MEMORANDUM OPINION SUSTAINING OBJECTIONS TO DEBTOR'S THIRD AMENDED CHAPTER 13 PLAN AND DISMISSING DEBTOR'S CHAPTER 13 CASE SUA SPONTE
BRIAN F. KENNEY, Bankruptcy Judge.
This matter is before the Court on Sara Odom's Objections to the Debtor's Third Amended Chapter 13 Plan (for purposes hereof, "the Plan"). Docket Nos. 78 (Third Amended Plan), 147 (Objections). The Court heard the evidence of the parties on February 10, 2017. For the reasons stated below, the Court will sustain Ms. Odom's Objections on the ground of good faith. 11 U.S.C. § 1325(a)(3). Further for the reasons stated below, the good faith objection to the Debtor's Plan cannot be cured with an amended plan. The Court, therefore, will enter an Order sua sponte dismissing the Debtor's Chapter 13 case.
The Debtor, Henry Michael Curtis Brandland, filed a voluntary petition under Chapter 13 with this Court on March 28, 2016. Docket No. 1. Ms. Odom, who is the Debtor's ex-wife, filed a Motion to Dismiss the Case, or Alternatively, to Convert the Case to Chapter 7. Docket No. 38. The Debtor filed a Response. Docket No. 49. The Court held a hearing on Ms. Odom's Motion to Dismiss on September 23, 2016, at the conclusion of which it denied Ms. Odom's Motion. Docket Nos. 66, 75 (Order Denying Motion to Dismiss).
In the meantime, Mr. Brandland filed a series of Chapter 13 Plans, all of which drew objections from the Chapter 13 Trustee as well as from Ms. Odom. Docket Nos. 10 (Chapter 13 Plan), 14 (Trustee's Objection), 20 (Ms. Odom's Objection), 26 (First Amended Plan), 27 (Trustee's Objection), 30 (Ms. Odom's Objection), 47 (Second Amended Plan), 50 (Trustee's Objection), 51 (Ms. Odom's Objection), 78 (Third Amended Plan), 147 (Ms. Odom's Objection). The Trustee did not object to the Debtor's Third Amended Plan, as he was satisfied that the Plan met the requirements for confirmation. Further, the Trustee and the Debtor agreed to a reporting requirement for Mr. Brandland's income that satisfied the Trustee's disposable income concerns, as more fully discussed below.
The Trustee also filed a Motion to Dismiss Mr. Brandland's bankruptcy case. Docket No. 28. When the Court denied Ms. Odom's Motion to Dismiss on September 23, 2016, it continued the Trustee's Motion to a later date. Docket No. 65. Ultimately, the Trustee withdrew his Motion to Dismiss the case. Docket No. 90.
In connection with her Objections to the Debtor's Third Amended Plan, Ms. Odom sought and was granted a series of Rule 2004 Examination Orders. In all, the Court granted eight (8) Rule 2004 Examination Orders at Ms. Odom's request, in advance of the confirmation hearing on the Debtor's Third Amended Plan. Docket Nos. 81 (Nathan Shapiro and Green Spring Carpets LLC), 83 (William Saul and Advantage Flooring, Inc.), 85 (WashingtonFirst Bank), 87 (John Kostakos), 115 (Paypal, Inc.), 123 (Lorraine Lorek), 125 (Branch Banking & Trust Company), 129 (JANZ, INC. (d/b/a Carpet Impressions)).
The confirmation hearing originally was set for November 10, 2016. However, Ms. Odom filed a Motion to Continue the confirmation hearing, owing to her outstanding discovery requests through the Rule 2004 process. Docket No. 92. The Court granted Ms. Odom's request for a continuance and set the confirmation hearing for February 10, 2017. Ms. Odom was permitted to testify via video connection from the U.S. Bankruptcy Court for the District of Colorado in her place of residence, Denver. At the conclusion of the hearing, the Court took the matter under advisement.
FINDINGS OF FACT
The Court, having heard the evidence, makes the following findings of fact:
A. City Floorcoverings.
1. The Debtor has been in the carpet and flooring business all of his adult working life.
2. In January 2012, the Debtor entered into a Membership Subscription Agreement for the purchase of a one-third interest in a business known as City Floorcoverings, LLC ("City Floorcoverings").
3. At the same time, in January 2012, the Debtor entered into a Membership Interest Purchase and Redemption Agreement with the other two owners of City Floorcoverings, John Kostakos and Segundo Quinones, both of whom had expressed a desire to retire and to exit the business. DR Ex. 14.
4. Under this Agreement, the Debtor agreed to purchase Mr. Kostakos's and Mr. Quinones's two-thirds (66.67%) interests in the business. Id. The aggregate purchase price for 100% of the business was $500,000.00. Id., Sec. 1.1. As noted, the Debtor had already paid $100,000.00 for his one-third interest in the business. The remaining $400,000.00 was due and payable by December 31, 2013, two years after the parties entered into the Membership Interest Purchase and Redemption Agreement. Id., Secs. 1.1, 2.1. During this two-year period, the Debtor's distributions would be escrowed in order to pay the remaining $400,000.00 when it became due and payable. Id., Sec. 220.127.116.11.
