In re Williams

• Docket Number: 23-10189
• Decision Date: 23 August 2023
• Parties: IN RE: GWENDOLYN DIANE WILLIAMS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Georgia

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IN RE: GWENDOLYN DIANE WILLIAMS, Debtor.

No. 23-10189

United States Bankruptcy Court, S.D. Georgia, Augusta Division

August 23, 2023

Chapter 13

OPINION AND ORDER

Susan D. Barrett, United States Bankruptcy Judge

Before the Court is the Motion to Set Aside Order of Conversion and Objection to Conversion to Chapter 13 (the "Motion to Set Aside Conversion") filed by the Chapter 7 Trustee ("Trustee") and the response filed by the debtor Gwendolyn Diane Williams ("Debtor"). Dckt. Nos. 28 and 33.

The Trustee's Motion to Set Aside Conversion comes after Debtor moved to convert her case from chapter 7 to chapter 13 on May 16, 2023. Dckt. No. 18. The case was converted to chapter 13 the same day. Dckt. No. 23.^[1] After notice and hearing, the Motion to Set Aside Conversion is granted.

FINDINGS OF FACT

The Trustee argues Debtor's failure to properly disclose her assets at the onset of her chapter 7 constitutes bad faith and therefore she is not entitled to convert to a chapter 13. Debtor acknowledges there were some inaccuracies in her original schedules but contends these were innocent mistakes and she is entitled to convert the case under §706(a).^[2]

Original Schedules.^[3]

Debtor filed her chapter 7 case on March 7, 2023. Under penalty of perjury, she submitted a Petition and Schedules reflecting the following:

1. No legal or equitable interest in any real estate. Dckt No. 1, Sch. A/B at ¶1.

2. As to whether she is a beneficiary of someone who has died, she stated: "My father [] just passed (2/21/2023) testate, heirs: me and my 3 brothers (decedent's real estate subject to mortgage [with an outstanding] balance [of] $80K)." Id., Sch. A/B at ¶32 and Sch. C at ¶2.

3. Four financial deposit accounts (a checking, two savings accounts, and a health savings) with a collective balance of $7,800.00. Id., Sch. A/B at ¶17.

4. Monthly expenses exceed her monthly income by $159.00. Id., Schs. I and J.

5. Her only debts are unsecured claims, totaling approximately $25,000.00, with no equity available after exemptions to pay her creditors anything. Id., Summary of Your Assets and Liabilities and Certain Statistical Info. and Sch. E/F.

Debtor's Testimony at the Hearing Regarding the Initial §341 Meeting and Other Matters.

Debtor missed numerous previously scheduled §341 meetings because of work commitments, but finally attended the meeting on May 10, 2023. Under questioning from the Trustee at the §341 meeting, she initially testified that she did not own any real estate. She denied inheriting anything in the last five years other than a partial interest in her father's residence and two previously undisclosed life insurance policies of $5,000.00 and $6,000.00, respectively. She testified that her father told her one of these policies was to cover his funeral expenses. She denied the existence of any other insurance policies.

Debtor's father passed away on February 21, 2023, two weeks before Debtor filed her bankruptcy petition, and almost three months before her §341 meeting. Debtor testified at the hearing that she had been working with her bankruptcy counsel for some time before her father passed away. She also testified that she provided her attorney with a copy of her father's will prior to filing her bankruptcy petition. The will provided that Debtor would inherit her father's entire estate, not a pro rata distribution with her brothers.

Under further questioning from the Trustee at the §341 meeting, Debtor acknowledged for the first time that she actually owned the Morehall Drive residence when she filed her bankruptcy petition. Her father conveyed the property to her in January 2023, well before she filed this bankruptcy. Debtor testified at the §341 meeting the property was worth about $125,000.00.

Upon discovery of discrepancies between Debtor's schedules and her assets, the Trustee continued the §341 meeting in order to obtain additional information.

First Amended Schedules Filed Contemporaneously with the Motion to Convert.

Six days after this initial §341 meeting, and contemporaneous with filing her Motion to Convert to chapter 13, Debtor amended her schedules for the first time. The amendments disclosed her outright ownership of the Morehall property, which her schedules valued at $96,351.00 based upon the tax-assessed valuation, subject to an outstanding $80,000.00 mortgage. Dckt. No. 19, Sch. A/B at ¶1.1.

These amendments also disclosed for the first time that Debtor is the beneficiary of a $100,000.00 life insurance policy on her father. Id., Sch. A/B at ¶30. Debtor testified that she discovered this policy in the six-day window between the initial §341 meeting and her filing of the Motion to Convert when she reviewed the checking account Debtor jointly owned with her father.

