Pamela June Testa

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UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
PAMELA JUNE TESTA,
DEBTOR.
CASE NO. 09-01446-8-JRL
CHAPTER 7
ORDER
This matter came before the court on the debtor’s motion for abandonment of property and
the trustee’s objection and motion to compel turnover of property. A hearing was held on September
11, 2012 in Raleigh, North Carolina.
BACKGROUND
Pamela June Testa (“debtor”) filed her voluntary petition under chapter 13 of the
Bankruptcy Code on February 24, 2009. After making her final payment under her chapter 13 plan
of reorganization, the debtor converted her case to one under chapter 7 on March 26, 2012 (the
“conversion date”). Thereafter, the chapter 7 trustee was appointed. According to the debtor, the
conversion was to shield her from exposure to any liability associated with real property located at
15809 Fairfield Drive, Matthews, NC 28104 (“Matthews real property”). 	The Matthews real
SO ORDERED.
SIGNED this 02 day of October, 2012.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1At the Rule 2004 examination, the debtor testified that prior to the conversion date, she
and her brother, Clark J. Hower (“Hower”), attempted to convey the remaining one-half interest
in the Stuart real property to the debtor by handwritten quitclaim deed recorded January 18,
2012.
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property was encumbered by a note and deed of trust originally held by Countrywide Bank, FSB,
now Bank of America, N.A. (“Bank of America”), which was to be paid directly to Bank of America
under the debtor’s chapter 13 plan. 	The debtor’s son and daughter-in-law were living at the
Matthews real property and agreed to pay the ongoing monthly obligations. Although the monthly
payments were made by the debtor’s son and daughter-in-law, she remained obligated to Bank of
America on the note and deed of trust. 	In July 2011, the couple began experiencing marital
difficulties, causing them to separate and cease making the monthly payments on the Matthews real
property. As a result, the debtor began receiving delinquency notices and correspondence from
Bank of America indicating its intent to foreclose on the Matthews real property.
After filing her chapter 13 petition, but before the conversion date, the debtor received an
inheritance from her uncle, Rudolph Kapps (“Kapps”). Kapps passed away on July 13, 2011, which
was during the pendency of the debtor’s chapter 13 bankruptcy. The debtor received the following
distributions from Kapps’ estate: (1) $10,040.57, as proceeds of a life insurance policy with
Prudential Life Insurance; (2) $38,227.69, as proceeds of a life insurance policy with Midland
National Life Insurance Company; (3) $23,451.17, as proceeds of a life insurance policy with
Fidelity & Guaranty Life Insurance Company; (4) an undivided one-half interest in real property
located at 2853 SW Versailles Terrace, Stuart, FL 34997 (“Stuart real property”);1 and (5) shares
in Piedmont Office Realty Trust worth approximately $4,354.58 (“Piedmont shares”) (collectively
“distributions”). In August 2011, the debtor began living in the mobile home located at the Stuart
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2The debtor’s grandson begun living with her in September 2011.
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real property. From these distributions, the debtor used $8,000.00 to purchase a 2008 Pontiac G6
and made gifts of $10,000.00 to her daughter and $5,000.00 to a friend in Texas. The debtor also
made continuous cash gifts to her son for living expenses and to support his son, the debtor’s
grandson. 2 The debtor also purchased a bedroom and mattress set, two television sets and flooring
for the mobile home at the Stuart real property.
The debtor did not inform counsel or the chapter 13 trustee of the inheritance or the
distributions she had received. 	Similarly, counsel for the debtor did not become aware of the
inheritance or the distributions until after the conversion date. On March 26, 2012, the debtor gave
notice of the conversion of her case to chapter 7. 	The distributions were not disclosed as property
acquired after the filing of her chapter 13 petition. In her interrogatories in lieu of attendance at the
§ 341 meeting of creditors, the debtor stated that the Stuart real property was her current address,
which she inherited from Kapps on July 13, 2011. On July 13, 2012, the trustee conducted a Rule
2004 examination of the debtor, where the full inheritance and postpetition purchases, transfers and
gifts were revealed. On July 16, 2012, the debtor filed an amended notice of conversion listing the
inheritance and the purchases she made with the distributions as property acquired after the filing
of her chapter 13 petition.
DISCUSSION
Section 348(f) of the Bankruptcy Code states:
(1) Except as provided in paragraph (2), when a case under Chapter 13 of this title
. . . is converted to a case under another chapter under this title –
(A) property of the estate in the converted case shall consist of
property of the estate, as of the date of filing of the petition, that
remains in the possession of or is under the control of the debtor on
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the date of conversion;
. . . .
. . . .
(2) If the debtor converts a case under chapter 13 of this title . . . to a case under
another chapter under this title in bad faith, the property of the estate in the converted
case shall consist of the property of the estate as of the date of conversion.
11 U.S.C. § 348(f). The plain language of § 348(f)(2) requires that the conversion itself be in bad
faith. In re Bell, 225 F.3d 203, 217 (2d Cir. 2000); see Warren v. Peterson, 298 B.R. 322, 327-28
(N.D. Ill. 2003) (emphasizing that the timing of conversion alone does not prove that it was the
product of bad faith).
At the hearing, the trustee relinquished his argument that the conversion itself was made in
bad faith or based on an ulterior motive. The record before this court supports the debtor’s assertion
that the conversion was to shield herself from liability associated with the Matthews real property
and provides no evidence that the conversion was the result of bad faith. She could not accomplish
the same result by modifying her chapter 13 plan because she had made her last payment under the
plan, and any deficiency claim resulting from the Matthews real property would have been a long-
term debt excepted from the chapter 13 discharge. 	Additionally (although this court has
subsequently held to the contrary in In re Zietchick, Case No. 09-05821-8-JRL, 2011 WL 5909279
(Bankr. E.D.N.C. Sept. 23, 2011)), the debtor had been informed by the chapter 13 trustee that only
an inheritance received within 180 days of filing became estate property; she did not covert her case
to protect the bequest from her uncle’s estate. 	Accordingly, the court finds that the debtor’s
conversion was not made in bad faith and the proceeds of the life insurance policies and the
Piedmont shares the debtor inherited from the Kapps estate do not constitute property of the estate.
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Alternatively, the trustee asserted that the debtor’s prepetition ownership of an undivided
one-half interest in the Rudolph Kapps Revocable Trust (“revocable trust”) constitutes property of
the estate in her chapter 7 case. 	The revocable trust named Kapps as trustee and the debtor and
Hower as co-beneficiaries. The corpus of the revocable trust consisted of the Stuart real property,
which was transferred to Kapps, as trustee of the revocable trust by warranty deed recorded on June
3, 2004. By its terms, the trust may be amended, altered, modified or changed by the settlor at any
time prior to his death. 	Regardless of the debtor’s knowledge of her property interest in the
revocable trust, the trustee takes the position that the debtor’s one-half undivided interest in the
revocable trust preceded the chapter 13 petition date and constitutes an asset of the bankruptcy estate
pursuant to § 348(f)(1)(A). Based on the limited record and counsel’s arguments, the court denies
the debtor’s motion to abandon as to the Stuart real property. 	Whether the trustee’s position is
correct will be determined in future proceedings.
CONCLUSION
Based on the foregoing, debtor’s motion for abandonment is DENIED IN PART and
trustee’s motion to compel turnover is DENIED.
END OF DOCUMENT
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