Donald Edward Benson and Judith Gainey Benson

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
DONALD BENSON
JUDITH BENSON,
DEBTORS
CHAPTER 11
CASE NO. 09-10540-8-RDD
ORDER DENYING CONFIRMATION OF
CHAPTER 11 PLAN OF REORGANIZATION
Pending before the Court is the Second Amended Chapter 11 Plan of Reorganization filed
on November 2, 2010 (the “Amended Plan”) by Donald Benson and Judith Benson, d/b/a SMB
Carolinas, Inc., f/d/b/a Stone Mill Builders, Inc. (the “Debtors”), the Objection to the Chapter 11
Plan of Reorganization filed on December 21, 2010, by Wells Fargo Bank, National Association,
successor by merger to Wachovia Bank, National Association (“Wells Fargo”), the Objection to the
Chapter 11 Plan of Reorganization filed on December 20, 2010, by Branch Banking and Trust
Company 	(“BB&T”) 	and 	the 	Bankruptcy 	Administrator’s 	Response 	to 	Debtors’ 	Plan 	of
Reorganization filed on December 20, 2010. The Court conducted a hearing on the Amended Plan
and the objections thereto on January 4, 2011 in New Bern, North Carolina.
SO ORDERED.
SIGNED this 18 day of February, 2011.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 1 of
12

BACKGROUND
On December 3, 2009, the Debtors filed a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code. 	The Debtors are individuals and have been engaged in the
business of commercial and residential construction. 	In 1992, the Debtors formed Stone Mill
Builders, Inc. for the purpose of business and residential construction. 	Subsequently, the name
Stone Mill Builders, Inc. was changed to SMB Carolinas, Inc. (“SMB”). SMB eventually became
the Debtors’ sole source of income. SMB invested in various parcels of land in both North Carolina
and South Carolina for future development or construction. Throughout their business dealings, the
Debtors signed personal guaranties for business debt secured by company owned land and buildings
to both BB&T and Wells Fargo. Additionally, the Debtors conveyed a deed of trust secured by their
primary residence and an office building located in Leland, North Carolina to BB&T for a working
capital loan to be used in connection with their construction business. In 2000, the Debtors sold a
one-third (1/3rd) interest in SMB to Dennis Pinkleton, an investor. The decline in the real estate
market caused the Debtors’ income to decrease and rendered them unable to service their secured
and unsecured debts.
Based on the arguments of counsel and the evidence presented to the Court at the hearings,
confirmation of the proposed Plan is DENIED for the reasons set forth herein.
BEST INTEREST OF CREDITORS TEST
Section 1129(a)(7) provides that in order for a plan to be confirmed, the plan must provide
creditors with at least as much as the creditors would have received in a Chapter 7 liquidation. In
re A.H. Robins, Co., Inc., 880 F.2d 694, 698 (4th Cir. 1989); In re Smith, 357 B.R. 60, 67 (Bankr.
2
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 2 of
12

M.D.N.C. 2006); In re Grandfather Mountain Limited Partnership, 207 B.R. 475, 484 (Bankr.
M.D.N.C. 1996); In re Piece Goods Shops Company, L.P./Piece Goods Shops Corp., 188 B.R. 778,
791 (Bankr. M.D.N.C. 1995). This section is commonly referred to as the best interest of creditors
test. The plan proponent bears the burden of introducing evidence of its current financial situation,
assets, liabilities, and prospects to satisfy the court that the proposed plan meets this test. In re Piece
Goods, 188 B.R. at 791.
Class XIV of the Amended Plan consists of general unsecured claims which total
approximately $4,794,939.00 and does not include any allowed deficiency claims from Classes IX,
X, XI and XII. The Amended Plan proposes to pay Class XIV claimants $190,000.00 plus interest
at three percent (3%) per annum over a period of two (2) years in equal quarterly installments of
$1,500.00. Starting in year three (3), and for a period of fifteen (15) years thereafter, the payments
to Class XIV claimants increase to equal quarterly installments of $3,687.72. Based on the ballots
presented at the hearing, Class XIV voted to reject the Amended Plan.
The feasibility analysis, set forth in the Amended Disclosure Statement filed by the Debtors
on November 2, 2010, provides that plan payments of $500.00 per month (which equals a $1,500.00
quarterly payment) would be paid to Class XIV claimants during the first and second year of the
confirmed plan and then $1,229.24 per month (equaling the $3,687.72 quarterly payment)
commencing the third year of the Amended Plan. 	The feasibility analysis states “[t]he Debtors
propose to sell the furniture in their mountain house. In addition . . . the Debtors expect to receive
tax refunds for 2010. They expect to receive at least $12,000 from those two sources which will be
paid prorata to the unsecured creditors $500 monthly during the first two years.”
3
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 3 of
12