Debtor's father became ill in 2021 and moved back into the Morehall property where Debtor was living. In November 2022, he was diagnosed with stage 4 cancer and passed away in February, before she filed her bankruptcy petition in March. Debtor testified her father handled all of his financial affairs and she was unaware of this $100,000.00 insurance policy until she reviewed her father's checking account records. The Trustee points out this actually is a joint checking account that Debtor owned with her father. Furthermore, Debtor's brother testified at the hearing that their father handled his finances until he became ill.

Debtor's initial schedules disclosed four bank accounts-a checking account, two savings accounts, and a health savings account with a collective balance of $7,800.00 as of the petition date. Dckt. No. 1, Sch. A/B at ¶17. In her initial chapter 7 petition, Debtor claimed these funds along with all her other assets as fully exempt from her creditors' reach. Id., Sch. C at ¶2. Her first amended schedules reflect a significant increase in the collective balance of the four bank accounts, from $7,800.00 to $11,537.00. Dckt. Nos. 1 and 19, Sch. A/B at ¶17.

In addition, Debtor's net monthly income increased from a negative $159.00 to a positive $525.00. Dckt. Nos. 1 and 19, Schs. I and J. Debtor failed to provide any explanation of the significant increase in her net monthly income. This positive monthly income is relevant because it shows an ability to fund a chapter 13 plan.

Finally, these amendments also disclosed Debtor would receive the following property from her father's estate: a 2011 Toyota Highlander (144,000 miles); a 2007 Toyota Sequoia (inoperable); and a bank account with Bank of America with an approximate balance of $4,000.00. Dckt. No. 19, Sch. A/B at ¶32. She valued the property due from her father's estate, including the Bank of America account, at $8,000.00 total. Id.

Second Amended Schedules Filed Before Hearing on Trustee's Motion and After the Conversion.

After the conversion and a few days before the hearing on the Trustee's Motion to Set Aside Conversion, Debtor again amended her schedules to disclose four previously undisclosed bank accounts. Dckt. No. 32, Sch. A/B at ¶17. Two of these accounts are relevant for purposes of this matter-another savings account with a balance of $2,068.00 and a checking account that she jointly owned with her father with a balance of $7,377.00. Id. The collective balance of her accounts rose again from $7,800.00 to $20,967.00. Dckt. Nos. 1, 19 and 32, Sch. A/B at ¶17. At the hearing, she testified she gave her counsel these accounts before she filed her bankruptcy petition.

In sum, her twice-amended schedules increased her assets from $36,175.00 to more than $259,000.00 and increased her net monthly income from a negative $159.00 to a positive $525.00. Dckt. Nos. 1, 19 and 32, Schs. A/B, I and J.

CONCLUSIONS OF LAW

The parties acknowledge that Debtor does not have an absolute right to convert her case to a chapter 13. Marrama v Citizens Bank of Mass., 549 U.S. 365, 372 (2007). Furthermore, given the facts and circumstances of this case, the parties acknowledge the Trustee now has the burden of proof to establish that Debtor is not eligible to convert her case. In re Bradley, 649 B.R. 693, 701 (Bankr. D.S.C. 2023)(once debtor makes a prima facie case for conversion, the burden shifts to the opposing party to show debtor is not eligible); In re Cilwa, No. 15-00263-HB, 2016 WL 2641963, at *3 (Bankr. D.S.C. Apr. 14, 2016)(same); In re Broad Creek Edgewater, LP, 371 B.R. 752, 757 (Bankr. D.S.C. 2007)(same); see also In re Goines, 397 B.R. 26, 33 (Bankr. M.D. N.C. 2007)(the party opposing the conversion has the burden to establish by a preponderance of the evidence that debtor is not entitled to conversion).

The Supreme Court found a chapter 7 debtor does not have an absolute right to convert to chapter 13 under §706(a) if she has engaged in bad faith conduct, prepetition or during the pendency of her chapter 7, sufficient to establish "cause" that would ultimately warrant dismissal or reconversion of a chapter 13 case. See Marrama, 549 U.S. at 373-74; Cilwa, 2016 WL 2641963, at *4; In re Gabriel, 390 B.R. 816, 819 (Bankr. D.S.C. 2008). Section 1307(c) provides that a chapter 13 case may be dismissed or converted to chapter 7 "for cause" and provides a nonexclusive list of ten causes justifying conversion or dismissal. 11 U.S.C. §1307(c). Although none of the enumerated reasons in §1307(c) include bad faith conduct, the Supreme Court found:

Bankruptcy courts nevertheless routinely treat dismissal for prepetition bad-faith conduct as implicitly authorized by the words "for cause." In practical effect, a ruling that an individual's Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the

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