5. The Debtor's 2012 tax return indicates that he had $206,970.00 in income from City Floorcoverings during that year. The Debtor testified that he received $74,000.00 in salary, so he estimated that Mr. Kostakos and Mr. Quinones escrowed approximately $130,000.00 pursuant to the terms of the Membership Interest Purchase Agreement (on which he was obligated to pay income taxes). DR Ex. 27, line 17; ODOM Ex. NN ($130,393.00 increase in capital account).
6. The Debtor estimated that he needed approximately $1.5 million in working capital to operate City Floorcoverings when he expected to take it over in January 2014. However, he was unable to secure any bank financing. He attributes his inability to secure any financing to the fact that his divorce was pending at the time.
7. As the December 31, 2013 closing date under the Membership Interest Purchase Agreement approached, the Debtor began negotiations again with Mr. Kostakos and Mr. Quinones. On December 31, 2013, the Debtor entered into a Settlement and Membership Interest Redemption Agreement with Mr. Kostakos and Mr. Quinones. DR Ex. 15 (hereinafter, the "Redemption Agreement").
8. Under the Redemption Agreement, the Debtor agreed to sell his one-third interest in City Floorcoverings back to Mr. Kostakos and Mr. Quinones for a purchase price of $150,000.00. Id., Sec. 4.
9. The $150,000.00 check was dated January 10, 2014. DR. Ex. 19.
10. The parties also agreed that: (a) there would be no adjustments to the Debtor's 2012 tax return (which included $130,000.00 in escrowed distributions as income); but (b) the Debtor would show an $80,000.00 loss on his 2013 tax return. DR Ex. 15, Secs. 4, 8; ODOM Ex. OO (2013 K-1; -80,393.00 decrease in capital account).
11. The Debtor received the $150,000.00 purchase price. His accounting of how he spent the funds is found at DR Ex. 20.
B. The Parties' Divorce.
12. The Debtor and Ms. Odom were married in 2002. They separated in June 2012, after which Ms. Odom initiated divorce proceedings against the Debtor in the Circuit Court of Fairfax County.
13. Prior to the Circuit Court hearing on equitable distribution, the parties engaged in pre-trial discovery. The Debtor was clearly untruthful in his deposition testimony on August 14, 2012, when he testified as follows:
ODOM Ex. RR, p. 63 (emphasis added).
14. In fact, the Debtor had already paid $100,000.00 for a one-third interest in the business pursuant to the Membership Subscription Agreement entered into on January 9, 2012. DR Ex. 13.
15. The parties tried their divorce case before the Honorable Brett Kassabian, Circuit Court Judge, of the Fairfax County Circuit Court on December 17 and 18, 2013. DR Ex. 1.
16. On January 15, 2014, the Debtor and Ms. Odom appeared before Judge Kassabian for his oral rulings in the case. ODOM Ex. B. During the course of the hearing, Judge Kassabian valued Mr. Brandland's one-third interest in City Floor Coverings, LLC, at $689,000.00. Id., p. 15. Judge Kassabian's valuation of City Floorcoverings was based on Ms. Odom's expert's valuation, that of Mr. Early. ODOM Ex. J.
17. The Debtor did not disclose to Judge Kassabian at the January 15th hearing that as of December 31, 2013, he had already entered into an agreement for the repurchase of his one-third interest in City Floorcoverings for $150,000.00, and that he received the funds for the purchase on or about January 10, 2014. ODOM Ex. B.
18. At the conclusion of the January 15th hearing, the parties and their counsel went into a small conference room outside of the courtroom, and drafted a handwritten, two-page Term Sheet, which: (a) after various setoffs and credits, obligated the Debtor to pay Ms. Odom the sum of $201,380.00; and (b) set out a payment schedule for the payment of this amount in annual installments. ODOM Ex. A.
19. The first installment, in the amount of $14,384.28, was due on June 1, 2015. Id. Subsequent installments were due on April 1st of each succeeding year through 2020. Id. This payment schedule required Mr. Brandland to pay Ms. Odom $38,358.09 in the years 2016 through 2018, $28,768.57 in 2019 and the final payment of $43,152.85 in 2020. Id.
20. The Debtor testified in this proceeding that he entered into the Term Sheet based on his understanding of his tax situation that he would receive refunds from the IRS in sufficient amounts to make the installment payments. Unfortunately, because he was behind on his taxes and had entered into a payment plan with the IRS, there were no tax refunds available to pay the amounts agreed upon in the Term Sheet with Ms. Odom.
21. The Debtor did not advise Ms. Odom during the course of the discussion on January 15, 2014, that he had already entered into an agreement for the repurchase of his one-third membership interest in City Floorcoverings for $150,000.00, and that he had the $150,000.00 sitting in a bank account at the time.