The liquidation analysis, also set forth in the Amended Disclosure Statement, reflects that
the Debtors received a tax refund from the Internal Revenue Service (“IRS”) for the tax year of
2005 in the amount of $91,933.00 on July 23, 2010. The Debtors anticipate a tax refund from the
North Carolina Department of Revenue for the tax year of 2005 in the amount of $21,624.00.1 The
Debtors propose to retain their 2005 federal and state tax refunds, but “are prepared to use the tax
refunds as necessary to cover any shortfall during the early years of the Plan.” The two tax refunds
are not listed in the Debtors’ schedules and are not claimed as exempt. At the hearing, Mrs. Benson
testified that the Debtors have used approximately $10,000.00 of the tax refund received from the
IRS to pay the homeowner’s insurance on their mountain house, residence and office building.
A debtor’s tax refunds withheld from the debtor’s income pre-petition are property of the
bankruptcy estate. Kokoszka v. Belford, 417 U.S. 642, 648 (1974); In re Hughes, 2009 WL 2252181
at *3 (Bankr. D.Utah 2009) (citing In re Barowsky, 946 F.2d 1516 (10 th Cir. 1991)). The Debtors’
tax refunds in the amounts of $91,933.00 and $21,624.00 constitute property of the estate. In a
hypothetical Chapter 7 liquidation, the Debtors’ tax refunds would be distributed pro-rata to
unsecured creditors in accordance with the priorities set forth in the Bankruptcy Code and would
not have been paid to satisfy the homeowner’s insurance payments as the Debtors elected to do. In
a liquidation scenario, the value of the Debtors’ tax refund is worth more today if paid to creditors
in a lump sum as opposed to creditors receiving quarterly installments over seventeen (17) years.
1Both the IRS and North Carolina Department of Revenue refunds for the tax year of
2005 result from the recalculation of the Debtors’ tax liability based on the inclusion of the
Debtors’ 2009 business losses which permit amendment of the 2005 tax returns since such losses
can be carried back.
4
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 4 of
12

Therefore, the proposed retention of the tax refunds, when viewed in light of the liquidation analysis,
would prevent the Debtors from satisfying the liquidation test.
In addition, the Court has concerns with the accuracy of the Debtors’ liquidation analysis.
The Debtors’ liquidation analysis is inconsistent with the testimony presented to the Court at the
confirmation hearing. The Debtors’ liquidation analysis shows that under a hypothetical Chapter
7, the unsecured creditors would receive $182,940.10.
The Debtors contend the office building and lot are valued at $440,000.00.2 Wells Fargo has
a first priority deed of trust on .312 acres, which is a portion of the property, located at 1485 Lanvale
Road in Leland, North Carolina. Wells Fargo filed a proof of claim in the amount of $139,576.58
to which the Debtors have not objected. BB&T has a second priority deed of trust on the office
building and lot at 1485 Lanvale Road in Leland, North Carolina (the “Office Property”) and filed
a proof of claim in the amount of $202,249.66.3 The total of these two secured claims is
approximately $342,000.00. 	Therefore, based on the Debtors’ valuation, there appears to be
approximately $98,000.00 of equity in the Office Property.
Pursuant to the Amended Plan, the Debtors propose to sell lots 5 and 6 at Elderberry for a
combined price of $70,000.00, a lot on Bluff Road for $20,000.00, and a parking lot adjacent to the
Office Property for $40,000.00. The Debtors failed to present any evidence, beyond their testimony
2The Debtors’ Schedule A lists the “Current Value of Debtor’s Interest in Property,
without Deducting any Secured Claim or Exemption” in the office building and lot as
$650,000.00.
3The second priority deed of trust in the amount of $202,249.66 is also the fourth priority
deed of trust on the Debtors’ residence. The Court does not believe there will be any value left
in the Debtors’ residence to satisfy any of the $202,249.66 claim. Debtors are now proposing to
surrender their residence.
5
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 5 of
12

