576 B.R. 472
M.D. Pa.2017Background
- Debtor Donald L. Demeza (horse trainer) filed Chapter 13 after lawsuits by creditor Richard Hackerman for the death of Hackerman’s mare and foal and after transferring half-interest in his farm property to his adult daughter shortly after notice of potential claims.
- Demeza obtained a mortgage using the property and used proceeds to pay various debts (including $22,500 toward a student loan) and personal/horse-related expenses; loan proceeds were largely spent by the time of the bankruptcy hearing.
- Hackerman sued in district court (tort and later fraudulent-transfer/fraud claims); both suits were stayed after Demeza’s bankruptcy filing.
- Hackerman objected to confirmation and moved to convert the case to Chapter 7, arguing bad faith under §1325(a)(3), and that the Chapter 13 plan fails the “best interests of creditors” liquidation test under §1325(a)(4).
- The bankruptcy court denied the motion to convert, found the petition/plan filed in good faith (reserving some feasibility concerns for confirmation), and confirmed the Chapter 13 plan.
- On appeal the district court affirmed denial of conversion and the good-faith finding (Hackerman waived much of that argument), but vacated the confirmation order and remanded because the bankruptcy court failed to make the required §1325(a)(4) valuation/findings on the record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plan was proposed in good faith under 11 U.S.C. §1325(a)(3) | Hackerman: plan filed in bad faith (timing, transfer, misuse of loan funds) | Demeza: petition and plan were filed in good faith; legitimate reasons for filing | Court: Hackerman waived detailed appellate challenge; bankruptcy court’s good-faith finding not clearly erroneous — affirmed |
| Whether plan satisfies §1325(a)(4) (best interests/liquidation test) | Hackerman: Chapter 7 hypothetical yields greater distribution to unsecureds than Chapter 13 plan — plan fails §1325(a)(4) | Demeza: plan meets creditors’ best interests (burden on proponent to prove) | Court: Bankruptcy court failed to make the necessary valuation and present-value findings on the record; confirmation vacated and case remanded for proper §1325(a)(4) calculations |
| Whether denial of conversion to Chapter 7 should be reversed | Hackerman: conversion appropriate based on alleged bad faith and inadequate payments | Demeza: conversion not warranted; good-faith filing and plan | Court: Hackerman did not brief this issue on appeal; deemed waived — denial of conversion affirmed |
| Burden and standard for §1325(a)(4) determinations | Hackerman: (argues liquidation yields more) | Demeza: plan proponent must prove compliance | Court: Plan proponent (Demeza) bears burden by preponderance; remand for bankruptcy court to make evidence-based liquidation and present-value findings |
Key Cases Cited
- In re Klaas, 858 F.3d 820 (3d Cir.) (standards of review on bankruptcy appeals)
- In re Lilley, 91 F.3d 491 (3d Cir. 1996) (multi-factor totality test for good faith in Chapter 13)
- In re Myers, 491 F.3d 120 (3d Cir. 2007) (listing Lilley factors and deference to bankruptcy court on bad faith)
- In re W.R. Grace & Co., 475 B.R. 34 (D. Del. 2012) (guidance on liquidation-value estimation and evidentiary requirements)
- In re Cumba, 505 B.R. 110 (Bankr. D.P.R. 2014) (two-step §1325(a)(4) methodology: hypothetical Chapter 7 value and present-valuing plan distributions)
- Green v. Fornario, 486 F.3d 100 (3d Cir.) (clearly erroneous standard explained)