Shelia Renito Smith

OCR transcription for search; preserved printed pages are authoritative

The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below.

Russ Kendig

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

IN RE: ) CHAPTER 7
)

SHELIA RENITO SMITH, ) CASE NO. 10-60849
)

Debtor. ) JUDGE RUSS KENDIG

) MEMORANDUM OF OPINION
) (NOT FOR PUBLICATION)
)
)

Chapter 7 trustee Anne Piero Silagy (“Trustee”) filed a motion for turnover on April
22, 2011. Debtor opposes turnover on the basis that the subject property is not property of
the estate under 11 U.S.C. § 348. The court held a hearing on August 22, 2011, at which
time the parties agreed to a briefing schedule. The parties filed briefs in support of their
respective positions and neither filed a request for further hearing.

The court has jurisdiction of this case under 28 U.S.C. § 1334 and the general order
of reference entered in this district on July 16, 1984. In accordance with 28 U.S.C. § 1409,
venue in this district and division is proper. This is a core proceeding pursuant to 28 U.S.C.

§ 157(b)(2)(E).

This opinion is not intended for publication or citation. The availability of this
opinion, in electronic or printed form, is not the result of a direct submission by the court.

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I
H

ACT

On March 8, 2010, Debtor filed an individual chapter 13 petition. At the time, she
was married and her husband operated a restaurant. Debtor listed her dower interest in
the business premises as an asset, valued at $17,700.00. She claimed an exemption of
$1,075.00 in the property. Debtor alleges that this asset was the basis for filing a chapter
13 petition rather than a chapter 7 petition. Chapter 13 trustee Toby L. Rosen objected to
Debtor’s proposed plan under 11 U.S.C. § 1325(a)(3) and (4). The objection included a
reference to the chapter 7 value of the business premises. Debtor’s plan was confirmed
without further action on the objection to confirmation and no chapter 7 value liquidation

value was established.

According to Debtor’s schedules, her husband contributed income of $800.00 per
month to their household. This represents about one-third of the monthly net income.

The court confirmed the plan on September 9, 2010. Debtor’s monthly payment
was $500.00 per month. The bulk of this payment ($400.00 per month) was applied to a
secured vehicle loan. A small portion of the payment was directed toward a priority tax
debt. After administrative claims, unsecured creditors were scheduled to receive a
dividend of approximately twenty percent of their claims. The general unsecured claims

filed totaled approximately $37,589.67.

Four months after confirmation, Debtor voluntarily converted her case to chapter
7. Her Notice of Conversion stated “Debtors (sic) husband died and she can no longer
afford the plan.” The chapter 13 trustee’s final report indicates that the only creditors
who received any distribution were administrative and secured claims. No distribution
was made on behalf of priority or general unsecured creditors.

Debtor’s husband passed away on November 17, 2010. Debtor was the
beneficiary of two life insurance policies totaling $125,000.00. Both benefits were paid

to Debtor in December 2010.

Between receipt of the life insurance proceeds and her chapter 7 meeting of
creditors, Debtor spent nearly $85,000.00. There is some dispute over disposition of the

funds:
Trustee: Debtor:
Funeral expenses $11,258.61 $15,000.00
Tithe $10,020.00 $12,500.00
New bedroom furniture $ 3,365.50 $ 6,100.00!

| Debtor has a category for apartment furniture. The amounts suggest Debtor is including
the appliances and electronics.

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Electronics $ 1,234.85

Washer and dryer $ 1,470.68
Jewelry $ 548.75 $ 550.00
Loan repayments $10,750.00 $ 5,750.00
$ 4,500.00
Loans to family/friends $ 4,800.00 $ 1,800.00°
$ 2,000.00
$ 1,000.00
Apartment deposit/rent prepay $ 4,650.00
House insurance, car repair $ 2,700.00
Utilities for restaurant/house $ 8,000.00
Attorney’s fees $ 300.00
Wheelchair ramp for husband $ 160.007
Dinner out $ 700.00
Neighbors shoveling snow $ 170.00
Out of pocket medical care $ 4,500.00
$ 43,448.39 $ 70,380.00

At the time the 341 meeting was held, Debtor had approximately $40,000.00 in life
insurance proceeds remaining.

LAW AND ANALYSIS

The parties do not dispute the underlying law. In accordance with 11 U.S.C.
§ 1306(a)(1), the life insurance proceeds, as after-acquired property, were property of
Debtor’s chapter 13 estate. Upon conversion, the general rule, set forth in 11 U.S.C.
§ 348(f)(1), provides that “property of the estate in the converted case shall consist of
property of the estate, as of the date of filing the petition, that remains in the possession of
or is under the control of the debtor on the date of the conversion.” By definition, after-
acquired property does not become property of the estate. While this may seem illogical,
Collier’s explains that the legislature “was concerned that the contrary rule would create a
serious disincentive to chapter 13 filings because debtors would fear that property
attained after filing, including equity created by payment of secured debts, could be lost if
the case were converted.” 3 Collier on Bankruptcy 9348.07[1] at 348-23 (16" ed. 2011).
Consequently, there is no dispute that, under the general rule, the life insurance proceeds
are not property of the chapter 7 estate.

