In re Toronto, Bankruptcy No. 92-53340.

• Decision Date: 31 March 1994
• Docket Number: Bankruptcy No. 92-53340.
• Citation: 165 BR 746
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Michael L. TORONTO and Diane M. Toronto, Debtors.

165 B.R. 746 (1994)

In re Michael L. TORONTO and Diane M. Toronto, Debtors.

Bankruptcy No. 92-53340.

United States Bankruptcy Court, D. Connecticut.

March 31, 1994.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Stuart M. Sheiman, Bridgeport, CT, for debtor.

Edward Krasnow, Marc A. Krasnow, Bridgeport, CT, for movant.

MEMORANDUM AND ORDER ON MOTION TO DISMISS

ALAN H.W. SHIFF, Bankruptcy Judge.

Sikorsky Federal Credit Union moves to dismiss this chapter 13 case or in the alternative to convert it to a chapter 7 case. Because I conclude that the debtors are ineligible for chapter 13 relief and that conversion to chapter 7 is in the best interests of creditors and the estate, the motion will be granted and this case will be converted to chapter 7.

BACKGROUND

On March 15, 1989, the debtors entered into a home equity line of credit with the movant which was secured by a mortgage on the debtors' residence. On October 18, 1989, the debtors refinanced and the mortgage was released. However, the movant sent the debtors a statement indicating that the line of credit remained open.¹ The debtors continued to use the unsecured line of credit until August 20, 1992, when they defaulted. On September 8, 1992, the movant obtained an attachment on the debtors' residence in the amount of $175,000.00 to secure the amount due on the line of credit. See Conn. Gen.Stat.Ann. § 52-278a et seq. (West 1991 & Supp.1993).

The debtors commenced this case on October 9, 1992 and listed the movant's claim in the amount of $175,000.00 on Schedule D (Creditors Holding Secured Claims) as a "judgment lien" on the debtor's residence. The description of the claim included the parenthetical: "unsecured as per Motion to avoid preferencial sic lien." Schedule D also listed a mortgage on the residence in the amount of $129,931.00. Thus, Schedule D disclosed that the secured claims encumbering the residence totalled $304,931.00. Schedules A (Real Property) and D listed the market value of the residence at $204,540.00, so the encumbrances exceeded its market value by $100,391.00. It is noted that the debtors failed to disclose the movant's claim on Schedule A although they were required to do so. If they considered that claim to be unsecured, they should have, but did not, list it on Schedule F. As filed, Schedule F listed unsecured nonpriority claims of $31,449.54. Schedule E stated unsecured priority claims of $1,401.25. It appears then from Schedules D, E and F that the unsecured portion of the movant's claim and the other unsecured debts totalled $133,241.79.

Confusing and contradictory amendments to the schedules followed. An amended Schedule A was filed December 28, 1992, stating that the only secured claim on the residence was in the amount of $129,197.02, again an apparent reference to the mortgage not to the movant's attachment lien. Despite that amendment, Schedule D was not amended, and the Amended Summary of Schedules still stated total secured debt of $304,931.00. Another amended Schedule A was filed November 24, 1993, stating that the value of the residence was $195,000.00 and that there was no secured claim on the residence. The latter representation is incorrect, because the mortgagee filed a secured claim in the amount of $133,539.59 on November 2, 1992, the mortgage lien was not voided, and the debtor's amended plan filed December 1, 1993, proposed to cure the arrearage on that claim and continue making payments directly to the mortgagee. Further, the Amended Summary of Schedules stated secured claims of $136,320.95 and unsecured nonpriority claims of $156,937.45. Schedule D was not amended after the November 24, 1993 amendment to Schedule A. Another example of the careless preparation of the debtors' petition is the failure to disclose the movant's prepetition collection action which resulted in an attachment on their residence. See Statement of Financial Affairs, item no. 4.²

In Schedule C, filed with the petition, the debtors claimed a number of exemptions under § 522(d). They claimed no exemption on their residence. On November 24, 1993, the debtors filed an amended Schedule C which purported to claim certain exemptions under Conn.Gen.Stat.Ann. § 52-352b (West Supp. 1993), including an exemption of $75,000.00 on the residence.

