In re McMahan

• Decision Date: 25 October 2012
• Docket Number: No. 12–34980.,12–34980.
• Citation: 481 B.R. 901
• Parties: In re John Michael McMAHAN, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

481 B.R. 901

In re John Michael McMAHAN, Debtor.

No. 12–34980.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Oct. 25, 2012.

Miriam Trubek Goott, Walker & Patterson, PC, Houston, TX, for Debtor.

David G. Peake, Chapter 13 Trustee, Houston, TX.

MEMORANDUM OPINION REGARDING PEARLAND STATE BANK'S MOTION TO DISMISS

[Main Case Doc. No. 32]

JEFF BOHM, Chief Judge.

I. Introduction

The dispute at bar involves what is, in bankruptcy parlance, referred to as a “Chapter 24.” In 2010, Pearland State Bank (the Bank) negotiated with John Michael McMahan (the Debtor) and agreed to a Chapter 11 plan of reorganization (the Chapter 11 Plan). Upon the Chapter 11 Plan's confirmation, and after ten months of plan payments, the Debtor defaulted. Rather than modifying the Chapter 11 Plan under § 1127(e) of the Bankruptcy Code¹, the Debtor filed a Chapter 13 petition (the Pending Chapter 13 Case) and a proposed plan in the Pending Chapter 13 Case (the Proposed Chapter 13 Plan). The Proposed Chapter 13 Plan, if confirmed, would change the payment schedule that the Debtor had negotiated with the Bank in the Chapter 11 case (the Chapter 11 Case).

The Bank has filed a motion to dismiss the Pending Chapter 13 Case for serial filing (the Motion to Dismiss), arguing that the Chapter 13 petition was not filed in good faith under §§ 1307 and 1325(a)(3). [Main Case Doc. No. 32]. The Debtor admits that he was in default to the Bank under the Chapter 11 Plan, and that he filed the Pending Chapter 13 Case to stop the Bank from going forward with its scheduled foreclosure sale-a right which the Bank had bargained for in the Chapter 11 Case, and which was expressly set forth in the Chapter 11 Plan. [Bank's Ex. No. 3, Ex. B, at 12]. However, the Debtor argues that he filed this second bankruptcy petition in good faith, and that therefore his Chapter 13 Case should not be dismissed.

The Court has decided to issue this Memorandum Opinion for three reasons. First, the Court wishes to clarify the provisions of § 1127. Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a different plan modification procedure is allowable for individual debtors in Chapter 11, as opposed to that for corporate or partnership debtors. Specifically, post-confirmation an individual debtor may continue to modify his plan even if the plan has been substantially consummated.² In the dispute at bar, the Debtor failed to make his scheduled payments under the Chapter 11 Plan. Even though the Chapter 11 Plan was confirmed and substantially consummated, the Debtor could nevertheless have invoked § 1127 to seek to modify his Chapter 11 Plan. Instead, the Debtor chose to file a Chapter 13 petition and propose a new plan. In doing so, the Debtor has attempted to circumvent the procedures put in place by BAPCPA for modifying confirmed Chapter 11 plans of individuals.

A second reason for issuing this Opinion is to underscore that an individual debtor receives a discharge in Chapter 11 only upon completion of plan payments or upon a showing of cause. Therefore, the Court wants to emphasize the following: until the debtor receives a discharge in his Chapter 11 case, he is barred from filing a second bankruptcy petition and proposing a new plan even if his Chapter 11 Case has been closed following confirmation of the plan. Two simultaneous reorganization cases in which no discharge has been granted constitutes an abuse and manipulation of the Code. Thus, the fact that the Debtor has not yet received his discharge in the Chapter 11 Case requires dismissal of the Pending Chapter 13 Case. This result is necessary, as an alternative rule would leave creditors vulnerable to adjudication of the same debt under two concurrent cases and plans.

Finally, the Court publishes this Opinion to emphasize that it is extending the rationale articulated in the Fifth Circuit's decision of Elmwood Dev. Co. v. General Elec. Pension Trust (In re Elmwood), 964 F.2d 508 (5th Cir.1992), which analyzed serial filings of Chapter 11 petitions. The principles articulated in Elmwood for Chapter 22 petitions (i.e., the filing of a second Chapter 11 petition after having already obtained a confirmed plan in a prior Chapter 11 case that is still being effectuated) should apply equally to Chapter 24 petitions (i.e., the filing of a Chapter 13 petition after having already obtained a confirmed Chapter 11 plan in a prior Chapter 11 case that is still being effectuated). The Elmwood case and its holding may therefore be analyzed in both contexts.

Based upon the entire record, the Court now makes the following written Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52, as incorporated into adversary proceedings by Fed. R. Bankr.P. 7052. The Court concludes that the Motion to Dismiss should be granted, and the Pending Chapter 13 Case should be dismissed with prejudice. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.

