Opinion
CASE NO. 01-50250-11.
June 18, 2001
FINDINGS OF FACT AND CONCLUSIONS OF LAW
On May 21, 2001, hearing was held on the motion to dismiss filed by Langford Land Cattle Co. (Langford), a secured creditor, asserting this Chapter 11 case, the Debtors' fourth bankruptcy filing, should be dismissed under § 1112(b) of the Bankruptcy Code. The Debtors, Jerry and Ginger Morgan (the Morgans), deny that dismissal is appropriate, contending two of their prior Chapter 11 filings were dismissed on technicalities (failure to timely file schedules in one instance and failure to file the required attorney fee disclosure in the other) and that they are entitled to attempt a reorganization under the present Chapter 11 case.
Findings of Fact
1. On March 3, 1997, the Morgans filed bankruptcy under Chapter 12 of the Bankruptcy Code, Case No. 597-50238. The Morgans obtained confirmation of their Chapter 12 plan. Despite this, they failed to make payments as required by the plan and a motion to dismiss was filed by Ag Credit of Texas, PCA (formerly Rolling Plains Production Credit Association). An agreed order was entered denying dismissal but providing that any future breach of plan payments would cause the stay to lift "as to any collateral of Ag Credit of Texas, PCA (formerly Rolling Plains Production Credit Association) and such creditor may proceed to enforce its security interest as to any collateral, including cattle, farm equipment, and real estate, without further notice and hearing." (Ex. 2).
2. Ag Credit of Texas, PCA's lien against real estate arose under an Abstract of Judgment issued in favor of Rolling Plains Production Credit Association. (Ex. 1).
3. The Morgans failed to make the plan payments after entry of the agreed order and Ag Credit of Texas, PCA proceeded with foreclosure of its abstract of judgment lien.
4. Prior to sale of the real property covered by the abstract of judgment lien, the Chapter 12 Trustee moved to dismiss the Morgans' Chapter 12 case because of their failure to make plan payments. The case was dismissed on September 26, 2000.
5. Ag Credit of Texas, PCA had noticed the real property for sale at a sheriff's sale, but the Morgans filed their second bankruptcy proceeding, a Chapter 11 case, Case No. 00-51108-11, on November 7, 2000. This filing stayed the foreclosure. This second case was dismissed on December 4, 2000, because of the Morgans' failure to timely file Schedules and Statement of Financial Affairs. (Ex. 4).
6. Ag Credit of Texas, PCA also owned a prior deed of trust lien transferred to it from Texas Rural Communities. Ag Credit posted the property covered by the deed of trust for a foreclosure sale to be held January 2, 2001. On such date, the Morgans filed their third case, a Chapter 11 case, Case No. 01-50002-11, which stayed the foreclosure sale. This case was dismissed on January 24, 2001, because the Morgans failed to timely file the required attorney fee disclosure. (Ex. 5).
7. First Ag Credit, PCA (formerly Ag Credit of Texas, Inc.) posted the real property covered by its liens for a foreclosure sale to be conducted on March 6, 2001. Again, for the fourth time, the Morgans filed bankruptcy, a Chapter 11 case, Case No. 01-50250-11, on such date, thereby staying the foreclosure sale.
8. On February 20, 2001, First Ag Credit, PCA transferred its lien securing notes to original payee, Texas Rural Communities, in the unpaid principal amount of $48,902.00, and its abstract of judgment lien in the unpaid principal and interest amount of $365,845.67 to Langford. (Ex. 1).
9. Langford is the present owner of the notes, judgment, and liens regarding the above- mentioned indebtedness which it contends totals in excess of $414,747.67. Id.
10. Since their original Chapter 12 filing, the real property owned by the Morgans has been reduced by approximately 1,800 acres. The Morgans' schedules, of which the court takes notice, reflect that they presently own a residence in Turkey, Texas, and a 3,552 acre ranch in Briscoe and Hall Counties, Texas.
11. The Morgans have a small operation which consists of some ranching, the projected leasing of property, and the maintaining of land in the conservation reserve program (CRP). In addition, both Mr. and Mrs. Morgan work for the Texas Boll Weevil Foundation.
12. The Morgans have monthly expenses of approximately $1,860.00. The Morgans' annual income from social security and wages is approximately $28,300.00, and their total annual living expenses are approximately $22,400.00. They project approximately $19,000.00 in annual CRP payments, lease income of $19,500.00, including $4,500.00 for hunting leases, and cattle sales of approximately $20,000.00.
