In Re Fonke
MEMORANDUM OPINION
Background
On August 7, 2003 (the “Petition Date”), Ronald Edward Fonke (the “Debtor”) filed his chapter 13 case. At that time, there was a pending state court lawsuit styled AAR Incorporated v. Ronald Fonke, case no. 2001-52828, pending in Harris County District Court (the “State Court Litigation”). All discovery in the State Court Litigation was complete and the case was ready to proceed to trial. The lawsuit involved a contract between AAR Incorporated (“AAR”) and Third Coast Services, Inc. (“Third Coast”) relating to the payment for services on a construction project performed by Third Coast. The lawsuit was filed against Third Coast and the Debtor, who was an officer of Third Coast. Third Coast is no longer operating and has no remaining assets. Consequently, AAR was pursuing the Debtor for recovery of damages. AAR’s allegations against the Debtor in the State Court Litigation included fraud, breach of fiduciary duty, negligent misrepresentation, and negligent accounting.
The Debtor’s chapter 13 case was dismissed on September 9, 2003 for failure to pay the filing fee (it appears this was a clerical error) and the Debtor’s case was reinstated on October 9, 2003. Debtor appeared at his § 341 on November 17,
In response to AAR’s Motion to Convert, the Debtor claimed in part that conversion of his case to chapter 7 was prohibited by § 1307(e) because the Debtor was a farmer; and that AAR’s allegations of improper transfers were without merit. On February 19, 2004, this Court began a trial on AAR’s Motion to Dismiss which was continued to February 23, 2004. At the conclusion of the February 23, 2004 hearing, the remainder of the trial was continued pending the outcome of the parties’ settlement discussions. An agreement was reached by the parties; this Court rejected the terms of the parties’ proposed agreement because it impermis-sibly interfered with the prerogatives of a to-bе-named chapter 7 trustee. After this Court rejected the parties’ proposed agreement and reset the continued trial on AAR’s Motion to Convert, the Debtor filed his Motion to Dismiss Case Pursuant to 11 U.S.C. § 1307(b) (the “Motion to Dismiss”) alleging that — notwithstanding the ongoing trial on AAR’s Motion to Convert, and the allegations of fraud and bad faith contained therein — he was entitled to dismiss his chapter 13 ease.
The findings of fact and conclusions of law which were made orally at the conclusion of the hearing on May 5, 2004 are supplemented by the following discussion. Discussion
A. 11 U.S.C. § 1307(b) — Absolute Right to Dismiss 1 ?
This Court continued the trial on AAR’s Motion to Convert on May 5, 2004. On May 5, 2004, the Court considered the Debtor’s arguments on whether he had the absolute right to dismiss his case. After reviewing the parties’ briefs and hearing counsels’ arguments, the Court concluded that a Debtor’s conversion rights under § 1307(b) are not absolute.
The Debtor argues that he hаs an absolute right to dismiss his case under 11 U.S.C § 1307(b). Section 1307(b) provides that “[o]n request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.” The next subsection, however, states that:
Except as provided in subsection (e) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause....
While several courts have adopted the Debtor’s view that a Chapter 13 debtor’s right to dismiss under § 1307(b) is absolute, other courts have held that § 1307(c) restricts a debtor’s right to voluntary dismissal.
See, e.g., In re Cobb,
Reading subsections (b) and (c) in pari materia leads one to the conclusion that Congress could not have intended to give a debtor an absolute right to obtain dismissal of a Chapter 13 case. Such a right would give the debtor unfettered power to prevent conversion under § 1307(c) by simply filing a motion to dismiss whenever conversion was requested. For all practical purposes, that would render subsection (c) a nullity, an intent that ought not to be attributed to Congress. Consequently, this Court holds that the conversion provision contained in § 1307(c) operates as a limitation on the debtor’s right to obtain voluntary dismissal under § 1307(b).
In re Gaudet,
The concern of these courts is that an absolute right to dismiss in face of allegatiоns of fraud and bad faith will encourage abuse of the bankruptcy systems by dishonest individuals who are misusing the system.
See, e.g., In re Molitor,
As such, this Court agrees with those courts that have concluded that the right to dismissal is not absolute when there is a pending motion to convert or there are allegations of fraud or bad faith.