at the hearing, as to the reasonableness of these proposed sale prices. However, assuming the values
are appropriate, the gross sales proceeds for these lots would be $130,000.00.
In addition to liquidating certain real property, the Debtors propose to sell the furniture in
their mountain house. At the hearing, Mrs. Benson testified that in her opinion, she believed she
could obtain anywhere from $7,000.00 to $10,000.00 for the furniture. She also testified that prior
to the hearing, she received an offer of $5,000.00 for the mountain house furniture.
To fund the Amended Plan, the Debtors intend to utilize tax refunds.4 As previously stated,
the Debtors anticipate tax refunds based on an adjustment of their losses in connection with their
2005 federal and state tax refunds. 	The Debtors previously received the federal tax refund of
$91,933.00 and anticipate additional funds from North Carolina in the amount of $21,624.00. In
addition, the Debtors anticipate receiving tax refunds for 2010.
Therefore, based on the Debtors’ proposed calculations, the total funds available through the
liquidation of certain real property, the sale of personal property, and the receipt of tax refunds,
would generate gross funds in the amount of $688,557.00. After payment of $139,576.58 to Wells
Fargo and $202,249.66 to BB&T on their secured claims, the remaining amount of $346,730.76
would be subject to distribution pursuant to the priorities set forth in the Bankruptcy Code.
4The pre-petition tax refunds are property of the estate and would be available for
distribution to creditors in a liquidation. See Kokoszka v. Belford, 417 U.S. 642 (1974); In re
Hughes, 2009 WL 2252181 (Bankr. D.Utah 2009).
6
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 6 of
12

However, should this case be converted to one under Chapter 7, administrative costs would
be incurred for realtor commissions and the commission for the Chapter 7 Trustee.5 Therefore, after
subtracting realtor and Chapter 7 trustee commissions of $94,677.85 from the net proceeds of
$346,730.76, approximately $252,052.91 would be available for distribution to creditors.6 This
5The calculations set forth herein assume a commission of ten percent (10%) to a realtor
based a combined sales price of $570,000 for liquidation of the real property; thereby resulting in
a realtor commission of $57,000.00. The commission due to the Chapter 7 Trustee would be
$37,677.85 and is calculated based on the total receipt of $688,557.00.
Calculation of Best Interest of Creditors Test:
Gross Proceeds after Liquidation: 	Office Property 	$440,000.00
Four Other Properties 	$130,000.00
2005 Tax Refunds 	$113,557.00
Personal Property - Furniture $ 	5,000.00
Total Proceeds 	$688,557.00
Claims Secured by Office Property: 	Wells Fargo 	$139,576.58
BB&T 	$202,249.66
Total Secured Claims 	$341,826.24
Realtors’ Commission on $570,000.00: 	$ 57,000.00
Chapter 7 Trustee’s Commission on $688,557.00: 	$ 37,677.85
Attorney’s Fees for Chapter 7 Trustee: 	Unknown
Net Proceeds Available for Distribution: 	$252,052.91
6The Amended Disclosure Statement states that $182,940.10 would be available for
unsecured creditors. The Debtors included in their liquidation analysis a residential exemption
claim of $70,000.00 in the residence, which they now plan to surrender and abandon.
Counsel for Debtors states that the Debtors intend to reside at the Office Property and
that they intend to amend their exemptions to claim the residential exemption in the Office
Property. Whether the exemption would be allowed is not an issue presently pending before the
Court. But see In re Alexander, 236 F.3d 431,432 (8th Cir. 2001) (stating that when converting a
bankruptcy case from one under Chapter 13 to one under Chapter 7, the original petition date
determines the debtor’s eligibility to claim an exemption); In re Lowe, 103 F.3d 20 (5th Cir.
1997) (finding that exemptions are determined on the petition date, when a case is converted
from one under Chapter 13 to one under Chapter 7, and citing § 522(b)(3)(A) which states
7
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 7 of
12

