In re Miller

• Decision Date: 24 July 2013
• Docket Number: No. 12–33942.,12–33942.
• Citation: 496 B.R. 469
• Parties: In re Gerald Loyd MILLER, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

496 B.R. 469

In re Gerald Loyd MILLER, Debtor.

No. 12–33942.

United States Bankruptcy Court,

E.D. Tennessee.

July 24, 2013.

Gribble, Carpenter & Associates, Keith L. Edmiston, Esq., Maryville, TN, Attorneys for Debtor.

Gentry, Tipton & McLemore, P.C., Maurice K. Guinn, Esq., Knoxville, TN, Tyler C. Huskey, Esq., Pigeon Forge, TN, Attorneys for Tennessee State Bank.

Samuel K. Crocker, Esq., United States Trustee, Patricia C. Foster, Esq., Howard H. Baker, Jr. United States Courthouse, Knoxville, TN, Attorneys for United States Trustee.

MEMORANDUM ON DEBTOR'S MOTION TO CONVERT TO CHAPTER 11

RICHARD STAIR, JR., Bankruptcy Judge.

This contested matter is before the court on the Motion to Convert Case From a Case Under Chapter 7 to a Case Under Chapter 11 (Motion to Convert) filed by the Debtor on April 5, 2013. On April 10, 2013, Tennessee State Bank filed the Objection by Tennessee State Bank to Motion to Convert Case From a Case Under Chapter 7 to a Case Under Chapter 11 (Objection), arguing that the Debtor did not file the Motion to Convert in good faith, that he has failed to turnover records to the United States Trustee, and that any plan of reorganization will be a liquidation of assets, which is more properly achieved in a Chapter 7 case. The issue to be resolved, as stated in the April 12, 2013 scheduling Order, is whether the Debtor is eligible to be a debtor under Chapter 11 as required by 11 U.S.C. § 706(d) (2006). Pursuant to the court's April 12, 2013 Order, Tennessee State Bank filed, on May 17, 2013, a Statement by Tennessee State Bank of Cause Factors and Bad Faith Acts, identifying the “cause” factors expressly identified in 11 U.S.C. § 1112(b)(4) (2006) that it argues are present in this case and/or reflecting the Debtor has engaged in “bad faith” which it supplemented on June 24, 2013, with the Supplement to Statement by Tennessee State Bank of Cause Factors and Bad Faith Acts (collectively, Statement of Cause Factors and Bad Faith Acts).

The trial on the Motion to Convert was held on July 1, 2013. The record before the court consists of the Stipulations filed by the parties on June 25, 2013, forty-nine exhibits introduced into evidence, and the testimony of four witnesses, Ann Mostoller, Chapter 7 Trustee, Shelly Spurgeon, Senior Vice President of Special Assets for Tennessee State Bank, Harold Ellison, and the Debtor.

I

On September 28, 2012, Tennessee State Bank commenced this bankruptcy case against the Debtor through the filing of an Involuntary Petition under Chapter 7 of the Bankruptcy Code. On that same date, Tennessee State Bank also filed an Involuntary Petition commencing, under Chapter 7, Case No. 12–33943 against Karen L. Miller, the Debtor's wife. Both Involuntary Petitions were later joined by the Housholder Family Trust and Charles A. and Melanie McGinnis. Tennessee State Bank is a creditor of the Debtor by virtue of thirteen Notes from Gerald Miller secured by real property located in Sevier County, Tennessee, owned by the Debtor, individually, or jointly with his wife, Karen L. Miller (collectively, the Millers).¹Coll. Trial Exs.. 1–13. As of the September 28, 2012 petition date, the aggregate outstanding balance on the thirteen Notes, inclusive of interest and late charges, was $7,369,348.53, and Tennessee State Bank has, as of June 17, 2013, incurred legal fees of $68,375.38 with respect to the Millers, with $2,575.00 of that amount attributable solely to the Debtor. Trial Ex. 14; Trial Ex. 23.

On October 5, 2012, the Debtor filed a Voluntary Petition under Chapter 11 in the Middle District of Florida commencing bankruptcy Case No. 12–06567–JAF. Coll. Trial Ex. 32. Thereafter, on October 19, 2012, he filed an Answer to the Involuntary Petition which was amended on October 24, 2012, to include a List of Creditors reflecting seventeen creditors as well as an Amended Exhibit A to his Amended Answer adding Sevier County Bank and Tennessee State Bank as creditors. Coll. Trial Ex. 29. Finally, on December 7, 2012, the Debtor filed an Amended List of Creditors reflecting twenty-five creditors. Trial Ex. 31.

