In re Zahniser

• Decision Date: 17 March 1986
• Docket Number: Bankruptcy No. 85 B 06947 G.
• Citation: 58 BR 530
• Parties: In re Jonathan Wilbur ZAHNISER, Social Security No. XXX-XX-XXXX, and Alice Mae Zahniser, Social Security No. XXX-XX-XXXX, Debtors.
• Court: U.S. Bankruptcy Court — District of Colorado

58 B.R. 530 (1986)

In re Jonathan Wilbur ZAHNISER, Social Security No. XXX-XX-XXXX, and Alice Mae Zahniser, Social Security No. XXX-XX-XXXX, Debtors.

Bankruptcy No. 85 B 06947 G.

United States Bankruptcy Court, D. Colorado.

March 17, 1986.

COPYRIGHT MATERIAL OMITTED

Steven R. Rider of Rider & Woulf, P.C., Aurora, Colo., for Federal Land Bank of Wichita.

Victor Roushar of Malone & Brown, P.C., Denver, Colo., for Southwest Production Credit Ass'n.

John W. Overholser, Overholser & Slee, P.C., Montrose, Colo., for Elbert Harris.

William D. Nelsch, Denver, Colo., for debtors.

FINDINGS, CONCLUSIONS AND ORDER ON MOTION TO DISMISS DEBTORS' CHAPTER 11 CASE

PATRICIA ANN CLARK, Bankruptcy Judge.

This matter comes before the Court on the motion of Federal Land Bank of Wichita to dismiss this case pursuant to 11 U.S.C. § 109(f). The motion was supported by Elbert Harris and Southwest Production Credit Association. Additionally, Southwest Production Credit Association asserts several alternative bases for dismissal. First, it avers that there is a continuing loss to the debtors' estate with no reasonable likelihood of rehabilitation. Second, Southwest Production Credit Association alleges that the debtors will be unable to effectuate a plan of reorganization under Chapter 11. Third, it asserts that the filing of this petition has caused and will continue to cause unreasonable prejudicial delay to the creditors. Further, it contends that debtors have not filed this bankruptcy petition in good faith. Upon conclusion of the hearing in this matter, the Court makes the following finds of fact and determination.

The debtors, Jonathan and Alice Zahniser, first filed a voluntary petition for reorganization under Chapter 11 on April 5, 1984. On June 6, 1985, this petition was dismissed by the Court pursuant to 11 U.S.C. § 1112(b)(1). After filing an appeal of the first dismissal, the Zahnisers, on November 13, 1985, filed a new petition for relief under Chapter 11. The pending appeal was subsequently dismissed as moot.

The movants in this case, Elbert Harris (Harris), Federal Land Bank of Wichita (FLB) and Southwest Production Credit Association (PCA), are secured creditors with liens on either Zahnisers' real estate or various items of personalty. Harris is the holder of a promissory note made by Zahnisers in 1979. The note is secured by a first deed of trust covering Zahnisers' property described in their schedules as Tract 2.¹ The Zahnisers' disclosure statement lists the delinquent amount due Harris to be $32,053.88 plus interest accruing at $20.05 per diem with a current principal balance of approximately $46,657.

FLB loaned the Zahnisers $150,000 in 1981. This loan was evidenced by a note and secured by a deed of trust on Tract 1. The past amount due on this note is $47,327.80 plus interest which is accruing daily. The current principal balance is approximately $146,967.

PCA is a creditor herein based upon a renewal note dated October 18, 1983. PCA's claim is principally secured by the livestock and equipment of the Zahnisers. Although the Zahnisers may dispute the allowance of all or part of this claim, the entire claim of approximately $520,179 is provided for in the plan.

Although the movants consist of three major secured creditors, the Zahnisers list other secured and unsecured debts. The summary of debts and property in the schedules filed by the Zahnisers on November 13, 1985 list taxes owing of $1,662; secured claims of $918,683.27; and unsecured debts of $36,950.93 for total scheduled liabilities of $957,296.20. The same summary lists real property assets at a fair market value, as of a 1984 appraisal, of $827,000; farming supplies and implements of $82,000 and livestock of $496,000 for total assets of $1,493,950.

The Zahnisers are farmers and raise sheep in Montrose, Colorado. Their operation consists primarily of breeding sheep for the sale of wool and for consumption by the American public. They also grow wheat and barley as winter feed for the sheep. In order to increase their herd, the Zahnisers have been breeding their sheep with sheep called Polypay. A Polypay is a distinct breed due to its ability to produce slightly lighter lambs in greater numbers. Through this breeding program, the size of their herd has increased from approximately 3,700 head on the date of the original filing to approximately 6,000 head as of the second filing date. The Zahnisers currently value their livestock at $496,000 with the value of the herd on the date of the original filing being $190,000.

