In Re Weber
MEMORANDUM OF DECISION
Before the Court for determination is confirmation of the Second Amended Plan of Reorganization (the “Plan”) filed by Eric T. Weber (the “Debtor”). The United States Trustee (the “UST”) has filed an “Objection to the Debtor’s Plan” (the “Objection”). The UST argues that the Plan was not proposed in good faith, a finding that is required for confirmation under 11 U.S.C. § 1129(a)(3). For the same reason, the UST has also filed a “Motion to Convert the Case to Chapter 7” pursuant to 11 U.S.C. § 1112(b) (the “Conversion Motion”). The UST contends that the Debtor’s lack of good faith in proposing the Plan constitutes an unreasonable delay which is prejudicial to creditors; precludes the Debtor from ever being able to effectuate a plan; and constitutes “cause” for conversion.
I. Facts
The Court makes the following findings under Fed.R.Bankr.P. 7052 as made applicable to contested matters by Fed.R.Bankr. 9014. Actually, most of the material facts are uncontested; however, what the facts mean in the ease is the source of the dispute.
The Debtor filed a petition in this Court under Chapter 11 of the Bankruptcy Code on June 1, 1994. The Debtor is a physician employed by the North Shore Medical Center in Salem, Massachusetts as Director of the Radiation Oncology Department. That employment constitutes the sole source of the Debtor’s income. In both 1994 and 1995, his annual salary was $242,000. The Debtor earned $252,000 in 1996. At the time the ease commenced, the Debtor’s reported material assets consisted of his interests in several real estate partnerships, 1 and nearly $700,000 in pension and retirement funds argued to be exchidible.-from the estate pursuant to 11 U.S.C. .§ 541(c)(2).
The Debtor’s financial difficulties stem primarily from several failed real estate ventures with respect to which the Debtor was a general, but passive, partner. However, the Debtor has not allowed these financial difficulties to adversely affect his lifestyle. The Debtor resides in a home in Weston, Massachusetts (the ‘Weston Property”), one of the wealthier of Boston’s suburbs. The home is located along the golf course of the Weston Country Club. The Debtor conveyed his undivided one-half interest in the Weston Property to his wife in 1992 for no consideration. The Debtor claims that the Weston Property now has a fair market value of $528,000. The Debtor also has the benefit of a vacation residence on Cape Cod in East Dennis, Massachusetts (the “East Dennis Property”). The Debtor conveyed his undivided one-half interest in the East Dennis Property to his wife in 1990 for no consideration. The Debt- or claims that the East Dennis Property now has a value of $293,000. 2 The Debtor continues to live in and pay all expenses associated with the Weston and East Dennis properties, totaling approximately $5,500 per month.
The foregoing were not all of the postpetition trips taken by the Debtor. The Debtor also attended five medical conventions, each for one week, in San Francisco (October of 1994), Aspen (January of 1995), Puerto Rico (February of 1995 & February of 1996), and Italy (Spring of 1996). 3 The Debtor’s spouse accompanied him on each trip at the Debtor’s expense. Although the Debtor was reimbursed by his employer for up to $6,000 annually for continuing medical education, the Debtor spent far in excess of his reimbursement allowance. For instance, 1995 credit card statements introduced into evidence revealed travel related purchases in Aspen and Puerto Rico combined of $8,300 (or $2,300 in excess of the Debtor’s total reimbursement allowance for 1995). Moreover, the charges introduced were only those incurred to American Express, Visa, and MasterCard; they do not include expenses which the Debtor may have paid in cash or charged to other credit cards.
It is not only with respect to travel that the Debtor has lived well since the filing of the petition. According to the Debtor’s monthly cash flow reports filed with the UST, in the 22 months from June of 1994 through September of 1996, the Debtor paid more than $17,000 to the Weston Golf Club where he remains a member, made approximately $90,000 in payments to credit card issuers, 4 gave approximately $3,200 to various charities, withdrew more than $16,000 from automatic teller machines, and wrote checks payable to his spouse in excess of $31,000 (exclusive of the mortgage payments he made on the houses that she owned after his transfers to her).
