In re Wetter

Decision Date14 October 2020
Docket NumberCASE NO. 19-71010
Citation620 B.R. 243
Parties IN RE: Jeffrey Bernhard WETTER Debtor.
CourtU.S. Bankruptcy Court — Western District of Virginia

Richard E. B. Foster, Richard E.B. Foster, PLLC, Roanoke, VA, for Debtor.

MEMORANDUM OPINION

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE

This matter comes before the Court on a Motion to Convert Case to Chapter 11 (the "Motion") filed on July 23, 2020 by the Debtor, Jeffrey Bernhard Wetter (the "Debtor" or "Dr. Wetter"). The Debtor asks this Court to convert his Chapter 7 case to one under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et. seq. , such that the Debtor can then amend his petition to avail himself of the relatively new Subchapter V provisions applicable to Small Business Debtors. The Chapter 7 Trustee, Steven L. Higgs (the "Trustee"), filed an objection, joined in by Aesthetic Dentistry of Charlottesville, P.C. ("ADC") and Pacific Western Bank. On August 17 and 20, 2020, the Court conducted evidentiary hearings on the Motion and the objections thereto.

The parties filed briefs and responses and the matter is now ready for decision. For the following reasons, the Motion will be denied.1

FINDINGS OF FACT

The parties to this case have a long history, both in this Court and elsewhere. The Debtor filed a voluntary Chapter 7 petition in this Court on July 31, 2019. ECF 1. The Debtor is a dentist practicing in the Commonwealth of Virginia. While the Debtor is married, he filed this case individually. His husband, Scott Sayre, is not currently employed. The Debtor's initial Schedule I reflects he works at ES Healthcare, which provides dental services to Virginia correctional institutions, generating a net take-home pay of $4,254.34 a month. After expenses, his net monthly income was shown as $154.34 per month. ECF 1, pp. 31-34.

Before taking his current employment, the Debtor sold his private practice and briefly ceased the active practice of dentistry. During the period he was not actively practicing, his main source of income was approximately $30,000 in monthly payments he received from ADC, his former practice.2 ADC began experiencing financial problems in 2018. In July 2018, ADC stopped making its monthly payments to the Debtor. In November 2018, ADC filed for Chapter 11 relief in the Harrisonburg division of this Court.3 That case is pending before Chief Judge Rebecca B. Connelly.4 Thereafter, the Debtor became personally liable on several ADC loans that he had guaranteed. These include an unsecured loan of approximately $490,000 to Capital Source Bank (also known as Pacific Western) and $35,000 in unsecured credit card debt owed Bank of America.

Along with his petition in this case, the Debtor filed a complete set of bankruptcy schedules (the "Original Schedules"). The Original Schedules reported total assets of $3,997,078.50 but indicated this was a no-asset case. ECF 1, p.17. Primarily, this was due to claimed exemptions, though some of the scheduled assets of substance appear to have little actual value.5 The crux of the present controversy involves the Debtor's claimed exemption of his membership interest in JBW Investments, LLC ("JBW") owned as tenants by the entirety.

Valued in its entirety at approximately $1,850,000.00 by the Debtor, with his portion valued at $924,875.00, JBW is a limited liability company holding real property. In total, JBW owns four properties: (1) the Debtor's residence at Smith Mountain Lake in Franklin County, Virginia; (2) a dental office in Bridgewater, Virginia; (3) a dental office in Charlottesville, Virginia; and (4) a condominium in St. Thomas, U.S. Virgin Islands. JBW has substantial equity in the first three properties and the condominium is completely debt-free. Neither the Debtor nor his spouse pay any rent to JBW for use of the residence.

The evidence at trial reflects that in the Original Schedules in this case, the Debtor stated that he transferred his 100% membership interest in JBW to him and his spouse as tenants by the entirety (the "TBE Transfer") on January 1, 2018. ECF 1, p.40. The evidence further reflects that at the first meeting of creditors, the Debtor confirmed that the date of the TBE Transfer was January 1, 2018. Tr. Ex. F. Moreover, in response to a verification demand from the United States Trustee (the "UST"), the Debtor represented a third time that the date of the TBE Transfer was January 1, 2018. Tr. Ex. C. Debtor's counsel also provided the UST with a copy of the JBW Operating Agreement which purportedly was signed by Debtor and his spouse on January 1, 2018 as tenants by the entirety. Id .

