In re Condon, 06-8021.

• Citation: 358 B.R. 317
• Decision Date: 12 January 2007
• Docket Number: No. 06-8021.,06-8021.
• Parties: In re Thomas C. CONDON, Debtor. Thomas C. Condon, Appellant, v. John Brady and Mary Smith, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit

358 B.R. 317

In re Thomas C. CONDON, Debtor.

Thomas C. Condon, Appellant, v. John Brady and Mary Smith, Appellees.

No. 06-8021.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: November 8, 2006.

Decided and Filed: January 12, 2007.

COPYRIGHT MATERIAL OMITTED

Harry B. Plotnick, Cincinnati, OH, for Appellant.

Eric W. Goering, Cincinnati, OH, for Appellees.

Before GREGG, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.

OPINION

GREGG, Bankruptcy Judge.

Thomas C. Condon (the "Debtor") appeals the bankruptcy court's denial of his motion to convert his chapter 7 case to chapter 13. For the reasons that follow, the bankruptcy court's decision is VACATED and REMANDED.

I. ISSUE ON APPEAL

What factors should a bankruptcy court examine to determine whether a debtor's motion to convert from chapter 7 to chapter 13 should be denied because of lack of good faith?

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Southern District of Ohio has authorized appeals to the Panel, and a final order of the bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). An order denying a debtor's request to convert from chapter 7 to chapter 13 is a final order. Copper v. Copper (In re Copper), 314 B.R. 628, 630 (6th Cir. BAP 2004), aff'd, 426 F.3d 810 (6th Cir.2005) (citations omitted).

The bankruptcy court's determination of whether a debtor acted in good faith is a finding of fact, which is reviewed on appeal for clear error. Id. (citing Alt v. United States (In re Alt), 305 F.3d 413, 419 (6th Cir.2002); Hardin v. Caldwell (In re Caldwell), 895 F.2d 1123, 1127 (6th Cir. 1990)); see Adell v. John Richards Homes Bldg. Co. (In re John Richards Homes Bldg. Co.), 439 F.3d 248, 254 (6th Cir. 2006). Findings of fact "will only be clearly erroneous when, although there may be some evidence to support the finding, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re Alt, 305 F.3d at 422 (quoting United States v. Latouf, 132 F.3d 320, 331 (6th Cir.1997)) (additional citation and internal quotation marks omitted).

The bankruptcy court's "conclusions with regard to the legal standard applicable to good faith determinations are questions of law reviewed under the de novo standard." In re Love, 957 F.2d 1350, 1354 (7th Cir.1992) (citing United States v. Singer Mfg. Co., 374 U.S. 174, 193, 83 S.Ct. 1773, 1783, 10 L.Ed.2d 823 (1963)); see Sorah v. Sorah (In re Sorah), 163 F.3d 397, 400 (6th Cir.1998) (citing Long v. Calhoun (In re Calhoun), 715 F.2d 1103, 1111 (6th Cir.1983) (application of legal standards and allocation of the burden of proof are conclusions of law)); Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir. 1996) ("Although the factual underpinnings of the bankruptcy court's decision must be upheld unless clearly erroneous, the application of the legal standard to the facts is a question of law that we review de novo.") (citation omitted). De novo review requires the appellate court to interpret "`the law independently of the trial court's determination.'" Thickstun Bros. Equip. Co. v. Encompass Servs. Corp. (In re Thickstun Bros. Equip. Co.), 344 B.R. 515, 517 (6th Cir. BAP 2006) (quoting Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001)).

III. FACTS

The Debtor is a professional photographer who was convicted of multiple counts of abuse of a corpse in the Court of Common Pleas for Hamilton County, Ohio. The conviction resulted from photographs of dead bodies taken by the Debtor at the Hamilton County Coroner's Office. To date, the Debtor has served at least twelve months in prison for these offenses. In addition to the criminal charges, the Debtor also faces civil liability for his actions at the morgue. John Brady and Mary Smith (the "Appellees") represent a certified class of persons who sued the Debtor for tortious conduct relating to the photographs in the United States District Court for the Southern District of Ohio (the "class action lawsuit"). The certified class includes relatives of the deceased individuals whose remains were in the morgue when the Debtor's photographs were taken. The damages sought by the Appellees in the class action lawsuit are in the "multi-million dollar . . . range." (Tr. at 4.)

The Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on October 15, 2005. The Appellees were granted relief from stay to pursue the class action lawsuit by order entered October 27, 2005.

Shortly thereafter, on December 1, 2005, the Debtor filed a motion to convert his case to chapter 13. The Appellees filed an objection to the requested conversion, and the court held an evidentiary hearing on January 24, 2006. The Debtor appeared at the hearing and gave extensive testimony regarding the circumstances that led to his bankruptcy filing, his current financial situation, and the reasons for his motion to convert to chapter 13. The Debtor explained that after his release from prison, he suffered from severe depression and had a difficult time obtaining employment. Due to the notoriety generated by the criminal case, the Debtor was unable to work in the commercial photography field. He accepted employment for significantly reduced wages in a metal fabrication shop. With the class action suit looming and little possibility of increasing his income in the future, the Debtor filed bankruptcy in a last ditch effort to move on with his financial life. The Debtor explained that he had relatively few creditors other than the class action tort claimants.¹ He also acknowledged that his primary reason for filing bankruptcy was to discharge the potential tort liability.

The Debtor stated that he filed his case under chapter 7 at the advice of his bankruptcy attorney. After the Debtor's initial meeting of creditors, the chapter 7 trustee allegedly asked the Debtor's attorney why he had advised the Debtor to file under chapter 7 when the potential class action debt was likely dischargeable in chapter 13. The Debtor's attorney apparently realized his error at that point,² and advised the Debtor to file a motion to convert. The motion was filed after the class action claimants obtained relief from the automatic stay.

Shortly before the hearing on the motion to convert, the Debtor filed amended schedules I and J. Amended schedule I disclosed the Debtor's monthly income as $2,166.66 but did not include any income from the Debtor's spouse. At the hearing, the Debtor testified that his wife has an income of approximately $1,000 per month. The Debtor's attorney claimed responsibility for this omission, representing to the court that the wife's income was properly excluded from the schedules filed with the original chapter 7 petition, and that her income was never added once conversion was sought.

Amended schedule J disclosed expenses totaling $2,065. The Debtor gave conflicting testimony about these expenses: at one point he stated that the scheduled amounts represented his total household expenses, but he later clarified that the figures reflected only his portion of the expenses. He also testified that the $200 monthly auto payment listed on schedule J went to his mother to repay her for expenses she incurred repairing a jointly owned vehicle. The Debtor further explained that the monthly $400 listed for "regular expenses from operation of business" related to his rental of art studio space. According to the Debtor, his sister " leased the space and permitted him to use it to "put [his] artistic life back together." (J.A. at 76.) Although he was not a party to the lease, the Debtor reimbursed his sister for the rental costs. The Debtor also stated that the studio space contained approximately ten sculptures and six or seven paintings that had not been disclosed in his bankruptcy petition. He explained that he had done that work primarily for his emotional wellbeing, was "not actively engaged in trying to sell the work," and had not disclosed those items because he honestly did not believe they had any value. (J.A. at 76-77.) Alternatively, he stated that he had an "unspoken" agreement with his sister that the proceeds from any work done in that studio would belong to her.

The Debtor also filed a proposed chapter 13 plan just prior to the hearing on the motion to convert. The Debtor's proposed plan extended thirty-six months and provided a three percent distribution to unsecured creditors.

At the conclusion of the hearing, the bankruptcy court took the matter under advisement. On April 3, 2006, the court issued its memorandum opinion finding that the Debtor's motion to convert was filed in bad faith. The court's opinion focused on three main factors which suggested the Debtor lacked good faith in seeking chapter 13 relief. First, the court noted that the Debtor's motion to convert was motivated by his desire to "avail himself of the super-discharge under chapter 13 to better discharge any potential judgment against him in the class action." (J.A. at 30.) While this alone did not establish bad faith, the court determined that it was a factor to be considered in assessing the Debtor's good faith under the totality of circumstances.

Next, the court noted that the Debtor's chapter 13 plan lasted the statutory minimum of three years and proposed to repay only three percent of his unsecured debt. Although the Bankruptcy Code does not require the Debtor to do more than this, the court found that the percentage and...