22. On March 14, 2014, the Circuit Court entered a Final Decree of Divorce, which incorporated the Term Sheet as an attachment. ODOM. Ex. A.
23. No funds were paid to Ms. Odom on account of the Circuit Court's equitable distribution award out of the $150,000.00 redemption payment other than $10,500.00 for her legal fees, $4,314.61 for a Gap Visa and $2,163.71 for Aetna. DR Ex. 20; ODOM Ex. A.
24. June 1, 2015, came and went with no payment from Mr. Brandland. Ms. Odom filed for a Rule to Show Cause, which was issued on September 2, 2015. ODOM Ex. C, D.
25. The Circuit Court found Mr. Brandland to be in contempt for his failure to pay the June 15th payment. ODOM Ex. G.
26. In October 2015, Mr. Brandland filed a Motion to Amend the Divorce Decree Nunc Pro Tunc, arguing that Judge Kassabian had made a mathematical error in valuing Mr. Brandland's one-third interest in City Floor Coverings, LLC, at $689,000.00. DR. Ex. H. Mr. Brandland argued that Judge Kassabian intended to value 100% of the business at $689,000.00, so that Mr. Brandland's one-third interest should have been valued at $229,666.67 (and Ms. Odom would be entitled to one-half of that number, or $114,833.33). Id., p. 2.
27. The Debtor did not disclose to the Circuit Court in his Motion to Amend that he had entered into an agreement for the repurchase of his one-third interest in City Floorcoverings for $150,000.00 in December 2013, and that the money had already been spent. Id.; DR Ex. 20 (reflecting that the last payment exhausting the $150,000.00 redemption payment had occurred on April, 29, 2014).
28. The Circuit Court denied Mr. Brandland's Motion to Amend, finding that it intended to value the Debtor's one-third interest in City Floorcoverings at $689,000.00. ODOM Ex. K.
29. On October 16, 2015, the same day it denied Mr. Brandland's Motion to Amend, the Circuit Court remanded Mr. Brandland to the custody of the Sheriff, with bond set at the amount of $16,884.28, this being the amount of the June 15th installment payment plus interest and legal fees. ODOM. Ex. L.
30. After being incarcerated for some period of time in the Fairfax County Adult Detention Center, Mr. Brandland was released when his mother delivered a cashier's check in the amount of the bond to Ms. Odom's attorneys.
C. Floor Covering Resources.
31. By 2015, the Debtor had acquired an interest in a commercial carpet business known as Floor Covering Resources, Inc. ("Floor Covering Resources"). See ODOM Ex. PP. According to the Debtor's 2015 K-1 for Floor Covering Resources, Floor Covering Resources was incorporated in January 2005 and as of the tax year 2015, the Debtor held a 100% ownership interest in the business. Id., Line E & Schedule K-1.
32. In April 2015, while the Debtor was still an employee at City Floorcoverings, Mr. Kostakos and Mr. Quinones advised the Debtor that they would close City Floorcoverings in nine days. The Debtor then began working for Floor Covering Resources, on May 1, 2015.
33. On August 31, 2015, Floor Covering Resources, as the seller, entered into an Asset Purchase Agreement with Greenspring Carpets, Inc. ("Greenspring"), a Maryland corporation, as the purchaser. DR Ex. 25.
34. Under this Asset Purchase Agreement, Floor Covering Resources sold all of its assets to Greenspring. There was no cash to Floor Covering Resources or to the Debtor; rather, Greenspring assumed approximately $300,000.00 in liabilities plus the showroom lease. Id., Asset Purchase Agreement Exhibit 1.06.
35. Although the Debtor did not receive any cash from this transaction, it should be noted that in the handwritten attachment to the parties' Final Decree of Divorce, the Debtor received a credit in the amount of $99,325.00 for "FCR Debt," debt that was assumed by Greenspring in the Asset Purchase Agreement in August 2015.
36. After the sale in August 2015, the Debtor continued to work as an employee for Greenspring, managing the store and as a salesperson. He was an authorized signatory on the Floor Covering Resources bank account at Wells Fargo, until the business was closed in October 2016. He had a salary of $150,000.00 per year plus a car allowance. He did not have health insurance coverage, nor a 401K plan, with Greenspring.
37. Mr. Shapiro further testified that the Debtor and he negotiated for a 5% interest in the profits of Floor Coverings Resources, which Greenspring continued to use as a trade name for the storefront operated by the Debtor, but that the parties "never got to that point;" that is, the business never reached profitability, so the 5% never came into being.
D. The Debtor's Schedules and Proposed Third Amended Plan.
38. With the second equitable distribution payment looming on April 1, 2016, in the amount of $38,358.09, the Debtor filed a Chapter 13 petition with this Court, three days before the payment was due, on March 28, 2016. ODOM Ex. M; Docket No. 1.
