Opinion
Case No. 99-31918; Chapter 13.
August 14, 2000.
MEMORANDUM AND ORDER
This case started out in chapter 7 but was voluntarily converted to chapter 13. Presently before the Court is a motion to reconvert the case back to chapter 7 filed on June 22, 2000, by two administrative claimants in the current chapter 13 case. One of the administrative claimants is Kip M. Kaler, the former chapter 7 trustee. The other administrative claimant is McNair, Larson, Carlson, Ltd. ("McNair"), the law firm employed by the trustee in the chapter 7 case. Kaler and McNair assert in their motion that the Debtor's bad faith coupled with an inability to propose a confirmable repayment plan warrant conversion of the case back to chapter 7 pursuant to 11 U.S.C. § 1307 (c). Responding, the Debtor, Marvin Jay Schauer ("Schauer"), asserts that he has acted in good faith and that there are no grounds upon which to convert the case back to chapter 7. This matter came on for hearing on July 10 and 11, 2000.
I. FINDINGS OF FACT A. Procedural Background
On November 23, 1999, Schauer filed a chapter 7 bankruptcy petition. After the § 341 meeting of creditors, Kaler employed McNair to conduct a more thorough investigation of Schauer's affairs, including Rule 2004 examinations of various creditors as well as Danny Schauer ("Danny") and Donna Schauer ("Donna"), two of Schauer's adult children. On April 7, 2000, Kaler commenced an adversary proceeding seeking to deny Schauer a discharge in bankruptcy on various grounds such as testifying falsely at the § 341 meeting of creditors and fraudulently transferring and concealing assets. Kaler subsequently amended his complaint seeking, in addition to denial of discharge, recovery from Danny and Donna various items of property for the bankruptcy estate.
On May 15, 2000, just five weeks after Kaler filed the adversary proceeding discussed above, Schauer moved to convert his case from chapter 7 to chapter 13, and his motion was granted on May 16, 2000. Schauer subsequently filed his chapter 13 repayment plan, and the meeting of creditors as well as the confirmation hearing in the chapter 13 case were scheduled for July 10, 2000. Kaler and McNair then filed the instant motion to convert the case back to chapter 7. In addition, Kaler, McNair, and the Internal Revenue Service filed objections to confirmation of the Debtor's chapter 13 plan. The hearing on the motion to convert the case back to chapter 7 was scheduled to take place concurrently with the confirmation hearing set for July 10, 2000.
At the July 10 hearing, Schauer asked for a continuance of the confirmation hearing pending redrafting of the plan in light of the IRS objection. The Court granted the Debtor's request. However, the hearing on the motion to convert the case back to chapter 7 went forward as scheduled.
B. Property Transfers and Omissions
The evidence at the hearing established that Schauer is an independent contractor who operates a construction business under the trade name "M.D. Construction." During the past several years, no fewer than 18 creditors sought and obtained judgments against him. The efforts of some of these creditors to collect on their judgments prompted Schauer to begin conducting his financial affairs in a less than forthright manner. The Debtor testified that various creditors had attempted to levy on his personal property and that a local sheriffs deputy who had helped him fill out exemption forms advised him to begin titling his assets under the names of family members in order to protect them from creditors. Thus, Schauer began titling assets in the name of his daughter Donna. Assets titled in Donna's name include the farmstead real estate where Schauer resides, two GMC trucks, and a checking account at Gate City Federal Savings Bank. In addition, testimony at the hearing suggested that Schauer's son, Danny, owned two skid steer loaders that were previously thought to belong to the Debtor. Both the Debtor's 1999 income tax return and a February 3, 1999, financial statement that the Debtor submitted to the First State Bank of Harvey suggest that the skid steer loaders were, in fact, owned by the Debtor. The Debtor testified that he converted his case from chapter 7 to chapter 13 to evade the chapter 7 trustee's efforts to recover assets for the bankruptcy estate.
