Dale Recycling & Used Auto Parts, Inc. v. Wade (In re Wade)Dale Recycling & Used Auto Parts, Inc. v. Wade (In re Wade)
The principal issue before this Court is whether the 87-year-old Mrs. Wade and 74-year-old Mr. Wade, both of whom live on fixed incomes from social security and pensions, converted their case from Chapter 7 to 13 in bad faith to gain the benefit of the more generous discharge provisions in Chapter 13. This issue arises through an Objection to Confirmation of Amended Plan and Amended Motion to Dismiss (the "Motion to Dismiss") [Bnkry. Doc. 54] and
The underlying bankruptcy case was filed by Arnold and Winnifred Wade on August 24, 2017 [Bnkry. Doc. 1]. The Wades are elderly, fixed-income debtors against whom DRUAP obtained a judgment in the amount of $ 20,000, the circumstances of which will be discussed below. In its Amended Complaint, DRUAP seeks to: (1) deny confirmation of the Wades' plan, (2) deny the Wades' discharge (and find that the debt owed to DRUAP is specifically non-dischargeable), and (3) direct the trustee to pursue fraudulent transfer claims or allow DRUAP standing to do so.
FACTS
The Wades are retired and subsist on income from social security and pension plan payments. Mrs. Wade is 87-years-old, and Mr. Wade is 74-years-old. DRUAP's claim arises from a longstanding and contentious dispute between DRUAP and certain nearby residents, including the Wades, over the existence and operation of DRUAP's recycling and automobile salvage business. The Wades, the Clarks, the Gerrins, and Nancy Ledford (collectively the "Neighbors") engaged in litigation with DRUAP over the course of five years, culminating in a judgment in favor of DRUAP in the Superior Court of Jackson County against the Neighbors in 2017. DRUAP's pleadings allege that the Neighbors engaged in a smear campaign, spearheaded by the Clarks, to shut down DRUAP by attempting to generate broad opposition to its continued operation. DRUAP alleges that the Clarks disseminated false information about the legality and safety of DRUAP's operations, both verbally and in the form of lawn signs and
DRUAP contends that the Neighbors tried to extort money from it, and when that proved unsuccessful, the Neighbors hired an attorney who issued a cease and desist letter to DRUAP. Shortly thereafter, the Neighbors, while represented by an attorney, sued DRUAP for nuisance and trespass in the Superior Court of Jackson County in a case styled Jackie Clark, et al. v. Dale Recycling & Used Auto Parts, Inc. , No. W14CV0705 (the "Lawsuit"). The action sought damages and a permanent injunction of DRUAP's business activities.
At the time of filing, the Wades' primary assets consisted of their residence which they valued at less than $ 90,000, another home they valued at $ 69,000, a 2011 Chevy Tahoe worth $ 23,000, a 20-year-old Ford F-150 pick-up truck worth $ 2,500, a burial plot worth $ 2,500, typical household goods worth a few thousand dollars, and a few thousand dollars in a credit union account. The Wades claim to have no equity in any of these assets. With respect to their secured liabilities on the petition date the Wades had a reverse mortgage on their residence for $ 160,000, a mortgage on the other home for $ 81,000, a lien on the Chevrolet Tahoe for $ 26,000 in favor of a credit union, and a right of set-off in favor of the credit union with respect to the cash held in the Wades' credit union account. The Wades' other liabilities consisted of the DRUAP judgment, which is secured by a judgment lien on the real estate but which the Wades have sought to avoid under § 522 to make it an unsecured claim, a claim for abusive litigation, a judgment against Mr. Wade in favor of Midland Credit for about $ 19,000, a credit card debt to Capital One for $ 6,000, and a medical debt owing to North Georgia Medical Center for about $ 1,300.
DRUAP's objections to the Amended Plan can generally be summarized as follows. First, DRUAP argues that the Wades have inappropriately scheduled expenses for the care of their non-custodial great grandchild and improperly borrowed funds to pay the bail of Winnifred Wade's son.
DISCUSSION
A. Dischargeability in Chapter 7 as Opposed to Chapter 13
Section 523(a)(6) of the Bankruptcy Code dictates that a Chapter 7 debtor may not discharge any debt arising from "willful and malicious injury by the debtor to another entity or to the property of another entity."
However, § 523(a)(6) does not apply to Chapter 13 debtors. In re Adams ,
When Congress uses particular language within one section of a statute, but uses different language in another section, this difference is presumed to be intentional. See Russello v. United States ,
Congress also narrowed the scope of nondischargeability in Chapter 13 by limiting those willful or malicious injuries to "personal injuries."
