539 B.R. 738
Bankr. W.D. Va.2015Background
- Debtor Sandra Boggs Colston transferred $414,590 and $39,755 in charges from Jacqueline Fay Alexander (a mentally impaired former friend) to Colston or entities Colston controlled between 2012–2014; Alexander alleged undue influence, fraud, and sought rescission and damages in state court.
- The Virginia Beach Circuit Court found undue influence and fraud, rescinded contracts against Colston’s entities, and awarded Alexander damages and attorney’s fees; Alexander then filed a large proof of claim against Colston personally in the bankruptcy.
- Colston filed Chapter 13 on the eve of the state-court trial; she proposed a 60-month plan estimating a 33% dividend but, given Alexander’s $621,875.66 claim, the effective dividend to unsecured creditors would be ≈4%.
- Nearly half of Colston’s proposed monthly plan payments were to be funded by gifts from her elderly mother; Colston failed to disclose a recent transfer of a $10,000 generator to her mother in her SOFA/schedules.
- The Chapter 13 Trustee recommended confirmation; Alexander objected alleging lack of good faith and infeasibility and moved to dismiss; after an evidentiary hearing the bankruptcy court denied confirmation and dismissed the case under 11 U.S.C. § 1307(c)(5).
Issues
| Issue | Alexander's Argument | Colston's Argument | Held |
|---|---|---|---|
| Whether Colston’s plan was proposed in good faith under 11 U.S.C. § 1325(a)(3) | Filing and plan were bad faith because plan offered a de minimis dividend on a claim arising from prepetition fraud/undue influence and timing shows motive to hinder collection | Plan was filed in good faith; proposes payments and is feasible; Trustee supports confirmation | Court: Plan not proposed in good faith — denial of confirmation (prepetition misconduct, minimal dividend, nondischargeability concerns, disclosure failures) |
| Whether filing of the Chapter 13 petition was in good faith under 11 U.S.C. § 1325(a)(7) | Petition filed to stop pending state-court recovery and delay enforcement — abuse of Chapter 13 | Filing was proper exercise of bankruptcy rights; not abuse | Court: Petition filed in bad faith (timing before trial, motive to hinder creditor, lack of candor) |
| Whether dismissal (rather than denial of confirmation) is appropriate under 11 U.S.C. § 1307(c) | Dismissal is warranted because additional amendment would be futile and dismissal protects creditors | Debtor sought chance to amend; Trustee supported confirmation | Court: Dismissal under § 1307(c)(5) appropriate — further amendment would be futile; conversion to Chapter 7 not in creditors’ best interest |
| Whether potential nondischargeability or other factors justify confirmation despite misconduct | Nondischargeability risks and minimal repayment show abuse; bad faith outweighs technical sufficiency | Presence of some favorable technical factors (60-month plan, no prior filings) and Trustee support justify confirmation | Court: Technical sufficiency insufficient; totality of circumstances (pre- & post-petition conduct, minimal repayment, likely nondischargeable claim) requires denial/dismissal |
Key Cases Cited
- Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986) (adopts totality-of-the-circumstances test for Chapter 13 good-faith plan inquiry)
- Deans v. O’Donnell, 692 F.2d 968 (4th Cir. 1982) (sets out factors for good-faith analysis in Chapter 13)
- Solomon v. United States, 67 F.3d 1128 (4th Cir. 1995) (expands Deans factors for totality analysis)
- Branigan v. Bateman (In re Bateman), 515 F.3d 272 (4th Cir. 2008) (considers abuse of Chapter provisions and purpose in good-faith inquiry)
- In re Love, 957 F.2d 1350 (7th Cir. 1992) (identifies factors relevant to good-faith filing under § 1307(c))
- Kestell v. Kestell, 99 F.3d 146 (4th Cir. 1996) (upholds dismissal where bankruptcy filing was used to evade a single creditor’s collection efforts)