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OPINION DENYING CONFIRMATION OF PLANUNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA In re Case No. 00-44490 ORLAND DEAN ROBB and PENELOPE KNOWLAND ROBB, Debtors. / OPINION DENYING CONFIRMATION OF PLAN This chapter 13 case is before the Court pursuant to an August 23, 2001 hearing to determine whether the plan proposed by the debtor meets the good faith requirement of 11 U.S.C. § 1325(a)(3). The facts are as follows: the debtors are guarantors of a Small Business Administration ("SBA") loan made to Kern Valley Industries (“KVI”) in 1982. The guaranty was secured by real estate owned by the debtors in Mendocino, CA. The guaranty obligation was triggered by KVI's 1983 default on the loans. In 1986 KVI filed a chapter 11 petition in the Eastern District of California at Fresno. A chapter 11 plan was subsequently confirmed in 1988, but the debtor thereafter defaulted on the plan payments. In the meantime, the debtors transferred both their personal residence located in Piedmont, CA and the Mendocino property into a revocable family trust. The debtors have asserted that the purpose of this trust was to provide for their retirement, but retirement is no where mentioned in the trust document and the only assets in the trust were non-income producing property. At best, the trust could be construed as a probate avoidance mechanism. More probably, it was intended to hinder the collection efforts of the SBA on the guaranty obligation. In any event, the trust was completely self-settled, allowing the Robbs to transfer the trust res at will. The Robbs transferred their first Piedmont residence (117 Hillside Ave.) and then their second Piedmont residence (55 Tyson Circle) into and out of the trust numerous times over subsequent years to arrange re-financing. In 1994 litigation was commenced in the United States District Court for the Eastern District of California in Fresno by the other principals of KVI against the SBA seeking declaratory and other relief regarding the loans in question. The SBA responded with counterclaims against the plaintiffs as well as guarantor Michele Copland and the Robbs. On July 19, 1999 the district court denied a motion to dismiss Copland on statute of limitations grounds. Sometime in mid-2000 the SBA filed a motion for summary judgement on the plaintiffs’ claims and its’ counterclaims, specifically seeking a determination among other things that the claims against the guarantors were not time barred and were fully due and owing. On July 27, 2000 the Robbs transferred the Piedmont property out of the revocable trust and into “The Orland Dean and Penelope Robb Retirement Plan and Amendment to the Orland Dean Robb and Penelope K. Robb Family Trust.” The sole asset of the trust was the debtor’s Piedmont residence. The debtors listed that house in their bankruptcy schedules as having a value of $600,000, but Mrs. Robb testified at the hearing that it’s true value is closer to $900,000. The obvious purpose of this entity was to shelter the debtor's main asset as a private retirement plan under the exemption set forth in Cal. Code Civ. Pro. § 704.115(a)(1). The plan called for Sutro & Co. to be the plan administrator, but as Mrs. Robb acknowledged at the hearing that there really was not anything to administer. The house was rented to the Robbs by the retirement plan rent free, with the Robbs being responsible for the mortgage and all upkeep. Neither the transfer of the house into this new entity, nor the transfers of the house into and out of the revocable trust within one year of the bankruptcy filing were listed in the debtors' Statement of Financial Affairs. Four days later, the Robbs filed this Chapter 13 case. On November 28, 2000 the Fresno District Court granted the SBA's motion for summary judgment, finding Copland fully liable on her guaranty. No ruling was made as to the debtors, presumably because of the automatic stay in this case. As a condition to confirming a Chapter 13 plan, §1325(a)(3) requires the bankruptcy court to make an affirmative finding that "the plan has been proposed in good faith....":
Bad faith is established if the filing was intended to defeat pending litigation. In re Eisen, 14 F.3d 469, 470 (9th Cir. 1994); In re Chinichian, 784 F.2d 1440 (9th Cir. 1986). "A finding of bad faith does not require fraudulent intent by the debtor." In re Leavitt, 171 F.3d 1219,1224(9th Cir. 1999). I find that the debtors have failed to meet their burden of establishing that their plan was filed in good faith. The evidence is clear that the plan was put together in contemplation of bankruptcy, after an adverse ruling in the Fresno litigation, and on the eve of a dispositive finding of liability as to one of the defendants' co-guarantors. Counsel for the debtors admitted at the hearing on this matter that the District Court's ruling regarding the debtors' liability was a foregone conclusion. Much like the situation in Chinichian, the debtor's petition only lists three other creditors having unsecured claims totaling some $3,850. Such behavior demonstrates an intent to treat their creditors inequitably which is inapposite to the spirit as well as the letter of Chapter 13. “The result sought to be acheived must be consistent with–not contrary to–the principles and purpose of chapter 13.” In re Warner, 115 B.R. 223, 238 (Bankr. C.D. Cal. 1989). Indeed, the evidence conclusively establishes that the debtors intended to defeat the SBA's rights by claiming an exemption that had already been rejected by another bankruptcy judge in this District on very similar if not identical facts. That finding was affirmed by the District Court and thus was binding precedent on this Court. In re Phillips, 218 B.R. 520 (N.D. Cal. 1998), affirming 206 B.R. 196 (Bankr. N.D. Cal 1998). While not germane to the issue before the Court, it is worth noting that the Ninth Circuit has since eliminated the ability to take advantage of C.C.P. § 704.115 by transferring property into what amounts to a self-settled trust. In re Lieberman, 245 F.3d 1090, 1095 (9th Cir. 2001). The debtors point to Mr. Robb's serious heart condition and the lack of any other significant assets for their retirement as justification for their prepetition conduct. Although I have given serious consideration to these unfortunate circumstances, I find that they do not overcome the taint of a self-settled trust designed to insulate their property from their creditors' collection efforts and pending litigation. Had the debtors simply transferred title to the Mendocino property when the guaranty was triggered (as their Chapter 13 plan now proposes), their present financial situation might well have been avoided. Taking all of the circumstances into account, I find that the debtor's conduct and proposed plan were intended to hinder and thwart pending litigation, and to unfairly manipulate the Bankruptcy Code to the detriment of their creditors. Accordingly, confirmation of the debtors' Chapter 13 plan is DENIED for failure to meet the requirements of 11 U.S.C. § 1325(a)(3). The debtors shall have fourteen (14) days from the date of this order to amend their schedules and propose a plan which incorporates the value of their residence that is not subject to exemption under C.C.P. § 704.730. If the debtors fail to make the appropriate amendments within that fourteen day period, this case shall be dismissed. IT IS SO ORDERED. ________________________________ Randall J. Newsome United States Bankruptcy Judge CANB DocumentsNorthern District of California |
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