The exception to the general rule is contained in section § 348(f)(2), which states

2 Debtor does not clearly delineate amounts that were loaned, repaid, or gifted.

3 Clearly, some of Debtor’s expenses appear to have been incurred prior to her husband’s
death.

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that if the case is converted 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.” Since Debtor held
the funds on the date of conversion, if she converted in bad faith, the life insurance
proceeds would be property of the chapter 7 estate and subject to turnover.

Both parties suggest that a review of all the facts of the case are pertinent to the
court’s determination of Debtor’s motivation in filing. The inquiry is fact-specific. See,
e.g., Citizens Bank v. McKendree, 2006 WL 2193053 (S.D. Ill. 2006) (unreported); In re
Messer, 2000 WL 33673648 (Bankr. M.D.N.C. 2000) (citing In re Siegfried, 219 B.R.
§81, 585 (Bankr. D. Colo. 1998)). Courts in the Seventh Circuit favorably adopted an
analysis similar to that used for good faith under § 1325(a)(3). See McKendree, 2006 WL
2193053, * 3. The specific factors include:

the nature of the debt, including the question of whether the
debt would be nondischargeable in a Chapter 7 proceeding;
the timing of the petition; how the debt arose; the debtor’s
motive in filing the petition; how the debtor’s actions affected
creditors; the debtor’s treatment of creditors both before and
after the petition was filed; and whether the debtor has been
forthcoming with the bankruptcy court and the creditors.

Id. (citing In re Love, 957 F.2d 1350, 1357 (7" Cir. 1992)).

In this circuit, the totality of the circumstances drive bad faith/lack of good faith
determinations. Adell v. John Richards Homes Bldg. Co., L.L.C. (in re John Richards
Homes Bldg. Co., L.L.C.), 439 F.3d 248 (6" Cir. 2006) (§ 303(i)); Behlke v. Eisen (In re
Behike), 358 F.3d 429 (6" Cir. 2004) (§707(b)); Alt v. U.S. (In re Alt), 305 F.3d 413 (6"
Cir. 2002) (§ 1325(a)(3) and § 1307(c)); Moyer v. Hollinshead (In re Hollinshead), 438
B.R. 354 (B.A.P. 6" Cir. 2010) (unpublished) (Federal Rule of Bankruptcy Procedure
1009(a) (citations omitted)). Relying on In re Bejarano, the parties also agree that bad
faith is ‘not simply bad judgment or negligence, but it implies the conscious doing of a
wrong because of dishonest purpose or moral obliquity; . . . it contemplates a state of
mind affirmatively operating with furtive design or ill will.’ 302 B.R. 559, 562 (Bankr.
N.D. Ohio 2003) (citing U.S. v. True, 250 F.3d 410, 423 (6" Cir. 2001)).

In its review, the Bejarano court considered the timing of the conversion, the
chapter 13 pay history, the debtors’ participation in the chapter 13 process, the amount of
post-petition debt, and the debtors’ previous bankruptcy filings, and the value of the
assets in question. Bejarano, 302 B.R. at 562-63. Although some of the facts were
indicative of bad faith, the court ultimately concluded that the debtors did not purpose to
abuse the bankruptcy system, mainly premised on the fact that one of the assets, a
personal injury claim, accrued post-petition, and neither of the assets in question were

particularly valuable. Id.

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In this case, Debtor, a below-median debtor, allegedly filed a chapter 13 petition
in order to protect her husband’s business on the theory that her dower interest was an
asset. There are no allegations that she was not forthright in the filing of the chapter 13
petition. The chapter 13 trustee’s final report shows that between March 8, 2010 and the
conversion, Debtor paid $5,081.85 into the plan, representing approximately ten
payments under her confirmed plan. Unsecured creditors were scheduled to received
twenty percent of their claims. These facts, standing alone, do not indicate bad faith.

What is symptomatic of bad faith is the timing and reason for Debtor’s
conversion. Debtor’s husband passed away on November 17, 2010. Two months later,
after receiving $125,000.00 in life insurance proceeds, Debtor filed a notice of conversion
that states she cannot afford the plan payments. This is simply false. Not only did she
have a source of income to replace her husband’s monthly income ($800.00) for the
duration of the plan (approximately 26 months), she had an amount that was sufficient to
pay the unsecured debt in full. Further, at the time of conversion, the life insurance
proceeds were property of the chapter 13 estate. Clearly, Debtor's statement was
disingenuous and impugns any claim of good faith in converting the case.

Additionally, the court finds Debtor’s amended Schedule J suspect. When she
originally filed this case, and her husband was living, Debtor’s monthly household
expenses totaled $2,074.25. After his death, Debtor’s expenses had increased to
$2,549.25, a difference of $475.00.

