In re Stokes, Case No. 09-60265-11 (Bankr.Mont. 9/21/2009)
| Decision Date | 21 September 2009 |
| Docket Number | Case No. 09-60265-11. |
| Parties | In re: JOHN PATRICK STOKES, Debtor. |
| Court | U.S. Bankruptcy Court — District of Montana |
The following contested matters are pending in this Chapter 11 bankruptcy case: (1) the Debtor John Patrick Stokes' ("Stokes" or "Debtor") motion to lift stay (Docket No. 58) seeking to proceed with his appeal of judgment in the Montana Supreme Court Case No. DA 09-0049, but to continue the stay of execution of judgment; and (2) the Office of United States Trustee's ("UST") motion to convert this case to Chapter 7 filed on April 22, 2009 (Docket No. 24). Stokes filed objections and a motion to dismiss the UST's motion for lack of jurisdiction, and Stokes appeared pro se and testified at the hearing in opposition to the UST's motion which was held after due notice at Missoula on August 13 and 14, 2009. Debtor's motion to lift stay was heard on July 16, 2009, and held in abeyance pending the decision on the UST's motion. Other witnesses testified and exhibits were admitted at the hearing on August 13 and 14, 2009, as described in detail below. At the conclusion of the parties' cases-in-chief the Court took the UST's motion to convert under advisement. After review of the record and applicable law, this matter is ready for decision. For the reasons set forth below the Court will enter a separate Order overruling the Debtor's objections and granting the UST's motion, and converting this case to Chapter 7 of the United States Bankruptcy Code. Debtor's motion to lift the stay will be denied without prejudice.
The UST was represented at the hearing on August 13 and 14, 2009, by attorney Neal G. Jensen ("Jensen") of Great Falls, and UST bankruptcy analyst/certified public accountant ("CPA") Larry Rezentes ("Rezentes") testified. Attorneys Joel E. Guthals of Billings, Robert K. Baldwin and Trent M. Gardner of Bozeman appeared representing creditors Todd Gardner and Davar Gardner (together "Gardners"), who filed a joinder to the UST's motion to convert, and Todd Gardner testified. In addition Gardners called the City Attorney of Kalispell, Montana, Charles Harball ("Harball") to testify.
The Montana Department of Revenue ("DOR") filed a joinder to the UST's motion to convert (Docket No. 38) and was represented by assistant attorney Keith A. Jones, and DOR's bankruptcy specialist Kim Davis ("Davis") testified. The United States of America, Internal Revenue Service ("IRS") filed a joinder (Docket No. 42) to the UST's motion, but did not appear. Creditors Thomas H. Boone, trustee of Boone Karlberg Employees Profit Sharing Trust, William E. Mytty, Sandra F. Mytty, Quality Supply, Inc. Profit Sharing Plan and Trust, Douglas S. Hadnot, J. Chriss Crawford, Myrna K. Crawford and Stephen S. Ellis, M.D., P.C. Employees Amended and Restated Pension Plan (together "Boone, et al.") filed a joinder to the UST's motion (Docket No. 33) and were represented by attorney Robert J. Sullivan of Missoula. Exhibits ("Ex.") 9, 17, 18, 19, 21, 22, 23, 24, 25 and 26 offered by the UST, and Gardners' Ex. 2, 3, and 11, were admitted into evidence at the hearing.
Although the Debtor argues that this Court lacks jurisdiction to convert this case to Chapter 7, under 28 U.S.C. 1334(a) this Court has original and exclusive jurisdiction in this bankruptcy case, and the Bankruptcy Code authorizes conversion of a Chapter 11 case to a case under Chapter 7 under 11 U.S.C. § 1112(b) if cause is shown and if conversion is in the best interests of creditors, and if the debtor fails to establish that there is a reasonable likelihood that a plan will be confirmed within applicable timeframes and that the acts or omissions of the debtor were not reasonably justified and will be cured within a reasonable period of time. The UST's motion to convert the case to Chapter 7 is a core proceeding under 28 U.S.C. § 157(b)(2). Debtor's motion to lift the stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G). This Memorandum of Decision includes the Court's findings of fact and conclusions of law.
John Stokes moved to Montana in 1994 and became a resident, but he testified at his § 341(a) meeting of creditors that he had never filed an income tax return for the State of Montana and that he has not filed a federal income tax return since 1985. Ex. 2, Transcript ("Tr."), pp. 82, 83. At the hearing on August 13, 2009, Stokes testified that he calls the IRS "every year" and "they say I don't owe any taxes."
