In re Lien
Decision Date | 16 March 2015 |
Docket Number | BKY Case No. 11–60636 |
Citation | 527 B.R. 1 |
Parties | In re: Bruce J. Lien and Sherie N. Lien, Debtors. |
Court | U.S. Bankruptcy Court — District of Minnesota |
Gene Doeling, Kaler Doeling PLLP, Michael L. Gust, Anderson & Bottrell, Fargo, ND, for Trustee.
Logan M. Moore, Velde Moore Ltd., Alexandria, MN, for Debtors.
This matter came on for evidentiary hearing before the Court on December 16, 2014, upon the chapter 7 Trustee's (“Trustee”) motion for a determination that conversion from chapter 13 to chapter 7 was done in bad faith under 11 U.S.C. § 348(f)(2), and for a determination that the “inheritance”1 received by the Debtors during the chapter 13 bankruptcy filing is property of the chapter 7 bankruptcy estate (the “Bad Faith Conversion Motion”), and the Debtors' response thereto, as well as the Trustee's motion for turnover appearing at ECF No. 58 (the “Turnover Motion”), and the Debtors' response thereto. Appearances were as noted on the record.2 After some discussion, the Court allowed the parties, in their discretion, to submit supplemental briefing on the Turnover Motion. Both parties did so and the Court took the matters under advisement. The matters are now ready for disposition.
This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (E), and (O) ; this Court has jurisdiction under 28 U.S.C. §§ 157(a) and 1334. The motions arise under 11 U.S.C. §§ 521 and 542. The motions were filed under Fed. R. Bankr.P. 9014 and Local Rule 6072–1. For the reasons set forth below, the Court will grant the Trustee's motions.
The Debtors, Bruce and Sherie Lien, originally filed a chapter 13 bankruptcy case on June 21, 2011. The Debtors' first amended chapter 13 plan was submitted to the Court on August 17, 2011; under it, the Debtors proposed to pay $550.00 each month for sixty months for a total of $33,000.00 to be paid under the plan. Ex. I. This plan was confirmed on October 25, 2011. The Debtors' second amended chapter 13 plan was submitted to the Court on April 2, 2012 and was approved by the Court on May 22, 2012. Ex. J. The Debtors' second amended chapter 13 plan provided that the Debtors would make the same payments of $550.00 per month for 60 months for a total of $33,000.00, but added an IRS debt to be paid as a priority claim in the second amended plan.4 On July 30, 2014, the debtors filed a verified conversion form, converting their chapter 13 case to a case under chapter 7. Ex. 13.
The chapter 13 trustee's final report and account was filed on August 18, 2014; it reflects that the Debtors paid a total of $19,250.00 during the chapter 13 plan, $4,308.24 of which went to costs of administration, and the remainder to creditors. The chapter 13 trustee's final report shows total allowed claims of $345,241.97.
Bruce Lien was appointed the trustee of the Loretta A. Lien Irrevocable Trust dated November 2, 1999. Ex. 9; Ex. B. Loretta A. Lien was Bruce Lien's mother. Mr. Lien testified that, at the time, he understood that he was also a beneficiary under the trust and he knew that his mother owned farmland. Bruce and his siblings are each beneficiaries under the trust. The trust provided that upon the death of the debtor's mother, Bruce, along with his eleven siblings, would each be entitled to one equal share of the assets of the trust, i.e., each was entitled to a one-twelfth share, unless alternative provisions of distribution were invoked.5
Bruce Lien testified that he began his duties as trustee of the trust in January 2012, when his mother was admitted to the nursing home;6 prior to that, his mother was in an assisted living facility since autumn of the preceding year, and prior to that, had lived alone, having been “feisty.” Bruce Lien's mother died on April 7, 2012, at which time he became entitled to receive property from his mother's trust. Ex. C.7 At that time, Bruce was also advised by the attorney for his mother's estate that Bruce was the sole trustee.
Sherie Lien testified that Bruce and his brother decided to liquidate their mother's trust estate sometime in 2013. There were two parcels of real estate in the trust, which are legally described in the trust document. Ex. 9; Ex. B.8
Parcel 1 was sold and the debtor received his share from the sale of that property in August, 2013, in the amount of $34,191.00. The Debtors did not report the income from this inheritance/land sale to the chapter 13 trustee. These funds were deposited into the Debtors' Mid Central Federal Savings Bank account, and the statement for that account reflects an ending balance of $19,925.32 as of June 30, 2014. Ex. 17. Sherie Lien testified that the difference was spent on medical bills and business debt. Sherie and Bruce further testified that additional amounts of the sale proceeds have since been spent, leaving a current balance of approximately $17,000.00.