39. In his Statement of Financial Affairs, the Debtor stated "No" in response to the question on whether he had made any insider payments within the year preceding his bankruptcy filing. ODOM Ex. M, p. 42 ("Include payments for domestic support obligations, such as child support and alimony.") In fact, the Debtor was regularly making spousal support and child support payments during the year preceding the bankruptcy filing.
40. The Debtor also answered "No" in response to the question on whether he was a party to any lawsuits or court actions within one year prior to his bankruptcy case. Id., p. 43. The Debtor's Motion to Modify the Term Sheet Payout and to Modify Support was pending within the year preceding his case. ODOM Ex. F (Circuit Court Order, 9/16/2015). Further, his Motion for Order Nunc Pro Tunc was pending during the year preceding his bankruptcy filing. ODOM Ex. H (Motion), K (Order Denying).
41. The Debtor also answered "No" to the question on whether within two years of the filing of his bankruptcy case he transferred any property other than in the ordinary course of business. ODOM Ex. M, p. 46.
42. The Debtor did, however, list his ownership interest in Floor Covering Resources as having ended on May 1, 2015. Id., p. 49. 43. The Debtor has no secured creditors. The IRS filed a proof of claim in the amount of $19,679.96, claiming $18,774.29 as priority debt. ODOM Ex. T, p. 1. Two creditors filed a total of three proofs of claim for unsecured credit card debts in the amount of $36,352.08. Id., pp. 1-3 (Claim Nos. 2, 3, 7). The Debtor also listed three family members, his mother his father and his sister, in the amounts of $16,884.28 (the amount that released the Debtor from custody), $10,000.00 and $2,000.00, respectively. ODOM Ex. M, pp. 25-27. His sister filed a claim for the $10,0000.00; his mother and father did not file claims. ODOM Ex. T. In addition, the Debtor listed his former divorce counsel with a debt in the amount of $24,935.52, who did file a proof of claim. ODOM Ex. M, p. 27; ODOM Ex. T. He listed Ms. Odom with a claim in the amount of $187,000.00, who also filed a claim. Id.
44. The Debtor's Third Amended Plan calls for payments of $905.73 per month for 54 months, plus $3,900.00 that the Debtor has already paid into the Plan. Docket No. 78, p. 2. The total plan funding equals $52,809.42. Id. The Plan would pay unsecured creditors a total of 11% over the life of the Plan. Id., p. 3. The Plan would pay the IRS priority debt in full. It would result in a payment of approximately $19,000.00 to Ms. Odom, without interest, over the 60 months of the Plan, at the conclusion of which the Debtor would receive a discharge of his unsecured debt.
E. The Debtor's Current Employment.
45. Currently, the Debtor is employed as a sales person with JANZ, Inc., doing business as Carpet Impressions, in McLean, Virginia.
46. Mr. Amin, the owner of Carpet Impressions, testified that the Debtor started with Carpet Impressions on November 28, 2016. The Debtor works on a commission basis. He is given a bi-weekly draw of $5,000.00, which is credited to his commissions if he has earned commissions in excess of the $5,000.00, bi-weekly (but, he is not debited if he is entitled to less than that amount in commissions). The Debtor also is paid $125.00 bi-weekly for health insurance and he is entitled to fifty-five cents ($0.55) per mile for his vehicle.
47. His agreement with Carpet Impressions is short term — only through March 1, 2017. The Court is not aware of whether this arrangement has been extended post-March 1st.
F. The Debtor's Post-Petition Domestic Support Obligations.
48. With only certain limited exceptions, the Debtor is current on his domestic support obligations.
49. Just before the hearing in this matter, the Debtor set off $380.00 in spousal support against Ms. Odom's obligation to reimburse him a certain percentage (22.5%) of the unreimbursed costs of the children's medical bills (some of which Ms. Odom agreed with; other costs she disputed). He recognized, with the advice of his counsel, that he was not entitled to set off this amount. He delivered a check in the amount of $380.00 to Ms. Odom at start of the hearing in this matter.
50. The day before the hearing in this case Ms. Odom took one of the children to the doctor. Under the Circuit Court's Order of September 16, 2015, reducing the Debtor's spousal support obligation, the Debtor was required to keep a credit card on file with the children's primary health care providers for any unreimbursed expenses. The Debtor acknowledges that he has not maintained a credit card on file with the children's physicians, but asserted that this is because he does not have a credit card. Ms. Odom was required to pay $50.00 in a co-payment to one of the children's physicians at this visit.
51. Finally, Ms. Odom and the Debtor agreed to maintain a sample of the children's cord blood with ViaCord, a cord blood bank, when their children were born. This costs $95.00 and $125.00 per year for the two children, respectively. The Debtor has not paid these amounts for 2016.
CONCLUSIONS OF LAW
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference entered by the U.S. District Court for this District on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L) (confirmation of plans).