figure could be reduced if the Chapter 7 Trustee incurs attorney’s fees. Because the Debtors propose
to pay unsecured creditors an amount less than the projected amount the unsecured creditors would
receive in a liquidation, the Debtors have not shown by a preponderance of the evidence that the
Amended Plan satisfies the best interest of creditors test as required by Section 1129(a)(7) of the
Bankruptcy Code.
Therefore, the Debtors have failed to carry their burden of proof to satisfy the Court that
the Amended Plan meets the best interest of creditors test.
FEASIBILITY OF THE AMENDED PLAN
Section 1129(a)(11) of the Bankruptcy Code requires that in order for a plan to be confirmed,
“[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further
financial reorganization, of the debtor or any successor to the debtor under the plan, unless such
liquidation or reorganization is proposed in the plan.” This requirement is often called the feasibility
requirement. 	In re A.H. Robins, Co., Inc. 880 F.2d 694, 698 (4th Cir. 1989). 	The question of
feasibility is a question of fact in which the debtor bears the burden to show feasibility of the plan
by a preponderance of the evidence. In re Investment Co. of Southwest, Inc. (F.H. Partners, L.P.
v. Investment Co. of Southwest, Inc. et. al), 341 B.R. 298, 310 (B.A.P. 10 th Cir. 2006). Feasibility
exemptions are determined “on the date of the filing of the petition.”).
As of the hearing date, the residential exemption has not been amended. Therefore, for
the purposes of the liquidation test, the proposed amendment of the residential exemption will
not be considered in the calculation of non-exempt assets. If the Debtors do amend the
residential exemption, creditors and parties-in-interest would have an opportunity to object.
The Court also notes that the Debtors included in their liquidation test, sale of other non-
exempt personal property with a total value of $16,605.00. The Court, however, need not
consider this amount in its calculation as the Debtors do not satisfy the liquidation test. See
Amended Disclosure Statement, docket entry 142, page 32, filed on November 2, 2010.
8
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 8 of
12

is “firmly rooted in predictions based on objective fact.” In re Cheatham, 78 B.R. 104, 109 (Bankr.
E.D.N.C. 1987); In re Investment, 341 B.R. at 310.
In re Piece Goods Shops Company, L.P./Piece Goods Shops Corp., the Bankruptcy Court
for the Middle District of North Carolina set forth factors a court may consider in assessing
feasibility. 188 B.R. 778, 798 (Bankr. M.D.N.C. 1995). These factors include “the capital structure
of the reorganized [d]ebtors, their projected earning power, economic conditions, management’s
ability and likelihood of continuing to work for the reorganized [d]ebtors, and any other factors
relevant to the performance of the [p]lan.” Id. (citing In re Polytherm Industries, Inc., 33 Bankr. 823
(W.D. Wis. 1983)).
The feasibility analysis states the Debtors’ projected income is $9,363.29 per month and that
their projected expenses are $9,363.44 per month for the first two years of the proposed plan.
Starting in the third year of the proposed plan, the Debtors’ proposed expenses are $9,092.68 per
month. The projected income remains the same for year three.
To calculate their projected income, the Debtors added: (1) the Debtors’ monthly net income
from employment and Social Security in the amount of $4,804.00 per month; (2) the 2005 IRS and
North Carolina tax refunds which will be used to pay creditors on a monthly basis in the amount of
$1,892.62 per month over sixty (60) months; 7 (3) the net proceeds from sale of lots five and six at
Elderberry in the amount of $70,000.00, the lot on Bluff Road for $20,000.00, and the parking lot
adjacent to Office Property for $40,000.00 equating to $2,166.67 per month; and (4) the net proceeds
7The tax refunds should be disbursed to the unsecured class upon confirmation of a plan
of reorganization and not held by the Debtors to be used to fund the plan over sixty (60) months.
9
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 9 of
12