13. The evidence indicates the Morgans owe ad valorem taxes of approximately $31,000.00. In addition, there is first lien of approximately $12,000.00 against a portion of the real property that secures the Langford debt.
14. While they have yet to file a plan, the Morgans contend that, if allowed to remain in Chapter 11, they have sufficient income to service the Langford debt over twenty years, along with ad valorem taxes, in a manner consistent with the Bankruptcy Code.
15. The Morgans presently have approximately $12,000.00 on deposit in the bank.
16. Cecil Langford owns 100% of Langford. This entity was formed for the purpose of purchasing the notes and liens from First Ag Credit. Mr. Langford was involved in the partnership that purchased the 1,800 acres that the Morgans previously owned.
17. Cecil Langford testified that if Langford is the successful purchaser at the foreclosure sale, Langford intends to develop the property for hunting and ranching.
18. If appropriate, these findings of fact shall be considered conclusions of law.
Conclusions of Law
19. This court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 and 1334. This is a core proceeding. 28 U.S.C. § 157(b).
20. Section 1112(b) of the Bankruptcy Code states as follows:
(b) Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee or bankruptcy administrator, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including —
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is prejudicial to creditors;
(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;
(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;
(7) inability to effectuate substantial consummation of a confirmed plan;
(8) material default by the debtor with respect to a confirmed plan;
(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges required under chapter 123 of title 28.
21. The enumeration of factors in § 1112(b) is intended only to be illustrative. In re SB Properties, Inc., 185 B.R. 206 (Bankr.E.D.Pa. 1995).
22. Dismissal "for cause" has been interpreted to include lack of good faith in the bankruptcy filing. In re Humble Place Joint Venture, 936 F.2d 814, 817 (5th Cir. 1991); see also In re SGL Carbon Corp., 200 F.3d 154 (3rd Cir. 1999) (Chapter 11 bankruptcy petitions are subject to conversion or dismissal for cause if not filed in good faith.). Dismissal or conversion of a Chapter 11 case for lack of good faith is a decision charged to the bankruptcy court's discretion. In the Matter of Koerner, 800 F.2d 1358 (5th Cir. 1986).
23. There is no precise test for determining whether a Chapter 11 petition has been filed in good faith; in making this determination, courts may consider any factors which evidence intent to abuse the judicial process and the purposes of Chapter 11 or the particular factors which evidence that a petition was filed to delay or frustrate legitimate efforts of a secured creditor to enforce his rights. MacElvain v. I.R.S., 180 B.R. 670 (M.D.Ala. 1995).
24. The Fifth Circuit has stated that "[d]etermining whether the debtor's filing for relief is in good faith depends largely upon the bankruptcy court's on-the-spot evaluation of the debtor's financial condition, motives, and the local financial realities." In the Matter of Little Creek Development Company, 779 F.2d 1068, at 1072 (5th Cir. 1986).
25. "Findings of lack of good faith in proceedings based on §§ 362(d) or 1112(b) have been predicated on certain recurring but non-exclusive patterns, and they are based on a conglomerate of factors rather than on any single datum," including: (1) the debtor has one asset, which is a tract of real property; (2) the debtor has few unsecured creditors whose claims are small in relation to the claims of the secured creditors; (3) the debtor has few employees; (4) the property is the subject of a foreclosure action as a result of arrearages on the debt; (5) the debtor's financial problems involve essentially a dispute between the debtor and the secured creditors which can be resolved in a pending state court action; and (6) the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights. See Little Creek, 779 F.2d at 1072-1073.
These factors are in addition to those specifically listed in 11 U.S.C. § 1112(b). It should also be noted that this list of factors is hardly exhaustive as some courts list as few as five factors while other courts list as many as fourteen factors for courts to analyze. See COLLIER ON BANKRUPTCY ¶ 1112.07[2] (15th ed. 2000) (Although application of the standard necessarily turns on the totality of the circumstances of each individual case, situations in which good faith have been found to be lacking include those involving (1) use of bankruptcy as a vehicle to defraud others, (2) the persistent failure to comply with applicable court orders, rules, or procedures, (3) use of the bankruptcy process to escape familial obligations; (4) the secretion of property and other efforts to avoid the disclosure of assets, (5) use of the bankruptcy system simply to avoid to consequences of prior misconduct, (6) the filing of a case to avoid an obligation under circumstances in which the debtor is not in need of reorganization, (7) the absence of legitimate debt, (8) the absence of any likelihood of rehabilitation, (9) use of bankruptcy as a vehicle to resolve disputes solely between equity participants, (10) use of the bankruptcy process merely to frustrate the rights of creditors (particularly with respect to single asset cases) or to coerce unfair treatment, (11) successive filings without any change in financial condition, and (12) the so-called new debtor syndrome, in which a debtor is created, or property is transferred, solely for the purpose of commencing a bankruptcy case.).