The Debtor bears the burden of proof with respect to all of the statutory requirements for confirmation, by a preponderance of the evidence. In re Cole, 548 B.R.132, 141 (Bankr. E.D. Va. 2016); In re Colston, 539 B.R. 738, 746 (Bankr. W.D. Va. 2015).
Ms. Odom has raised a series of objections to the Debtor's Third Amended Plan. The Court will address each objection, in turn.
I. Section 109(e) — the Regular Income Requirement.
Bankruptcy Code Section 109(e) requires the Debtor to have regular income in order to be eligible for Chapter 13. 11 U.S.C. § 109(e). The term "individual with regular income" means an individual "whose income is sufficiently stable and regular to enable such individual to make payments" under the debtor's Chapter 13 plan. 11 U.S.C. § 101(30). In this case the Debtor is employed at Carpet Impressions. He has bi-weekly draws of $5,000.00, which are credited against his commission income if he exceeds that amount in commissions. Conversely, his income will not be less than $5,000.00, even if he does not meet that target in commission income.
Although Mr. Amin testified that the Debtor's employment arrangement is up for renewal as of March 1, 2017, eligibility under Section 109(e) is determined as of the filing of the petition. In re Robinson, 535 B.R. 437, 443 (Bankr. N.D. Ga. 2015); In re Jurgens, Case No. 15-60592-13, 2015 WL 6163511 (Bankr. D. Mont. Oct. 20, 2015). The Court is satisfied that the Debtor has met the regular income requirement for eligibility under Section 109(e) of the Code. The Court overrules this objection.
II. The Disposable Income Requirement.
Ms. Odom argues next that the Debtor has not met the disposable income requirement for confirmation of his Chapter 13 Plan. 11 U.S.C. § 1325(b)(2). Ms. Odom asserts that because the Debtor's income is commission-based, there is a risk that the Debtor may not be contributing all of his disposable income to the Plan. This problem, however, is solved by two methods in this case. First, the Debtor will be required to turn over his tax returns annually to the Chapter 13 Trustee, as all Debtors in this District are required to do. The Trustee, therefore, will be able to determine whether there is a substantial increase in the Debtor's income.
Second, the Trustee and the Debtor's counsel have agreed to a quarterly reporting requirement that that will be incorporated into the Order confirming the Debtor's Plan. If either the tax returns or the quarterly reports indicate a "substantial and unanticipated" increase in income, the Trustee can file a motion to modify the Plan under Section 1329(a) of the Code. In re Murphy, 474 F.3d 143 (4th Cir. 2007).
The Court finds that the production of the Debtor's tax returns, together with the quarterly reporting requirement, ensure that all of the Debtor's income will be accounted for and that he will be required to devote all of his disposable income to the Plan. The Court overrules this objection.
III. The Debtor's Domestic Support Obligations.
Ms. Odom's third objection is that the Debtor is not current in his domestic support obligations. Domestic support obligations are accorded the highest priority for payment under the Code. 11 U.S.C. § 507(a)(1). In order to gain confirmation of a plan, the debtor must be current in all post-petition domestic support obligations. 11 U.S.C. § 1325(a)(8). Domestic support obligations are not dischargeable in Chapter 13. 11 U.S.C. §§ 1328(a)(2), 523(a)(5). Further, the debtor must certify that he or she is current on all domestic support obligations in order to receive a discharge. 11 U.S.C. § 1328(a).
In this case, Ms. Odom asserts that the Debtor has not paid: (a) the $380.00; (b) a $50.00 co-pay; and (c) the ViaCord expenses. The Debtor, however, delivered a check to Ms. Odom on the morning of the hearing in this case for $380.00. The $50.00 co-pay was incurred the day before the hearing in this matter. Mr. Brandland is in default of his obligation to maintain a credit card with the children's primary health care provider. The Debtor, on the other hand, testified that he is unable to obtain a credit card, given his financial circumstances. The Court understands the importance of these obligations to Ms. Odom and does not intend to minimize their importance to her. The Court will not, however, allow a $50.00 co-pay that was incurred the day before the hearing on confirmation in this case to derail the Debtor's Chapter 13 case.
Finally, the Court has already found, above, that the Debtor's failure to pay the ViaCord expenses does not constitute a failure to pay "necessary" medical expenses under the two State Court Orders. See fn. 10, above. Accordingly, the Debtor's failure to pay the ViaCord expenses does not constitute a default in the payment of his domestic support obligations.
The Court will overrule this objection.
IV. The Best Interests of Creditors Test.
Ms. Odom's more substantive objections to confirmation are her best interests of creditors objection and her good faith objection, discussed below. In her best interests of creditors objection, Ms. Odom argues that the best interests test has not been met because the bankruptcy estate may have fraudulent transfer claims or voluntary conveyance claims against Mr. Kostakos and Mr. Quinones arising out the repurchase of the Debtor's one-third interest in City Floorcoverings for $150,000.00 in December 2013-January 2014. DR Exs. 15-19.