For several years, Schauer's principle lender has been the First State Bank of Harvey. From time to time, the First State Bank of Harvey has required financial statements detailing Schauer's assets and liabilities. The most recent financial statement provided by Schauer was dated February 3, 1999. It disclosed assets of the Debtor totaling $586,800.00, including: (1) business tools and equipment worth $200,000.00; (2) various vehicles and trailers worth $123,000.00; (3) jobs in progress and business accounts receivable totaling $23,000.00; (4) two skid steer loaders worth a total of $48,000.00; (5) a farmstead on 40 acres of land worth $190,000.00; and (6) $2,800.00 cash in an account at Gate City Federal Savings Bank. Schauer also listed liabilities totaling $64,945.00, including a $26,000.00 mortgage on his homestead in favor of Gate City Federal Savings Bank which was being repaid at the rate of $350.00 per month. Thus, according to the financial statement, Schauer had a total net worth of $521,855.00 as of February 3, 1999. The financial statement included, as assets, the two skid steer loaders which were not disclosed on the bankruptcy schedules and which are now claimed to be the property of his son.
Schauer testified that the financial statement was prepared by Todd Toso, an employee of First State Bank of Harvey, and suggested that he signed the financial statement without reading it. Nevertheless, Schauer apparently did discuss the contents of the financial statement with Mr. Toso to some extent. Schauer further testified that he told Mr. Toso his farmstead was worth $90,000.00, not $190,000.00. Furthermore, he testified that the financial statement was also in error to the extent that it indicated the Debtor's farmstead included 40 acres of land. According to the Debtor, the farmstead actually encompassed only 10 acres of land.
Debtor's counsel stated to the Court that the Debtor had suffered a stroke that left him without the ability to read and write. However, the Debtor testified that he had difficulty reading because he rarely carried his eye-glasses with him.
Less than 10 months after providing the financial statement to the bank, Schauer filed for relief under chapter 7. In contrast to the financial statement discussed above, Schauer claimed, on his amended summary of schedules, that the total value of his assets was $95,660.04 and that his liabilities totaled $178,922.66. Notably, on his amended schedules, he disclosed that he owned: (1) business equipment worth approximately $61,100.00; (2) vehicles and trailers worth approximately $30,500.00; (3) various other personal property worth $3,810.04; (4) one business account receivable for $250.00; (5) no skid steer loaders; and (6) no farmstead on 10 acres of land. On his amended Schedule G, Schauer claimed that he leased the farmstead from his daughter, Donna, at the rate of $260.00 per month.
On Schedule B under the heading "Machinery, fixtures, equipment, and supplies used in business," the Debtor disclosed the following property: (I) a 1941 B John Deere tractor co-owned with son Danny Schauer worth $500.00; (2) a 1942 A John Deere tractor co-owned with son Danny Schauer worth $600.00; and (3) a 1997 JCB loadall forklift worth $60,000.00.
Schauer explained how he acquired the real estate comprising his farmstead. In 1996 or 1997, he borrowed $6,000.00 from his daughter, Donna, to purchase 10 acres of farm land. This sum was subsequently repaid, but the real estate was titled in Donna's name because, according to Schauer, he had judgments against him. In addition, Donna obtained a mortgage loan from Gate City Federal Savings Bank, and Schauer used the loan proceeds to build a house and several other buildings on the subject property, including a workshop, a storage shed, and a horse barn. In his amended bankruptcy schedules, Schauer disclosed that he leased the farmstead from Donna for $260.00 per month. However, in her testimony at the hearing, Donna claimed no ownership interest in the farmstead whatsoever. Moreover, Donna claimed no ownership interest in either of the two GMC trucks that had been titled in her name. She testified that she did not pay for them, makes no payments on them, and does not use them. Donna also acknowledged the existence of the checking account in her name at Gate City Federal Savings Bank. However, she testified that she had never deposited any money into it and does not use it. Schauer agreed with Donna's testimony, saying that he is the one making deposits and writing checks on this account. He testified that he created the account in Donna's name so his creditors could not attach it.
