Karen W. Ford

In re
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
KAREN W. FORD,
Debtor.
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Case No. 	12-20094
Chapter 11
OPINION ON WELLS FARGO'S MOTION TO CONVERT
CASE TO CHAPTER 7
On May 9, 2013, this matter came before the court for an evidentiary hearing on the
Motion to Convert Case to Chapter 7 filed by Wells Fargo Bank, N.A. ("Wells Fargo"), the
Joinder filed by Natasha Saypol ("Saypol") and the objection filed by the debtor, Karen W.
Ford ("Ford"). At the conclusion of the hearing, the court took the matter under
advisement. The court having reviewed the record, testimony and other evidence,
applicable law and the arguments of the parties, is prepared to rule.
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334.
This is a core proceeding under § 157 (b)(2)(A). This motion is brought pursuant to 11
u.s.c. §1112(b). 1
Wells Fargo contends that cause exists to convert Ford's chapter 11 bankruptcy case
to a chapter 7 asserting that (1) Ford's sole purpose in filing her bankruptcy case was to
prevent Wells Fargo from collecting its judgment; (2) Ford does not have any business to
1 Unless otherwise noted, all statutory references are to Title II of the United States Code.
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reorganize; (3) her status as manager of Flat Creek is her only business-related activity and
as she attempted to sell Flat Creek, this business position and income source would be
eliminated; (4) Ford has not filed a plan; and, (5) that she filed her bankruptcy case in bad
faith and has administered it in violation of the Bankruptcy Code and Federal Rules of
Bankruptcy Procedure ("Rules").
Ms. Ford filed for chapter 11 bankruptcy protection on February 10, 2012. The
history between Ford and Wells Fargo, and Ford and Saypol has evolved into highly
contentious business relationships resulting in a myriad of motions and adversary
proceedings in the Bankruptcy Court, along with numerous actions in state court.
The historical facts of this case have been presented numerous times. Ford and her
husband, Glenn Ford (Glenn) pledged Flat Creek Capital, LLC's ("Flat Creek") asset, a
mini warehouse, as collateral for their personal loan. Additionally, Ford and Glenn
executed personal guaranties on loans with Wells Fargo. Prior to filing for bankruptcy
protection, Ford and Wells Fargo were involved in litigation in the United States District
Court for the District of Wyoming ("Wyoming District Court"). Wells Fargo initiated the
action on the personal guaranties that Ford and Glenn had granted to Wells Fargo. A
judgment was entered in favor of Wells Fargo and against Ford and Glenn on November 2,
2011 in the amount of$2,161,203.71. Wells Fargo filed an "Exemplification Certificate"
against Ford's residence in order to create a judgment lien in the real estate records of
Teton County Clerk. In this bankruptcy case, Ford filed an adversary complaint against
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Wells Fargo to avoid the preferential transfer which was created by the judgment lien. The
trial is scheduled for September 11, 2013.
Ford owns seventy-five percent (75%) of the shares of Flat Creek and is its
managing member. Glenn and Ethan Valenstein, each own 6.25% shares and Saypol owns
the remaining 12.5% shares. Flat Creek is not a debtor in bankruptcy. Saypol brought state
court actions requesting access to Flat Creek's books and information and an accounting.
These matters are pending in the Ninth Judicial District Court for the State of Wyoming
("State Court"). In the State Court, Wells Fargo requested and was granted, the
appointment of a receiver to administer Flat Creek's rental income. 	Wells Fargo, after this
court determined that the automatic stay did not apply to Flat Creek, initiated foreclosure
proceedings in State Court.
In this court, Saypol filed adversary proceedings, and upon the court's approval, an
amended complaint, individually and derivatively on behalf of Flat Creek to determine the
dischargeability of Saypol's claim against Ford and Glenn. These trials are scheduled on
August 15, 2014.
Ford filed her Disclosure Statement and Chapter 11 Plan of Reorganization on May
7, 2013.
Discussion
Wells Fargo argues that (1) there is a substantial or continuing loss to or diminution
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of the estate and the absence of a reasonable likelihood of rehabilitation; (2) Ford failed to
timely satisfy filing or reporting requirement established by the Bankruptcy Code and
Rules; and, (3) Ford lacks good faith in filing and administering this bankruptcy case.
Saypoljoined Wells Fargo's motion. Wells Fargo makes the additional allegation that
cause exists to convert the case as Ford failed to comply with an order of this court. Both
Saypol and Wells Fargo assert that it is in the best interests of Ford's creditors that the case
not be dismissed.