The Debtor filed his petition in this case on March 28, 2016, more than two years after the date of the transfer (the latest date from which the two years would run would have been January 10, 2014, the date of the $150,000.00 check). DR Ex. 19. Neither Section 548(a)(1)(A) of the Bankruptcy Code (transfers made with actual intent to hinder, delay or defraud creditors) nor Section 548(a)(1)(B) (transfers for less than reasonably equivalent value while the debtor was insolvent or was rendered insolvent or left with unreasonably small capital), would be available to a Chapter 7 Trustee to avoid the repurchase of the Debtor's one-third interest in City Floorcoverings because the transfer is outside of the two year lookback period under Section 548. Rather, the hypothetical Chapter 7 Trustee would be left with Section 544(b) and the rights of State law creditors under Virginia Code Sections 55-80 (transfers made with actual intent to hinder, delay or defraud creditors) and 55-81 (transfers for no consideration made at a time when the transferor was insolvent or was rendered insolvent). The Court will analyze the City Floorcoverings repurchase transaction under each statute.
A. Virginia Code Section 55-80.
Section 55-80 provides as follows:
Va. Code § 55-80.
In discerning the transferor's intent, the courts routinely look to badges of fraud. These badges include, but are not limited to:
Hyman v. Porter (In re Porter), 37 B.R. 56, 63 (Bankr. E.D. Va. 1984).
Ms. Odom argues that there are a number of badges of fraud here. First, the Debtor entered into the agreement to sell his one-third interest in City Floorcoverings on December 31, 2013, at a time when his divorce case was pending. Second, the purchase price of $150,000.00 was, in Ms. Odom's estimation, unreasonably low, in comparison to Judge Kassabian's valuation of the Debtor's one-third interest at $689,000.00. The Debtor attempted to conceal his one-third interest in pre-trial discovery in the State court when he testified that the $100,000.00 that he paid was only for "cash flow," and not for the purchase of the one-third interest.
Ms. Odom argues further that the transfer was one to "insiders," but it is doubtful that Mr. Kostakos and Mr. Quinones would be considered insiders of the Debtor when they were purchasing the Debtor's one-third interest in City Floorcoverings. Ms. Odom also argues that the Debtor was rendered insolvent by the redemption, but there was no expert evidence presented on solvency as of December 2013, so the Debtor's solvency would be an open issue.
Ms. Odom relies heavily on the Debtor's letter to Mr. Kostakos and Mr. Quinones of November 26, 2013, leading up to the sale, in which he stated:
ODOM Ex. II.
She buttresses her conclusion on the alleged fraudulent nature of the transfer with her Exhibit XX, which indicates that after the December 31, 2013, sale, Mr. Kostakos and Mr. Quinones received roughly $2,081,000.00 in distributions from the business. ODOM Ex. XX. One third of this amount, she argues, would be $693,666.00, a figure remarkably consistent with Judge Kassabian's valuation of the Debtor's one-third interest at $689,000.00. In Ms. Odom's view, if we take the difference between what Mr. Kotakos and Mr. Quinones actually paid ($150,000.00) for the Debtor's one-third interest, and the $689,000.00 valuation, the Debtor is not accounting for $539,000.00 in his liquidation analysis.
Still, the Court does not view the potential for a fraudulent transfer claim against Mr. Kostakos and Mr. Quinones as anything close to a certainty. As noted above, it is unlikely that Mr. Kostakos and Mr. Quinones would be considered insiders of the Debtor for purposes of this transfer. The Court has not heard any evidence on the Debtor's insolvency at the time of the redemption in December 2013. Importantly, the one badge of fraud that would be of critical importance here, the retention of some financial interest in the business, is lacking. The Debtor retained no benefit whatsoever in the City Floorcoverings business for himself or anyone with whom he was affiliated after the sale. It is difficult to see what would have motivated the Debtor to fraudulently sell his one-third interest back to Mr. Kostakos and Mr. Quinones, allegedly at a bargain basement price, where the Debtor did not retain any prospective benefit. If his only intent was to deprive Ms. Odom of the benefit of his one-third ownership, he could have just defaulted on the original purchase agreement, at which point he would have forfeited the interest for nothing. The $150,000.00 purchase price was the product of arms-length bargaining where, the Debtor testified (convincingly, at least on this point), that he had no negotiating leverage whatsoever and was left in a "take it or leave it" position. A hard bargain is not the same thing as a fraudulent transfer, as long as the parties dealt with each other at arms-length and the transferor retains no interest in the property transferred.
In the end, the Court is unable to ascribe any real value to the allegation that the redemption of the Debtor's one-third interest was a transfer made with the intent to hinder, delay or defraud the Debtor's creditors, despite the presence of a number of alleged badges of fraud. The Court finds that the Debtor has met his burden with respect to the liquidation test on this claim.
B. Virginia Code Section 55-81.
Virginia Code Section 55-81 provides as follows:
Va. Code § 55-81.
