In re Hardigan

• Citation: 490 B.R. 437
• Decision Date: 29 March 2013
• Docket Number: No. 12–40484.,12–40484.
• Parties: In the matter of Kenneth R. HARDIGAN, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Georgia

490 B.R. 437

In the matter of Kenneth R. HARDIGAN, Debtor.

No. 12–40484.

United States Bankruptcy Court,

S.D. Georgia,

Savannah Division.

March 29, 2013.

Mark A. Bandy, Law Office of Mark A. Bandy PC, Savannah, GA, for Benjamin R. Roach, Trustee.

Mark Bulovic, Bulovic Law Firm, LLC, Catherine M. Palumbo, McCorkle & Johnson, LLP, Savannah, GA, for Debtor.

Joel Paschke, Office of U.S. Trustee, Savannah, GA, for US Trustee.

OPINION AND ORDER ON SUNTRUST BANK'S AND THE UNITED STATES TRUSTEE'S MOTIONS TO CONVERT OR DISMISS

LAMAR W. DAVIS, JR., Bankruptcy Judge.

Debtor filed his Chapter 7 case on March 7, 2012. On May 17, 2012, SunTrust Bank (“STB”), a creditor in the case, filed a Motion to Convert to Chapter 11 or, in the Alternative, to Dismiss (“STB's Motion to Convert or Dismiss”). Dckt. No. 28.¹ The United States Trustee (the “UST”) also filed a Motion to Convert to Chapter 11, or in the Alternative, to Dismiss Case (“UST's Motion to Convert or Dismiss”) on May 23, 2012. Dckt. No. 36. After discovery, both STB and the UST filed Motions for Summary Judgment, which were denied. The Order denying STB's Motion for Summary Judgment was entered on December 19, 2012. Dckt. No. 110. The Order denying the UST's Motion for Summary Judgment was entered on December 20, 2012. Dckt. No. 111. In the Order denying the UST's Motion for Summary Judgment, the Court held that Debtor “passed” the Means Test. Id. Accordingly, the presumption of abuse does not arise in this case under 11 U.S.C. § 707(b)(2).

The remaining issues raised by both Motions to Convert or Dismiss under 11 U.S.C. §§ 707(b)(3) and 706 were tried on January 25, 2013. Based on the stipulations of the parties, the evidence introduced at trial, and the record in this matter, the Court now enters the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

Debtor is a sixty-year-old cardiologist. On the petition date, Debtor resided in a home located at 1 W. Bluff Drive in Savannah, Georgia (the “Bluff Drive Property”). This home was purchased in 2006 for $1,725,000.00 by One Bluff Drive LLC (“OBD”), a company of which Debtor is the sole owner, member, and manager. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 49–51. The purchase of the Bluff Drive Property was financed by SunTrustMortgage (“STM”). Id. at ¶¶ 52–53. In December 2006, OBD conveyed an undivided 1% interest in the Bluff Drive Property to Debtor. Id. at ¶ 54. Debtor continued to pay STM, the first priority mortgage holder on the property, up through February 2012, and continued to pay utilities for the property even after he moved out. Id. at ¶ 70; Debtor's Brief, Dckt. No. 124 at 7. Debtor moved out of the home in June 2012, and Debtor's home has now been surrendered and foreclosed upon. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶ 67. Debtor's current monthly rent is $1,250.00. Id. at ¶ 68.

Prior to the petition, Debtor also owned two investment rental and vacation properties in Colorado. STB held the mortgages on these properties, and the mortgages were cross-collateralized by the Bluff Drive Property. The first Colorado property was sold after about a year, but Debtor kept the second property until, at STB's urging, Debtor sold the property in 2010 for $2,300,000.00.² The STB mortgage on the property was paid off in its entirety from the sale, but Debtor testified that this sale amount was approximately $2,000,000.00 less than what the property had appraised for the summer before.

Debtor is currently employed as a principal in a local cardiology practice, Savannah Cardiology, PC. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶ 71. He formerly earned a substantial additional salary as a contract cardiologist providing coverage at Meadows Regional Medical Center in Vidalia, Georgia, approximately 100 miles from the location of his principal practice in Savannah. Debtor's Exh. 14. He took on this job of seventy hours per month, in addition to his full-time medical practice, to attempt to deal with the financial difficulties that led to the filing of this case. That contract terminated in 2012. Debtor's Exh. 16. Because his principal practice already consumes 70–80 hours per week, Debtor has not attempted to replace the income derived from this outside work which, because of his exhausting regular schedule, is not reasonable to continue indefinitely.

While his 2011 and 2012 earnings showed substantially higher income as a product of this part-time work with Meadows Regional, the Debtor's income from Savannah Cardiology is the relevant income for the pending motion. In 2011, Debtor grossed $422,000.00 and netted $196,000.00 from that practice. Movant's Exh. 12. In 2012, his gross was $519,000.00 and his net was $201,000.00. Debtor's Exh. 13. At trial, Debtor testified that pending adjustments in Medicare and Medicaid could potentially further decrease his salary. Recent cuts have already caused Debtor's net income from his cardiology practice to decline by approximately 20%.

