Connie A. Johnson and Connie A. Johnson

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 11
CONNIE A. JOHNSON :
Debtor : Bankruptcy No. 05-39238bf
.................................................
MEMORANDUM
.................................................
Two contested matters are presently before me in this chapter 11 case.
First, the United States trustee seeks conversion of this case to chapter 7 under 11 U.S.C.
§ 1112(b) or, alternatively, dismissal of this case. Second, the debtor, who had sought
confirmation of her second amended plan of reorganization pursuant to 11 U.S.C. §
1129(b), now seeks additional time to propose and confirm a third amended plan of
reorganization.
The United States, acting through its agency the Internal Revenue Service
(IRS), opposed confirmation of the debtor’s second amended plan due to lack of
feasibility, but is willing to afford the debtor one further opportunity at confirmation. The
United States trustee, however, opposes the debtor’s request to consider another chapter
11 plan arguing:
The United States Trustee submits that the debtor is
financially unable to offer any more money and she can not
modify the rights of the creditors to accept any less, unless the
creditors affirmatively agree. Given that scenario, the debtor
is unable to amend a plan to comport with all the requirements
of 11 U.S.C. § 1129, and specifically 11 U.S.C. §
1129(a)(11). The United States Trustee therefore submits that
giving the debtor the opportunity to file a third plan is
pointless absent the express consent of the creditors. The
United States Trustee submits that conversion of this case is
the appropriate remedy as the debtor may still obtain a
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discharge of her dischargeable debts. The United States
Trustee does not oppose dismissal of the case.
U.S. Trustee Post-Hearing Memorandum, at 5.
As will be discussed, there is no dispute that the debtor’s proposed second
amended plan cannot be confirmed. Thus, the actual issue before me is whether the
debtor can reorganize under chapter 11 and, if so, whether it is an appropriate exercise of
discretion to afford her an additional opportunity to do so under the circumstances of this
case.
I.
After an evidentiary hearing, and upon taking judicial notice of certain
matters of record in this case, I make the following factual findings.
The debtor, Ms. Connie Johnson, commenced this bankruptcy case by filing
a petition under chapter 13 on November 1, 2005. On that same date, the debtor filed a
proposed chapter 13 plan proposing monthly payments of $210 for 54 months. This plan
provided for no priority claims (except for payments to debtor’s bankruptcy counsel) and
stated that secured claims held by Ocwen Loan Servicing and Southside Bank would be
cured of their prepetition delinquencies by trustee payments aggregating $9,500. Further,
the debtor proposed to tender postpetition payments directly to creditor National City
Bank.
Also on November 1, 2005, the debtor filed bankruptcy schedules of her
monthly income and expenses. Schedule I, her disclosure of monthly income, reflects
three such sources: employment at Forman Mills as a manager, earning net monthly
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income of $1,007; employment at Liberty Resources, earning $1,215 monthly; and a
monthly contribution from her non-dependent daughter of $600. Her monthly expenses,
itemized on Schedule J, were disclosed at $2,612. Thus, the debtor represented that her
monthly income exceeded her expenses by only $210. And the existence of net monthly
income was due to a contribution from her daughter.
On January 30, 2006, the IRS objected to the debtor’s proposed chapter 13
plan. Its objection alleged that the debtor had failed to file federal income tax returns for
calendar years 2001 to 2004. Based upon the information the IRS then possessed, this
creditor estimated the debtor’s tax liability at more than $358,000, of which about
$93,000 was categorized as a priority claim, and about $11,000 of the claim as secured.
The debtor’s proposed chapter 13 plan did not provide for payment of the IRS’s claim.
The debtor responded by objecting to the IRS proof of claim. At a hearing
on that objection, the IRS agreed to amend its claim. After some amendments, and the
debtor’s later challenge raising bifurcation under section 506 of the secured portion of the
claim, the IRS’s total claim was fixed at $201,574.93, of which $9,920 is secured and
$10,301.27 is a priority claim. See IRS Amended Claim filed February 2, 2007; Order
dated December 6, 2007.
Ocwen Loan Servicing also filed an objection to the debtor’s proposed
chapter 13 plan. It maintained that it was owed more than the $3,500 that the plan
allocated to Ocwen on its secured claim.