Section 55-81, like Bankruptcy Code Section 548(a)(1)(B), is a constructive fraud statute. Unlike Section 548(a)(1)(B), however, Section 55-81 does not contain a "reasonably equivalent value" standard. Rather, Section 55-81 provides for the avoidance of transfers where there is no consideration at all. The phrase "upon consideration deemed valuable in law" refers to "any valuable consideration received by the transferor." In re Meyer, 244 F.3d 352, 355 (4th Cir. 2001) (citing Moore v. Manson (In re Springfield Furniture, Inc.), 145 B.R. 520, 533 (Bankr. E.D. Va. 1992)) (emphasis in original); In re LandAmerica Financial Group, Inc., Case No. 08-35994-KRH, APN 10-03819-KRH, 2014 WL 2069651 (Bankr. E.D. Va. May 19, 2014).
In the LandAmerica case, Judge Huennekens held:
2014 WL 2069651, *5.
In this case, there isn't any question that Mr. Kostakos and Mr. Quinones paid $150,000.00 for the Debtor's one-third interest in City Floorcoverings. The transfer, therefore, cannot be avoided under Va. Code § 55-81, and cannot form the basis for a liquidation test objection. The Court overrules the liquidation test objection insofar as it is based on a Section 55-81 claim.
V. The Debtor's Good Faith.
The Court turns finally to Ms. Odom's objection on the grounds of bad faith. As noted above, the Court has already denied Ms. Odom's Motion to Dismiss this bankruptcy case. The Debtor's good faith in proposing a plan, however, is an independent requirement for confirmation. 11 U.S.C. § 1325(a)(3). "The obligation of good faith is imposed on the debtor at two stages in a Chapter 13 proceeding; first, the debtor must file the petition for Chapter 13 bankruptcy in good faith, and second, the debtor must file the Chapter 13 plan in good faith." In re Colston, 539 B.R. at 746 (quoting In re Tomer, Civil Action No. 4:09CV0008, 2009 WL 2029798, at *4 (W.D. Va. July 14, 2009)).
In Deans v. O'Donnell, the Fourth Circuit held that, with respect to good faith, "[b]roadly speaking, the basic inquiry should be whether or not under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of [the Chapter] in the proposal or plan. . . ." 692 F.2d 968, 972 (4th Cir. 1982) (quoting 9 Collier on Bankruptcy 9.20 at 319 (14th ed. 1978)). The Fourth Circuit held that a non-exclusive list of factors might include: not only the percentage of proposed repayment, but also the debtor's financial situation, the period of time payment will be made, the debtor's employment history and prospects, the nature and amount of unsecured claims, the debtor's past bankruptcy filings, the debtor's honesty in representing facts, and any unusual or exceptional problems facing the particular debtor.
Id. The totality of the circumstances must be examined on a case by case basis. Id.; see also Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986). The burden of proof rests with the Debtor to prove good faith in the confirmation of his Plan. In re Colston, 539 B.R. at 749; In re Taylor, 261 B.R. 877, 885 (Bankr. E.D. Va. 2001).
Ms. Odom identifies a number of factors that she describes as bad faith conduct on the part of the Debtor. The Court will address each of her concerns.
A. The Discharge of Debt that Would Not Be Dischargeable in Chapter 7.
Ms. Odom argues first that the Debtor is seeking to discharge her equitable distribution award, an obligation that would not be dischargeable in a Chapter 7 case. In Neufeld, the Fourth Circuit held that "although the discharge of an obligation which would be nondischargeable in Chapter 7 is not, standing alone, a sufficient basis on which to find bad faith or deny confirmation, it is a relevant factor to be considered in the § 1325(a)(3) good faith inquiry." 794 F.2d at 152. The Court went on to say:
Id. at 152-153 (emphasis added).
Here, the Debtor is attempting to discharge Ms. Odom's equitable distribution debt, which would not be available in Chapter 7. 11 U.S.C. § 1328(a)(2) (excepting from discharge in Chapter 13 Section 523(a)(5) domestic support obligations but not providing an exception for Section 523(a)(15) property settlement or equitable distribution obligations). On the other hand, the desire of the Debtor to take advantage of Congress's intent in providing for the discharge of his equitable distribution obligations in Chapter 13 does not amount to a fraud or other wrongful conduct. Compare In re Fulmer, 535 B.R. 854, 860 (Bankr. M.D. Ala. 2015) ("A debtor . . . who lawfully seeks a discharge in bankruptcy is not, by definition, acting in bad faith.") with In re Mitrano, 472 B.R. 706, 711-12 (E.D. Va. 2012) (finding bad faith where: (a) debtor listed virtually every claim in the case as being disputed, despite pre-petition judgments establishing the claims; (b) debtor was sanctioned $88,000.00 pre-petition; (c) debtor proposed a repayment plan of $10.00 per month; and (d) debtor's "egregious efforts to avoid his child support restitution obligation" were well-documented). The Debtor in this case has never contested his domestic support obligations and has not disputed the amount of the equitable distribution debt to Ms. Odom. Further, the Court would not describe an 11% plan as being a "minimal" repayment of Ms. Odom's debt.
