In re Mills
In re Mills
Opinion of the Court
MEMORANDUM OPINION
The parties to this matter all agree that valid grounds exist to dismiss or convert this chapter 13 case for cause under § 1307(c). They differ on whether the Court can convert a chapter 13 case to chapter 7 after the debtor has requested dismissal under § 1307(b) and, second, whether it would better serve the interests of the creditors to dismiss this case or convert it to chapter 7. If, as a matter of law, the debtor’s motion to dismiss must be granted, whether the case should be converted is a moot point.
11 U.S.C. § 1307(b) says that the court “shall” grant the request of the debtor to dismiss his case “at any time.” But subsection (c) provides that the court “may” dismiss a chapter 13 case for cause or convert it to chapter 7 if that would be in the best interests of the creditors and estate. Mills says that the statute’s mandate to dismiss the case trumps the discretionary power to convert his case. Creditors Jason Appell, Kevin Law, and Robert Law, joined by Kanza Bank (and the trustee, at least in the beginning) assert that “Debtor’s absolute right to dismiss is qualified by an implied exception for bad faith conduct and/or abuse of the bankruptcy process.”
Procedural History
Mills filed his chapter 13 case on November 20, 2014. He submitted a 36-month plan that proposed monthly payments of $1,500. After the debtor’s first meeting of creditors on December 19, the trustee filed her initial objections to the
Facts
The underlying question here is one of law: can the court deny a debtor’s motion to dismiss his chapter 13 case for bad faith conduct and/or an abuse of the bankruptcy process? But because bad faith or abuse of the process is largely a factual matter, some background is necessary.
Ryan Mills was in the construction and real estate development business before he filed his case. In 2011 he formed a company called RDM Properties LLC, d/b/a Mills Construction. In 2012, he organized M & L Development Group LLC with Mickey Lynch.
The Walker’s Bar/Jetty’s Pizza project is the centerpiece of the parties’ dispute. Ryan Mills acquired a 50% interest in The Tree Guys LLC in 2010. That entity purchased two old buildings located at 220 and 222 S. Commerce Street (the “Commerce Property”) from Michael McGill. In the fall of 2011, Mills and McGill formed Commerce Street Developers, LLC (CSD) to acquire the Commerce Property from The Tree Guys.
Along with his work for CSD, Mills did business as “Commerce Street Operators,” a sole proprietorship. In 2012, he solicited a $120,000 loan from Appell and the Law brothers for development of the Commerce Property. He gave them a promis
Mills defaulted on the April note. He began to improvise. He offered Appell a “royalty” on Walker’s operating revenue in exchange for Appell’s forbearing to sue him for his portion of the April note. He convinced Appell to loan him another $60,000 in August of 2013, giving him note from Mills and CSD, the same to be payable in 30 days in the amount of $66,000.
Mills met Lynch during this period of time. Lynch agreed to invest in the project and became a member of CSD in 2013, acquiring what may have been McGill’s 51% interest in that company for an initial $250,000 cash investment. Mills found another investor, 222 Commerce LLC, and assigned it a 25% membership from his holdings. As of October 15, 2013 Mills owned 24%, Lynch owned 51% and 222 Commerce owned 25% interest in CSD.
Walker’s and Jetty’s opened in late 2013, but due to a lack of parking and other issues, did not flourish. By March of 2014, Mills had only paid Appell $20,000 of the $60,000 he had borrowed oh the second note. Appell and the Law brothers sued Mills in state court in September, seeking judgment on the notes and claiming that Mills had fraudulently induced them to lend and/or invest in the enterprise. The bar and restaurant both closed by August.
In July of 2014, Mike McGill, who had previously owned this property, became interested in acquiring it again. Mills and CSD were still indebted to McGill on the purchase money mortgage notes that Tree Guys had granted to McGill when it acquired the property from him in 2010. McGill formed Uncondemned Properties, LLC (“UP”) in July of 2014 to reacquire the Commerce Property from CSD. He was UP’s managing member and owned 86% of it; Mills owned the other 14%.
Even after transferring his 51% interest in CSD, Lynch executed a deed on September 4 as a “member” of CSD, conveying the Commerce Property to UP. At closing, Lynch received 14% of UP, Mills’ interest increased to 35%, and McGill re-
Then, shortly after the closing on September 4, UP bought out Mills’ 35% interest in it for $42,000 cash and forgave Mill’s personal liability on the Tree Guys $440,000 debt. McGill conceded that there was no writing that evidenced the release of Mills.