Discussion
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The Bankruptcy Code provides, in relevant part:
"[O]n request of a party in interest, and after notice and a hearing, the
court shall convert a case under this chapter to a case under chapter 7 ... for
cause unless the court determines that the appointment under section 11 04( a)
of a trustee or an examiner is in the best interests of creditors and the estate. " 2
"The court may not convert a case under this chapter to a case under
chapter 7 ... ifthe court fmds and specifically identifies unusual circumstances
establishing that converting ... the case is not in the best interest of creditors
and the estate, and the debtor or any other party in interest establishes that-
(A) there is a reasonable likelihood that a plan will be confirmed
within the time frames established in sections 1121(e) and 1129(e) of
this title, or if such sections do not apply, within a reasonable period
of time; and
(B) the grounds for converting or dismissing the case include an act or
omission of the debtor other than under paragraph (4)(A)-
2 § 1112(b)(l).
3 § 1112 (b)(2).
(i) for which there exists a reasonable justification for the act or
omission; and
(ii) that will be cured within a reasonable period of time fixed
by the court. " 3
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Paragraph (4), includes as "cause" to convert or dismiss:
(A) 	substantial or continuing loss to or diminution of the estate and
the absence of a reasonable likelihood of rehabilitation;
(E) 	failure to comply with an order of the court;
(F) 	unexcused failure to satisfy timely any filing or reporting
requirement established by this title or by any rule applicable to a case under
this chapter. 4
As succinctly stated by the Bankruptcy Court for the N orthem District of Iowa,
"The initial burden lies with the movants to establish cause for
conversion of a Chapter 11 bankruptcy case to a chapter 7 case. Once
"cause" has been demonstrated, the Court must convert or dismiss, unless the
court specifically identifies unusual circumstances that establish that such
relief is not in the best interests of creditors and the estate. Absent unusual
circumstances, the court must not convert or dismiss a case if the debtor
establishes that (1) there is a reasonable likelihood that a plan will be
confirmed within a reasonable time, (2) the "cause" for dismissal or
conversion is something other than a continuing loss or diminution of the
estate coupled with a lack of a reasonable likelihood of rehabilitation; and (3)
there is a reasonable justification or excuse for a debtor's act or omission and
the act or omission will be cured within a reasonable time." 5
(1) 	Substantial or continuing loss to or diminution of the estate and the absence
of a reasonable likelihood of rehabilitation
Section 1112(b)(1) provides that a bankruptcy court may convert a case when
there is continuing loss to or diminution of the estate and absence of reasonable
likelihood of rehabilitation. This has two components: (1) the court tests whether,
after the commencement of the case, the debtor continues to experience a negative
cash flow, or alternatively, declining asset values; and, (2) the court tests whether
4 § 1112 (b)(4).
5 In re Mie/1, 419 B.R. 357 (Bankr. N.D. Iowa, 2009).
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there is any reasonable likelihood that the debtor, or some other party will be able to
stem the debtor's losses and place the debtor's business enterprise back on a solid
financial footing within a reasonable amount oftime. 6
Declining asset value
Under §541, all property of the bankruptcy estate is determined as of the time
the bankruptcy is filed. 	At the time Ford filed her bankruptcy petition she had assets
valued in the amount of$2,712,635.10 and scheduled liabilities in the amounts of(a)
secured claims: $1,238,862.20; (b) priority claims: $7,377.18; and (c) unsecured
claims: $2,442,128.24.
Since filing, Ford sold her Jackson residence, paid the bank its secured
amount and is holding the net equity ($946,263.47) in a joint account with Wells
Fargo pending resolution of the adversary proceeding. Ford scheduled her interest
in Flat Creek Capital, LLC on Schedule Bin the amount of$581,000.00. Although
the sale never closed, due to considerations other than value, Ford contingently
accepted an offer of approximately 1.7 million in December 2012 for the sale of Flat
Creek's asset, the mini warehouse. However, the potential increase of the value of
Flat Creek is speculative as the sale was not completed, nor was there testimony
regarding whether the increase in Flat Creek's value upon a sale translated into an
increase in the share values which Ford owns.
6 In re Bartmann, BAP no. 03-078, 2004 Bankr. LEXIS 620 (10'" Cir. BAP, May 10, 2004).
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On May 3, 2013, the Ninth Judicial District Court for the State of Wyoming
entered a Decree of Foreclosure allowing Wells Fargo to foreclose its security
interest in Flat Creek. 7 This court is unaware of the status of this foreclosure at this
time. However, if Flat Creek's asset, the mini-warehouse is foreclosed upon, Ford's
monthly income from the management of the warehouse would ceased. Also, the
income producing asset for Flat Creek would be gone, which potentially would
affect the value of the shares Ford owns. All of this is speculative. It is difficult for
the court to determine that Ford's assets have declined in value.