B. Farmer Status
The Debtor also argues that his case can not be converted because he is a “farmer” for purposes of 11 U.S.C. § 1307(e). Section 1307(e) provides that “[t]he court may not convert a case under this chapter to a case under chapter 7, 11, or 12 of this title if the debtor is a farmer, unless the debtor requests such a conversion.” “Farmer” is defined as a:
[P]erson that received more than 80 percent of such person’s gross income during the taxable year of such person immediately preceding the taxable year of such person during which the cаse under this title concerning such person was commenced from a farming operation owned or operated by such person.
11 U.S.C. § 101(20).
An individual’s status as a farmer is an affirmative defense that may be waived.
In re McCloy,
The term “gross income” is not dеfined in the Bankruptcy Code.
In re Way,
Total Farm Non-Farm
Interest $ 1,645.00 0.00 $ 1,645.00
Rents $ 9,000.00 0.00 $ 9,000.00
Capital gain Gross farm income $38,000.00 $41,055.00 0.00 $41,055.00 $ $38,000.00 0
TOTAL $89,700.00 $41,055.00 $48,645.00
Percentage 100.00% 45.77% 54.23%
The Debtor has suggested that such a technical application of “gross income” may be unfair. Although the Court does not believe thаt it can or should vary the plain language of the statute
(See United States v. Ron Pair Enter., Inc.,
Total Farm Non-Farm
Interest $ 1,645.00 $ 0.00 $ 1,645.00
Rents $9,0000.00 $ 0.00 $ 9,000.00
Gross farm income $41,055.00 $41,055.00 0
TOTAL $51,700.00 $41,055.00 $10,645.00
100.00% 79.41% 20.59%
Accordingly, if the Debtor’s 2002 tax return is accepted at face value and the capital gains income is excluded, the Debt- or is not a farmer as that term is used in the Bankruptcy Code. The Court recognizes that 0.59% (in this case $305.00) is a small amount of money. However, Congress has adopted a bright line rule; even if this Court were willing to exclude the capital gains, it cannot vary the bright line created by Congress. The Debtor is not a farmer.
C. Lack of Good Faith
Since this Court found that the Debtor’s right to dismiss pursuant to § 1307(b) is not absolute — and further decided that the Debtor is not a farmer for purposes of § 1307(e) — the last issue before the Court is whether the Debtor’s case was filed in “bad faith” and therefore should be converted.
Under § 1307, upon the request of a party in interest, the court may convert a chapter 13 case to chapter 7 “for cause”. Section 1307 delineates a nonexclusive list of 8 circumstances which constitute cause. Lack of good faith constitutes “cause” for purposes of § 1307(c).
See, e.g., Toles v. Powers,
Employing the “totality of circumstances” test, and as announced at the May 5th hearing, this Court finds that the Debtor lacked good faith in filing his bankruptcy petition, and therefore, cause exists to convert his case to a case under chapter 7 of the Bankruptcy Code. The Court did not find the Debtor to be a credible witness. His testimony was largely inconsistent in nature and often contradicted both his earlier testimony as well as the testimony of his wife. The Debtor displayed little regard for the truth. Among other things, the Debtor provided evasive and contradictory testimony about the sale of real property in Matagorda County to his stepson and how and to whom the money from the sale was paid 4 ; conflicting testimony concerning his knowledge of and the ownership of certain bank accounts 5 , and the details surrounding the creation and ownership of LT Cattle Company. 6
The Debtor’s testimony about why he filed his Motion to Dismiss was also telling. The Debtor claimed that things were now “out of hand”, that he realized that the dispute with AAR would eventually need to be fought in state court, and most notably that
“he did not need the
bankruptcy” and that he could “afford to pаy his debts”. He further testified that he had filed the bankruptcy because he couldn’t afford to fight the State Court Litigation anymore, yet he now wanted to dismiss his case and go back to state court because he now realized that bankruptcy was not going to “solve” the State Court Litigation and there was going to be no “cheap” way to take care of the “problem”. He stated that he could afford to fight the State Court Litigаtion now because he could easily make more money if he desired. This and other testimony leads the Court to conclude that the Debtor’s bankruptcy was motivated solely by the two-party dispute with AAR, and was essentially an attempt to thwart AAR in the State Court Litigation and to engage in forum shopping in the hopes of discouraging AAR. It wasn’t until the Debtor realized that bankruptcy
This, however, is not the only indicia of the Debtor’s bad faith in filing his petition. The Debtor failed to disclose all of his assets on his schedules, including certain leases, “memberships”, farming equipment, livestock, as well as property that he himself judged to be his wife’s separate property. While the Debtor later acknowledged most of these omissions, he in large part excused his failure to disclose certain items because he either “forgot” about them or he did not deem them to be “assets”. Debtors, however, “have an absolute duty to report whatever interests they hold in property, even if they believe their assets are worthless or are unavailable to the bankruptcy estate.”