On his amended statement of financial affairs, Schauer disclosed in answer to question 14, "Property held for another person," that his son, Danny, also lives on the farmstead and that Danny's property is commingled with his own. Attached to Schauer's amended schedules is "Exhibit 1," a handwritten list of property located at the farmstead that is owned by persons other than Schauer. According to the Exhibit 1 attached to the amended schedules, Danny Schauer owns the following property located at the Debtor's farmstead: wire welder; cutting torch; big air compressor; AC welder; texture machine; drill press; bench grinder; cut off saw; Nipco heater; battery charger; radial alarm (sic) saw; two table saws; table planner; two electric hand saws; chain saw; belt sander; two power trowels; power skreed; skafeling (sic); three step ladders; 1845C Case skid steer loader; 75XT Case Skid Steer loader; tiller for skid steer; weed badger for skid steer; forks for skid steer; three buckets for skid steer; post hole auger for skid steer; water pump; jumping jack tamper (sic); Alide (sic) van body; two cordless drills; 20 cards (?); 2 saw zalls; two screw guns; five levels; mechanical tool box; miscellaneous tools; refridgerator (sic); gas fire place; power washer; two snowmobiles and trailer; fiber glass boat and trailer; pellet of post rails; fifth wheel goose neck; 1974 Chevy 3/4 ton pickup; 1994 Dodge half-ton pickup; 1988 Chevy S-10 Blazer; and a 1998 28' x 70' doublewide trailer house. Schauer provided no similar list of specific power tools and shop equipment that he owns. On amended Schedule B, Schauer merely disclosed that he owns "misc. tools" worth $500.00.
Exhibit I also lists the following owners of property located at the farmstead. A person named Bonnie, who may be one of Schauer's adult children, is disclosed as owning two John Deere lawn tractors, a hand tiller, a 60 John Deere (?), a John Deere 3-point mower, a 3-point disk, a 3-point blade, and a brush mower. A person named Donna, who may also be one of Schauer's adult children, is said to own a china hutch, a table and chairs, a sofa, and a 42-inch television. Connie and Robin Harrington are revealed as owning a 2-wheel horse trailer and a gun cabinet. Ken Mickelson is said to own a Ford truck. Fred Brancio is said to own a corn planter and a 24-foot drill. Ardel Wolff is said to own a 1980 Chevy 2-wheel-drive pickup and a 16-foot car trailer. Ben Haunt is disclosed as owning a boat and trailer. All of the foregoing items of personal property are located at the farmstead.
Schauer's state and federal income tax returns for 1997, 1998, and 1999 were admitted into evidence at the hearing on July 10, 2000. The tax returns reveal that he owns more property than was disclosed on his amended bankruptcy schedules. Moreover, several items appearing on his tax returns appear to be the very property he now claims is owned by others. For example, Form 4562 of the Debtor's North Dakota income tax return for 1999 discloses the following depreciating business assets with a total aggregate cost basis of $297,512.00: (1) a 60' x 120' workshop; (2) a goose neck trailer; (3) a Massey Ferguson 40; (4) a nailer compressor; (5) a gravel truck; (6) a payloader; (7) construction forms; (8) a skid steer; (9) a model XL75 skid steer; (10) another gravel truck; (11) 2 power trailer; (12) a power scraper; (13) a standard forklift; (14) a Dodge truck; and (15) another Dodge truck. Although Danny Schauer, in his testimony at the hearing, claimed ownership of the two skid steer loaders, Schauer apparently lists them on his own tax returns for depreciation purposes.
