In re Fulmer

• Decision Date: 07 July 2015
• Docket Number: Case No. 14–33373–WRS
• Citation: 535 B.R. 854
• Parties: In re Sharon T. Fulmer, Debtor
• Court: U.S. Bankruptcy Court — Middle District of Alabama

535 B.R. 854

In re Sharon T. Fulmer, Debtor

Case No. 14–33373–WRS

United States Bankruptcy Court, M.D. Alabama.

Signed July 7, 2015

Filed July 08, 2015

Mary Conner Pool, Bond, Botes, Shinn & Donaldson, P.C., Montgomery, AL, for Debtor.

MEMORANDUM DECISION

William R. Sawyer, United States Bankruptcy Judge

This bankruptcy case came before the Court for an evidentiary hearing on May 27, 2015, on Oliver Fulmer's objection (Doc. 26) to Sharon Fulmer's motion to convert her Chapter 7 bankruptcy case to a case under Chapter 13. (Doc. 21). For the reasons set forth below, Oliver Fulmer's objection is OVERRULED and Sharon Fulmer's motion to convert is GRANTED.

I. BACKGROUND PROCEEDINGS

The Court will divide its discussion into four parts. In this Part, the Court will discuss the divorce agreement and bankruptcy proceedings that led to this dispute. In Part II, the Court will discuss the applicable law and the burden of proof. In Part III, the Court will analyze Oliver Fulmer's written objection and the evidence presented at the May 27 hearing in light of the applicable law. In Part IV, the Court will announce its legal conclusion and order.

A. The Divorce Proceedings

The Fulmers were divorced on August 13, 2012.¹ The Divorce Decree incorporated a Marital Settlement Agreement. (Oliver Exhibit 1). The Agreement provided for the division of the Fulmers' property; however, it curiously did not dispose of one of their most valuable (and troublesome) assets, a 2002 Fourwinds Fun Mover RV that is encumbered by an indebtedness to USAA, on which both of them are liable.

The parties entered into a Modification Agreement on August 26, 2014. (Oliver Exhibit 4). In general terms, the Modification Agreement provides that the parties are to split the costs of maintaining the RV and paying the indebtedness until the RV can be sold. Paragraph 5 of the Modification Agreement provides, in part, that “[t]he parties shall continue to cooperate towards the mutual goal of selling the RV in order to pay off the loan. The selling price of the RV shall be the amount necessary to pay off the loan on the RV.”

This provision demonstrates the naivete of the parties and shows why there has been so much unnecessary discord. The amount of the debt owed to USAA has nothing to do with the sales price of the RV. To state what should be obvious to all, and which seems to have escaped not only the parties but their lawyers as well, the fact that the parties have not been able to sell the RV, for the amount owed to USAA, for 3 years or more means that it is not worth as much as the debt owed against it. That the parties have failed to grasp this simple but important fact is the cause of all the discord here.

B. The Bankruptcy Proceedings

Sharon filed a petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code on December 16, 2014. (Doc. 1). On March 4, 2015, Oliver filed a complaint, seeking a determination that Sharon's obligation under the Modification Agreement to hold him harmless for her half of the RV debt should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(15).² (Adv.Pro.15–3015, Doc. 1). Two days later, on March 6, 2015, Sharon moved to convert her Chapter 7 proceeding to a case under Chapter 13. (Doc. 21). Given the timing of Sharon's motion, the Court infers that her purpose in moving to convert her case is to discharge her indebtedness to her former husband.³ Oliver filed an objection contending that Sharon's motion to convert is filed in bad faith. (Docs.26, 28).

II. LAW

A. Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a), and the District Court's General Order of Reference dated April 25, 1985. Venue is proper under 28 U.S.C. § 1408(1). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). This is a final order.

B. Conversion

1. Section 706(a) and Marrama

Section 706(a) of the Bankruptcy Code provides that “[t]he debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.” The Supreme Court held, in Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), that a Bankruptcy Court may deny a debtor's motion to convert if it finds that the debtor has acted in bad faith. Prior to the time Marrama was handed down, some bankruptcy courts had held that § 706(a) provided that the debtor had an unconditional right to convert.

The debtor in Marrama fraudulently transferred a house seven months before he filed a petition in bankruptcy pursuant to Chapter 7, failing to disclose the transfer in his schedules. The Chapter 7 Trustee discovered Marrama's ruse and stated that he would take action to recover the property. In response, Marrama moved to convert his case to a case under Chapter 13. The Bankruptcy Court denied the motion and the Supreme Court ultimately held that a Bankruptcy Court may, in its discretion, deny a debtor's motion to convert upon a finding that the motion was filed in bad faith. This power flows from “the inherent power of every federal court to sanction ‘abusive litigation practices.’ ” Marrama, 549 U.S. at 376, 127 S.Ct. at 1112.

