598 B.R. 34
Bankr. N.D. Ga.2019Background
- Arnold and Winnifred Wade (age 74 and 87) filed Chapter 7 on Aug. 24, 2017 after a state-court judgment in favor of Dale Recycling & Used Auto Parts, Inc. (DRUAP) (DRUAP awarded $20,000 against the Wades).
- One day before DRUAP's post-judgment discovery, the Wades filed Chapter 7; the trustee reported no distribution and the Wades converted to Chapter 13 on Dec. 1, 2017.
- The Wades live on fixed social security and pension income (~$3,800/month) and listed limited assets (two homes, a 2011 Tahoe subject to a lien, modest household goods, and small bank funds); they proposed a 36-month plan paying $550/month and a 0% dividend to unsecured creditors.
- DRUAP objected, arguing (a) conversion was in bad faith to obtain a broader Chapter 13 discharge, (b) plan underpays unsecured creditors and includes improper expenses/transfers, and (c) the Wades should be required to pay 60 months.
- The Chapter 13 trustee recommended confirmation after the Wades amended schedules and plan; the court held a Kitchens totality-of-circumstances good-faith inquiry and addressed dischargeability differences between Chapters 7 and 13.
Issues
| Issue | Plaintiff's Argument (DRUAP) | Defendant's Argument (Wades) | Held |
|---|---|---|---|
| Whether DRUAP's judgment is nondischargeable after conversion | Judgment arises from willful/malicious acts (defamation/tortious interference) and would be nondischargeable in Chapter 7 | Chapter 13 §1328(a)(4) limits nondischargeability to "personal injury" to a natural person; DRUAP is a corporation so its claim is dischargeable in Chapter 13 | Held: DRUAP's corporate judgment is dischargeable in Chapter 13; §1328(a)(4) precludes nondischargeability here |
| Whether conversion from Chapter 7 to Chapter 13 was in bad faith (improper conversion to obtain discharge) | Conversion was to circumvent Chapter 7 nondischargeability and avoid paying DRUAP; conversion therefore abusive/bad faith | Conversion is allowed; debtors may use statutory Chapter 13 benefits; they committed all disposable income and acted in good faith | Held: Conversion was not in bad faith; court denies dismissal and confirms plan |
| Whether the Wades satisfied Chapter 13 eligibility and proposed their plan in good faith under Kitchens factors | DRUAP points to factors (insufficient payments to creditors; alleged improper expenses; failure to pay prepetition) as evidence of bad faith | Wades rely on fixed income, surrender of property, commitment of social security/pension income, modest living, trustee recommendation | Held: Under a Kitchens totality-of-circumstances analysis, the Wades acted in good faith and meet eligibility; plan confirmed |
| Alleged improper postpetition payments and fraudulent transfers (child care, bail, setoff by credit union) | These payments/expenses are improper transfers and evidence of bad faith; trustee should pursue avoidance actions | Payments were minimal/de minimis or permissible (post-petition medical, setoff by secured creditor), and DRUAP failed to follow §548 demand procedure for derivative standing | Held: Court rejects these arguments; finds payments not sufficient to deny confirmation and denies avoidance claims without prejudice for DRUAP's failure to demand trustee action |
Key Cases Cited
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (courts may deny conversion where prepetition bad faith renders debtor unqualified for chosen chapter)
- Law v. Siegel, 571 U.S. 415 (2014) (§105(a) cannot be used to contravene explicit Code provisions)
- Kitchens v. Georgia R.R. Bank & Trust Co., 702 F.2d 885 (11th Cir. 1983) (eleven-factor totality-of-circumstances test for Chapter 13 good faith)
- Jennings v. R.W. (In re Jennings), 670 F.3d 1329 (11th Cir. 2012) (definition of "willful" in §523(a)(6))
- Jove Eng'g, Inc. v. I.R.S., 92 F.3d 1539 (11th Cir. 1996) (interpreting statutory use of "individual")