C. The Amended Plan Now Proposed for Confirmation
The amended chapter 13 plan, which includes a cash flow analysis, proposes a payment to the chapter 13 trustee of $285.00 per month over 36 months in addition to satisfaction of the IRS claim. However, Schauer appears to have insufficient income with which to fund this plan. Testimony from the July 10 hearing indicated that there is very little construction work available in Schauer's location. Schauer testified that he had no construction jobs in progress and no contracts for future jobs. Moreover, his tax returns reveal that his construction business has not generated a net profit in any of the past three years. Nevertheless, according to the cash flow analysis, Schauer claims he can earn $1,100.00 per month from his construction business. Assuming that this claim is true, income from construction work alone is not sufficient to fund the amended plan because Schauer claims to have monthly expenses of $1,115.00. The cash flow analysis lists disability income in the amount of $300.00 per month. However, testimony at the July 10 hearing indicated that Schauer's application for disability benefits had already been denied. Thus, there is no disability income and hence, no funding for the monthly payments called for in the plan. Moreover, the monthly plan payments will not pay the $25,478.93 priority unsecured claim of the IRS. In the amended plan, Schauer proposed to pay the priority unsecured claim by borrowing over $28,000.00 from an unknown lender before December 1, 2000. The plan also fails to make any provision for real estate taxes. As with other funding problems, Schauer testified he would get the necessary money "somehow."
The Debtor's cash flow analysis contains a mathematical error. The Debtor lists total monthly expenses of $1,075.00. However, the itemized expenses claimed by the Debtor actually add up to $1,115.00.
II. CONCLUSIONS OF LAW
On request of a party in interest and after notice and a hearing, the court may, for cause, dismiss a chapter 13 case or convert it to chapter 7. 11 U.S.C. § 1307 (c). Whether the case is dismissed or converted to chapter 7 depends on the best interests of creditors and the bankruptcy estate. Id.
Schauer argues that he has an absolute right to voluntarily convert his case from chapter 7 to chapter 13 pursuant to 11 U.S.C. § 706 (a). However, this argument is misplaced in that it fails to recognize the current procedural posture of the case. Schauer's motion to voluntarily convert his case from chapter 7 to chapter 13 pursuant to 11 U.S.C. § 706 (a) was granted by the order of this Court on May 16, 2000. Thus, Schauer's statutory right to convert to chapter 13 was, in fact, honored. Whether or not he has the ability to defeat the present motion and remain in chapter 13 is another matter entirely. Schauer's ability to remain in chapter 13 depends upon his good faith, or lack thereof, in seeking chapter 13 relief. It may also depend upon his chapter 13 eligibility under 11 U.S.C. § 109 (e).
A. Bad Faith
Filing a chapter 13 bankruptcy petition in bad faith constitutes proper cause for dismissal or conversion to chapter 7 pursuant to section 1307 (c) of the Bankruptcy Code. Ladika v. Internal Revenue Service (In re Ladika), 215 B.R. 720, 725 (B.A.P. 8th Cir. 1998);Molitor v. Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996) (citations omitted). As a practical matter, there is no real difference between filing a chapter 13 petition in bad faith and converting a case from chapter 7 to chapter 13 in bad faith. In both instances, the debtor is seeking relief in chapter 13, and there is no reason why the good faith requirement should apply to the filing of a chapter 13 petition but not to the conversion of a case from chapter 7 to chapter 13. The rule espoused in Ladika and Molitor should extend to cover the case at bar. Thus, proper "cause" for dismissal or conversion exists within the meaning of 11 U.S.C. § 1307 (c) if a debtor converts his other case from chapter 7 to chapter 13 in bad faith. Indeed, where a debtor exhibits obvious bad faith in seeking to convert to chapter 13, there is authority in this circuit for denying the debtor's motion to convert. See Martin v. Cox, 213 B.R. 571 (E.D.Ark. 1996), aff'd 116 F.3d 480 (8th Cir. 1997). However, as the discussion below indicates, a court's determination of a debtor's good faith often depends, to a large extent, on the plan proposed for confirmation. Thus, a motion to reconvert a case back to chapter 7 is often more properly handled in conjunction with confirmation of the proposed chapter 13 plan. See Little, 245 B.R. at 356. This Court generally favors this approach, and since Schauer has already filed an amended plan for confirmation, the issue of bad faith in this case is ripe for decision.
