567 B.R. 473
Bankr. M.D. Penn.2017Background
- Debtor Donald Demeza filed Chapter 13 on July 5, 2016; creditor Richard Hackerman moved to convert to Chapter 7 claiming the petition/plan were filed in bad faith. An evidentiary hearing was held Dec. 6, 2016.
- Dispute stems from prior incidents (2012) where Hackerman alleged tort claims for the death of a mare and foal; Hackerman holds a contingent, disputed claim (~$500,000). A separate judgment against Debtor and related entities for ~$241,103 was entered in April 2016.
- Debtor owns a farmette titled jointly with his daughter after a 2013 refinance; loan proceeds (~$31,000) paid debts including a student loan and credit cards. Debtor now pays the mortgage alone; daughter does not live on the property.
- Debtor’s schedules list substantial secured debt (~$417,305), modest unsecured claims, monthly income ~ $2,132, and other small business and equine assets; Debtor was current on mortgage and plan payments at hearing.
- Hackerman contends timing and transfers (property to daughter, student loan payoff) indicate fraudulent conveyance and bad faith; Debtor says refinance was needed to obtain credit and primary motives were to satisfy judgments/taxes and reorganize finances.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Chapter 13 petition was filed in bad faith so as to require conversion to Chapter 7 under 11 U.S.C. § 1307(c) | Hackerman: petition timed to defeat his suit; transfers and refinancing benefitted daughter and hide assets; creditors would recover more in Chapter 7 | Debtor: petition motivated by other judgments, tax liabilities, and desire to reorganize; transfers had legitimate financing rationale; has been current on plan and mortgage | Denied conversion; court finds petition filed in good faith on totality of circumstances (burden shifted to Debtor and met) |
| Whether transfers (adding daughter to deed; student loan payoff) were fraudulent and justify conversion | Hackerman: transfers likely fraudulent; Chapter 7 trustee could pursue PUFTA claims increasing creditor recovery | Debtor: transfer enabled loan approval; daughter employed and helped qualify; loan proceeds used to pay legitimate debts; speculative that trustee would succeed | Court: insufficient evidence that fraudulent transfer action is likely; legitimate purpose shown for transfer |
| Whether Debtor concealed assets or misreported material facts (candor) | Hackerman: mischaracterized property, undervalued horses, misreported income, hid insider benefit of mortgage payments | Debtor: discrepancies are nonmaterial or explained; valuations based on experience; income calculation clarified by counsel; rents offset mortgage | Court: no evidence of material concealment or deceit; characterization and valuations not materially misleading |
| Whether Debtor lacks regular income making the Chapter 13 plan infeasible | Hackerman: Debtor borrows from friends/family and lacks stable income, so plan not viable | Debtor: reports monthly income and rents; current on plan and mortgage payments | Court: reserved ruling on plan feasibility and income for confirmation hearing; did not convert case now |
Key Cases Cited
- Myers v. Schneiderman, 491 F.3d 120 (3d Cir. 2007) (bad-faith grounds support dismissal/conversion of Chapter 13)
- Lilley v. Wilson, 91 F.3d 491 (3d Cir. 1996) (totality-of-circumstances test and factors for good-faith inquiry)
- Perlin v. Hitachi Capital Am. Corp., 497 F.3d 364 (3d Cir. 2007) (good faith measured by honest intent and abuse of bankruptcy provisions)
- Tamecki v. Frank, 229 F.3d 205 (3d Cir. 2000) (good-faith standard for Chapter 13)
- Zick v. Eakin, 931 F.2d 1124 (6th Cir. 1991) (egregious cases with concealed assets or abuse justify dismissal)
- Caldwell v. Caldwell, 895 F.2d 1123 (6th Cir. 1990) (debts from tortious or criminal conduct not automatically bad faith)
- Alt v. U.S., 305 F.3d 413 (6th Cir. 2002) (burden shifts when creditor makes prima facie showing of bad faith)