The questions becomes: What is “bad faith” such that a bankruptcy court should deny a motion to convert? The Supreme Court stated in Marrama that:

We have no occasion here to articulate with precision what conduct qualifies as “bad faith” sufficient to permit a bankruptcy judge to dismiss a Chapter 13 case or to deny conversion from Chapter 7. It suffices to emphasize that the debtor's conduct must, in fact, be atypical. Limiting dismissal or denial of conversion to extraordinary cases is particularly appropriate in light of the fact that lack of good faith in proposing a Chapter 13 plan is an express statutory ground for denying plan confirmation. 11 U.S.C. § 1325(a)(3) ; see In re Love, 957 F.2d [1350] at 1356 [ (7th Cir.1992) ] (“Because dismissal is harsh ... the bankruptcy court should be more reluctant to dismiss a petition ... for lack of good faith than to reject a plan for lack of good faith under Section 1325(a) ”).

Marrama, 549 U.S. at 375 n. 11, 127 S.Ct. 1105, 1112.

In a case handed down by the Bankruptcy Court in the Middle District of Florida shortly after the Supreme Court decided Marrama, conversion was denied after a finding that the debtors acted in bad faith when they converted nonexempt property into exempt property and failed to make accurate disclosures. See In re Mercado, 376 B.R. 340 (Bankr.M.D.Fla.2007). In another case from the Southern District of Florida, a Chapter 7 Trustee moved to vacate a Chapter 7 discharge after he learned that the debtor had concealed valuable jewelry. See In re Alvarez, No. 10–45709, 2011 WL 5593176 (Bankr.S.D.Fla. Oct. 25, 2011). In response, the debtor moved to convert the case to a case under Chapter 13. The court in Alvarez denied the debtor's motion to convert, finding that the debtor had made misleading statements in an effort to defraud creditors. Mercado and Alvarez provide useful examples of the kind of conduct that will result in the denial of a motion to convert. The Court is looking for proof of a materially false statement made with the purpose of defrauding creditors.

2. The Burden of Proof

It is well established that when a debtor seeks to confirm her Chapter 13 Plan, the burden is on her to prove her good faith. 11 U.S.C. § 1325(a)(3) ; In re Smith, 328 B.R. 797, 801 (Bankr.W.D.Mo.2005) (holding that while the creditor has the initial burden to produce some evidence of lack of good faith, the ultimate burden is on the debtor to prove his good faith); see also In re Kearney, 439 B.R. 694, 697–98 (Bankr.E.D.Wis.2010) ; In re Delbrugge, 347 B.R. 536, 540 (Bankr.N.D.W.Va.2006) ; In re Maronde, 332 B.R. 593, 597 (Bankr.D.Minn.2005). However, when a creditor seeks to forestall access to Chapter 13 relief as a threshold matter, and not as an objection to confirmation of a plan, the burden is on the creditor to prove the debtor's bad faith with a preponderance of the evidence. In re Goines, 397 B.R. 26, 32 (Bankr.M.D.N.C.2007) ; see also In re Jennings, No. 12–32615, 2013 WL 1137052, *4 (Bankr.W.D.N.C. Mar. 19, 2013) ; In re Nelson, No. 13–32469, 2014 WL 1884323, *4 (Bankr.W.D.N.C. May 12, 2014). Thus, the burden of proof here is on Oliver to (1) make a sufficient allegation of bad faith and (2) produce sufficient credible evidence supporting his allegation to meet the preponderance standard.

III. ANALYSIS

Oliver's objection to Sharon's motion to convert is 31 pages long, including 83 numbered rhetorical paragraphs followed by a memorandum of law. (Doc. 28). The objection is prolix, rambling, and confused. Oliver's argument may fairly be summarized in three points, which cover the substance of his objection: (1) that Sharon acted in bad faith with respect to Oliver concerning the RV; (2) that Sharon's motivation to convert is in bad faith; and (3) that Sharon's statements and schedules are inaccurate and fraudulent.

A. The RV

Having heard the evidence, the Court is convinced that the discord between the parties centers on the now despised RV. As stated in Part I(A) above, the Marital Settlement Agreement made no mention of the RV and its disposition. The Modification Agreement purports to cure that deficiency and make provision for the disposition of the RV. However, the Modification Agreement is inherently unworkable. That the parties would agree to an order decreeing that “[t]he selling price of the RV shall be the amount necessary to pay off the loan on the RV,” is ample evidence of how poorly the divorce has been handled to date. It should stand without saying that no prospective purchaser will be bound by the Modification Agreement. An unrelated purchaser, acting at arm's length, will offer no more than market value for the RV. Three years of experience...