In re Hunter
| Decision Date | 19 February 2019 |
| Docket Number | Case No. 18-51081 |
| Citation | 597 B.R. 287 |
| Court | U.S. Bankruptcy Court — Middle District of North Carolina |
| Parties | IN RE Gregory Bowman HUNTER, Sr., Debtor. |
Jennifer Barker Lyday, Thomas W. Waldrep, Jr., Waldrep LLP, Winston-Salem, NC, for Debtor.
C. Edwin Allman, III, Winston-Salem, NC, for Trustee.
This matter coming before the court on February 6, 2019 on the Debtor's Motion to Convert this case from Chapter 7 to Chapter 11 (the "Motion"). At the hearing, Thomas W. Waldrep, Jr. and John R. Van Swearingen appeared on behalf of the Debtor, Ellis B. Drew, III appeared on behalf of Mountain Commerce Bank ("MCB"), Kiah T. Ford IV appeared on behalf of Todd O'Gara and Wanu Water, Inc. ("Wanu"), Robert E. Price, Jr. appeared on behalf of the Bankruptcy Administrator, and C. Edwin Allman, III, the Chapter 7 trustee, also appeared. Having considered the Motion and all other matters of record, including those incorporated through judicial notice, the evidence presented at the hearing, and the arguments of counsel, the court finds and concludes as follows:
BACKGROUND
The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 17, 2018 (the "Petition Date"), and C. Edwin Allman, III was appointed to serve as Chapter 7 trustee (the "Trustee"). On the Petition Date the Debtor, who holds an MBA from Wake Forest University, was earning income as an independent contractor with a three-month contract with Musubu, a local technology company, in the amount of $ 12,500.00 per month. His original Schedule I showed household income of $ 15,500.00, and original schedule J showed expenses of $ 14,759.31, leaving net income in the amount of $ 740.69. The Schedule I indicated that the Debtor did not expect any increase or decrease in income within a year. Shortly after the Petition Date, the Debtor was offered a position as a director at Musubu where his duties now include marketing, sales, operations, and finance.1 According to an Amended Schedule I filed January 4, 2019 the Debtor now has gross wages of $ 12,916.00 a month and household income of $ 15,916.00. He shows no amount on line 5a for taxes, Medicare, and Social Security deductions for himself. According to an amended Schedule J filed January 4, 2019 the Debtor had expenses of $ 14,759.31 and net income $ 1,156.69; his latest amended Schedule J filed the week before the hearing shows expenses of $ 13,214.31, including $ 4,000.00 a month for taxes, leaving monthly net income of $ 2,701.69.
The Debtor's schedules and statement show that prior to obtaining employment with Musubu, the Debtor had been in severe financial distress for a number of years. His Statement of Financial Affairs ("SOFA") lists gross income of $ 9,259.00 for 2018 as of the Petition Date, and $ 14,122.0 for 2016.2 The Debtor's SOFA shows that in 2018 he took an early IRA withdrawal and a deferred compensation early payout to have a total of over $ 330,000.00 in other income. In 2017, the Debtor's SOFA shows that he liquidated over $ 300,000.00 in assets, and in 2016 the Debtor liquidated over $ 370,000.00 in assets. The Debtor and his spouse own a home with a petition value of $ 695,500.00 encumbered by a first mortgage with a balance of approximately $ 550,000.00 and a second mortgage in favor of his parents. He listed the amount of his parents' claim as $ 90,000.00, but admitted at the February 6 hearing that the claim was closer to $ 39,000.00. He has a half interest in a 2008 Lexus with 290,000 miles on it and a value of $ 4,280.00. The Lexus is encumbered by a lien in the amount of $ 19,235.00. He lists priority debts totaling $ 45,636.86 and general unsecured claims in the amount of $ 738,546.59 in an amended Schedule E/F. The Debtor lists interests in Hunter Family LLC and Kingsley Investment Group, LLC in Schedule A/B with values of $ 0.00.3
Also on his Schedule A/B, the Debtor lists a civil action pending in the United States District Court for the Middle District of North Carolina, Case No. 15-CV-1050 styled Gregory Hunter and Hunter Family Capital, LLC v. Mountain Commerce Bank and Bobby A. Brown (the "Civil Case") which the Debtor valued at $ 3,000,000.00.4 In the Civil Case, the Debtor asserts that MCB's employee made a number of false or misleading statements in connection with an SBA loan application for Kingsley Investments,5 an entity originally owned 50% by Bob Feathers and 50% by Hunter Family Capital. The Debtor presently owns a 35% interest in Hunter Family Capital.6 As generally described at the February 6 hearing, the SBA loan application with MCB was part of a business plan by Kingsley Investments to obtain multistore financing for a number of East Coast Wings franchises in Tennessee. The Debtor asserts that he, individually, suffered damages as a result of MCB's false or misleading statements indicating that the SBA loan was being processed when in fact, it was not. Among other contentions, the Debtor alleges that he sold his book of business from his previous employment as an Oppenheimer financial advisor under financial duress. The Civil Case is currently set for trial in April 2019, and a motion for summary judgment is pending. According to the Debtor's schedules, he has essentially no other nonexempt assets of value other than his potential damages in the Civil Case.