The Debtor's desire to discharge his equitable distribution to Ms. Odom does not, standing alone, warrant a denial of confirmation or dismissal of this case. It is only when such an intent is coupled with other bad faith conduct that the Court will deny confirmation or dismiss the case, under Neufeld. The Court, then, turns to examine the Debtor's pre-petition conduct in his divorce case.
B. The Debtor's Pre-Petition Concealment of His Ownership Interest in City Floorcoverings.
The Debtor was not truthful in his deposition in his divorce case concerning his ownership of a one-third membership interest in City Floorcoverings, as indicated above. ODOM Ex. RR, p. 63. This alone, while not admirable, might not be enough to warrant a denial of confirmation or a dismissal of the Debtor's bankruptcy case. Ms. Odom learned of the Debtor's one-third ownership interest with sufficient time to engage an expert witness to value that interest at the equitable distribution hearing in December 2013, testimony that the Circuit Court accepted in placing a value of $689,000.00 on the Debtor's one-third interest.
More damning, though, was the Debtor's decision not to disclose the Redemption Agreement and the receipt of $150,000.00 in proceeds for his one-third interest in City Floorcoverings to Judge Kassabian in the January 15th hearing, and immediately thereafter in the conference with Ms. Odom and her counsel. The funds were received on January 10, 2014. DR Ex. 19. The Debtor's first payment out of the $150,000.00 in proceeds was made on January 24, 2014. DR Ex. 20. The Debtor, therefore, had the $150,000.00 in the bank at the time of the January 15th hearing and post-hearing conference with Ms. Odom and her attorney.
The Debtor allowed the Final Decree of Divorce to be entered on March 14, 2014, with no mention of the Redemption Agreement. He further filed a Motion to Amend the Final Decree of Divorce in October 2015 — twenty-two months after the Redemption Agreement of December 2013 — with no mention of the Redemption Agreement. With only certain limited exceptions, the Debtor did not pay any of the $150,000.00 to Ms. Odom on account of her equitable distribution award. The Debtor concealed the Redemption Agreement from the Circuit Court and from Ms. Odom in a plain effort to use the funds for other purposes, while negotiating for and receiving additional time to pay the equitable distribution award.
This strategy to conceal the Redemption Agreement and the $150,000.00 in proceeds, coupled with a delay in the payment of the $201,000.00 equitable distribution award, turned out in hindsight to be spectacularly misguided. The Debtor chose to pay creditors who, with the exception of the IRS, held dischargeable debt, while failing to make arrangements to pay the one creditor who had the power to have him held in contempt and incarcerated (and who ultimately did just that). He plowed a total of $68,200.00 (approximately 45% of the $150,000.00 redemption price) into Floor Covering Resources (DR Ex. 20), a business that by August 2015 the Debtor sold for no cash, only the assumption of its liabilities — liabilities for which Ms. Odom gave a $99,325.00 credit in the Term Sheet and for which she never received any adjustment as a result of Greenspring's assumption of those obligations.
The Debtor's intent to discharge Ms. Odom's equitable distribution debt, which would not be dischargeable in a Chapter 7 case, coupled with his pre-petition concealment of the Redemption Agreement from the Circuit Court and from Ms. Odom, and his use of all of the $150,000.00 in proceeds without payment of virtually any of the equitable distribution award when he had the opportunity to do so, causes the Court to sustain Ms. Odom's good faith objection to the Debtor's Third Amended Plan.
VI. The Court Will Dismiss the Debtor's Bankruptcy Case Sua Sponte.
The Court has sustained Ms. Odom's Objections to the Debtor's Plan, for the reasons stated above. This case has been pending since March 28, 2016, for about a year now, with no confirmed Chapter 13 plan. This is the Debtor's Third Amended Plan, meaning that it is the fourth Plan that the Debtor has proposed without achieving confirmation. More importantly, the defects in the Debtor's Plan — a lack of good faith arising primarily out of pre-petition conduct in his divorce case — cannot be remedied by the filing of an amended plan. The Court, therefore, will enter a separate Order dismissing this case sua sponte.
For the foregoing reasons:
1. The Court overrules Ms. Odom's Objections to the Debtor's Third Amended Plan on the grounds of eligibility, disposable income, failure to pay domestic support obligations and the liquidation test. 11 U.S.C. §§ 109(e), 1325(b)(2), 1325(a)(8) and 1325(a)(4).
2. The Court sustains Ms. Odom's Objection to the Debtor's Third Amended Plan on the ground of good faith. 11 U.S.C. § 1325(a)(3).
3. The Court will dismiss this case sua sponte.
4. A separate Order shall issue.
5. The Clerk will mail copies of this Memorandum Opinion, or will provide CM-ECF notice of its entry, to the parties below.