On July 25, 2006 an order was entered denying confirmation of the debtor’s
chapter 13 plan. Just prior to this adjudication, on July 24, 2006, the debtor moved to
convert her case to one under chapter 11, alleging (in effect) that her debts exceeded the
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ceiling established for chapter 13 cases by section 109(e). This conversion request was
granted as unopposed pursuant to 11 U.S.C. § 1307(d) on August 22, 2006. Thereafter,
the debtor amended her schedule of unsecured creditors, listing a disputed total amount of
$259,000.
The debtor’s bankruptcy filing was motivated by her desire to avoid a
foreclosure sale of real property located at 868 Simonson Road, Farnham, Richmond
County, Virginia. Ex. D-1 (Schedule A). She owns this property in fee simple, and it is
worth $112,000. See Order of December 6, 2007. There are two mortgage liens (or
deeds of trust) on this real property, which liens have priority over the statutory lien held
by the IRS. The second mortgage lien is held by Ocwen Loan Servicing, LLC, which
filed a secured proof of claim in the amount of $71,800.48, docketed as claim #10. Ex.
D-2. The first mortgage lien is held by Southside Bank, which filed a secured proof of
claim docketed as claim #6, and which asserts that the debtor owes $32,821.42. Thus, the
mortgage liens total $104,241.70. When the IRS secured claim of $9,920—which claim
is secured by the debtor’s real and personal property, the latter being valued at about
$2,420, see December 6th order—is added to the mortgage liens, the debtor has little or
no equity in her Virginia property.
On April 16, 2007, the debtor filed her first proposed chapter 11 plan. On
April 24, 2007, Ocwen filed an objection thereto. This prompted the debtor to file her
first amended chapter 11 plan on June 15, 2007. This was soon followed by a second
amended plan on June 25, 2007. On July 6, 2007, the debtor was directed to amend her
section 1125 disclosure statement, and the amended disclosure statement was approved
on July 12, 2007. A confirmation hearing on this plan was originally scheduled for
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August 27, 2007 but was postponed a number of times at the debtor’s request for reasons
including the adjudication of claims objections. (For example, on August 14, 2007, the
debtor filed objections to various proofs of claims submitted by Arrow Financial.)
On August 23, 2007, the United States trustee filed the instant motion to
convert or dismiss this case. The motion alleged three grounds for relief under section
1112:
The Debtor has failed to submit all required monthly
operating reports to the United States Trustee. The Debtor’s
failure to do so is cause for conversion or dismissal pursuant
to 11 U.S.C. § 1112(b)(4)(F).
The Debtor has failed to submit quarterly fees payments to the
United States Trustee pursuant to 28 U.S.C. § 1930(a)(6),
which fees are obligations of all debtors to the United States
Trustee directly resulting from the administration of this case.
The Debtor’s failure to do so is cause for conversion or
dismissal pursuant to 11 U.S.C. § 1112(b)(4)(K).
The Debtor’s actions in this case have resulted in a substantial
and continuing loss to or diminution of the estate and
demonstrate the absence of a reasonable likelihood of
rehabilitation. The Debtor’s actions constitute cause for
conversion or dismissal pursuant to 11 U.S.C. §
1112(b)(4)(A).
U.S. Trustee’s Motion, ¶¶ 5-7.
Ms. Johnson, as a chapter 11 debtor in possession, began filing monthly
operating reports (as required by Fed. R. Bankr. P. 2015(a) and the directives of the
United States trustee) starting with September 2006. Some of the reports were not filed
timely, thus serving as the first basis for the section 1112(b) motion.
The United States trustee has summarized these chapter 11 monthly reports.