On December 13, 2018, the Trustee filed a Motion for Approval of Settlement of Disputed Claim against MCB and Bobby A. Brown (Docket No. 21) seeking approval of a proposed settlement of the Debtor's claims in the Civil Case for the sum of $ 150,000.00 along with subordination of MCB's claim in the bankruptcy case. This settlement would not affect the Hunter Family Capital claim against MCB. In response, the Debtor has filed the Motion seeking to convert to Chapter 11. His stated intent is twofold: (1) he wishes to incorporate his postpetition income into his bankruptcy estate7 and (2) he wishes to continue prosecution of the Civil Case because he does not agree with the Trustee's proposed settlement. Todd O'Gara and Wanu8 as well as MCB9 filed objections asking that the court deny the Motion for cause. In addition, the Trustee filed a response describing the Civil Case as an ill-conceived and fanciful lawsuit and requesting the court enter such order as it deems appropriate (Todd O'Gara, Wanu, MCB, and the Trustee are collectively referred to herein as the "Respondents").
Though § 707(a) gives a debtor broad authority to convert, the Supreme Court has interpreted § 707(d) to limit a debtor's right to convert a Chapter 7 case to a case under Chapter 13. Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). In Marrama, the Court found that there were "at least two possible reasons" why a debtor may not qualify to convert from Chapter 7 to Chapter 13, the requirements of § 109(e) and for "cause" under § 1307(c). Id. at 372, 127 S.Ct. 1105. The Court found the debtor's bad faith conduct constituted cause under § 1307(c) such that the debtor did not qualify to be a debtor under Chapter 13. Id. at 374, 127 S.Ct. 1105. The Court also found that § 105(a) authorizes "an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide the debtor with an opportunity to take action prejudicial to creditors." Id. at 375, 127 S.Ct. 1105. Later, in Law v. Siegel , the Supreme Court further explained Marrama , "even if the Bankruptcy Court's refusal to convert the case had not been expressly authorized by § 706(d), that action could have been justified as a way of providing a ‘prompt, rather than a delayed, ruling on [the debtor's] unmeritorious attempt to qualify’ under § 1307(c)." Law v. Siegel , 571 U.S. 415, 426, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) (quoting Marrama at 376, 127 S.Ct. 1105 ).
Though Marrama addresses a Chapter 7 debtor's conversion to Chapter 13, courts have found its analysis applicable where a Chapter 7 debtor seeks to convert to Chapter 11, reasoning that § 1112(b) serves the same purpose as § 1307(c). In re Woodruff, 580 B.R. 291, 296 (Bankr. M.D. Ga. 2018) ; In re FMO Assoc. II, LLC , 402 B.R. 546, 551 (Bankr. E.D.N.Y. 2009) ; In re Broad Creek Edgewater, LP , 371 B.R. 752, 758 (Bankr. D.S.C. 2007). As such, a Chapter 7 debtor seeking to convert to Chapter 11 must be eligible to be a debtor under that chapter and not subject to conversion or dismissal for cause as set forth in § 1112(b), including but not limited to bad faith. In re Daughtrey, 896 F.3d 1255 (11th Cir. 2018) (); In re Miller , 496 B.R. 469 (Bankr. E.D. Tenn. 2013) (); In re Broad Creek Edgewater, LP , 371 B.R. at 759 (). Courts are in agreement that the burden rests with the objecting party to demonstrate by a preponderance of the evidence why the debtor should not be permitted to convert to a case under Chapter 11. In re Mercury Data Systems, Inc. , 586 B.R. 260, 270 (Bankr....
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...conversion from Chapter 7 to Chapter 13 – not a conversion to Chapter 11. Nevertheless, this Court agrees with In re Hunter , 597 B.R. 287 (Bankr. M.D.N.C. 2019), that Marrama is also applicable where the debtor seeks to convert to Chapter 11, because 11 U.S.C. § 1112(b) serves a similar pu......
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