26. The court concludes that the Morgans meet certain of the non-exclusive enumerated factors set forth at § 1112(b). The Morgans' original Chapter 12 case, in which they had a confirmed plan, was dismissed because of their defaults. See 1112(b)(8) (material default with respect to a confirmed plan). This court will not, as a convenience to the Morgans, ignore their defaults in the prior Chapter 12 case simply because such defaults occurred in a prior bankruptcy case. Moreover, the dismissal occurred after the Morgans defaulted under both the confirmed plan and under the agreed order entered on the motion to dismiss filed by Ag Credit of Texas, PCA, the predecessor to Langford. The dismissal of the Chapter 12 because of the Morgans' failure to meet the conditions of the plan or agreed order thereby effectively terminated the Chapter 12 plan. See 1112(b)(9) (termination of plan by reason of the occurrence of a condition specified in the plan).
27. While serial filings may not per se render a bankruptcy filing invalid, the multiple Chapter 11 filings by the Morgans, and particularly the timing of such filings, evidence the Morgans' intent to delay and frustrate the legitimate efforts of their secured creditor, Langford (and its predecessor Ag Credit of Texas, PCA), to enforce its rights.
28. The Fifth Circuit in In the Matter of Elmwood Development Co., 964 F.2d 508 (5th Cir. 1999) stated that "[w]here a debtor requests Chapter 11 relief for a second time, the good faith inquiry must focus on whether the second petition was filed to contradict the initial bankruptcy proceedings." Id. at 511. The Morgans succeeded, in their prior Chapter 12 case, in obtaining confirmation of a plan with specific treatment of the debt and liens presently held by Langford. However, they defaulted under their Chapter 12 plan, resulting in dismissal of the case. The filing of the present Chapter 11 case and the Morgans' stated intent to defer payments to Langford over twenty years under a Chapter 11 plan are inconsistent with, and contradict, the treatment of such claim in the Morgans' prior Chapter 12 case. While dismissal of a Chapter 12 case may indeed have ramifications that are different than those resulting from a dismissal of a Chapter 11 case because the debtor has not been discharged in Chapter 12, the court, nevertheless, considers the Morgans' inconsistent treatment of Langford's claim as a factor in determining whether the present case is filed in good faith.
29. There is no evidence to indicate the present Chapter 11 filing was precipitated by the Morgans experiencing an unanticipated change of circumstances. See In the Matter of Elmwood Development Co., 964 F.2d at 511-512.
30. The Morgans contend the present Chapter 11 filing was justified as the two prior Chapter 11's were dismissed because of their attorney's failure to insure the Morgans complied with mere technicalities. The court does not excuse a persistent failure to comply with applicable court orders, rules, or procedures. See COLLIER ON BANKRUPTCY ¶ 1112.07[2] (15th ed. 2000) (see footnote 1). Each filing occurred on the eve of foreclosure as a means to stop the scheduled foreclosure. The pattern of dismissals and refilings indicates that the Morgans simply ignored their Chapter 11 requirements once the foreclosure was halted thereby allowing the case to be dismissed, only to be refiled as necessary to stop the next scheduled foreclosure. The court can discern no justifiable excuse for such conduct by the Morgans. The court concludes that the Morgans are simply using the bankruptcy system as a means to stop the scheduled foreclosures and not as an avenue to reorganize.
31. The Morgans have one major asset, a 3,552 acre ranch, and one major creditor, Langford.
Their only other secured creditors are ad valorem tax claims and Caprock Plains Federal Land Bank which holds a deed of trust lien against property located in Hall County, Texas, which presumably constitutes a portion of the same property securing the claim of Langford. The Morgans' unsecured creditors consist of two credit card debts totaling $1,691.00.
32. Given the foregoing facts and circumstances, the court is of the opinion and so concludes that the Morgans' Chapter 11 case should be dismissed with prejudice to refiling for a period of 180 days.
33. If appropriate, these conclusions of law shall be findings of fact.