Confirmation of the Plan is not intended to alter the Debtor’s current lifestyle. The Disclosure Statement sets forth the Debtor’s projected postconfirmation monthly expenses as follows:
Mortgage (Weston Property) $2,612
Mortgage (East Dennis Property) $1,513
Property taxes (East Dennis Property) $ 262
Utilities $ 425
Home maintenance/repairs $ 459
Food $ 612
Clothing $ 450
Laundry/dry cleaning/personal care products $ 200
Unreimbursed medical/dental $ 130
Gas, oil, repairs $ 206
Auto payments $ 656
Family expenses, newspapers, magazines, recreation, entertainment $1,012
Professional Associations meetings/Continued Education $ 782
Other unreimbursed travel $ 800
Life Insurance $ 82
Homeowner’s insurance $ 259
Auto insurance $ 322
Professional/legal $ 300
Miscellaneous/other $ 200
(Ex. B to the Disclosure Statement, Pl.’s Ex. 1). The Debtor has no dependents other than his spouse.
The Plan provides for a single class of creditors consisting of all general unsecured claims. These claims, resulting primarily from the Debtor’s investments in the real estate partnerships, total approximately $2,500,000. The Plan proposes to pay the unsecured creditors $125,000 (approximately a 5% dividend) over five years. Plan payments will be made from the Debtor’s future
All creditors voted to accept the Plan. After a nonevidentiary hearing on the UST’s Objection, the Court scheduled an evidentiary hearing on confirmation. Subsequently, the UST’s “Conversion Motion” was also scheduled for an evidentiary hearing on the same day. Upon conclusion of the evidentiary hearing, the Court took the matters under advisement.
II. Discussion
Since the Supreme Court held in
Toibb v. Radloff,
A. The Good Faith Requirement of § 1129(a)(3)
Section § 1129(a)(3) requires that a plan have been “proposed in good faith and not by any means forbidden by law.” Even where all creditors vote to accept a plan, the good faith requirement contained in § 1129(a)(3) must still be satisfied for the plan to be confirmed.
Crestar Bank v. Walker (In re Walker),
Good faith is not defined in the Bankruptcy Code. It is often stated that “the term is generally interpreted to mean that there exists a reasonable likelihood that the plan will achieve a result consistent with the objective and purposes of the Bankruptcy Code.”
E.g., McCormick v. Banc One Leasing Corp. (In re McCormick),
In applying this standard, courts have considered a wide variety of factors, such as whether the plan was proposed exclusively for tax considerations,
In re Maxim Indus., Inc.,
The Debtor, however, argues that because postpetition wages are not property of the estate, he does not owe a fiduciary duty to the estate with respect to the disposition of those wages. It is true that 11 U.S.C. § 541(a)(6) specifically excludes from the bankruptcy estate earnings from services performed by an individual debtor after the commencement of the case
6
But see Harp,
For example, the
Harman
court found, in the context of analyzing the application of the new value exception to the absolute priority rule in individual cases, that “a debtor’s failure to make anything close to the best offer of payment to creditors violates § 1129(a)(3).”
In order to demonstrate that a debtor has made its best effort to repay creditors, it is certainly appropriate to examine both the use of the debtor’s resources during the administration of a Chapter 11 ease
and
the debtor’s projected use of those
In the instant ease, the Debtor maintains two homes and travels extensively. Even though he has no dependents other than his wife, his monthly budget is extravagant including $1,012 for newspapers, recreation and entertainment, $800 for travel not reimbursed by his employer, and $782 for professional associations meetings/eontinued education. 8 Without deciding what expenses must be eliminated or reduced, the Court notes that the Debtor’s needs could be well satisfied by eliminating or, at the very least, reducing vacations, travel expenses in excess of his reimbursement allowance, or the golf club membership. Additional savings could be achieved by reducing the Debtor’s excessive expenses for recreation and entertainment. Likewise, by selling the vacation home in West Dennis, the Debtor could save yearly expenses of at least $21,300. Such belt-tightening could more than double the Debtor’s proposed payments to creditors.
