Hackerman v. Demeza (In re Demeza)

Citation: 567 B.R. 473Docket: CASE NO. 1:16-bk-02789-MDF

Court: United States Bankruptcy Court, M.D. Pennsylvania; February 21, 2017; Us Bankruptcy; United States Bankruptcy Court

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Richard Hackerman's Motion to convert Donald Demeza's Chapter 13 bankruptcy case to Chapter 7 is denied. Demeza filed for Chapter 13 on July 5, 2016, after Hackerman objected to his plan, claiming it was filed in bad faith. Following an evidentiary hearing on December 6, 2016, the court reviewed the case history. 

Demeza operates as a horse trainer and resides on a property he acquired solely in his name but later added his daughter's name for a mortgage loan. The property, described as a farmette, is valued at $160,000, with Demeza holding an $80,000 equity interest. He used loan proceeds to pay various debts, including credit card bills and legal expenses, and reported a monthly income of $2,132.33. 

Hackerman's legal actions against Demeza include a gross negligence lawsuit stemming from the death of Hackerman's mare and foal while in Demeza's care, as well as a subsequent fraudulent conveyance action. Key assets listed by Demeza include his interests in Toledo Racing Stables, LLC, and FDO Holdings, LLC, along with thoroughbred horses, but he primarily relies on the farmette for his financial standing.

Debtor's monthly mortgage payments are $877, which includes escrow for taxes and insurance. He owes a total of $417,305 to secured creditors, including a $241,103 judgment from Franklin County. Debtor's obligations also include $5,547.70 to priority unsecured creditors and $49,784.23 to non-priority unsecured creditors. He and his daughter are listed as joint obligors on a student loan, but the statement identifies him as the sole obligor. At the hearing, Debtor was current on his mortgage payments and had complied with all requirements of the proposed Chapter 13 plan.

Hackerman contends that Debtor's case should convert to Chapter 7, arguing that creditors would receive higher payouts under that chapter and that Debtor's full mortgage payments unfairly benefit his daughter, a co-owner of the property, at the expense of creditors. Hackerman also asserts that Debtor has not been transparent with the Court and questions his regular income, suggesting that these factors indicate a lack of good faith in filing for Chapter 13.

The legal standard requires that a Chapter 13 petition be filed in good faith, as established in *In re Myers*. A Chapter 13 plan must also be proposed in good faith to be confirmed under 11 U.S.C. § 1325(a)(3) and § 1325(a)(7). Courts consider the same good faith standards for both the dismissal or conversion of a case under § 1307(c) and the confirmation of a Chapter 13 plan, with the burden of proof shifting between the parties depending on the context. A Bankruptcy Court has significant discretion in determining 'cause' for conversion or dismissal, and while good faith is not explicitly mandated by the Bankruptcy Code, its absence can lead to dismissal, as recognized by the Third Circuit.

Good faith in bankruptcy cases lacks a precise definition and requires a fact-intensive, case-by-case assessment considering the totality of circumstances. A bankruptcy court evaluates a debtor's good faith by examining their honest intentions and whether they have abused the provisions of bankruptcy law. Dismissal or conversion of a case is reserved for egregious instances involving concealed assets, lavish lifestyles, or fraudulent conduct. If a creditor suggests a case was filed in bad faith, the onus shifts to the debtor to prove good faith by a preponderance of evidence.

The Third Circuit outlines specific factors for determining whether a Chapter 13 case should be dismissed or converted due to bad faith, including the nature of the debt, timing of the petition, how the debt arose, the debtor's motives, effects on creditors, treatment of creditors, and transparency with the court and creditors. However, these factors are not exhaustive. 

In the case at hand, the debtor owes significant amounts to secured and unsecured creditors, but there is no evidence of debt incurred for luxury items before filing. A motion by Hackerman, who claims a contingent and disputed debt against the debtor based on alleged criminal conduct, does not inherently indicate bad faith, as the nature of the debt does not reflect dishonesty necessary for such a finding.

Hackerman contends that Debtor filed for bankruptcy to evade liability from his claim, suggesting that the bankruptcy was timed to coincide with his intent to sue. However, the record indicates that Hackerman's claim originated in spring 2012, four years prior to Debtor's bankruptcy filing. Debtor first discussed bankruptcy with his attorney in April 2016, prompted by a judgment against Debtor and FDO Holding, LLC, coupled with increasing tax liabilities, which led to the Chapter 13 filing. The court referenced *In re Zaver*, noting that while a lawsuit may influence a debtor's decision to file, other significant factors must also be considered.

Regarding creditors, Hackerman argues for a Chapter 7 conversion to potentially increase payouts, suggesting that a student loan paid from refinancing primarily benefited Debtor's daughter. However, the evidence did not support this claim. Hackerman further claims Debtor's daughter should cover half the mortgage due to her joint ownership; yet, since she does not reside in the property and Debtor receives substantial rental income, this assertion lacks merit. Hackerman also alleges that Debtor's transfer of property to his daughter was fraudulent under the Pennsylvania Uniform Fraudulent Transfers Act (PUFTA). Debtor explained the transfer was to secure an equity loan for debt payments, supported by his daughter’s employment status at the time. The likelihood of a Chapter 7 trustee pursuing this claim appeared speculative, leading to the conclusion that the transfer was justified.

Despite Hackerman's objections, Debtor has shown good faith in pursuing his Chapter 13 plan, maintaining current payments. The Chapter 13 trustee has withdrawn objections and recommended plan confirmation, thus supporting Debtor's intentions to reorganize and treat creditors fairly.

Finally, Hackerman accuses Debtor of lacking candor with the Bankruptcy Court, citing several inaccuracies. Debtor characterized the property as a "farmette" rather than a single-family home, a distinction deemed non-material by the court. The absence of evidence suggesting intentional omissions indicates no bad faith on Debtor's part concerning the reported information.

Debtor testified to valuing his horses based on their age, performance, and personal experience, with no contrary evidence presented by Hackerman to suggest undervaluation. The court referenced In re Zaver to support the conclusion that without conclusive evidence of misrepresentation, Debtor had not undervalued his assets. Debtor claimed that, despite transferring a half interest in a property to his daughter, he alone benefits from and pays the mortgage on the home, and he is willing to transfer the property back if the lender agrees. 

The court found no deceit in Debtor's income disclosures, noting that any confusion regarding the bankruptcy schedule process was clarified by his attorney, and no evidence indicated that Debtor's reported income was materially inaccurate. Thus, the court concluded that Debtor had not concealed assets or been less than candid with the court or creditors. 

Hackerman's concerns about the real estate transfer shifted the burden to Debtor to prove good faith in filing the case. After considering all factors, the court determined that Debtor had met this burden, although the issue of Debtor's alleged lack of regular income and reliance on borrowing from friends and family remained unresolved pending the confirmation hearing. 

The court found that Debtor's Chapter 13 case and plan were filed in good faith but reserved final judgment on the feasibility of the plan until the confirmation hearing. An order denying Hackerman's motion will be issued. The court acknowledged its jurisdiction under 28 U.S.C. §§ 157 and 1334, classifying the matter as core. The focus of the ruling was on Debtor's good faith in filing the Chapter 13 case, and any unauthenticated documents presented by Debtor were disregarded. Additionally, it was noted that no evidence was provided regarding the transfer of a judgment lien to Adams County, and no criminal proceedings were initiated related to Hackerman's claims.