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Pre-filing Conduct Dooms Debtors Post-filing Plans

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In re Wetter, 620 B.R. 243 (Bankr. W.D. Va. 2020)(Black, J.)

The Debtor filed a Chapter 7 case as he was personally liable on a number of his business debts. The debtor exempted an investment LLC as tenant by the entireties, claiming to own half of the company with his spouse.  The Chapter 7 case was filed on July 31, 2019; the Debtor purportedly made the transfer from his own name to TxE with his spouse on January 1, 2018.

 

The Trustee was wary of this transfer.  Section 727(a)(2) provides that the Court shall not grant a discharge if the debtor, “with intent to hinder, delay or defraud a creditor . . has transferred (A) a property of the debtor, within one year before the date of filing of the petition.”

 

The Trustee requested the Debtor provide organizational and meeting documents for the investment company. Debtor’s counsel has emailed the Trustee an assignment of the investment company’s interests dated September 25, 2018, which was within the one-year period, rather than the January 1, 2018 date, which was not. The Debtor confessed that the transfer was actually signed on September 25, 2018, but his estate planning lawyer told him to backdate the transfer.

 

The Debtor filed a motion to convert to Chapter 11 after finding a previously signed revocable trust he has conveyed the property into in 2016.

 

Analysis

The Court began its analysis with Section 706(a) which provides “the debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time” but then notes that this right to convert is no absolute, citing Marrama, 549 U.S. 365 (2007). Marrama involved the conversion of a Chapter 7 to a Chapter 13. But many courts have held that it applied with equal force to the conversion to a Chapter 11.  However, the controlling Fourth Circuit case involving the conversion to a Chapter 11 is Carolin Corp, 886 F.2d 693 (4th Cir. 1989) which provides a test for denying conversion: that subjective bad faith and objective futility must be shown.

 

The Court elects not to resolve that conflict. It determines that if the conversation were to be allowed, the debtor would be in default of the filing deadlines for a Small Business Debtor or the deadlines under Subchapter V. 

 

The Court also questions whether the debtor could meet the “best interests of the creditors” test.  The end result, and the lesson for all debtors, is that if you play fast and loose with the facts and keep documents from the Court, much of the benefits of a bankruptcy could be lost to you. It’s not worth it!!

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