On the petition date, the debtors also filed a plan which stated in paragraph 2.d. that the movant's $175,000.00 lien "shall be deemed to be unsecured as per Motion to avoid preferential lien." On December 10, 1992, the debtors filed a Motion to Avoid A Preferential Transfer, seeking to avoid the movant's attachment, notwithstanding that such relief is available only by adversary proceeding. See Rule 7001 Fed.R.Bankr.P. That motion was denied for failure to prosecute on February 17, 1993. On January 11, 1993, the movant filed a proof of claim in the amount of $124,163.85 "plus 10% interest" which was asserted to be secured by the $175,000.00 attachment. On March 9, 1993, the debtors filed an objection to that proof of claim "because said debt is not secured on the basis that the attachment was made within ninety days prior to the filing of the petition and while the debtors were insolvent." On that date, the debtors also commenced an adversary proceeding, seeking to avoid that alleged preferential attachment, which was dismissed on July 14, 1993. On August 26, 1993, the debtors commenced a second adversary proceeding, seeking the same relief. The movant filed an answer admitting every allegation of the complaint, and on November 4, 1993, a judgment entered against the movant avoiding the attachment as a preference under § 547 and allowing the movant's claim as a general unsecured claim.

The instant motion to dismiss or convert this case was filed on August 11, 1993. It is noted that rather than consent to an order sustaining the debtors' objection to its proof of claim, the movant filed a motion which acknowledged that its claim was a preference. The movant now alleges that the debtors are ineligible for chapter 13 relief because their noncontingent, liquidated, unsecured debts exceed $100,000.00. See § 109(e), infra, p. 751. Relying on the Black's Law Dictionary definition of "avoid," the movant argues that its preferential attachment was void ab initio and that the debtors therefore did not meet the chapter 13 eligibility requirements on the petition date. See Supplemental Memorandum of Law in Support of Movant's, Sikorsky Federal Credit Union, Motion to Dismiss, filed September 27, 1993, at p. 2. The debtors counter that "events occurring after the petition has been filed should not be used to affect the amount of debt for eligibility purposes," relying in part on Comprehensive Accounting Corp. v. Pearson (Matter of Pearson), 773 F.2d 751 (6th Cir.1985), and assert that because the preference could not be avoided until after the petition, the movant's claim must be treated as a secured claim as of the petition date. See Reply Brief to Movant's Motion to Dismiss, filed October 1, 1993, at p. 1.

DISCUSSION

I note at the outset that courts in this district have approved the use by chapter 13 debtors of the trustee's power to avoid preferential transfers. See Carr v. DeMusis (In re Carr), 34 B.R. 653, 655 (Bankr.D.Conn. 1983), aff'd on other grounds, 40 B.R. 1007 (D.Conn.1984); Ottaviano v. Sorokin & Sorokin, P.C. (Matter of Ottaviano), 68 B.R. 238, 240 (Bankr.D.Conn.1986); accord Russo v. Ciavarella (In re Ciavarella), 28 B.R. 823, 826-28 (Bankr.S.D.N.Y.1983). While I acknowledge authority to the contrary, see, e.g., Hill v. Fidelity Fin. Servs. (In re Hill), 152 B.R. 204, 206 (Bankr.S.D.Ohio 1993); In re Redditt, 146 B.R. 693, 701 (Bankr.S.D.Miss. 1992), the movant did not raise that issue in the debtors' adversary proceeding in which a final judgment has entered. Accordingly, I need not revisit that issue.³

The issues before me are (i) whether these debtors are eligible for chapter 13 relief and (ii) if not, whether dismissal or conversion is in the best interests of the creditors and the estate.

I.

CHAPTER 13 ELIGIBILITY

The following code provisions are relevant:

Section 109(e) (chapter 13 eligibility):

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $100,000 and non-contingent, liquidated, secured debts of less than $350,000, or an individual with regular income and such individual\'s spouse ... that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $100,000 and noncontingent, liquidated, secured debts of less than $350,000 may be a debtor under chapter 13 of this title.

11 U.S.C.A. § 109(e) (West 1993).

Section 547(b) (preferences):

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; ... and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C.A. § 547(b) (West 1993).

Section 550(a) (liability for avoided transfers):

Except as otherwise provided in this section, to the extent that a transfer is avoided under section ... 547 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property....

11 U.S.C.A. § 550(a) (West 1993).

Section 502(h) (allowance of claims):

A claim arising from the recovery of property under section ... 550 after the

...