601 B.R. 754
Bankr. W.D. Ky.2019Background
- Debtor Julie M. Wood filed Chapter 7 on August 21, 2018, listing few creditors; creditor Janice Gerstenecker held an Alabama judgment (final Sept. 11, 2017) for roughly $30,300 and claims total ~$75,644.
- Prior to judgment, four joint bank accounts (Debtor, her father Jack Wood, and sister) that held roughly $57,365 (partly from the Debtor’s tax refunds) were closed by Jack in August 2017 and funds moved; Debtor did not receive those funds and did not schedule claims against her father.
- Debtor’s 2016 tax return reported a 20% interest in a family real-estate venture (claiming losses that reduced taxable income); Debtor’s 2017 return omitted that interest after her father testified he removed her without consideration.
- Debtor sought conversion from Chapter 7 to Chapter 13 (Nov. 14, 2018) and filed a proposed 60‑month plan paying $150/month; schedules contained inconsistent and amended income and expense figures (including shifting rent owed to parents) and initially omitted the bank accounts and business interest.
- Creditor objected and commenced an adversary seeking denial of discharge under § 727; Trustee and creditor opposed conversion arguing ineligibility, lack of good faith, and that conversion would abuse the bankruptcy process.
- After an evidentiary hearing, the court denied conversion, finding Debtor failed to show stable regular income sufficient to fund a Chapter 13 plan and that conversion was sought in bad faith (omissions, inconsistent schedules, and manipulation of expenses).
Issues
| Issue | Debtor's Argument | Creditor/Trustee's Argument | Held |
|---|---|---|---|
| 1) Is Debtor eligible to convert to Chapter 13 ("individual with regular income")? | Debtor: income and schedules show disposable income to fund $150/month plan; landlord reduced rent to permit plan. | Objectors: Debtor’s income decreased before filing, schedules are unreliable; disposable income is not stable or sufficient. | Denied — Court found income not proven stable/regular and disposable income calculation unreliable. |
| 2) Was the conversion sought in good faith or an abuse of process? | Debtor: seeks conversion to avoid escalating fees and to reorganize debts. | Objectors: conversion is tactical to avoid creditor’s § 727 action and to minimize recovery to Gerstenecker; schedules show deliberate omissions and manipulation. | Denied — Court found bad faith and abuse of process; conversion would unfairly prejudice creditor. |
| 3) Could Debtor propose a confirmable/feasible Chapter 13 plan? | Debtor: proposed 60‑month plan paying $150/month. | Objectors: plan is infeasible given uncertain/lower income and manipulated expenses; creditors would be prejudiced. | Denied — Court concluded plan would not be confirmable or feasible. |
| 4) Would conversion impair efficient administration or estate recovery? | Debtor: conversion not addressed to Trustee’s suits; Debtor would not pursue estate claims. | Objectors/Trustee: conversion would foreclose Trustee’s potential claims against father and reduce recovery to creditors. | Denied — conversion would hinder estate administration and eliminate Trustee’s potential recoveries. |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (conversion may be denied for prepetition bad faith and abuse of process)
- Copper v. Copper (In re Copper), 426 F.3d 810 (6th Cir. 2005) (bad faith and futility are grounds to deny conversion)
- In re Condon, 358 B.R. 317 (6th Cir. BAP 2007) (party opposing conversion bears burden to prove lack of good faith)
- Stout v. J.D. Byrider, 228 F.3d 709 (6th Cir. 2000) (signer of document is presumed to know its contents absent fraud)
- Sears, Roebuck & Co. v. Lea, 198 F.2d 1012 (6th Cir. 1952) (similar presumption regarding knowledge of signed documents)