In re Coleman, CIV.A. 1:03CV00002.

• Decision Date: 30 September 2003
• Docket Number: No. CIV.A. 1:03CV00003.,No. CIV.A. 1:03CV00002.,CIV.A. 1:03CV00002.,CIV.A. 1:03CV00003.
• Citation: 299 B.R. 780
• Parties: In re Molly Jane COLEMAN, Debtor. Molly Jane Coleman, Appellant and Cross Appellee, v. Community Trust Bank, N.A., Appellee and Cross Appellant.
• Court: U.S. District Court — Western District of Virginia

299 B.R. 780

In re Molly Jane COLEMAN, Debtor.

Molly Jane Coleman, Appellant and Cross Appellee, v. Community Trust Bank, N.A., Appellee and Cross Appellant.

No. CIV.A. 1:03CV00002.

No. CIV.A. 1:03CV00003.

United States District Court, W.D. Virginia, Abingdon Division.

September 30, 2003.

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John M. Lamie, Browning, Lamie and Gifford, Abingdon, VA, for debtor.

Mark L. Esposito, Penn, Stuart & Eskridge, Bristol, VA, Charles H. Keen, United States Department of Justice, Washington, DC, for appellee.

MEMORANDUM OPINION

GLEN M. WILLIAMS, Senior District Judge.

I. Introduction

This case is before the court on appeal and cross appeal from the decision of the United States Bankruptcy Court for the Western District of Virginia (hereinafter, "Bankruptcy Court"). The Appellant and Cross Appellee, Molly Jane Coleman, contends that the Bankruptcy Court erred in finding that two deeds of trust could be avoided but only to the extent necessary to pay the creditors and otherwise to remain in effect. Mrs. Coleman further contends that it was error for the Bankruptcy Court to rescind its order dated March 21, 2002 and order her to file a modified Plan. Cross Appellant, Community Trust Bank, N.A. (hereinafter, "Bank"), contends that the Bankruptcy Court erred in denying the Bank's motion to dismiss the Chapter 11 case for lack of good faith and improper purpose. The Bank further maintains that it was error for the Bankruptcy Court to fail to address or sustain the Bank's contention that the debtor was estopped to assert or recover upon the causes of action set forth in the Adversary Proceeding. The Bank states further that the determination by the Bankruptcy Court that the Debtor met her burden of proof under Virginia Code § 55-80 and Tennessee Code § 66-3-101 is clearly erroneous. The Bank also contends that it was error for the Bankruptcy Court to set aside the deeds of trust with respect to the interest of non-debtor, non-plaintiff, Roger Coleman. This court exercises appellate jurisdiction in this matter pursuant to 28 U.S.C. § 158(a), and AFFIRMS the decision of the Bankruptcy Court.

II. Standard of Review and Facts of the Case

In reviewing the decision of the Bankruptcy Court, this court uses two standards of review. The court reviews all factual findings of the Bankruptcy Court under the "clear error" standard. De novo review is exercised as to matters of law. In re Bullion Hollow Enterprises, Inc., 185 B.R. 726, 728 (W.D.Va.1995) (citing In re Midway Partners, 995 F.2d 490, 493 (4th Cir.1993)).

The facts pertaining to this case are generally not in dispute. Mrs. Coleman is married to Roger Coleman (hereinafter "Coleman"), who also filed for Chapter 11 prior to Mrs. Coleman. Coleman was involved in the coal industry for some time and was somewhat successful. He was partners with Darrell Cook (hereinafter "Cook"), who also filed his own Chapter 11 case with the Bankruptcy Court. Coleman and Cook elected to conduct business under a "Subchapter S" election, which meant that any profits were taxed against the individuals personally as owners of the business. Coleman and Cook owned several businesses together, and one of them generated a profit of more than $1 million in 1993, which was taxed personally to Coleman and Cook. However, the profits generated in the various companies did not personally benefit Coleman and Cook because the profits for each business were largely used to fund operations in one or more of their other companies. As a result, the Colemans were unable to pay their tax liability assessed in 1993.

Coleman and Cook had obtained financing for their businesses from Pikeville National Bank, now known as Community Trust Bank. The Bank took a security interest in the operating assets of the coal companies as collateral for the loans that were given to Coleman and Cook. At some point, Coleman and Cook sought the Bank's approval to extend the term of the financing and to move some of the secured assets to another location.

In or about 1995, Coleman and his wife, Mrs. Coleman, were concerned that the Internal Revenue Service (hereinafter "IRS") would collect on the 1993 tax liability by levying on their valuable residence and farm located in Buchanan County, Virginia, and also a vacation residence located in Sullivan County, Tennessee, on South Holston Lake. As a result, the Colemans sought legal advice, and upon advice of counsel, granted on January 18, 1995, two deeds of trust upon the properties in question to secure to the Bank the repayment of Coleman's liability upon his outstanding business loans. Mrs. Coleman was not a party to these loans and no new loan was advanced when the deeds of trust were granted to the Bank. Mrs. Coleman contends that her reason for signing these deeds of trust was to prevent the IRS from levying upon the two properties.