There may be a question among courts as to whether post-conversion facts can be
considered in determining whether a case was converted in bad faith. See, e.g., Norman
v. Yates (In re Yates), 2005 WL 2499488 (B.A.P. 10" Cir. 2005) (unpublished) (finding
creditor’s evidence related to the pre-conversion conduct, and not the conversion itself,
and therefore did not establish bad faith in the conversion); United States Trustee v.
Standifered (In re Standifered), 2009 WL 7831848, *2 (D. N.M. 2009) (citation omitted)
(holding that “[c]ourts may review the debtors’ entire course of conduct in the prior
chapter 13 case in determining whether the conversion to chapter 7 was done in bad
faith.”); cf, Mullican v. Moser (In re Mullican), 417 B.R. 408, 414 (E.D. Tex. 2009)
(stating “the bankruptcy court may consider all facts that are relevant to the debtor’s
intent at the time of conversion, regardless of whether the fact occurred pre-conversion or
post-conversion.”) This court holds that the totality of the circumstances, including post-
conversion facts, are ripe for consideration. Post-conversion facts can help a court
ascertain the credibility of a debtor’s statements regarding the motivation for conversion

and are therefore highly relevant.

In this case, debtor’s post-conversion actions speak volumes about her intent.
Prior to her husband’s death, Debtor’s net household income was approximately
$30,000.00. It declined to approximately $21,000.00 after her husband passed. In less
than three months, Debtor had spent the equivalent of her annual after tax income for
three years. She selectively decided to repay creditors who were close to her and

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completely disregard the creditors included in the bankruptcy case.

Further, she has failed to fully account for the life insurance proceeds. It is clear
that some of the itemized expenses include items which pre-date her husband’s death.
This raises to the “unfair manipulation of the bankruptcy system to the substantial
detriment or disadvantage of creditors” discussed in Bejarano. 302 B.R. at 563.

Part of Debtor’s good faith argument is premised on her understanding that, upon
conversion, Trustee could sell the restaurant property for the benefit of her unsecured
creditors. As Trustee identifies, this is not possible. The real estate was titled to Debtor’s
husband and is now an asset of his probate estate. Since the property was not owned by
Debtor, Trustee has no authority to liquidate the property. Debtor’s claims that the
unsecured creditors will be paid is inaccurate. Although Debtor’s mistaken
understanding of the law may not arise to bad faith, the impact to unsecured creditors is

detrimental.

Debtor’s reliance on In re Doetsch is misguided. The Doetsch debtor had
committed to paying $18,000.00 to unsecured creditors. Nearly two years into the plan,
after paying nearly fifty-percent of the amount due under the plan, the debtor received
notice that the plan was unfeasible by approximately $14,000.00. Debtor’s response was
to convert her case. In finding the conversion was not in bad faith, the court emphasized
that it was not clear that the debtor was aware of an obligation to report the inheritance.
The court also pointed out that when Debtor received the inheritance, she had been
diagnosed with ovarian cancer, had lost her part-time second job, and was off work from
her regular job for a period of time. Although the court indicated she may have exercised
poor judgment in her expenditures, it found no pattern of fraud or deceit, and concluded
the conversion was necessitated by the lack of feasibility.

Similarly, Debtor’s citation to In re Gibson is also inapposite. In re Gibson, Case
No. 01-17173 (Bankr. S.D. Ohio January 17, 2008). In Gibson, debtor-husband was
injured in a post-petition accident and a personal injury claim arose. The debtors
converted before receipt of any of the personal injury proceeds. The court specifically
found the debtors converted as a result in a change in circumstances following the
accident and were not attempting to manipulate the bankruptcy process. The loss of
debtors’ home may have been a key factor in the court’s finding.

The facts that appear to have mitigated a bad faith finding in Doetsch and Gibson
are simply not present. First, the same financial hardships are simply not born out by the
facts here. Although Debtor may have lost income, her expenses increased significantly
in spite of the smaller household size. Second, the substantial life insurance proceeds
gave her the means to continue her chapter 13 payments. Third, while Debtor was current
on plan payments, she had paid nothing to her unsecured creditors at the time of
conversion. Her actions belie any regard for her prepetition unsecured creditors. Fourth,
she was completely disingenuous in her conversion document.

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Based on the totality of the circumstances, the court concludes that Debtor did
convert her case in bad faith and the balance of the life insurance proceeds constitute
property of the estate. Trustee’s motion for turnover is granted.

An order will be issued immediately reflecting the decision of the court.

SERVICE LIST

Nicole L. Rohr
Thrush & Rohr LLC
4410 22nd Street NW
Canton, OH 44708

Shelia Renito Smith
3746 Martindale Rd NE Apt 3
Canton, OH 44714

Anne Piero Silagy, Esq
220 Market Ave S
#900

Canton, OH 44702

Bruce R Schrader, I
Michael J. Carey
Roetzel & Andress
222 S Main St

Suite 400

Akron, OH 44308

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