In contrast, the Debtor argues that his use of his postpetition income was and is in good faith. The following exchange at trial between counsel to the UST and the Debtor is indicative of a significant difference in perspective:
MS. DOWNING (Counsel to the UST): Do you think it’s fair to creditors that you take all these trips when you have so much debt that’s owed?
DEBTOR: I hadn’t thought it was unfair. MS. DOWNING: Dr. Weber, have you ever thought about the concept of tightening your belt in order to pay your creditors?
DEBTOR: I think there are things we have not done, hard as it may seem to you, that we might have done if I weren’t in this situation.
The Debtor’s preceding answer was fully responsive to the UST’s inquiry. It reflected the Debtor’s complete insensitivity to his circumstances.
In his Post-Trial Memorandum in Support of Confirmation of the Plan, the Debtor further explains “[i]f the Court considers the Debtor’s position in life, the daily stress of his position dealing only with cancer patients and his contributions to his community, the Debtor’s postpetition activities ... take on a new meaning.” (Debtor’s Posh-Trial Mem. at 8.) The Debtor then rhetorically asks with unmitigated temerity:
Is it grandiose or flamboyant living to take part in a cultural exchange to China as the guest of one’s spouse, who had earned this honor? Is it improper to spend Christmas in Bermuda with [the Debtor’s] family, living in a housekeeping cottage, the family cooking their own meals with food brought predominantly from home when this is done in lieu of the family exchanging presents over a period of years? Is it totally inappropriate to celebrate a close friend’s65th birthday in Florida, to attend the wedding of a close friend’s son in Vermont or to visit old Boston friends who moved to Arizona?
(Debtor’s Post-Trial Mem. at 8.) The Court’s answer to these questions is a resounding “yes.” A debtor cannot file a Chapter 11 petition and claim an entitlement to live in the style to which he or she has become accustomed.
The Debtor further urges that “[t]he debt- or’s lifestyle should not reasonably be construed as offending the integrity of the system.” (Debtor’s Post Trial Mem. at 8.) “The record is clear that post-petition trips were not extravagant.” (Debtor’s Post Trial Mem. at 11.) “Nor are there suggestions of a lifestyle that would be shocking to the court or worse, conduct which would send the wrong message to the public.” (Debtor’s Post Trial Mem. at 11.) The Court finds these statements preposterous. The record could not be more clear that the trips were extravagant in light of the Debtor’s bankruptcy, that the Debtor’s lifestyle was unreasonable, and that the Debtor’s conduct both offends the integrity of the system and sends a wrong message to the public. The message that this Debtor’s Plan and conduct send is that an individual may file a Chapter 11 petition and continue to live in luxury while paying a relative pittance to creditors. The purpose of the Bankruptcy Code is to provide the debtor with a fresh start, not to preserve a debtor’s extravagant lifestyle.
See In re Belco Vending, Inc.,
A plan in which the Debtor retains 100 percent of the expenditure necessary to support a lavish lifestyle, while proposing to pay a 5 percent dividend to creditors is not proposed in good faith.
See Harman,
B. Appropriate Remedy When a Plan Fails to Meet the Good Faith Requirement
Now that the Court has held that the Debtor’s Plan cannot be confirmed, the remaining issue is how the case should proceed. Before the Court is the UST’s Conversion Motion. However, there are two other alternatives: the Court could allow the Debtor to amend the Plan, or the Court could dismiss the case sua sponte 10 as a bad faith filing.
In determining the appropriate remedy, the Court must ascertain whether the Debt- or’s conduct during the pendency of the ease constitutes an unreasonable delay which is prejudicial to creditors; precludes the Debt- or from ever being able to effectuate a plan; or rises to a level of bad faith which prohibits the Debtor from amending the Plan, and thus warrants conversion or dismissal of the case.
Lack of good faith constitutes cause for dismissal or conversion pursuant to § 1112(b).
E.g., Carotin Corp. v. Miller,
A debtor who comes to a court of equity seeking equity must be prepared to do equity. In
Tejano,
the court concluded that a debtor’s plan provided evidence of the debtor’s intent in the filing of the Chapter 11 case.