Appell and the Law brothers say that this series of transactions should be examined by a trustee and, possibly, avoided for the benefit of Mills’ creditors, even though most of the transfers appear to involve the property of entities, not of Mills individually. They also say that Mills filed his bankruptcy case in bad faith and abused the legal process because he filed this case immediately after the state court pretrial discovery conference in their suit and because his bankruptcy pleadings reflect some inconsistencies. For example, Mills discloses that he sold his 35% interest in UP to McGill for $42,000, but does not refer to his being forgiven on the Tree Guys debt. He failed to append exhibits referenced in his statement of financial, affairs that would have detailed his pending lawsuits and business interests. At trial, though, Mills said he provided these exhibits to the trustee at the first meeting of creditors and no one contradicted that testimony. Mills’ declaration on Schedule B that he retained ownership of 49% of the federal historical tax credits is also likely inaccurate because Mills never owned the credits as an individual. The entities did. Finally, Mills admitted at his first meeting and again at trial that he listed CSD’s unsecured creditors as well as creditors of his construction entities on Schedule F, but disputed any personal liability for those debts.
After he filed, Mills collected about $4,500 of his construction accounts receivable and used those funds either in his construction business or for living expenses. In February of 2015, he organized a new limited liability company called RDM Development, LLC to conduct his construction business.
Analysis
Appell and the Laws (and, initially, the trustee) argue that the existence of the potential transfer actions, combined with the various inaccuracies on Mills’ schedules demonstrate his bad faith and justify
Bankruptcy Code § 1307(b) states that “on request of the debtor at any time, if the case has not been converted [from chapters 7, 11, or 12], the court shall dismiss a case under [chapter 13].”
Along with denying that he acted improperly, Mills says that the court lacks discretion to deny a debtor’s motion to dismiss a chapter 13 case by using § 105(a) as the Marrama court did. The Supreme Court’s recent refinement, of its holding in Marrama in Law v. Siegel supports his view.
At most, Marrama’s dictum suggests that in some circumstances a bankruptcy court may be authorized to dispense with futile procedural niceties in order to reach more expeditiously an end result required by the Code. Marrama most certainly did not endorse, even in dictum, the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code.22
The interplay of § 1307(b) with the Rules of Bankruptcy Procedure lends support to that conclusion. Fed. R. Bankr. P. 1017(f)(2) governs a debtor’s request to dismiss under § 1307(b) and provides that "... dismissal under ... § 1307(b) shall be on motion filed and served as required by Rule 9013.” That rule provides the means for serving a “request for an order,” but doesn’t provide for other parties having an opportunity to object. Rule 1017(f)(1) governs a motion to convert under § 1307(c), providing that such a motion shall be treated as a contested matter under Rule 9014 which, in turn, requires that parties be served with notice under Rule 7004, be granted an opportunity to object, and be given a hearing. Rule 1017(f)(2) contemplates that a debtor’s § 1307(b) dismissal motion should be granted out of hand.
There is no binding Tenth Circuit precedent on the question of whether a debtor’s § 1307(b) unconditioned right to dismiss is trumped by the court’s § 1307(c) power to convert a case in the best interests of the creditors. Other circuits are split on the issue.
In re Molitor was a pre-Marrama case in which the Eighth Circuit employed similar reasoning to convert a repeat chapter 13 debtor’s filing to chapter 7 over his protest without considering § 105(a). It emphasized that bankruptcy affords the honest but unfortunate debtor a fresh start, but does not grant wrongdoers a shield from paying their debts.
Other courts have recognized Law v. Siegel’s limitations on Marrama and declined to fashion equitable relief that contravenes express provisions of the Code.
It is the discord between a debtor’s right to dismiss under Section 1307(b), allegations of bad faith, and a creditor’s motion to convert that this Court now addresses, particularly in light of the impact of Law v. Siegel, which speaks to the Bankruptcy Court’s power to fashion equitable relief in the presence of express statutory language that instructs otherwise.
The Court’s role is not to redraft the statute, even if it perceives a need to deter and remedy a debtor’s bad-faith conduct in advance of a motion under 11*887 U.S.C. § 1307(b). Law is instructive in that regard ...