The Bank continued its business relationship with Coleman and Cook and eventually after much hardship the coal businesses ultimately failed, a downfall that led Coleman and Cook to file personal petitions in the Bankruptcy Court. Coleman, as debtor-in-possession, filed an Adversary Proceeding which sought to avoid the 1995 deeds of trust which he and his wife had granted to the Bank. After a robust defense by the Bank to the Adversary Proceeding, Coleman attempted to join Mrs. Coleman as a party. The Bank contested this motion and it was ultimately denied by the Bankruptcy Court on August 2, 2002. Upon Coleman's motion, his Chapter 11 proceeding was converted into a Chapter 7 proceeding on October 6, 2000. He obtained a discharge on January 9, 2001, and his case was closed on February 14, 2001.

As a result, the Bank had made arrangements to enforce its debts against the properties owned jointly by Coleman and Mrs. Coleman. In order to accomplish this task, the Bank hired an auction company to advertise and sell the properties; the sales were to take place on March 23, 2001. However, the day prior to the sale date, Mrs. Coleman filed her Chapter 11 petition in the Bankruptcy Court to prevent the taking of her home and to attempt to avoid the 1995 deeds of trust held by the Bank. Within one week, Mrs. Coleman filed an Adversary Proceeding challenging the deeds of trust on the ground that the deeds were given to hinder the collection process of the IRS and were voidable under the laws of Virginia and Tennessee as fraudulent conveyances. Generally, this was not a claim available to Mrs. Coleman because she was a party to the transaction and any challenge had to be mounted by the creditor or creditors adversely affected by the conveyance of the deeds of trust. However, being a debtor-in-possession, Mrs. Coleman enjoys the powers of a bankruptcy trustee to assert rights possessed by creditors under state law to challenge improper transfers by virtue of 11 U.S.C. § 544(b).

Mrs. Coleman listed four creditors in her bankruptcy petition: (1) the Bank as secured creditor in the amount of $900,000, (2) the Internal Revenue Service as an unsecured priority creditor in the amount of $260,000, (3) the Bank of America as an unsecured creditor in the amount of $7,877.10, and (4) Galen Med, Inc., doing business as Clinch Valley Medical Center, as a joint unsecured creditor in the amount of $32,000. Her petition further indicated that the value of her Virginia and Tennessee properties owned jointly with her husband was worth an aggregate amount of $745,000. The record indicates that the IRS has filed a proof of claim of 1993 income tax penalties and interest in the total sum of $571,569.63, of which $15,370 has been characterized as a secured claim and $556,199.63 has been designated as an unsecured general claim. Galen Med., Inc. has filed five proofs of claim for medical services in the total sum of $22,559.34.

Mrs. Coleman also engaged tax counsel in order to present a petition on behalf of her to seek innocent spouse equitable relief pursuant to 26 U.S.C. § 6015(f) from her tax liabilities to the IRS. Relief for all years sought except 1993 was obtained. This claim was pursued through administrative appeals and was ultimately denied.

If Mrs. Coleman was successful in the Adversary Proceeding, she had proposed to sell in an orderly fashion as much of her property as necessary to pay her creditors in full, and that if her administrative appeal of the initial denial of innocent spouse relief was successful, she would sell the Tennessee property if necessary to pay her general unsecured creditors in full and keep the Virginia property free and clear of the 1995 deeds of trust.

At the confirmation hearing on February 12, 2002, only two ballots representing votes cast on the Debtor's proposed Plan were filed, one by Galen Med., Inc., which voted in favor of the Plan, and the other by the Bank, which voted against the Plan. The IRS did not choose to cast a ballot.

In an Order entered March 21, 2002, the Bankruptcy Court confirmed the plan of reorganization, released Mrs. Coleman from all dischargeable debts, and entered an injunction preventing all creditors affected by the Order from pursuing any action, suit or process to collect, recover, or offset such debts as personal liabilities of the debtor. The Bank filed a motion to reconsider the Order confirming the Plan and the Bankruptcy Court took the motion under advisement pending the outcome of the Adversary Proceeding.

The Adversary Proceeding was held on May 10, 2002, and the Bankruptcy Court issued a Memorandum Opinion on September 17, 2002, that granted the avoidance of the liens requested by Mrs. Coleman, but only to the extent necessary to satisfy the creditors of her estate. In addition, an Order was entered the same day granting the Bank's motion to reconsider the confirmation order of March 21, 2002, and ordered Mrs. Coleman to file an amended Plan of liquidation. Mrs. Coleman moved for reconsideration of these two issues, ...