In re Yonikus,
The Court finally notes the strong circumstantial evidence presented that indicates numerous potentially preferential and fraudulent transfers that occurred pri- or the Debtor’s filing for bankruptcy rеlief, many of which were also not disclosed on the Debtor’s schedules.
7
This includes “informal arrangements” in which the Debtor transferred cattle and other property to friends and family, the alleged transfer of cattle to LT Cattle Company, as well as the unaccounted for fluctuation in the number of livestock under the Debtor’s control
8
. As the Court announced at the May 5th hearing, the evidence strongly indicates that pre-petition the Debtor went to any lengths to hide assets with the goal of treating his creditors, namely AAR, unfairly. Furthermore, the evidence also suggests the vast dissipation of the Debt- or’s assets. During the testimony, the Debtor claimed to have baled approximately 5,000 round bales of hay, and that he could get approximately $30 for each round bale. Put simply, the Debtor could not begin to explain the loss of the
Therefore, given the “totality of the circumstances”, this Court finds that there has been an abuse of the provisions, purposes, and spirit of chapter 13 by the Debtor and that cause exists to convert the Debtor’s case.
Aichler,
Conclusion
Based on the Court’s oral findings and the foregoing discussion, this Court concludes that cause exists, and that it is in the bеst interests of creditors and the estate, to convert the Debtor’s case to a case under chapter 7 of the Bankruptcy Code. A separate order converting the case has been entered.
Notes
. While not dispositive in its decision, the Court notes that AAR’s Motion to Convert was not simply pending, but that a trial had already commenced on the Motion and had been continued in order to facilitate the pаrties' settlement negotiations.
. The Court has excluded the Debtor’s spouse’s income from wages. Inclusion of such amounts (i).is not appropriate inasmuch as the spouse is not a Debtor; and (ii) in any event, would adversely affect the Debtor’s claim of farmer status.
. The Debtor has requested that the Court only consider one-half of the income from community sources. There is no logical basis for such a split of the community income. If the Court were to apply a non-technical definition, it would apply one that conforms with § 541 of the Code. See 11 U.S.C. § 541(a)(2) and § 541(a)(6).
. Debtor originally claimed that he could not recall if or how his stepson paid the $42,000 for the property. Later he claimed the payment was probably made to his wife and that she would have deposited it into her separate account. Not only does this suggest the commingling of joint community/sole management property and that much of the property that the Debtor deemed to be his wife's "separate” property was in fact not, but the Debt- or's wife testified that the money was paid to the Debtor himself. Until the Court expressed its incredulity, the Debtor even claimed that he could not recall if the $42,000 was paid in currency.
. The Debtor at one point claimed that he had no knowledge of his wife's bank acсounts— i.e. how many existed, where they were located, etc. However, when it served his benefit, the Debtor’s subsequent testimony distinguished "his” bank accounts from "hers” by memory of the account numbers alone.
.The Debtor first testified that he had transferred or "gifted” some cattle to LT Cattle Company for the benefit of his grandchildren, but his wife later testified that she set up the company, including the purchase of at least 8 to 14 cattle, with a small Christmas bonus of approximately $1,000. While the true nature of LT Cattle Company is still a mystery, it does seem apparent that the Debtor’s wife could not have established LT Cattle Company on her Christmas bonus alone. The Court also notes that the Debtor and his wife acknowledged that there was nothing in writing regarding LT Cattle Company and the ownership of the cattle encompassed by it.
. The evidence presented during the hearing indicates that prior to filing bankruptcy, the Debtor sold a large portion of his homestead and used the proceeds to pay off approximately 24 creditors which amounted to the payment of all of the Debtor’s creditors excluding AAR. While AAR argued this was an example of the Debtor's bad faith, this Court does not find that the Debtor's sale of exempt property and use of those exempt funds is an indication of bad faith. The Court notes, however, that this did result in AAR becoming the Debtor’s only "true” creditor, further supporting the two-party dispute finding made earlier by this Court.
. This includes the apparent inaccurate listing of the number of cattle that belong to the Debtor, and the Debtor’s claim that he does not know how many cattle were in his possession at the commencement of the case, nor how many have been sold since the commencement of the case.