The Debtor filed the instant case in 1994. During the interim, he has failed to, in good faith, prosecute his reorganization effort. Nevertheless, it seems to be in the best interests of creditors to allow the Debtor to amend the Plan. Conversion may result in no distribution to creditors since the Debtor claims to have no prepetition assets constituting property of the estate. In addition, although dismissal will allow the creditors to continue to seek payment, the Debtor may be tempted to file another bankruptcy case. It makes more sense to give the Debtor an opportunity to overcome his self-inflicted postpetition problems, if possible. This Court is not yet prepared to say that the Debtor’s conduct rises to such a level of bad faith that his reorganization effort is irretrievable.
Accordingly, the Court will allow the Debt- or an additional 30 days to file an amended plan and the Conversion Motion will be denied without prejudice. However, the Court wishes to be very clear that its tolerance for the Debtor’s conduct is nearly exhausted. This will be the Debtor’s final opportunity to propose a plan in good faith. If a confirmable plan is not filed in accordance with the Order issued in conformity with this Memorandum, the Court will order the Debtor to show cause why the case should not be converted or dismissed pursuant to § 1112(b).
Notes
. The Debtor claimed that these interests bore no equity for and represented a potential burden to the estate. Consequently, on April 26, 1995, the Court allowed the Debtor’s motion to transfer his interest therein to his non-debtor partners.
. Although the Debtor does not concede that the transfers of the Weston and the East Dennis properties constituted fraudulent transfers, recoverable by the estate pursuant to 11 U.S.C. § 544, the Debtor contends that the proposed dividend to creditors exceeds the combined equity of the properties. The UST did not seriously contest that assertion.
. Although the medical convention in Italy was set for only one week, the Debtor spent an additional week vacationing in Italy.
. Granted, the Court may be guilty of some double-counting as the credit card payments include the travel expenses set forth above and possibly some payments to the Weston Golf Club.
. Similarly, courts have also examined a debtor’s ability to pay in the context of dismissal or conversion for lack of good faith.
E.g., In re Tejano,
. Section 541(a)(6) is problematic when an individual debtor is a sole proprietor. Courts have reached different conclusions as to the extent to which an individual Chapter 11 debtor's earnings from a sole proprietorship are excluded from the estate. Some courts divide the earnings based on how the income was generated. Thus, earnings generated from the debtor’s services are not included in the estate, while earnings attributable to invested capital, accounts receivable, and the like are property of the estate.
See, e.g., In re Prince,
In the instant case, the Court need not opine on this split of opinion as the Debtor does not have an ownership interest in his employer.
.In practical reality, individual debtors will generally need to utilize some portion of the very postpetition earnings which are excluded from the estate in order to fund a confirmable plan of reorganization.
See In re Keenan,
. It is unclear how this figure is related to the Debtor’s $6,000 annual reimbursement from his employer for these expenses. Even if the $6,000 reimbursement is subtracted from the budgeted amount, the Debtor still anticipates spending an additional $3,384 per year for professional associations meetings/eontinued education. This in itself is excessive, particularly in light of the extra $9,600 the Debtor budgets annually for other unreimbursed travel.
. The UST also argues that the Court should find that the Debtor’s intention, stated at trial, to pay the monthly mortgage payments to Wellesley Cooperative Bank and Cape Cod Cooperative Bank in full is indicative of the Debtor's lack of good faith because the Debtor proposes to treat those creditors (unsecured to him) differently from other unsecured creditors under the Plan. The record before the Court is insufficient to justify such a finding. The Debtor did not obligate himself to make such payments in the Plan. Therefore, those payments could be characterized as voluntary. See 11 U.S.C. § 524(f). Alternatively, such payments could be characterized as ongoing postpetition support obligations to which the Debtor’s wife might be entitled. In order to characterize the payments themselves as improper, more would need to be shown.
. Sua sponte dismissals have been sanctioned by a variety of courts.
E.g., In re Finney,