Given the guidance in Law, the right of the debtor to request a bankruptcy court to dismiss an unconverted Chapter 13 case becomes even more compelling. If this Court were to refuse to grant the Debtor’s request ... it would exceed its authority by acting in direct contravention of the express terms of Section 1307(b). This Court declines to do so.40
I concur with these well-stated comments and conclude that Barbieri and the courts that follow it correctly interpret and apply § 1307(b). Law v. Siegel precludes bankruptcy courts from crafting a bad faith exception to a chapter 13 debtor’s voluntary dismissal. Chapter 13 is a voluntary remedy only; in the absence of specific statutory direction, a debtor should be able to exit without risking being subjected to involuntary liquidation without the due process, protections afforded involuntary debtors by § 303. If a debtor commits sanctionable wrongdoing in the course of the case, the court has’ many means of addressing that other than forced liquidation premised on a shaky legal foundation. Section 1307(b) grants a chapter 13 debtor the absolute right to voluntarily dismiss his case at any time.
Conclusion and Orders
The Court GRANTS Ryan Mills’ motion to voluntarily dismiss his chapter 13 case under § 1307(b) and DENIES as MOOT the motion of the trustee, Jason Appell, Kevin Law, Robert Law, and Kanza Bank to convert under § 1307(c). The case is DISMISSED.
SO ORDERED.
SIGNED this 29th day of October, 2015.
. Dkt. 65.
. The ¡debtor Ryan Mills appeared in person and by his attorney Mark J. Lazzo. The chapter 13 trustee Laurie B, Williams appeared by her attorney Karin Amyx. The Law creditors appeared by their attorney Tom Gilman. Chris Borniger briefly appeared for creditor Kanza Bank but requested to be excused from participation in the proceedings and the Court granted that request.
. Debtor’s Ex. C.
. Ex. 27, 29. Mills organized a third entity post-petition named RDM Development, LLC. See Ex. 32. According to Mills, this new entity was his construction business post-petition.
. This is clear from some of the proofs of claim filed in the case.
. Ex. 24 shows that CSD was organized in 2011 with McGill and Mills as its initial members. According to McGill, he owned 51% of CSD and Mills owned 49%.
. Nor could he have; though the record is cloudy on this point, Mills doesn’t appear to have held more than 49% of CSD at that time.
. The extra $6,000 is euphemistically described in the instrument as "10% interest.”
. See Ex. 105, pp. 147-176 — original Operating Agreement for UP executed July 17, 2014. How or why Mills retained this interest was not éxplained at trial.
. Ex. 105, pp. 275-89, 304-06.
. An operating agreement for UP was executed by the members of UP on September 4, 2014 showing these revised interests. See Ex. 110.
. This change was allegedly negotiated and agreed upon by the parties notwithstanding an "entireties clause” in the asset purchase agreement. See Ex. 105, p. 285, ¶ 11. No written document that memorialized this oral agreement or modified the asset purchase agreement was produced at trial.
.' Mills disclosed the sale'and transfer of this interest in his Statement of Financial Affairs, Questions 2 and 10.
.Ex. 32.
. The trustee initially joined this view, but her counsel abandoned that position at trial.
. See 11 U.S.C. § 1307(b), emphasis added.
. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
. Id. at 374-75, 127 S.Ct. 1105.
. Id. at 375, 127 S.Ct. 1105.
. -U.S.-, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014).
. 134 S.Ct. at 1197.
. Id.
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014). See also Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258, 1263 (10th Cir. 2008) (Bankruptcy court’s equitable powers under § 105(a) may not be used to contravene or disregard the plain language of a statute or exercised in a manner that is inconsistent with specific provisions of the Code.); In re Alderete, 412 F.3d 1200, 1207 (10th Cir. 2005): In re Hedged-Investments, 380 F.3d 1292, 1298 (10th Cir. 2004); In re Alternate Fuels, Inc., 789 F.3d 1139, 1146-49 (10th Cir. 2015).
. See Alan N. Resnick and Henry J. Sommer, 8 Collier on Bankruptcy, ¶ 1307.03 at 1307-9 (16th Ed. 2015) ("... because there is no right to contest the dismissal, the procedures of Bankruptcy Rule 9013, rather than Bankruptcy Rule 9014, are followed. No hearing is required.”).
