529 B.R. 257
C.D. Ill.2013Background
- Dennis Killian filed Chapter 13 on Jan 14, 2011; he later amended schedules and proposed a plan but failed to disclose certain prepetition transfers and a trust account funded by a 2009 land sale.
- At a Rule 2004 examination and creditors’ meeting, creditors and the Trustee discovered undisclosed transfers: $60,000 sale proceeds, $25,000 deposited to a law‑firm trust, an $11,000 transfer to Killian’s wife two days before filing, and post‑filing trust disbursements.
- Killian amended some schedules months later; the Trustee objected to exemptions claimed for funds in the trust account and moved to convert the case under 11 U.S.C. § 1307 for bad faith.
- The bankruptcy court found intentional concealment and bad faith, denied Killian’s amended exemption for the trust funds, and involuntarily converted the Chapter 13 case to Chapter 7; Killian appealed.
- The district court held the appeal was not moot and reviewed whether the bankruptcy court clearly erred in finding bad faith, converting the case, and disallowing the exemption; it affirmed Judge Gorman’s decision.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether appeal is moot under equitable/pragmatic mootness | Killian implicitly contends appeal should proceed (no stay timely sought) | Trustee argues actions taken post‑conversion (refunds, §341 scheduling) make review impractical | Not moot; Seventh Circuit rejects "equitable mootness" doctrine and financial adjustments here did not preclude review |
| Whether bankruptcy court erred in finding bad faith to convert under §1307 | Killian: court failed to apply Love totality‑of‑circumstances test and did not show fraudulent intent | Trustee: concealment, timing of transfers, and resistance to discovery show bad faith | No clear error; court considered relevant factors and could infer intent from conduct |
| Whether conversion was in creditors’ best interest vs dismissal | Killian: conversion gives access to Chapter 7 relief despite over‑median status and may not benefit creditors net of recoveries | Trustee: Chapter 7 trustee can avoid preferential transfers (e.g., $11,000) and potentially produce more for creditors | Conversion was not clearly erroneous; Chapter 7 avoidance rights supported conversion as better for creditors |
| Whether amended exemption should be allowed despite concealment | Killian: amendment permitted under Rule 1009; no clear proof of fraudulent intent | Trustee: concealment and lack of disclosure justify denial for bad faith/prejudice | Denial upheld: clear and convincing evidence of intentional non‑disclosure warranted disallowing the exemption |
Key Cases Cited
- United States v. Buchman, 646 F.3d 409 (7th Cir.) (rejecting equitable‑mootness doctrine in local bankruptcy appellate practice)
- In re UNR Indus., Inc., 20 F.3d 766 (7th Cir.) (distinguishing real mootness from equitable mootness)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (U.S.) (bad‑faith conduct can justify dismissal or conversion of bankruptcy case)
- In re Love, 957 F.2d 1350 (7th Cir.) (totality‑of‑circumstances test for good‑faith in Chapter 13 filings)
- In re Yonikus, 996 F.2d 866 (7th Cir.) (concealment of assets bars exemption; amendment may be denied for bad faith)
- In re Neis, 723 F.2d 584 (7th Cir.) (a court may infer debtor’s intent from the record)