from sale of the mountain house furniture and any 2010 tax refunds over the first two years of plan
in the amount of $500.00 per month.8
However, the feasibility analysis includes a disclaimer related to the projected income. The
disclaimer provides: “[a]ll of the above income figures are contingent on the occurrence of certain
events. The Debtors neither know precisely when Mrs. Benson’s accounting income will increase
as projected nor do they know when they will be able to sell their various parcels of real estate . .
. . [t]he sales proceeds from real estate are estimated conservatively. It is hoped that the Debtors will
be able to take their time marketing these parcels in order to take advantage of rising real estate
prices during the hoped for recovery.”
The Court does not believe the feasibility analysis presented by the Debtors presents an
accurate representation of the Debtors’ ability to make payments pursuant to their proposed
Amended Plan. Schedule I, attached to the Debtors’ Amended Disclosure Statement as Exhibit D-1,
provides that Mrs. Benson earns $900.00 as income from part-time contract work as a certified
public accountant (“CPA”). Schedule I also states “[t]he female Debtor’s income from her part-time
contract work is $900. 	She believes that she will be able to increase her account[ing] practice
income from the present average of $900 per month to $3,600 within the next year.” The Debtors
rely on the increase of Mrs. Benson’s income to fund their plan.
At the hearing, Mrs. Benson testified that she has practiced as a CPA for approximately
twenty-five (25) years and until recently she devoted all of her CPA work to providing financial
8Liquidation of assets should result in a lump sum payment to unsecured creditors rather
than providing a source of income for the Debtors. Otherwise, the creditors are not receiving an
amount equal to the value of their claim as they would in a Chapter 7 liquidation. 11 U.S.C. §
1129(a)(7)(a)(ii).
10
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 10 of
12

services within the construction industry. Currently, Mrs. Benson no longer focuses her CPA work
within the construction industry and is seeking employment as a CPA outside of the construction
industry. Mrs. Benson testified that not many CPA positions are available in the current job market,
but that she is in the process of building up her own CPA practice. She testified that she currently
has one client and works approximately ten (10) to twelve (12) hours per week. 	Mrs. Benson
testified that it would take time to build up her business and that building a CPA practice is not a
task that can be achieved overnight.
The possibility of Mrs. Benson earning as much as $3,600.00 per month is speculative given
her current numbers. The Court recognizes that time is involved in developing a client base but also
has serious concerns with the Debtors’ ability to make the payments required under the proposed
plan. The Debtors admit that their projected income figure, as presented in the feasibility analysis,
is contingent on the occurrence of certain events, including (1) Mrs. Benson building her CPA
practice such that she can earn $3,600.00 per month; and (2) liquidating certain real property at price
points established by the Debtors.9
In addition, the Debtors included their 2005 federal and state tax refunds as part of the
projected income calculation. 	These refunds are property of the estate and should be distributed
to creditors. These amounts should not be included as part of the Debtors’ projected income.
Regardless of the speculation and inclusion of the tax refunds in the projected income
calculation, even if the Debtors are given the benefit of the doubt, the Debtors’ total monthly income
is $9,363.29, which is almost equal to their expenses of $9,363.44. Given the lack of evidence that
9The Court notes for the record that other than the Debtors’ testimony, there was no
evidence offered in connection with the value of the real property.
11
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 11 of
12

there would be sufficient, regular monthly income which would be generated by the Debtors to
maintain their plan payments, the Debtors have failed to show that the Amended Plan is feasible by
a preponderance of the evidence.
The Court finds that based on the evidence presented at the hearing, and the arguments of
counsel, the Amended Plan is not feasible.
Therefore, the Amended Plan fails to satisfy the requirements of Section 1129 of the
Bankruptcy Code and confirmation of the Amended Plan is DENIED.
SO ORDERED.
END OF DOCUMENT
12
Case 09-10540-8-RDD Doc 182 Filed 02/18/11 Entered 02/18/11 14:09:56 Page 12 of
12