Ex. T-2. My own summary of the debtor’s monthly operating reports, reflecting all
income and expenses as revealed by the debtor, is as follows:
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The January 2008 report was filed after the confirmation hearing was held.1
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Summary of Monthly Operating Reports
Sept-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07
Income $2,920 $2,190 $2,255 $2,255 $2,255 $2,326 $2,396 $1,900
Expenses 2,833 2,106 595 595 595 595 8,445 1,864
Quarterly
Fees
250 250
Net Income
(Loss)
87 84 1,660 1,660 1,660 1,481 -6,049 -214
Cash on
Hand
84 1,512 3,024 4,536 5,869 0 0
May-
07
Jun-
07
Jul-07 Aug-
07
Sept-
07
Oct-
07
Nov-
07
Dec-
07
Jan-
081
Income $1,779 $1,785 $1,783 $2,502 $3,202 $1,629 $2,261 $3,127 $3,203
Expenses 2,339 1,547 1,739 1,162 2,367 2,265 1,566 2,244 3,293
Quarterly
Fees
500 250 250
Net Income
(Loss)
-560 238 44 840 835 -886 695 633 -90
Cash on
Hand
0 238 282 662 1,497 611 1,306 1,939 1,849
These reports disclose that the debtor has not been receiving any cash
contributions from her daughter, but has been receiving a small pension. In addition, they
reveal that after converting her case to chapter 11, the debtor began receiving rent of $500
monthly from the Virginia property. It is also apparent from these reports that in the 17
months covered by these reports, the debtor has been able to save less than $2,000.
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During this period, she has not tendered any plan payments to creditors, except for certain
regular postpetition payments.
Her proposed second amended chapter 11 plan contains 7 classes of claims:
class 1 consists of priority claims; class 2 contains the secured claim of Southside Bank,
the first mortgagee on the Farnham, Virginia property; class 3 holds the secured claim of
Ocwen, the second mortgagee; class 4 consists of the secured claim of National City Bank
held on a 1998 Nissan Sentry automobile; class 5 contains the secured claim of the IRS;
class 6 holds the secured claim of Coggin Furniture; and class 7 consists of the class of
general unsecured claims. Ex. D-1.
In sum, the debtor’s proposed second amended chapter 11 plan provides
that she would pay priority claims in full within 120 days after confirmation; make
regular monthly mortgage payments to the two Virginia property mortgagees while curing
the pre-bankruptcy mortgage arrears by paying them a combined $360 per month for 15
years; the outstanding car loan would also be repaid over 15 years at $45 per month; the
priority tax claim of the IRS is not expressly dealt with; the IRS’s secured claim would be
paid over five years from the commencement of the case in November 2005 at the
statutory interest rate, with payments beginning 30 days after confirmation; the secured
claim of Coggin Furniture would be paid in full with a $100 payment 120 days after
confirmation; and unsecured creditors would receive a 0.1% dividend, or $1 each,
whichever is greater, 120 days after confirmation. The plan also provided for the debtor
to receive a bankruptcy discharge upon confirmation. Ex. D-1, Article VI.
The debtor’s report of plan voting, Ex. D-2, reveals that only one creditor
voted in favor of her proposed plan: Southside Bank. This creditor, however, filed both a
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secured claim and a small unsecured claim. The debtor had successfully objected to the
claims of all other unsecured creditors that voted against the plan. Thus, classes 2 and 7
may have supported the plan, there being no other negative votes. Classes 3-6 did not
vote, and therefore to the extent those classes are impaired, they have rejected the plan.
The debtor’s testimony filled in some gaps in the documentary evidence but
also revealed difficulties in confirmation of her proposed plan.
Presently, as was revealed in her income Schedule I, she works for Forman
Mills and Liberty Resources. As for the latter, she is employed full-time at 40 hours per
week, netting $630. For the former, she works 35 hrs per week at $10.35 per hour,
netting $500 to $600. Thus, she testified that she works 75 hours per week at her two
jobs. In addition, she receives a monthly pension of $138. She also rents her Virginia
realty for $500 monthly.
The debtor lives with her adult daughter and pays the daughter no rent. She
does pay certain utility expenses and food expenses. Plus, she has expenses associated
with her car and health insurance, as well as the Virginia property. She anticipates having
to pay about $2,957 per month in plan payments and normal living expenses (the latter
being estimated by her at a very modest $500 per month), and projects her monthly
employment income at $2,500, plus rent of $500 and pension payments of $138. Ex. D-5.
She conceded at the hearing, however, that her projection of monthly plan payments are
understated by at least $90 per month. Furthermore, her projected monthly income of
$3,138 in Ex. D-5 is not consistent with her operating reports filed since September 2006.
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II.