. See In re Jacobsen, 609 F.3d 647 (5th Cir. 2010) (chapter 13 debtor's right to voluntarily dismiss case is not absolute and may be de- . nied on grounds of bad faith conduct and provide cause for conversion); In re Rosson, 545 F.3d 764 (9th Cir. 2008) (same); In re Molitor, 76 F.3d 218 (8th Cir. 1996) (same); In re Barbieri, 199 F.3d 616 (2nd Cir. 1999) (chapter 13 debtor has absolute right to dismiss so long as order converting case to chapter 7 has not been entered). All of these cases were decided prior to Law v. Siegel.
.The interpretation of a bankruptcy statute is a question of law. The inquiry begins with the language of the statute itself and courts must presume that Congress says in a statute what it means and means in a statute what it says. If the language of the statute is unambiguous, the plain and ordinary meaning of the statute controls and the judicial inquiry is complete. In re McGough, 737 F.3d 1268, 1272-73 (10th Cir. 2013); In re Mallo, 774 F.3d 1313, 1317, 1327 (10th Cir. 2014). See also United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
. Barbieri v. RAJ Acquisition Corp. (In re Barbieri), 199 F.3d 616 (2nd Cir. 1999).
. Id. at 619.
. Id.
. Id. at 620, internal citation omitted.
. Id.
. Id. at 620-21, citing Official Comm. of Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir. 1987).
. See 11 U.S.C. § 349(a); 11 U.S.C. § 109(g)(1) and (2); Fed. R. Bankr. P. 9011. See e.g., Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D.Pa. 2015) (dismissal with prejudice and debtor enjoined from filing future cases without permission from bankruptcy court); In re Winder, No. 10-07070-TOM13, 2011 WL 2620992 (Bankr. N.D.Ala. July 1, 2011) (voluntary dismissal conditioned under § 109(g)(1) with 180-day refiling bar for failure to comply with confirmation order to provide tax return to trustee); In re Hasan, 287 B.R. 308 (Bankr.D.Conn. 2002) (after voluntary dismissal of case, bankruptcy court assessed attorney fees against debtor for offensive conduct during the case); In re Polly, 392 B.R. 236 (Bankr.N.D.Tex. 2008) (§ 349 permits the court to dismiss the case with prejudice to refiling and the court may reserve the matter of sanctions under Rule 9011 following dismissal).
.See Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277 (E.D.Pa. 2015) (debtors right to dismissal under § 1307(b) is absolute, but court has the power to impose restrictions on debtor’s refiling); Johnston v. Johnston, 536 B.R. 576 (D.Vt. 2015) (following Barbieri, the controlling Second Circuit authority); In re Procel, 467 B.R. 297 (S.D.N.Y. 2012) (applying Barbieri), In re Dulaney, 285 B.R. 10 (D.Colo. 2002) (concluding chapter 13 debtor has absolute right to dismiss under the clear language, history and purpose of § 1307(b)); In re Thompson, No. 10-23017, 2015 WL 394361 (Bankr.E.D.Ky. Jan. 29, 2015); In re Darden, 474 B.R. 1 (Bankr.D.Mass. 2012); In re Williams, 435 B.R. 552 (Bankr.N.D.Ill. 2010); In re Neiman, 257 B.R. 105 (Bankr. S.D.Fla. 2001); In re Patton, 209 B.R. 98 (Bankr.E.D.Tenn. 1997); In re Greenberg, 200
. 609 F.3d 647, 660 (5th Cir. 2010).
. 76 F.3d 218 (8th Cir. 1996).
. 545 F.3d 764 (9th Cir. 2008).
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 1194, 1197, 188 L.Ed.2d 146 (2014).
. No. 14-61076: 2015 WL 1263354 (Bankr. W.D.Va. Mar. 19, 2015). '
. 2015 WL 1263354 at *2, *6. See also Ross v. AmeriChoice Federal Credit Union, 530 B.R. 277, 287-88 (E.D.Pa. May 5, 2015) (citing Law v. Siegel and distinguishing Marrama); In re Williams, 435 B.R. 552 (Bankr.N.D.Ill. 2010) (distinguishing Marrama; cited with approval in In re Fisher).
Reference
- Full Case Name
- IN RE: Ryan D. MILLS, Debtor
- Cited By
- 13 cases
- Status
- Published