Debtor has three adult sons. His wife passed away in 2004, and so Debtor's household size is one. On the petition date, Debtor owned five automobiles free and clear of liens, three of which were not in working condition. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 85–86. One vehicle was sold for scrap and the proceeds of that sale went to the Chapter 7 Trustee. Id. at ¶ 89. Debtor currently drives a thirteen-year-old Mercedes, and Debtor's sons have two of the vehicles. Id. at ¶¶ 87–88. Debtor maintains several term life insurance policies for the benefit of his sons. Id. at ¶ 82. The aggregate death benefit on the Debtor's term-life insurancepolices is approximately $9,000,000.00, and Debtor claimed a deduction of $1,160.00 per month on his amended means test for the premiums associated with these policies. Id. at ¶ 83; Dckt. No. 39.

Debtor's major debts at filing were $1,700,000.00 to STM for his residence, a $905,000.00 construction loan from STB for a renovation to his residence, and a $875,000.00 disputed claim by K.A.P., Inc. (“K.A.P.”) for unpaid cost overruns on the renovation project. These debts were evidenced in Debtor's schedules, which he filed with his petition and later amended on June 7, 2012. Dckt. Nos. 1 and 39. The amendments to Debtor's schedules showed a reduced value of his real estate collateral (from $1,740,000.00 to $1,500,000.00), an increased amount of disputed liability to K.A.P. (from $550,000.00 to K.A.P.'s current claim of $875,524.35), and an increased amount of unsecured nonpriority debt, largely based on guaranty obligations to STB. Id.; see also Movant's Exh. 8. Debtor also amended his schedules to show that his debts were primarily consumer in nature and removed from Schedule J the monthly payment amount for the second mortgage on Debtor's residence. Dckt. No. 39.

Debtor's home has been foreclosed on, and so the potential unsecured claim on the STM loan is $200,000.00. Thus, his maximum exposure for unsecured claims by STM, STB, and K.A.P. is approximately $2,000,000.00. He also personally guaranteed $6,200,000.00 for STB loans to Savannah Cardiology. Movant's Exh. 8, Dckt. No. 39 at 9–10. However, his personal liability on these claims is capped at approximately 25% of that total or around $1,500,000.00.³ Movant's Exh. 8.

The renovation project claim originates from a dispute between Debtor and K.A.P., which was hired to do a complete renovation to Debtor's home. After difficulties with plans and specifications supplied at no cost by K.A.P., Debtor engaged his own architect, and K.A.P. provided a base bid for the project of $1,100,000.00 to be funded by STB. Debtor's Exh. 1. Debtor has paid that amount in full and periodic reports from K.A.P. showed the project as 97% complete in October 2008. Debtor's Exh. 6 and 9.

However, in December 2008 K.A.P. billed an additional $276,000.00 (Debtor's Exh. 7), showed a balance due of $234,000.00 in February 2009 (Debtor's Exh. 9), and finally claimed cost overruns due of $314,000.00 in April 2009. Debtor's Exh. 10. These bills were largely undocumented, and Debtor testified that his inquiries into the bases for these overruns went unanswered.

To deal with the potential K.A.P. claim, Debtor had obtained a commitment from STB to advance another $350,000.00. Debtor tried to resolve the dispute until K.A.P. filed a contractor's lien in May 2009 for $544,000.00. Debtor's Exh. 11. When this occurred, Debtor decided not use the advanced $350,000.00 and returned it to STB. Both K.A.P. and STB sued Debtor. On the eve of trial, K.A.P. and Debtor entered into a week-long mediation with the assistance of the presiding Superior Court Judge. A settlement amount of $200,000.00 was determined, but any settlement was contingent on a feasible settlement with STB, and Debtor's negotiations with STB were unsuccessful. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 115, 116. Debtor ultimately paid $85,000.00 to K.A.P. when his review of the records showed this amount to be attributable to added costs he was advised about before the work was done.

Debtor filed his bankruptcy case a week after this mediation. Prior to the petition, Debtor had incurred $161,125.52 in legal fees and expenses defending the K.A.P. and STB claims. Dckt. No. 130. As of February 4, 2013, Debtor had incurred $176,212.18 in legal fees and expenses in connection with that litigation. Id. K.A.P. initiated an Adversary Proceeding (No. 12–4069) against Debtor on October 17, 2012, asserting that its claim is non-dischargeable. Dckt. No. 80. This Court has allowed K.A.P. and Debtor to go forward with their state court litigation to determine the amount, if any, of Debtor's liability to K.A.P. for the renovation project, but has retained jurisdiction on the issue of dischargeability of K.A.P.'s claim under 11 U.S.C. § 523(a). A.P. Dckt. No. 13. At the hearing, the Court estimated K.A.P.'s claim to be $115,000.00.

Movants and Debtor entered into...