It is problematic whether a plan is feasible and is fair and equitable under
section 1129(b) when the plan would last 15 years, repays a car loan involving a 1998
automobile over the life of the plan, and is based on the debtor receiving monthly income
that has little historical support. That precise issue though need not be resolved, as the
debtor concedes that drafting errors in her plan, her miscalculation of the amount needed
to fund the plan, and the provisions of section 1141(d)(5) (providing that a discharge in
an individual chapter 11 presumptively is entered only after completion of all plan
payments, see generally In re Goldstar Emergency Medical Services, Inc., 2007 WL
208441, at *5 n.2 (Bankr. S.D. Tex. 2007)), preclude confirmation.
Nevertheless, a related issue remains in this case. The debtor’s opposition
to dismissal or conversion now is based primarily upon her request to be granted
additional time to confirm another chapter 11 plan. In support thereof, the debtor has
attached a copy of a third amended chapter 11 plan to her posthearing memorandum.
This proposed third amended plan is similar to the second amended plan just described.
Certain drafting errors have been eliminated, but much of the plan remains unchanged.
The classification of claims is the same, except the third amended plan
provides that the priority tax claims of the IRS and the Pennsylvania Department of
Revenue are now paid as if they were in class 5, along with the IRS’s secured claim, at
statutory interest and payments to conclude within five years of the commencement of the
case. This third amended plan also calls for payments over ten years to classes 2 through
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Where National City Bank, the automobile lender, was to receive 180 monthly2
payments of $45 in the second amended plan, it would receive 120 monthly payments of $45 in
the third amended plan.
See http://www.paeb.uscourts.gov, posting a notice from the Office of the United3
States Trustee stating that, effective January 2008, minimum quarterly fees in chapter 11 cases
would increase from $250 to $325.
The third amended plan states that the debtor owes $644 to her former chapter 134
attorney and expects to owe $25,000 to her chapter 11 attorney. According to the third amended
plan, the latter attorney would “defer or otherwise agree to collect [his fee] only if the Debtor has
the means to make these payments.” Priority claims, such as counsel fees awarded under section
330(a), must be paid in full on the effective date unless the claimant agrees otherwise. 11 U.S.C.
§ 1129(a)(9).
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4. Further, the proposed plan states that the debtor would receive her bankruptcy2
discharge only after completing her plan payments. The effective date of the plan would
be 30 days after confirmation.
The debtor’s third amended plan states that she would pay creditors in
classes 2 through 5 a total of $1,254.50 each month, plus maintain regular monthly
mortgage payments on the first and second mortgages on the Virginia property, equaling
another $1,292. The debtor would also have to tender quarterly fees to the U.S. trustee
under 28 U.S.C. § 1930(a)(6) in the now minimum amount of $325 (averaging $108.33
per month). Thus, before paying any required priority counsel fees or normal living3 4
expenses, the debtor desires to propose a ten year plan requiring, at least for its first few
years, payments of $2,654.83. Even if her monthly expenses for food, transportation,
utilities, insurance and the like could be limited to the debtor’s estimated $500 over a
period of years, which is very doubtful, Ms. Johnson would need to demonstrate a
likelihood of monthly income of at least $3,154.83 to meet her burden of demonstrating
plan feasibility under section 1129(a)(11). See generally, e.g., In re Danny Thomas
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Properties II Ltd. Partnership, 241 F.3d 959, 963 (8th Cir. 2001) (“The debtors bear the
burden of establishing the feasibility of their plans by a preponderance of the evidence.”).
Although testifying that she works 75 hours per week in two jobs, as noted
in the table above, the debtor has received income equal to or greater than $3,154.83
(inclusive of pension and rental income) in only two of the months (including the January
2008 report) since this chapter 11 case commenced in September 2006. See Ex. T-2.
Moreover, in those two months, September 2007 and January 2008, the debtor’s reported
expenses, not including her monthly mortgage payments, were $703 and $1,609
respectively: greater than her $500 per month projection. Therefore, even in those two
months, her net income would be insufficient to fund her desired third amended plan.
The U.S. trustee seeks to have this case converted to chapter 7, or
dismissed, because the debtor—after spending more than 28 months in bankruptcy,
including more than 18 months as a chapter 11 debtor in possession—has not been able to
confirm a reorganization plan and has little likelihood of doing so in the near future (i.e,
the third of the dismissal grounds alleged in her motion). Upon review of the evidence
presented, I concur with the U.S. trustee’s assessment.