Here, the Court believes that while DRUAP's judgment against the Wades could possibly be nondischargeable in Chapter 7
B. Conversion from Chapter 7 to Chapter 13
A Chapter 7 debtor may generally convert his or her case to Chapter 13, and vice versa, at "any time." See
Such an "abuse of process" is best understood to be any attempt by a debtor to convert his or her case to a chapter that the debtor could not have initially filed under. In Marrama, the United States Supreme Court reduced prepetition bad faith conduct to a question of whether the debtor could have originally filed under Chapter 13.
Bankruptcy courts nevertheless routinely treat dismissal for prepetition bad-faith conduct as implicitly authorized by the words "for cause." In practical effect, a ruling that an individual's Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13 . That individual, in other words, is not a member of the class of "honest but unfortunate debtor[s]" that the bankruptcy laws were enacted to protect. Marrama ,[ 549 U.S. at 373-74] (emphasis added). 127 S.Ct. 1105
Relying on § 706(d), Marrama guided bankruptcy courts to employ their discretion over § 105(a) to prevent conversion only if a debtor would not otherwise qualify as a debtor under Chapter 13. Marrama did not imbue bankruptcy judges with an unbridled discretion to prevent conversions; rather, it permitted bankruptcy courts to holistically determine if the debtor could be a debtor in his or her desired chapter. Law v. Siegel ,
In view of Marrama , the analysis of good faith must invariably turn on whether the Wades could have qualified for Chapter 13 at the time of their initial filing and, if so, whether subsequent post-petition conduct during the pendency of their Chapter 7 would have disqualified the Wades from filing under Chapter 13.
C. Whether the Wades Could Have Initially Filed under Chapter 13
A debtor's eligibility to file under Chapter 13 is reliant on that debtor's ability to satisfy the requirements of § 109(e).
Once a debtor has satisfied § 109(e)'s regular income and debt requirements, the debtor may still have his or her case dismissed "for cause."
Section 1325, in turn, lays out the criteria for a Chapter 13 plan to be confirmed.
(1) the amount of the debtor's income from all sources;
(2) the living expenses of the debtor and his dependents;
(3) the amount of attorney's fees;
(4) the probable or expected duration of the debtor's Chapter 13 plan;
(5) the motivations of the debtor and his sincerity in seeking relief under the provisions of Chapter 13;
(6) the debtor's degree of effort;
(7) the debtor's ability to earn and the likelihood of fluctuation in his earnings;
(8) special circumstances such as inordinate medical expense;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act and its predecessors;
(10) the circumstances under which the debtor has contracted his debts and his demonstrated bona fides, or lack of same, in dealings with his creditors;
(11) the burden which the plan's administration would place on the trustee. In re Kitchens ,, 888-89 (11th Cir. 1983). 702 F.2d 885 9
1. The amount of the Debtors' income from all sources
Despite its prominent position as the first enumerated factor in Kitchens , there is some disagreement concerning whether courts should continue to consider the amount of a debtor's income in its good faith analysis. Compare In re Shelton ,
Regardless of the vitality or lack thereof of the first Kitchens factor, there are no facts to suggest that the Wades are contributing insufficient income into their plan. In fact, the Wades have proposed to commit all of their social security income and pension income into the plan, despite arguably not being required to do so.
2. The living expenses of the Debtors and their dependents
A plan may be proposed in bad faith where the debtor insists on living lavishly while refusing to make his or her creditors whole. In re Bandini ,
3. The amount of attorney's fees
The amount of an attorney's fees may call into question the good faith of the debtor where such fees are clearly unreasonable and significantly harm the return to creditors. In re Zepecki ,
4. The probable or expected duration of the Debtors' Chapter 13 plan
The probable or expected duration of a debtor's plan may indicate bad faith where the term of the plan is less than sixty months and significant income is being withheld from the plan. In re Dalby ,
5. The motivations of the Debtors and their sincerity in seeking relief under the provisions of Chapter 13
Bad faith may be found where the Chapter 13 debtor is not sincerely motivated to pay his or her creditors over the life of the plan. See generally In re Brown ,
6. The Debtors' degree of effort
A debtor's lack of effort may justify a finding of bad faith where proposed plan payments are nominal in view of the debtor's ability to pay and in light of the debtor's discretionary expenses. See e.g. In re Lott , No. 10-06061-TOM-13,
Chapter 13 requires the debtor to have a consistent income which can support plan payments for the life of the plan. In re Buccolo ,
8. Special circumstances such as inordinate medical expense
Special circumstances, such as significant medical expenses, may reduce the feasibility of a debtor's plan to such an extent that a debtor proposing a plan that ignores those circumstances may have acted in bad faith. See generally In re Goodavage ,
9. The frequency with which the Debtors have sought relief under the Bankruptcy Reform Act and its predecessors
Similar to the first Kitchens factor, there is some dispute as to whether bankruptcy courts should consider a debtor's successive prior filings in their good faith analyses.