Negative cash flow
Wells Fargo argues that based upon Ford's own fmancial information, her
estate is diminishing as her administrative expenses exceed her cash flow. 	The
court's review of Ford's monthly operating reports from February 2012 through
March 2013 show her income is derived from Social Security (14 months for a total
of$21,063.10), Flat Creek management fees (13 months for a total of$35,000.00),
sporadic Flat Creek loan interest payments (six payments for a total of$15,120.14);
IRA withdrawals (two in a total amount of$24,000.00); and two Flat Creek
distributions (in the total amount of $10,500.00).
Upon Ford's encouragement, the court reviewed the pending Disclosure
Statement and proposed Plan of Reorganization. Ford concedes that the
7 The Wyoming District Court entered its Order Denying Motion for Stay Pending Appeal on May 7, 2013.
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management fee from Flat Creek will cease as a receiver was appointed. This
results in a decrease of Ford's income by $2,500.00 per month after March 2013.
As disclosed on Ford's monthly operating reports, Ford's monthly expenses
from February 2012 through March 2013 were:
February 2012 	................... 	$5,472.94
March 2012 	$7,594.44
April2012 	..................... $24,639.21
May 2012 ....................... 	$2,668.48
June 2012 ....................... 	$7,197.00
July 2012 	....................... $2,795.08
August 2012 ...................... $7101.00
September 2012 	.................. $9,664.00
October 2012 	. . . . . . . . . . . . . . . . . . . . $5,983.93
November 2012 	.................. $3,500.39
December 2012 	.................. $8,994.56
January 2013 	.................... $6,177.20
February 2013 	................... $5,775.46
March 2013 	..................... $9,395.72
Reviewing the first fourteen months ofFord's income and expenses, six of the
months resulted in negative cash flow. 	Three of the months with negative cash flow were
within the last four months, specifically, December 2012, February 2013, and March 2013.
The court's review of the descriptions for Ford's expenses include, but are not
limited to: fees for recreation, payments for her adult children's expenses, numerous
expenses for "books." The court is aware that two days prior to this hearing, Ford filed her
disclosure statement and plan, urging the court to review and consider the disclosure
statement and plan while determining this motion. In conclusion, it appears to the court
that Ford is experiencing negative cash flow since filing, more so in the most recent
months.
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The second part of the test is whether there is any reasonable likelihood that the
debtor, or some other party will be able to stem the debtor's losses and place the debtor's
business enterprise back on a solid financial footing within a reasonable amount of time.
At this time, one ofF ord' s assets, her shares in Flat Creek, are in litigation with both Wells
Fargo and Saypol.
Ms. Ford is retired. As stated previously, her income is derived from social security,
IRA account withdrawals; interest payments, distributions and management fees relating to
Flat Creek. Her business enterprise is related to the stability of Flat Creek and is affected
upon (1) the foreclosure of Flat Creek's asset; (2) the effect ofthe foreclosure on the value
of the shares owned by Ford; and, (3) the results of the Saypol adversary proceedings. The
Saypol trials are scheduled in August 2014. The court finds that the debtor will not be able
to stem her losses and place her retention of management fees; interest income and the
dischargeability of Saypol' s claims within a reasonable amount of time.
The court finds that cause has been established to convert Ford's case to a chapter 7
as there is a continuing loss to or diminution of the estate and absence of reasonable
likelihood of rehabilitation.
2) 	Failure to satisfY timely any filing or reporting requirement established by the
Bankruptcy Code and the Federal Rules of Bankruptcy Procedure
The court's review of the monthly financial reports shows that the reports were
generally timely filed. Additionally, under Rule 2015.3(b), Ford is required to file
"periodic financial reports of the value, operations, and profitability of each entity in which
the estate holds a substantial or controlling interest. An entity of which the estate controls
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or owns at least a 20 percent interest, shall be presumed to be an entity in which the estate
has a substantial or controlling interest." Based upon the above, Ford holds a substantial or
controlling interest in Flat Creek as she owns 75% of its shares and has testified that as the
majority shareholder she has authority to make decisions regarding Flat Creek's operations.
Ms. Ford filed the first report on March I, 2012. The next report was filed on Aprill8,
2013, after Wells Fargo raised the issue ofFord's failure to file the report. Ms. Ford
admitted that the report was untimely filed.