The feasibility requirement of section 1129(a)(11) requires a greater
showing of plan viability than the debtor is likely to demonstrate in the near future. See
In re Danny Thomas Properties II Ltd. Partnership, 241 F.3d at 964. In addition, the
fairness of a ten year plan proposed in 2008 to a creditor holding a secured claim on a
1998 automobile (that is unlikely to remain operable and in the debtor’s possession over
the length of the plan) is dubious. See generally In re D & F Construction, Inc., 865 F.2d
673, 676 (5th Cir. 1989); In re Adelphia Business Solutions, Inc., 341 B.R. 415, 421
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The debtor appears to minimize the importance of the feasibility requirement for5
chapter 11 plans. See Debtor’s Memorandum, at 2-3. I disagree, as important creditor interests
are involved. As observed by one commentator, it is the burden of the plan proponent at a
confirmation hearing to provide sufficient evidence of her ability to fund a proposed plan:
Particularly important in this regard is that the plan proponent
demonstrate that any necessary financing has been obtained, or is
likely to be obtained. With or without such financing, “section
1129(a)(11) requires the plan proponent to show concrete evidence
of a sufficient cash flow to fund and maintain both its operations
and obligations under the plan.” Feasibility obviously becomes
more difficult to establish if the plan provides for long-term
payments to creditors. “In general, proof of feasibility is an easier
task when payouts are done over shorter periods of time. The
longer the debtor proposes a payout, the more difficult it may
become to prove distant future ability to service debts.”
7 Collier on Bankruptcy, ¶ 1129.03[11], at 1129-74.2 to 74.3 (15th ed. rev. 2007) (footnotes
omitted) (quoting In re SM 104 Ltd., 160 B.R. 202 (Bankr. S.D. Fla. 1993) and In re White, 36
B.R. 199 (Bankr. D. Kan. 1983) respectively).
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(Bankr. S.D.N.Y. 2003) (“[The] purpose [of the feasibility requirement] is to protect
creditors against unrealistic plans that have little or no chance of success.”); In re 222
Liberty Associates, 108 B.R. 971, 995 (Bankr. E.D. Pa. 1990); see also In re Frascella
Enterprises, Inc., 360 B.R. 435, 446 (Bankr. E.D. Pa. 2007) (plan proposed in good faith
where “there was fundamental fairness in dealing with the creditors”). Thus, near future
confirmation of a third amended plan, based upon the current evidentiary record, is
extremely doubtful.5
In addition, this entire reorganization case has been pending more than two
years and has seen very little creditor support. Its sole purpose appears to be the
protection of real property in which the debtor does not reside, and in which she has little
or no equity. Furthermore, the debtor’s ability to work two full-time jobs with 75 hour
work weeks for years, so as to maximize her income, is problematic.
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Section 1112(b) of the Bankruptcy Code grants the authority to dismiss or
convert a chapter 11 case to one under chapter 7, “whichever is in the best interest of
creditors and the estate, for cause . . . .” The term “cause” is not defined by the statute;
the examples provided by subsection 1112(b) are meant to be nonexclusive. See, e.g., In
re Brown, 951 F.2d 564, 572 (3d Cir. 1991); Hall v. Vance, 887 F.2d 1041 (10th Cir.
1989); In re Smith, 77 B.R. 496 (Bankr. E.D. Pa. 1987). Factors other than those
expressly enumerated in the statute may be considered, and the bankruptcy court has the
discretion to reach the appropriate result in a particular case. Generally, a court should
consider the “totality of the circumstances.” See, e.g., In re Integrated Telecom Express,
Inc., 384 F.3d 108, 118 (3d Cir. 2004), cert. denied, 545 U.S. 1110 (2005); In re Trident
Associates Ltd. Partnership, 52 F.3d 127, 131 (6th Cir. 1995); In re Cohoes Indus.
Terminal, Inc., 931 F.2d 222, 227 (2d Cir. 1991); In re Ravick Corp., 106 B.R. 834, 843
(Bankr. D.N.J. 1989).