On November 9, 2012, the Debtor filed a Motion for Summary Judgment seeking a determination that Tennessee State Bank was not a qualified petitioning creditor to which Tennessee State Bank filed its Reply to the Motion for Summary Judgment on November 29, 2012. Following an Order entered on December 7, 2012, denying summary judgment with respect to the petitioning creditors' statuses as creditors and qualifications to be petitioning creditors, and a trial held on December 21, 2012,² an Order for Relief was entered against the Debtor on January 9, 2013.³ Ann Mostoller was appointed Chapter 7 Trustee in the Debtor's Chapter 7 bankruptcy case and continues to serve in that capacity. The Debtor's initial meeting of creditors was scheduled for March 8, 2013, but has been adjourned on several occasions, presumably to allow time for the court to rule on the Motion to Convert. On April 25, 2013, the Chapter 7 Trustee filed a Motion for Turnover Order, asserting that the Debtor is the sole owner of several vehicles identified in the motion, to which the Debtor filed an Objection of Debtor in Opposition to Motion for Turnover Order. SeeTrial Exs. 42–43. Following a hearing on the Motion for Turnover Order, on June 10, 2013, the court entered the Order Resolving Motion of Trustee for Turnover, directing turnover of titles to vehicles and one-half of the proceeds in the Debtor's joint bank account, all of which have since been turned over to the Chapter 7 Trustee. SeeTrial Ex. 44.

At the time the Involuntary Petitions were filed against them, the Debtor, who is a licensed real estate broker, and Karen L. Miller owned 100% of the stock in Cove Mountain Realty, Inc., an entity which lists real estate for sale, manages a cabin rental program, and operates a campground in Sevier County, Tennessee. Pursuant to a Lease Agreement between the Millers and Katherine Housholder, Marceil H. Peery, and James A. Housholder that had been assigned to Tennessee State Bank for collateral purposes, counsel for Tennessee State Bank sent a letter to Cove Mountain Resorts on July 14, 2012, requesting that all future payments for rents from Cloud 9, a cabin property owned by the Millers, be made directly to Tennessee State Bank. Trial Ex. 21; Trial Ex. 24. In order to protect its collateral, Tennessee State Bank has made all lease payments under the Lease Agreement since the Millers stopped making payments in June 2011. SeeTrial Ex. 22. Additionally, the base property taxes owing to Sevier County, Tennessee, on the real properties securing Tennessee State Bank's Notes, not including interest or penalties, are $56,187.00. SeeTrial Ex. 37.

On February 19, 2013, the court held a trial on the Involuntary Petition filed against Karen L. Miller and, on March 14, 2013, entered an Order for Relief in Case No. 12–33943, which was subsequently converted to Chapter 11, without objection, on March 28, 2013. The Debtor filed his Motion to Convert on April 5, 2013, and Tennessee State Bank filed its Objection to Motion to Convert on April 10, 2013.

II

The Debtor seeks to convert his case to Chapter 11 under the authority of § 706, which allows a debtor to convert from Chapter 7 to another chapter if the case has not previously been converted and the debtor is eligible to be a debtor under the chapter to which it is to be converted. See11 U.S.C. § 706(a), (d) (2006). The right to convert, however, is not absolute where cause may exist to convert or dismiss under the chapter to which the debtor seeks conversion or when denial of a conversion motion would serve to prevent “an abuse of process.” Marrama v. Citizens Bank of Mass., 549 U.S. 365, 372–75, 127 S.Ct. 1105, 1110–12, 166 L.Ed.2d 956 (2007). In finding bad faith conduct by a debtor sufficient to deny conversion based on his ineligibility to qualify to be a debtor under Chapter 13, the Supreme Court summarized the facts in Marrama as follows:

Marrama misrepresented the value of his Maine property and that he had not transferred it during the preceding year. Respondent DeGiacomo, the trustee of Marrama's estate, stated his intention to recover the Maine property as an estate asset. Thereafter, Marrama sought to convert the proceeding to Chapter 13, but the trustee and respondent bank, Marrama's principal creditor, objected, contending that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process.

Marrama, 549 U.S. at 365, 127 S.Ct. at 1106;see also In re Sammut, 486 B.R. 404, 407 (Bankr.E.D.Mich.2012) (stating that “the Court held that the bankruptcy court can deny conversion if the debtor has acted in bad faith before seeking to convert, either during the Chapter 7 case or before the bankruptcy case.”); In re Lane, 2011 WL 3205782, at *3, 2011 Bankr.LEXIS 2906, at *8 (Bankr.D.Colo. July 26, 2011) (summarizing the facts as follows in finding that the debtors' conduct did not “rise to the level of misconduct that took place in Marrama ... [where] the debtor listed his house as having a value of zero, while the house actually had substantial value[, and] the debtor in Marrama transferred the house to a trust with the admitted intention of protecting his property from creditors.”); In re Hua, 411 B.R. 671, 672–73 (Bankr.S.D.Cal.2009) (“Marrama has to be understood in its factual context, which involved concealment of an asset in the pending Chapter 7 case. When the trustee discovered and pursued the asset, the debtor sought to convert the case [.] So while the debtor's bad faith conduct was committed prior to conversion, it was committed in conjunction with the filing of his chapter 7 petition and thereafter.”). Explaining its reasoning, the Court further stated:

Nothing in the text of ... § 706 ... (or the legislative history ... ) limits the authority of the court to take appropriate action in response to...