10. The circumstances under which the Debtors have contracted debts and demonstrated bona fides, or lack of same, in dealings with creditors
If a debtor has contracted his or her debts via conduct which would call into
11. The burden which the plan's administration would place on the trustee.
A finding of bad faith may occur where the debtor has proposed a plan which would place an undue administrative burden on the trustee. In re Brown ,
12. Other considerations
In addition to the expressly enumerated eleven factors, Kitchens discussed other factors that a bankruptcy court could use in its good faith analysis referencing case law from the Eighth Circuit. See generally In re Kitchens ,
" '[I]t is not "bad faith for [the Debtor] to adhere to the provisions of the Bankruptcy Code and, in doing so, obtain a benefit provided by it.' " Matter of Ogden ,
Here, the Wades converted their Chapter 7 bankruptcy to Chapter 13 to take advantage of Chapter 13's broader discharge. This Court does not fault the Wades for initially filing a Chapter 7 case to see if DRUAP would contest the dischargeability of the debt and then converting the case when it became likely DRUAP would. The implication of this broader discharge in Chapter 13 will be that the Wades can discharge their judgment debt owed to DRUAP after paying future income into their plan for the life of the plan. Regardless of whether this is the ideal outcome of conversion for DRUAP, it is statutorily permissible. The Supreme Court has held that § 105(a) does not empower courts to contravene the express provisions of the Bankruptcy Code. Law v. Siegel ,
D. Comparisons with In re McGovern
DRUAP principally relies on In re McGovern ,
The facts of McGovern bear little resemblance to the instant case. In this case, DRUAP's judgment against the Wades accounts for less than 50% of the Wade's potentially dischargeable debt. On their Schedule E/F the Wades listed $ 55,000 in unsecured claims, $ 30,000 of which was comprised of creditors other than DRUAP [Bnkry. Doc. 1]. Whether or not those creditors filed claims is irrelevant in assessing the good faith of the Wades at the time of filing their petition. Additionally, the Wades are a fixed income household, receiving all income from social security and their pensions, with a combined monthly income of approximately $ 3,800. As such, the Wades do not have any reasonable likelihood of significantly increasing their income or earning potential, a marked difference from the McGovern case. The Wades are not retaining any luxury items, and they have surrendered a parcel of real estate and cash in a bank account to creditors. Other than a car payment that DRUAP erroneously asserts is disproportionately expensive to the Wades income, there are no allegations here of a luxurious or extravagant lifestyle. Finally, DRUAP makes a point of asserting in several filings that the Wades filed their petition the day before a post-judgment deposition in order to "avoid...discovery and collection efforts." [Adv. Doc. 10], [Bnkry. Doc. 54]. However, by submitting themselves to the jurisdiction of the bankruptcy court, the Wade's finances have been and will continue to be thoroughly disclosed. Obtaining a breathing spell from collection efforts is permitted and even contemplated by the Bankruptcy Code and should not be read as per se bad faith. The totality of the circumstances clearly distinguishes the McGovern debtor from the Wades and warrants a finding that they filed and converted their case in good faith.
DRUAP also makes the argument that one of the most important factors to consider in the good faith analysis is whether the Wades ever attempted to pay the judgment pre-petition. The Court can only conclude
DRUAP also relies in briefing and in oral argument on the pre-BAPCPA cases In re Whitlock (confirming plan of debtor and granting discharge of judgment based on breach of fiduciary duty as father's executrix), In re Caldwell (dismissing case of Chapter 13 debtor who was seeking discharge of false arrest and imprisonment judgment and had failed to disclosed substantial assets), and In re LeMaire (denying discharge to debtor of judgment from civil suit resulting from debtor attempting to kill someone by shooting him five times) in support of its contention that the Wades failure to pay DRUAP pre-petition is demonstrative of bad faith.
E. Payment of Unsecured Creditors
DRUAP alleges that the Wades' monthly payment of $ 60.00 for surgery performed on Mrs. Wade is improper and, thus, indicative of the Wades' bad faith. But the evidence showed that this payment on Schedule J was for a post petition surgery so it is not improper.