The evidence at the hearing revealed that, notwithstanding occasional price fluctuations, the market price for sheep has steadily increased. Mr. Zahniser testified that the most recent price he received for lamb was 70.50 cents per pound. The success of the plan is based, in part, on the sales price being at least 70 cents per pound for lambs in 1986 with a 4 percent increase in each subsequent year. An additional basis for income under the plan is the sale of wool under the federal government's wool incentive program. The Zahnisers anticipate adding $74,000 per year to their income from the sale of wool.

With their plan and disclosure statement, the Zahnisers submitted cash flow projections for the life of the plan, which is eight years. The cash flow projections reflect actual cash positions for the first month of operation as debtor-in-possession under this plan. The monthly and yearly cash flow projection sheets show beginning balances, additions for income from sales of livestock and other sources, deductions for operating expenses, deductions for debt service and ending cash balance.

For 1986, the operating expenses are estimated at $231,715, of which $6,894 is set aside for family living. The Zahnisers project their annual income for 1986 will reach $446,936,² of which $286,500 is from the sale of lambs. The income figures have been increased at a rate of 4 percent per annum and the operating expense figures have been increased at a rate of 6 percent per annum. The Zahnisers estimate that payments required pursuant to their plan of reorganization for retirement of secured debt will be $160,897. The debt service under the plan for each year is expressed as 36 percent of gross receipts.

The first issue presented is whether the Zahnisers, who had their prior Chapter 11 case dismissed, are eligible to be debtors under 11 U.S.C. § 109(f). Section 109(f) is one of the several amendments enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. It is designated to control abusive repetitive filings. See Statement of Senator Dole in 130 Cong. Rec. S8894 (daily ed. June 29, 1984). In relevant part, the section provides that "no individual may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if . . . the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case . . . or, the debtor requested and obtained voluntary dismissal of the case. . . ."

In the present case Zahnisers' original petition was dismissed by the Court on June 6, 1985, approximately 160 days before the second petition was filed. In its Order, the Court made no findings of "willful failure to obey an order of the court."³ Instead it found that because of land values and projected income, there was no reasonable probability of successful rehabilitation. The Court also found that there would be a continuing loss or diminution of the estate. Such an order does not make the Zahnisers ineligible to be a debtor under Section 109(f), because of willful failure to obey a court order. Compare In re Patel, 48 B.R. 418 (Bankr.M.D.Ala.1985) (where debtor, who had two prior Chapter 13 plans dismissed for failure to pay under confirmed plans, was not eligible to be a debtor within 180 days of prior dismissal).

Further, the dismissal was not based on the Zahnisers' failure to appear before the Court in proper prosecution of the case. Although the Court commented on counsel's inadequate representation of the Zahnisers, its decision was premised, as above noted, on a finding of a continuing loss to the estate and the improbability of a successful reorganization. Finally, it is clear that the June 6, 1985 dismissal was not voluntary but based upon a motion to dismiss by PCA. In fact, the Zahnisers pursued an appeal of that dismissal. Therefore, this Court finds no basis for the allegation that Section 109(f) bars the filing of this petition.

Movants herein assert four additional grounds for dismissal of this case: (1) bad faith;⁴ (2) continuing loss or diminution of the estate and absence of a reasonable likelihood of rehabilitation; (3) inability to effectuate a plan; and (4) unreasonable prejudicial delay.

The facts required to mandate dismissal based upon lack of good faith are as varied as the number of cases. See, e.g., In re Coastal Cable T.V., Inc., 709 F.2d 762 (1st Cir.1983); Furness v. Lilienfield, 35 B.R. 1006 (D.Md.1983); In re Alison Corp., 9 B.R. 827 (Bankr.S.D.Cal.1981); In re Nancant, 8 B.R. 1005 (Bankr.D.Ma. 1981); In re Dutch Flat Investment Co., 6 B.R. 470 (Bankr.N.D.Cal.1980). A common thread is the requirement that the debtor must owe real "legitimate" debts, In re Coastal Cable T.V., Inc., 709 F.2d at 765, to "real creditors," Furness v. Lilienfield, 35 B.R. at 1013, constituting an "unsecured creditor body." In re Alison Corp., 9 B.R. at 829. Further, there must be an established "ongoing business." In re Dutch Flat Investment Co., 6 B.R. at 471, with more than a "vague plan for the development of a sole asset." In re Nancant, Inc., 8 B.R. at 1009. If it is apparent that the purpose is not to delay or defeat creditors but rather to put an end to delays, to administrative expenses and to invoke the bankruptcy laws in the spirit indicated by Congress,...