Given the substantial value of the JBW asset, the Trustee remained wary of the purported exemption. Moreover, Section 727(a)(2) provides, in pertinent part, that the Court shall not grant the debtor a discharge if the debtor, "... with intent to hinder, delay or defraud a creditor ...has transferred ...(A) property of the debtor, within one year before the date of the filing of the petition." 11 U.S.C. § 727(a)(2). In advance of the continued meeting of creditors scheduled for September 24, 2019, the Trustee requested the Debtor provide organizational and meeting documents for JBW. Debtor's counsel emailed the Trustee an assignment of the JBW interests, identical in form, but dated September 25, 2018. Tr. Ex. D. This later date was well within the one-year period set by Section 727(a)(2)(A). The January 1, 2018 date was not.

At the continued meeting of creditors, the Trustee quizzed the Debtor regarding the discrepancy. The Debtor explained that he had actually signed the assignment on September 25, 2018, but his estate planning lawyer, James B. Massey, III, had told him to "backdate the transfer" to January. 6

The UST was not present at the meeting of creditors and was not subsequently informed of the backdated TBE Transfer.

The September meeting of creditors was continued until October 2019 and then several more times because the Debtor needed to provide certain additional information and documentation to the Trustee. The meeting of creditors concluded on April 23, 2020. During this time, the Debtor did not correct or clarify his representations and statements to the UST. The UST still believed the TBE Transfer date to be January 1, 2018.

The Court granted the Debtor's discharge on March 4, 2020. ECF 20. However, on May 22, 2020, the Trustee filed an Adversary Proceeding (A.P. No. 20-07025) alleging the Debtor's TBE Transfer was a fraudulent conveyance made with the intent to hinder, delay, and defraud his creditors and recoverable under 11 U.S.C. §§ 544, 548, and applicable Virginia state law. This prompted the UST to contact the Trustee. They discovered that they both emailed the Debtor in September 2019 requesting verification of the TBE Transfer but received different answers. The Trustee was sent a TBE Transfer Assignment dated September 25, 2018. Tr. Ex. D. The UST was sent a TBE Transfer Assignment dated January 1, 2018. Tr. Ex. C. While the Debtor informed the Trustee at the meeting of creditors that he backdated the TBE Transfer, he never so apprised the UST. The Debtor was clearly in financial distress as of the September 2018 date, lending support to various fraudulent and/or voluntary conveyance theories.7

Shortly thereafter, the UST filed an Adversary Proceeding (A.P. No. 20-07026) seeking to revoke the Debtor's discharge. On July 14, 2020, in his Answer to the UST's Complaint, the Debtor admitted for the first time – nearly one year after filing – that at all times he knew the TBE Transfer occurred on September 25, 2018.8

Shortly after the Debtor's admissions to the UST, another twist occurred. The Debtor filed Amended Schedules on July 28, 2020. ECF 60. The Amended Schedules show the Debtor owning only a 50% membership interest in JBW held through a revocable trust. The Debtor explained that in September 2016, approximately three years before his Petition was filed, he actually transferred his 100% interest in JBW in a different manner. He conveyed 50% into a revocable trust for himself and 50% to Mr. Sayre, who in turn conveyed his interest into his own revocable trust. While the Debtor knew he had signed the Assignment in September 2016, he could not find the documents, and assuming them lost and ineffective, proceeded with the TBE Transfer in 2018 as though he owned 100% of the membership interest in JBW. It does not appear the Debtor told anyone, including the Trustee or the UST, about the missing 2016 assignments until he "found" them.9

At trial, the Debtor explained that on July 19, 2020 he found the September 2016 Assignments in a gun safe inside his home along with other estate planning documents, including original wills and trusts, prepared by Mr. Massey for both the Debtor and Mr. Sayre. The estate planning documents were signed and witnessed in Mr. Massey's office. However, Mr. Massey's September 8, 2016 transmittal letter explained that while the original signed estate planning documents were enclosed, the LLC membership assignments needed to be executed. Specifically, Mr. Massey stated as follows:

I also enclose six documents you may wish to use for JBW Investments LLC. Two are documents whereby Jeff transfers X% of his membership interests to Scott. The others are documents whereby each of you transfers your share of JBW into your respective revocable trusts and, as Trustee, agrees to be bound by the company's operating agreement. The percentages need to be filled in if and when you do this.

Debtor's Ex. 2. ECF 66. The signed Assignment documents found in the gun safe are each dated September 12, 2016. Debtor's Ex. 4-6. ECF 66.

Thus, after the September 2016 Assignments, it appears the Debtor owned a 50% membership interest in JBW through his revocable trust. The 50% interest is valued at $924,875.00 on the Amended Schedules. The day after finding these signed documents, the Debtor filed a motion to convert.10 The Trustee filed an Objection to the Motion....

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