DRUAP also asserts that North Main Credit Union received improper payments by deducting payments from an account the Wades held there to repay a loan and that North Main failed to file a proof of claim. "Section 553(a) does not contain a requirement that a creditor seeking to exercise a setoff must first file a proof of claim." Matter of Cent. Equip. & Serv. Co., Inc. ,
F. Inappropriate Expenses
DRUAP alleges that the Wades' scheduling of expenses associated with the care of their non-custodial great grandchild and the payment of bail for Winnifred Wade's son constitute fraudulent transfers under
For the above-stated reasons, this Court is unwilling to find that the Wades have acted in bad faith in seeking to discharge their debt to DRUAP under Chapter 13. In summary, this Court finds the Wades have satisfied the totality of circumstances test after application of each Kitchens factor, and this Court is unwilling to ignore the intent of Congress in the broad discharge it granted to Chapter 13 debtors. As a result, this Court overrules the objection that the Wades' case was filed or converted in bad faith and finds that the Wades' plan was, in fact, proposed in good faith and that the Amended Plan should be confirmed.
CONCLUSION
For the reasons stated above, it is hereby
ORDERED that DRUAP's Amended Motion to Dismiss is DENIED , and
ORDERED that DRUAP's Amended Complaint is DISMISSED , and
ORDERED that the Amended Plan is CONFIRMED . The Court shall issue its standard order confirming a Chapter 13 plan that provides for the avoidance of judicial liens under § 522.
The Clerk is directed to serve a copy of this order on DRUAP, counsel for DRUAP, Debtor, counsel for Debtor, the
Notes
DRUAP's original Motion to Dismiss was amended, at least in part, because the original motion incorporated much of the Chapter 13 trustee's prior objection to confirmation. Since that original Motion, the trustee has considered her objection satisfied, no longer seeks dismissal and recommends confirmation. As such, this Court will not consider arguments made in the trustee's objection and will only consider the arguments made in DRUAP's original motion to the extent they were expressly reasserted in DRUAP's Amended Motion to Dismiss.
Section 548 grants the power to avoid transfers solely to the trustee. While Courts are split as to whether a third-party creditor can possess derivative standing, those courts that do recognize such standing require a formal, written demand upon the trustee, refusal to pursue the transfer by the trustee, and a determination that the refusal is unreasonable by the court. Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Grp.) ,
As the case progressed the Neighbors withdrew their claim for injunctive relief.
DRUAP also initially asserted a claim for attorney's fees under the Georgia abusive litigation statute for $ 65,000, but that claim had not yet been filed in state court at the time the Wades filed for bankruptcy. During the hearing on December 17, 2018 counsel for DRUAP indicated that it would not be pursuing this litigation against the Wades.
Because the Wades income comes from social security and private pensions, collection is difficult because neither can be garnished, but while the social security income can also generally not be attached in a bank account, it could be possible to attach the private pension income if it was deposited in a bank account.
The payment on the bail was only a few hundred dollars.
It is worth noting that Debtor's counsel does not concede that the debt would be nondischargeable in a Chapter 7.
DRUAP's arguments relate to Kitchens factors 2,4,5,6, and 10, but the Court analyzed the totality of the circumstances which included all of the factors in making its determination.
"BAPCPA subsumes the future application of certain of the Kitchens factors. BAPCPA amendments to the disposable income sections of § 1325(b), new rules on serial filers, and other code requirements may limit such inquiries. Otherwise, barring specific conflict with the new statute, there is no indication the factors are not still good law in the Eleventh Circuit." In re Roberts ,
The Wade's amended Schedule J indicates that their net monthly income is $ 550.00. [Doc. 53]. The Wades state in their plan that they will contribute $ 550.00 per month into their plan. [Doc. 50].
The amendments to the Bankruptcy Code in 2005 added specific provisions regarding serial filers.
In re Whitlock ,
During the hearing on December 17, 2018, Mr. Wade testified that his great grandson was not staying with the Wades as frequently anymore because he was now old enough to attend school, although another great grandchild was also being cared for and transported on occasion. There also appeared to be some confusion about the scheduling of medical expenses as out-of-pocket or covered by insurance. The Court has considered whether this could potentially lower the Wades' expenses and thereby increase income available to contribute to the plan, but the Court has decided not to require the Wades to adjust their plan payment on account of this because (1) the Wades had lower expenses in some areas than allowed on the means test so the expenses basically even out, in other words the Court will not penalize a debtor who is subject to a 36 month applicable commitment period who is thrifty in some areas because the debtor wants to spend money in other necessary areas such as the care of family members and (2) the effect of increasing the monthly plan payment would only serve to shorten the time period over which the secured creditor - who has not objected to its treatment - would get paid and not produce any benefit to unsecured creditors.