Prior to trial, and per the parties' stipulation of undisputed facts, Parcel 2 had been listed for sale with a listing price of $159,000.00, which would have yielded a potential gross recovery from the sale of that land, before costs of sale, of $13,250.00 ($159,000.00 /12 children = $13,250.00). ECF No. 66.
In addition, Bruce Lien has a claim to a one-twelfth interest in $40,000.00 currently being held in escrow for taxes and trust expenses by the attorney for the trust.
As noted, Bruce Lien received the funds from the sale of Parcel 1 of the real estate in approximately August 2013 and did not notify the chapter 13 trustee.9 Both Debtors testified, rather unconvincingly, that they had no idea that they had an obligation to report additional disposable income or property to which they became entitled during the pendency of their chapter 13 case, i.e., after the filing of their chapter 13 case.10 This testimony was belied by the fact that Bruce Lien testified that he knew he had an obligation, among other things, to submit copies of the Debtors' state and federal income tax returns to the chapter 13 trustee. And, the Debtors' second amended chapter 13 plan, provided, at ¶ 13, that the Ex. J. More specifically, both Debtors unconvincingly testified that they were under the belief that they had no obligation to report the inheritance that Bruce Lien received after the passing of his mother, a substantial amount when viewed in comparison to what the Debtors were paying their unsecured creditors under their chapter 13 plan. In actuality, the amount the Debtors received from the trust proceeds from the sale of Parcel 1 alone, $34,191.00, was more than the entire amount the Debtors were to pay under their chapter 13 plan, which was $33,000.00.
Not long after receiving a copy of the Debtors' 2013 federal tax return, on May 29, 2014, the chapter 13 trustee's office sent the Debtors a letter inquiring about the Loretta Lien Irrevocable Trust referred to in Schedule E of the Debtors' 2013 tax return, as well as requesting other income information,11 and documentation and turnover of a portion of the 2013 tax refund. Exs. 6 & 21. Bruce Lien testified that he was very “upset” about this letter, primarily because of the chapter 13 trustee's request for information regarding the trustee's assertion that the tax return reflected greater income than that reflected in the Debtors' schedules.
On June 19, 2014, the Debtors' attorney requested information from the chapter 13 trustee as to a “payoff” amount for the chapter 13 case. Ex. 16. The chapter 13 trustee's office provided counsel for the Debtors the amount required to pay all claims in full, $293,432.80.12 The Debtors never discussed the inheritance with the chapter 13 trustee, e.g., the proceeds from the sale of Parcel 1, or that they had a right to a share of the sale proceeds from Parcel 2.13 The Debtors made no effort to resolve the inheritance issue with the chapter 13 trustee, as Mr. Gieseke testified chapter 13 debtors sometimes do, e.g., when they become entitled to an inheritance or receive other, unexpected disposable income—post-confirmation.14 Instead, the Debtors converted their chapter 13 case to a case under chapter 7.
Sherie Lien testified that the reason for the conversion had not been because the Debtors were financially unable to make their chapter 13 plan payments; rather, it was because the Debtors understood that they could “pay off” their chapter 13 plan. When asked by the Trustee at trial whether the inheritance had anything to do with the conversion, Sherie Lien—rather forcefully—responded, “absolutely not!” Initially, Bruce Lien testified at trial that the reason the Debtors converted their case to chapter 7 was to “move on” with life.15 However, upon further inquiry from the Trustee at trial, Bruce Lien later admitted that “part of” of the reason for the conversion was indeed the inheritance.
On Schedule B of the conversion documents, the Debtors identified an “inheritance over 180 days from filing date” in the amount of $34,191.00, which was Bruce Lien's interest in the proceeds from a sale of one parcel of farmland previously owned by his mother. Ex. 13. None of the conversion documents, however, disclosed Bruce Lien's one-twelfth interest in the second parcel of real property, also previously owned by his mother, and which, according to Mr. Lien's testimony, sold on December 12, 2014 for $140,000.00; he also testified that he was entitled to one-twelfth of the net proceeds of the $140,000.00.16
The Debtors also failed to disclose a Toyota automobile, which was purchased for Sherie Lien, pre-conversion, for $2,500.00.17 Finally, the Debtors did not disclose Conservation Reserve...
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