The Bankruptcy Court for the District of Colorado found that the reporting
requirements provide the primary means for monitoring the debtor's compliance with the
Code's requirements and serve as a test for the debtor's ability to reorganize. Non-
compliance in filing the reports is "not a mere technicality."" Habitual non-compliance
calls in to question a debtor's ability to effectively reorganize." 8
In the case before this court, Ford's one-time failure to file the report required under
Rule 2015.3 does not reflect habitual non-compliance. Wells Fargo has failed to meet its
burden that Ford's failure to timely satisfY filing or reporting requirement established by the
Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.
(3) 	Failure to comply with an order of this court
Wells Fargo asserts that Ford failed to comply with this court's order entered on
January 16, 2013. Wells Fargo argues that this court ruled that Ford's loan to Flat Creek
was set-off pre-petition. Thereafter, Ford, as manager of Flat Creek, paid herself a payment
8 Whetten at 383.
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in the amount of $5,000.00 as an interest payment on that loan. 	Wells Fargo argues that
those acts of paying herself is a violation of the court's Order and Opinion on Motion for
Order to Show Cause and/or for Contempt Citation. This court disagrees.
The Tenth Circuit Bankruptcy Appellate Panel, in In re Bartmann, held that debtors
transferred funds in violation of a court order as grounds for converting their chapter II
case to a chapter 7. 9 The debtors were ordered to not transfer or liquidate any of their non-
exempt assets. In the case before this court, no such order has been entered. Wells Fargo
failed to carry its burden proving that Ford violated a court order, as grounds for conversion
of her bankruptcy case.
(4) 	Lack of good faith in filing and administering this bankruptcy case
As a general rule, the movant bears the burden of proving by a preponderance of the
evidence that cause exists for the dismissal or conversion of a debtor's bankruptcy case.
However, when lack of good faith is raised, the debtor bears the burden of proving that the
filing was made in good faith. 10
To convert or dismiss on the basis of lack of good faith, the court should consider,
arnoung other things,(!) the timing of the filing of the petition, (2) the motive of the debtor
in filing the petition; and (3) the accuracies or inaccuracies of the debtor's assertions in its
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9 In re Bar/mann, BAP No. 03-078, 2004 Bankr. LEXIS 620 (10'" Cir. BAP, May 10, 2004).
10 In re Fox, 232 B.R. 229 (Bankr. D. Kan. 1999).
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petition and schedules. 11 The Kansas Bankruptcy Court stated, "The bankruptcy court's
power to dismiss for want of good faith in filing, while essential to proper administration of
Bankruptcy Code policies and implicit in the statute itself, is obviously one to be exercised
with great care and caution." 12 A debtor's bad faith in filing a petition can constitute
"cause" for dismissal under§ 1112(b), although it is not an enumerated ground. Courts
have overwhelmingly held that proof of such an allegation may be "cause." 13
In determining whether a chapter 11 petition was filed in bad faith, court considers
the totality ofthe circumstances and any conceivable list of non-exclusive factors. No
single factor is determinative and does not create a per-se test. The weight given to each
factor varies with the facts and circumstances of the case. The following factors have been
considered by the courts:
"( 1) 	Whether the petition serves a valid bankruptcy purpose such as preserving an
ongoing concern or maximizing the value of the debtor's estate;
(2) 	whether the petition is merely to obtain a tactical litigation advantage;
(3) 	whether the debtor's financial problems involve essentially a dispute between
the debtor and secured creditors that can be resolved in the pending state
court litigation;
(4) 	whether it is a single asset case;
(5) 	whether there are one or a very few unsecured creditors;
11 !d. at 235.
12 I d. at 236.
13 In re Picacho Hills Utility Company, Inc., Case. No. 11-13-10742,2013 Banl<r. LEXIS 1733, (Banl<r.
D.N.M., Apr. 26, 2013).
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(6) 	whether there is no ongoing business or employees;
(7) 	whether the pre-petition conduct of the debtor was improper; and
(8) 	whether the case is filed to evade one or more court orders."14
In Ford's bankruptcy, the court finds that the debtor's financial problems stem from
the dispute between Ford and Wells Fargo. Ford admits that Wells Fargo's judgment,
award in the Wyoming District Court and Wells Fargo's collection efforts on that judgment
were the precipitating factors for filing her Chapter 11 petition. The pending adversary
proceedings between (1) Ford and Wells Fargo; and, (2) Saypol versus Ford, involves
preserving Flat Creek, an asset that Ford owns 75% of the shares.