The Eighth Circuit Bankruptcy Appellate Panel recently summarized the law of good faith in the context of bankruptcy as follows:
The relevant inquiry regarding good faith is "whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code." Education Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987). However, the foregoing inquiry is governed by a "totality of the circumstances" test. Noreen, 974 F.2d at 76; LeMaire, 898 F.2d at 1349; In re Estus, 695 F.2d 311, 316 (8th Cir. 1982). Factors which are particularly relevant to determining good faith under the totality of the circumstances include: (1) the nature of the debt sought to be discharged; (2) whether the debt would be dischargeable in a chapter 7 bankruptcy case; and (3) the debtor's motivation and sincerity in seeking chapter 13 relief. LeMaire, 898 F.2d at 1349 (citing Estus, 695 F.2d at 317). See also In re Kurtz, 238 B.R. 826, 830 (Bankr. D.N.D. 1999) ("Further consideration must be given to the sincerity of the Debtor in putting forth his Chapter 13 plan of repayment and whether that plan demonstrates real sincerity on the part of [the Debtor] to repay his creditors as best he can in exchange for the liberal Chapter 13 discharge."). Another relevant factor in determining good faith is the Debtor's pre-filing conduct. LeMaire, 898 F.2d at 1352 (citations omitted). However, even in light of egregious pre-filing conduct by the debtor, a chapter 13 plan may be confirmed if other factors "suggest that the plan nevertheless represents a good faith effort by the debtor to satisfy his creditors' claims." Id. (citation omitted).
Banks v. Vandiver (In re Banks), 248 B.R. 799, 803 (B.A.P. 8th Cir. 2000).
The case at bar constitutes a textbook example of bad faith because Schauer fails nearly every aspect of the good faith inquiry. First, he failed to fully disclose on his bankruptcy schedules the true nature and extent of his interests in property. For example, even after various amendments, Schauer failed to disclose any ownership interest in real estate on his bankruptcy schedules. Instead, he attempted to mislead the Court by amending Schedule G to indicate that he leased the farmstead from his daughter, Donna. However, Donna's testimony at the hearing directly conflicted with Schauer's assertion. Donna testified that she did not, in fact, own the farmstead. Moreover, there was no evidence that Schauer had ever paid any rent to Donna on the basis of any alleged oral lease. Although Donna obtained a mortgage loan on the farmstead real estate that enabled Schauer to build a house, nothing in evidence suggests that she ever made any payments on the loan. Instead, Schauer conceded in his post-hearing brief that he, in fact, paid the mortgage and that he used a checking account in Donna's name to do so. Schauer's dishonest conduct extended to other assets, as well. Specifically, two GMC trucks were titled in Donna's name. Although Schauer's counsel made much of the fact that the Debtor has only an 8th grade education and had apparently suffered a minor stroke some years ago, nothing suggests that the Debtor failed to understand what he was doing when he titled assets in Donna's name or that he failed to recognize the fundamentally dishonest character of his conduct. Thus, Schauer's attempt to shift blame for his conduct onto the aforementioned sheriffs deputy is not credible. All in all, his conduct suggests a pattern of deception and concealment that began several years ago and did not end with the filing of his bankruptcy petition and amended schedules. Such conduct is the essence of bad faith in that it evinces Schauer's apparent desire to unfairly manipulate this Court and the Bankruptcy Code in furtherance of a dishonest scheme to shelter assets from creditors. Similar conduct has been the basis for a finding of bad faith in other cases. See e.g. Ladika v. Internal Revenue Service (In re Ladika), 215 B.R. 720 (B.A.P. 8th Cir. 1998) (debtor acted in bad faith by titling assets in the name of a non-operating corporation).
Additionally, the likelihood that Schauer would be denied a discharge in chapter 7 further supports a finding of bad faith. In this case, the chapter 7 trustee thoroughly investigated Schauer. This investigation uncovered facts that gave rise to a colorable claim for denying him a discharge in chapter 7. See 11 U.S.C. § 727 (a)(2)-(5). Moreover, the chapter 7 trustee filed an adversary proceeding with that purpose in mind as well as to recover various items of property for the bankruptcy estate, prompting the voluntary conversion to chapter 13.