Stokes lives in a house on 80 acres at 12887 Raven Way in Bigfork, Montana. In 1994 he mortgaged the property to HSBC. 341 Tr., p. 28. Stokes owned that property until he transferred the house and 80 acres in 1998 to his daughter Elizabeth Stokes-Pickavance ("Elizabeth"), who paid him no money for the property. Stokes kept a life estate and pays his daughter no rent, but pays the mortgage and expenses. Ex. 2, pp. 27, 28, 167, 169.
In April 2000 Stokes signed a promissory note in the amount of $665,000. Stokes testified that note was assigned to creditors Boone, et al. Stokes admitted that he failed to make payments on that note. Foreclosure proceedings were commenced, and Stokes counterclaimed alleging usury. A settlement was reached between Stokes and Boone, et al. on April 24, 2006. Stokes testified that under that settlement he released his usury claims, and a balloon payment was due on April 24, 2009. That balloon payment was not made and interest continues to accrue on that debt at the rate of $9,000 per month. Stokes testified that the balloon payment has grown to $1.1 million but that he has assets to pay it.
Stokes owns and operates KGEZ, an AM radio station in Kalispell, Montana, under license from the United States of America, Federal Communications Commission ("FCC"). He testified that KGEZ is the oldest continuously operating AM station in America. The station sits on 6.5 acres at 2995 Highway 93 South, and Stokes owns additional real property nearby on which are located KGEZ's radio towers. Stokes testified that a corporation owned by him purchased KGEZ and its property in April 2000, but that his secretary failed to keep the corporation registered with the State of Montana and it was dissolved1, leaving Stokes as the sole successor and owner.
Stokes had his corporation which owned KGEZ sign a promissory note in the amount of $985,000, and gave Stokes a second mortgage. In 2002 Stokes assigned that mortgage to his daughter Elizabeth. Nothing was ever recorded regarding that assignment, and the public record still shows the property is in Stokes' name. In Ex. 9, Stokes' responses to Gardner's discovery requests dated February 25, 2008, Stokes identified his assets in response to Interrogatory No. 14 on page 10 as a "2nd Mortgage — 160 acre easement" which he acquired on January 2001, the value of which and Stokes' equity of which are stated as $2,800,000. Stokes testified that he answered those interrogatories in a hurry and was sanctioned for his responses. He testified that he owed the second mortgage to his daughter, and that he transferred the easement to her six years earlier.
Stokes testified that KGEZ grosses about $7,000 or $8,000 per month, and that it just about breaks even after the bills are paid. He testified that he does not need much. However, Stokes answered "No" at his § 341 meeting when asked whether the radio station ever made money. Ex. 2, 341 Tr., p. 183. At the hearing Stokes was impeached when he answered "No" when asked if it was true that the radio station has never made money. When asked whether he lived off of donations from his audience Stokes answered "No" at the hearing, but at a hearing held on October 12, 2007, in Cause No. DV-01-023(c) in the Montana Eleventh Judicial District Court, Flathead County, Stokes testified that he, his wife and his daughter work for free and live on donations from his audience. Ex. 11, p. 13.
KGEZ's towers are located on 47 acres of land near the Kalispell City Airport. Harball is the Kalispell City Attorney. He testified that the FAA has found that the KGEZ radio towers are a hazard to aviation, that the towers extend 150 feet into the necessary airspace2 of the airport, and that the FAA has specifically advised Kalispell how to proceed to remove the hazard to aviation.
Stokes testified that the City of Kalispell voted to condemn his radio station property. The Kalispell City Council met and passed a resolution with the mayor dated December 15, 2008, Ex. 3, acknowledging the hazard to aviation posed by the KGEZ towers and the need to remove and/or relocate the towers. Ex. 3. Ex. 3 resolves at page 2, Section 1, to direct the city manager to advise the city counsel of the projected costs of relocating the KGEZ towers, after which the City Council will decide whether or not to make a formal offer to the owner of the KGEZ towers. Section II of Ex. 3 provides that if a formal offer is made and rejected, the City Council will determine whether or not it will commence condemnation action against the towers. Harball testified that the City has not yet decided to expand its airport, has not decided to make an offer to Stokes for the towers, and has not yet begun condemnation proceedings against the KGEZ towers, but that if the City wants to use FAA funds to expand its airport it must mitigate the towers.
Harball explained that it not necessary for Kalispell to acquire or condemn the KGEZ land under the towers, but rather it needs only lower the KGEZ towers below the necessary airspace or relocate them3 to eliminate the hazard to aviation. Harball testified that Kalispell does not have $1 million available for Stokes' property. Under cross examination by Stokes, Harball acknowledged that the City has purchased two parcels of property near the airport, and that if the City decides to acquire the KGEZ towers it will make Stokes an offer.
The Gardners sued Stokes' corporation in state court and...
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