Ford has other non-exempt assets: (1) membership share in Fish Creek, and (2) and
the net equity from the sale of her Jackson residence. 	She testified that she signed a
quitclaim deed to transfer Fish Creek's assets to Wells Fargo (without its consent or
knowledge at the time) to resolve the dispute regarding that property.
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The court's review of the claim docket reflects that Ford's creditors include:
(1) 	Wells Fargo filed an amended claim in the amount of$2,296.055.49,
asserting that $955,263.29 as secured;
(2) 	Saypol filed an amended claim in the amount of$1,021,000.00 based upon
the resolution of the pending litigation;
(3) 	Retail Collection filed a secured claim in the amount of$588,186.29 based
upon the note and mortgage for Ford's Arizona residence;
(4) 	American Express filed two unsecured claims in the amounts totaling
approximately $40,000.00;
14 Jd. at 34.
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(5) 	Maricopa County filed a secured claim in the amount of$5,891.76; and,
(6) 	The Internal Revenue Service filed an unsecured priority claim in the amount
of nearly $25,000.00.
Based upon its review the court finds that there are very few unsecured creditors, although
the claim amounts are potentially substantial.
Ms. Ford is retired. Her on-going business interest involves the management of Flat
Creek. She or her husband, Glenn, managed the mini-warehouse until the receiver was
appointed by the State Court. Flat Creek's asset, the mini-warehouse is currently involved
in foreclosure proceedings. As previously stated, Ford admits that the reason she filed for
bankruptcy protection was to circumvent Wells Fargo's collection efforts on its state court
judgment. 	Based upon the totality of the circumstances and the factors discussed above,
the court finds that Ford lacked good faith in filing her bankruptcy petition.
The Bankruptcy Code requires that the court convert or dismiss a case if cause is
proven, unless the court specifically identifies unusual circumstances establishing that it is
not in the creditors' best interest. 	The Code does not define "unusual circumstances." The
Bankruptcy Court for the District of Colorado found that the term "contemplates conditions
that are not common in Chapter II cases 15 • The adversary proceeding between Ford and
Wells Fargo is a preferential transfer action that is not uncommon in bankruptcy cases. The
Ford and Saypol adversary proceeding is a complaint to determine the dischargeability of
15 In re Whetten, 473 B.R. 380 (Bankr. D. Colo. 2012).
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debt. This adversary is also not uncommon. Therefore unusual circumstances do not exist
as an exception for the conversion of this case.
In the absence of unusual circumstances, the court must not convert or dismiss a
case if the debtor establishes that (1) there is a reasonable likelihood that a plan will be
confirmed within a reasonable time, (2) the "cause" for dismissal or conversion is
something other than a continuing loss or diminution of the estate coupled with a lack of a
reasonable likelihood of rehabilitation; and (3) there is a reasonable justification or excuse
for a debtor's act or omission and the act or omission will be cured within a reasonable
time.
Ford filed her plan of reorganization two days prior to the hearing on this motion.
This was 15 months after Ford filed her bankruptcy petition. At her hearing, Ford
encouraged the court to review the proposed plan and determine that there was a reasonable
likelihood of rehabilitation. The court reviewed the proposed plan and finds that it is just
summarizes the case as it stands. Ford proposes to pay Wells Fargo from the net proceeds
it retains and contingent upon the disposition of its adversary proceeding. Additionally,
Ford proposes to pay Saypol, based upon the disposition of those proceedings. Considering
that Wells Fargo is pursuing its foreclosure of the basis of Ford's income (Flat Creek's
asset), the court does not see that there is a reasonable likelihood of rehabilitation.
Additionally, this court has found that cause exists based upon lack of good faith in filing
this petition. These are grounds other than the continuing loss or diminution of the estate
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coupled with a lack of a reasonable likelihood of rehabilitation. The court finds that the
exceptions to conversion are not applicable.
In conclusion, the court finds that movant, Wells Fargo, met its burden proving that
Ford lacked good faith when filing her bankruptcy petition as cause to convert the case to a
chapter 7. The court finds that the exceptions do not apply. The court also finds, upon a
review of the assets of the estate, that it is in the creditors' best interest to convert this
chapter 11 to a chapter 7 bankruptcy case and allow a chapter 7 trustee to independently
investigate and purse the estate's assets.
This opinion constitutes the Court's findings of fact and conclusions of law. A
separate order shall be entered pursuant to Fed. R. Bankr. P. 9021.
DATED this .5" day ofJune, 2013.
By the Court
~RJ.MCNIFFUnited States Bankruptcy Judge
Service to:
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James Belcher
Stephen Winship
Christopher Bryan
John Coppede
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