Finally, Schauer's apparent motivation and sincerity in seeking chapter 13 relief support a finding of bad faith. Ideally, a debtor should be motivated to seek chapter 13 relief, as opposed to chapter 7 relief, by the desire to repay his or her creditors to the best of his or her ability. Here, Schauer admitted that his primary motivation in converting from chapter 7 to chapter 13 was to evade the chapter 7 trustee's action for a denial of discharge and the recovery of property. Although such a motive does not establish bad faith per se, it is nevertheless a factor that the Court must consider under the totality of the circumstances, See Banks, 248 BR. at 804 n. 2, especially where a debtor's chapter 13 plan illustrates a lack of sincerity with respect to repaying creditors. Id. at 804-05. In the case at bar, the amended chapter 13 plan that has been proposed suggests a lack of sincerity on Schauer's part because the plan is simply not feasible. According to his own cash flow analysis, Schauer has no means of funding the monthly payments required by the plan. His ability to make monthly plan payments depends entirely on his receipt of disability benefits, and testimony at the hearing established that Schauer's application for such benefits had already been denied. Accordingly, the amended plan appears to be patently unconfirmable under section 1325 (a)(6) of the Bankruptcy Code. In addition, the IRS has filed a priority unsecured tax claim for $25,478.93, and the amended plan proposes to somehow borrow enough money to pay this obligation before December 1, 2000. Without the ability to make monthly plan payments, Schauer must presumably fund the entire plan with borrowed money. The plan does not disclose the name of any lender willing to grant Scahuer such a loan, and given his current financial circumstances, it is unlikely that such lending sources exist. Thus, Schauer's proposal to borrow money to fund the plan is nothing more than a "visionary promise." See Clarkson v. Cooke Sales and Service Co. (In re Clarkson), 767 F.2d 417, 420 (8th Cir. 1985). Clearly, the amended plan represents an unconfirmable and less than realistic effort on Schauer's part to repay his creditors. Thus, Schauer's motivation and sincerity in seeking chapter 13 relief support a finding that he converted his case to chapter 13 in bad faith.
B. Ineligibility for Chapter 13 Relief
Only an individual with regular income may be a chapter 13 debtor. 11 U.S.C. § 109 (e). "Section 101 (30) of the Bankruptcy Code defines an `individual with regular income' as an `individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.'" In re Antoine, 208 B.R. 17, 19 (Bankr. E.D.N.Y. 1997). "The benchmark for determining whether an individual has `regular income' for purposes of section 101 (30) of the bankruptcy code is not the type or source of income, but `its stability and regularity.'" Id. at 20 (citations omitted). Ineligibility for chapter 13 relief may constitute sufficient cause for conversion of a case to chapter 7 pursuant to section 1307 (c) of the Bankruptcy Code. See Rudd v. Laughlin, 866 F.2d 1040 (8th Cir. 1989).
In the case at bar, testimony at the hearing indicated that there was little or no construction work available for Schauer to perform in his general location. He had no jobs in progress and no contracts for future jobs at the time of the hearing. His application for disability benefits had already been denied at the time of the hearing, and no other sources of income have been disclosed to the Court. Thus, Schauer's income from construction work appears to be highly unstable at best and at worst, nonexistent. Without regular income, Schauer does not satisfy the eligibility requirements of 11 U.S.C. § 109 (e), and his apparent ineligibility may very well constitute additional cause for dismissal or conversion pursuant to 11 U.S.C. § 1307 (c).
III. CONCLUSION
Based on the foregoing, sufficient cause exists for dismissal or conversion of this case back to chapter 7 pursuant to 11 U.S.C. § 1307 (c). Furthermore, given Schauer's pattern of concealing assets and the likelihood that he would continue such conduct to the detriment of his creditors if this case is dismissed, the Court concludes that the interests of creditors are best served by converting this case to chapter 7. Accordingly, the motion to convert this case to chapter 7 pursuant to 11 U.S.C. § 1307 (c) filed by Kaler and McNair on June 22. 2000, is hereby GRANTED.