would file their plans with reasonable dispatch. Congress just as clearly recognized that there would be exceptional situations where a plan cannot be filed within the 90-day period specified in § 1221 and gave the bankruptcy court discretion to enlarge the time where, due to factors beyond the debtor's control, a plan could not reasonably be formulated within that time. Such discretion should not be invoked, however, where there is no realistic likelihood that the debtor will be able to obtain confirmation of a plan within a reasonable period of time. In this case, based on all the circumstances, the court cannot find that the debtor is moving diligently and in good faith toward confirmation. Accordingly, the court declines to exercise its discretion to extend the time to file a chapter 12 plan.
One final point deserves comment. The debtor, as noted above, vigorously denies that Brookneal Milling had any basis for obtaining a judgment against him in the first instance. He asserts that when the liability (for feed supplied to the dairy farm) was incurred, he was not an owner of Woodburn Dairy Farm, but was only a salaried employee of his father (who was the owner of Woodburn Dairy Farm) and attorney-in-fact for his parents under a power of attorney. As noted above, the debtor, although personally served with Brookneal Milling's motion for judgment that named him as a defendant, did not file a responsive pleading, apparently believing that he was protected either by the § 362 automatic stay or by the co-debtor stay under § 1201, Bankruptcy Code, based on his father's pending chapter 12 case at the time. However, § 362 does not stay actions against other parties who may be jointly liable with the debtors on a claim. Credit Alliance Corp. v. Williams, 851 F.2d 119 (4th Cir. 1988) Section 1201, moreover, only stays actions by a creditor "to collect all or any part of a consumer debt" from "an individual that is liable on such debt with the debtor, or that secured such debt" (emphasis added). A "consumer debt" is defined as a debt "incurred by an individual primarily for a personal, family, or household purpose." § 101(8), Bankruptcy Code. A debt incurred in the commercial operation of a dairy farm simply does not fit within the definition of a consumer debt, and its enforcement against a co-debtor is therefore not stayed by § 1201.
With respect to the assertion that the debtor had no personal liability for the amounts due Brookneal Milling, this is a defense that could and should have been raised in the state court action. The debtor chose not to defend the action, and default judgment was entered against him. The debtor did file a motion in the Campbell County Circuit Court on March 4, 1994, to vacate the default judgment on various grounds, including the existence of a meritorious defense, but that motion was denied by the Circuit Court, and it does not appear that any appeal was taken from that ruling. Settled principles of res judicata, as well as the express requirement of the full faith and credit statute ( 28 U.S.C. § 1738) preclude this court from reexamining the state court judgment except on very limited grounds. See, In re Wizard Software, Inc., 185 B.R. 512 (Bankr.E.D.Va. 1995). Whether those grounds are present in the present case is a matter the court need not decide in connection with the motions that are currently before the court. I simply note, as I held in Wizard Software, that in the claims objection context, the existence of a meritorious defense is not, by itself, sufficient to defeat the res judicata effect of a default judgment against the debtor.
Briefly, this court is required to give the properly authenticated judgments of a state court "the same full faith and credit" as such judgments would "have by law or usage in the courts of [the] State . . . from which they were taken." 28 U.S.C. § 1738. Under § 8.01-428(A), Code of Virginia, a default judgment may be set aside on motion in the trial court more than 21 days after the judgment was entered only upon a showing of "(1) fraud on the court, (ii) a void judgment, (iii) on proof of an accord and satisfaction." Where the ground is fraud on the court, the motion must be brought within two years of the date of the judgment. In addition, Virginia by statute explicitly preserves the inherent right of a court of equity to entertain an independent action "to relieve a party from any judgment or proceeding . . . or to set aside a judgment or decree for fraud upon the court." § 8.01-428(D), Code of Virginia. The Supreme Court of Virginia has held that the elements that must be established in an independent action to set aside a judgment are:
(1) a judgment which ought not, in equity and good conscience, to be enforced; (2) a good defense to the alleged cause of action on which the judgment is founded; (3) fraud, accident or mistake which prevented the defendant in the judgment from obtaining the benefit of his defense; (4) the absence of fault or negligence on the part of the defendant; and (5) the absence of any adequate remedy at law.
Charles v. Precision Tune, Inc., 243 Va. 313, 317-8, 414 S.E.2d 831, 833 (1992). Additionally, the United States Supreme Court has held that a proof of claim based on a judgment
may be assailed in the bankruptcy court on the ground that the purported judgment is not a judgment because of want of jurisdiction of the court which rendered it over the persons of the parties or the subject matter of the suit, or because it was procured by fraud.
Reiser v. Woodruff, 327 U.S. 726, 736, 66 S.Ct. 853, 858, 90 L.Ed. 970 (1946). Otherwise, "a state court default judgment bars litigation, in the context of an objection to the judgment creditor's claim, of defenses that were available to the debtor at the time the state court judgment was obtained." Wizard, supra, 185 B.R. at 518.
In any event, no proof of claim has been filed by Brookneal Milling, and the matter is simply not before the court at the present time. More to the point, the mere existence of a defense to Brookneal Milling's claim does not justify an extension of the time for filing a plan in this case. Unquestionably, there will be times when the feasibility of a plan will hinge upon resolution of a disputed claim. However, in those circumstances, it is the debtor's responsibility to bring the matter before the court by appropriate pleadings in a timely manner, so as not to delay the administration of the case. The debtor has not done so, and given the lack of any substantial showing that he is likely to prevail on an objection to the claim, the court will not extend the time for filing a plan simply to give the debtor an additional forum in which to contest Brookneal Milling's claim.
In the case of a contingent or unliquidated claim, the court has authority to estimate the claim for the purpose of allowance, if the fixing or liquidation of the claim "would unduly delay the administration of the case." § 502(c)(1), Bankruptcy Code.
The debtor has filed in this court a "motion for judgment" against Brookneal Milling's attorney alleging fraud in the procurement of the judgment. The motion has been dismissed without prejudice on procedural grounds.
Finally, there is left for consideration the motion of Brookneal Milling and Mays to dismiss the debtor's case. The primary reason asserted as grounds for the dismissal is the debtor's failure to propose a plan within the time period specified by § 1221, Bankruptcy Code, and the unlikelihood that the debtor could propose, or perform under, a workable plan. Under § 1208(b), Bankruptcy Code, a chapter 12 case may be dismissed, "on request of a party in interest, and after notice and a hearing," on, among other grounds,
(1) unreasonable delay . . . by the debtor that is prejudicial to creditors.
(3) failure to file a plan timely under section 1221 of this title.
Here, the debtor has unquestionably failed to file a timely plan under § 1221, and the court has denied the debtor's motion to enlarge the time for filing a plan. Accordingly, there is no purpose to be served by this case remaining in chapter 12, and the court will enter an order granting the motion to dismiss.
A separate order will be entered consistent with this memorandum opinion.