II. Findings of Fact

1. On April 6, 2010, the Debtor filed a Chapter 11 petition. [Chapter 11 Doc. No. 1]. The Debtor is in the business of buying, fixing up and selling cars, including classic automobiles. [Tape Recording, 10/01/12 Hearing at 3:47:20–3:47:35 p.m.]. This case was assigned Case No. 10–32978 (the Chapter 11 Case). The Honorable Karen K. Brown, United States Bankruptcy Judge for the Southern District of Texas, was assigned the Chapter 11 Case. See [Chapter 11 Doc. No. 5].

2. The Debtor owns two pieces of real property located in Houston, Texas. One of these tracts is referred to as the Beltway 8 Property; this is unimproved real estate. [Tape Recording, 10/01/12 Hearing at 3:46:30–3:46–37 p.m.]. The other is referred to as the Greens Road Property; this is improved real estate on which the Debtor's business is operated. [ Id. at 3:46:37–3:47:24 p.m.].

3. The Bank has a valid first lien on both the Beltway 8 Property and the Greens Road Property. [Bank Ex. No. 4 at 10–11]. The Bank has had a lending relationship with the Debtor for approximately seven years. [Tape Recording, 10/01/12 Hearing at 4:33:35–4:33:45, 4:37:00–4:37:45 p.m.]. The relationship has been rocky; the Debtor has repeatedly made late payments; and the Debtor has failed to pay all ad valorum taxes on the Beltway 8 Property and Greens Road Property in violation of the deed of trust held by the Bank. [ Id.].

4. The Debtor initiated the Chapter 11 Case to stop the Bank from foreclosing on the Beltway 8 Property and the Greens Road Property. [Tape Recording, 10/01/12 Hearing at 3:47:20–3:47:88 p.m.].

5. Alan Gerger (Gerger) represented the Debtor in the Chapter 11 Case. [ Id. at 3:48:45–3:49:20 p.m.]. Gerger is a seasoned lawyer who is well-versed in prosecuting Chapter 11 cases.

6. David Smith (Smith) represented the Bank in the Chapter 11 Case. Smith filed a Notice of Appearance on May 7, 2010 [Chapter 11 Doc. No. 9], and was actively involved throughout the Chapter 11 Case; for example, as the docket sheet for the Chapter 11 Case reflects, Smith made numerous appearances and filings. See, e.g., [Chapter 11 Doc. Nos. 9, 52 & 57].

7. On January 19, 2011, in the Chapter 11 Case, Judge Brown confirmed the Debtor's First Amended Chapter 11 plan (already defined herein as the Chapter 11 Plan). [Chapter 11 Doc. No. 79].

8. Smith, on behalf of the Bank, and Gerger, on behalf of the Debtor, conducted negotiations leading up to confirmation of the Chapter 11 Plan. The negotiated and agreed terms of the Chapter 11 Plan provided, among other things, for the following treatment of the Bank:

a. The Bank had an allowed secured claim of $630,079.74, secured by the Beltway 8 Property and the Greens Road Property, as well as by all equipment owned by the Debtor;

b. The Bank's secured claim would be evidenced by a promissory note for $630,079.74 (the Note), bearing interest at 10.5% per annum, to be repaid in monthly installments as follows: (1) beginning on February 1, 2011 and continuing through and including December 1, 2011, a monthly payment for $2,756.60; (2) on January 1, 2012, a payment for $280,000.00; (3) beginning February 1, 2012 and continuing each month thereafter through and including May 1, 2012, a monthly payment in the amount of $2,756.60; and (4) one final balloon payment due on June 1, 2012. On January 10, 2011, the Debtor did indeed execute the Note, and delivered it to the Bank.

c. The Debtor would also execute a Deed of Trust and Security Agreement (the Deed of Trust) to secure the Note, with the liens to attach to the Beltway 8 Property and the Greens Road Property. The Debtor did indeed execute this instrument and deliver it to the Bank, which recorded it in the Real Property Records of Harris County, Texas. The Deed of Trust provided in Section 3.3 the following: “Upon the occurrence of an uncured Event of Default as provided in the Note, [the Bank] shall have the option, without declaring the entire [i]ndebtedness due, to proceed with foreclosure in satisfaction of such Default ...”

d. The Debtor would pay delinquent ad valorum taxes on the Bank's collateral.

e. The Debtor would provide the Bank with proof of payment of the ad valorum taxes.

[Bank's Ex. No. 3].

9. The Chapter 11 Plan, in the section entitled “Means for Execution of the Plan,” represented, among other things, to the Court and the Debtor's creditors the following:

The Reorganized Debtor shall continue to conduct his ordinary course of business which relates to the automobile industry with a special expertise in the classic automobile business ... The Debtor's ordinary course includes, but is not limited to, buying, selling, trading, appraising, exchanging, refurbishing and renovating high-end...