Whether cause exists under section 1112(b) in a particular instance and, if
so, whether conversion or dismissal is more appropriate are questions naturally left to the
sound discretion of the bankruptcy court. See, e.g., Matter of Sullivan Cent. Plaza I, Ltd.,
935 F.2d 723, 728 (5th Cir. 1991); Hall v. Vance; Matter of Koerner, 800 F.2d 1358,
1367 (5th Cir. 1986). In so concluding, a court need not provide an exhaustive
elaboration of its reasoning. See Matter of Koerner, 800 F.2d at 1368; In re Nardi, 1991
WL 255681, at *2 (E.D. Pa. 1991). Section 1112(b) effectively enables the bankruptcy
court to administer promptly chapter 11 cases upon its docket. See generally In re
Timbers of Inwood Forest, Ltd., 808 F.2d 363 (5th Cir. 1987), aff’d, 484 U.S. 365 (1988).
When it becomes apparent that a chapter 11 reorganization is highly unlikely, that case
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should either be dismissed or converted. See In re Brown, 951 F.2d at 572; In re
Edwards, 1996 WL 407253, at *3 (Bankr. E.D. Pa. 1996); In re HBA East, Inc., 87 B.R.
248, 261 (Bankr. E.D.N.Y. 1988).
Although the debtor appears to have cured two of the defects raised by the
United States trustee in its motion to dismiss—delinquent operating reports and quarterly
fees—the United States trustee still maintains that there is no reasonable likelihood that
Ms. Johnson can reorganize under chapter 11. The evidence presented supports this
position. The debtor has had ample opportunity to reorganize in bankruptcy, has been
unable to do so, and has little likelihood of doing so in the near future with her proffered
third amended plan. Therefore, the better exercise of discretion is to decline the debtor’s
request for an additional period of time to propose a chapter 11 reorganization plan. As
sought by the United States trustee, relief under section 1112(b) for cause, is warranted.
See, e.g., In re Cothran, 45 B.R. 836, 838-39 (S.D. Ga. 1984). And as a chapter 7 trustee
would have little or no assets to administer for creditors, dismissal is more appropriate
than conversion to chapter 7. See, e.g., In re Tornheim, 181 B.R. 161, 168 (Bankr.
S.D.N.Y. 1995) (“The debtors do not have any property that a chapter 7 trustee could
administer for the benefit of creditors. Conversion, therefore, does not serve the interest
of the creditors and the estate.”).
Finally, in order to prevent any misuse of the banrkruptcy process, the
debtor shall need to obtain court approval prior to filing any future bankruptcy cases for
the next six months. See generally In re Casse, 198 F.3d 327 (2d Cir. 1999).
An appropriate order shall be entered.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 11
CONNIE A. JOHNSON :
Debtor : Bankruptcy No. 05-39238bf
.................................................
ORDER
.................................................
AND NOW, this 11th day of March 2008, for the reasons stated in the
accompanying memorandum, it is hereby ordered that confirmation of the debtor’s second
amended chapter 11 plan is denied.
It is further ordered that the motion of the United States trustee for relief
under 11 U.S.C. § 1112(b) is granted and this case is dismissed.
It is also ordered that the debtor is barred from filing future bankruptcy
cases for 180 days from the date of this order without obtaining prior court approval.
The clerk of court shall serve a copy of this order upon all creditors.
BRUCE FOX
United States Bankruptcy Judge
copies to:
David A. Scholl, Esquire
Regional Bankruptcy Center of SE PA
Law Office of David A. Scholl
6 St Albans Avenue
Newtown Square, PA 19073
Ms. Connie A. Johnson
2003 W. Hunting Park Avenue
Philadelphia, PA 19140
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Ms. Connie A. Johnson
2007 W. Hunting Park Avenue
Philadelphia, PA 19140
Jason M. Kuratnick, Esquire
Special Assistant United States Attorney
IRS No. 23-08679
701 Market Street, Suite 2200
Philadelphia, PA 19106
Carrie L. Kleinjan, Esquire
IRS Office of Chief Counsel
701 Market Street, Suite 2200
Philadelphia, PA 19106
Kevin P. Callahan, Esquire
Office of the U.S. Trustee
833 Chestnut Street, Suite 500
Philadelphia, PA 19107
Timothy McGrath, Esquire, Clerk of Court
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