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In re No. 99-41266 JG

Chapter 13

ROBERT D. HARTMANN,

Debtor./

The court will dismiss this case, with prejudice, as a bad faith filing⁽¹⁾.

This is the second chapter 13 case that the above debtor filed over a five month period. In late 1997, the debtor, facing a "criminal investigation and . . . multiple lawsuits pending⁽²⁾", borrowed some $250,000 on the security of his home, followed by an additional borrowing in the sum of $120,000 in March, 1998. Either the debtor, or his spouse, Mary Hartmann ("Mary"), then transferred over $208,000 in loan proceeds to the debtor's son, Robert G. Hartmann ("Robert").

The debtor also repaid $100,000 of the home loan, purchased a car for $25,800, and paid off approximately $55,000 in legal fees and credit card debts.

The debtor and Mary were co-trustees of 800 shares of Bank of America stock, which they held in a revocable trust. The stock, earned by Mary through her employment, was presumptively community property, a fact that the debtor has not denied. See Cal. Fam. Code § 760 (West 1994)⁽³⁾. Over a four month period starting in April 1998, the debtor and Mary liquidated the stock, and placed proceeds totaling some $68,000 in an account held jointly in the names of Mary and Robert.

After the foregoing asset dispositions, the debtor filed his first chapter 13 petition on September 8, 1998. The debtor's Statement of Affairs, signed under penalty of perjury, stated that over the year prior to the filing, the debtor had made no gifts of $200 or more, made no transfers of property out of the ordinary course of business, and that no accounts had been closed in which

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funds were held for his benefit⁽⁴⁾. The debtor then filed a chapter 13 plan proposing to pay $11,214 to his prepetition creditors.

The debtor contends that after the filing, he learned for the first time about the foregoing transfers. (The debtor offers no explanation as to how the house, to which he held title in joint tenancy with Mary, was twice encumbered without his knowledge.) After consulting with counsel⁽⁵⁾, the debtor then requested and obtained an order dismissing the case⁽⁶⁾.

After the dismissal, California State court judgments for conversion and fraud were entered against the debtor⁽⁷⁾, and the debtor went to work to better protect his assets from creditor claims. Robert returned over $213,000 of the money that he was holding. With these funds, the debtor bought a retirement annuity for $75,000. The debtor also bought approximately $26,000 worth of life insurance. The debtor also repaid $104,000 in secured home loans.

On September 16, 1999, the debtor filed the present case. To justify his filing of a new bankruptcy case only 3-1/2 months after the dismissal of the prior case, the debtor filed a "Declaration of Debtor re Changed Circumstances" under penalty of perjury stating, "I lost my job.⁽⁸⁾"

In this new case, the debtor listed the value of his interest in the recently-purchased $75,000 annuity as "0". The debtor claimed as exempt his $89,000 interest in Mary's IRA, an asset that the debtor did not list in his Statement of Affairs for the first bankruptcy case. The debtor claimed as exempt insurance policies valued at $16,000. The debtor claimed as exempt $125,000 of home equity. The debtor filed a plan proposing to pay $22,000 to his prepetition creditors.

The debtor admits that his testimony at the meeting of creditors herein was "vague and misinformed". In part, he blames his misconduct on the "misguided, now corrected, decisions of Mrs. Hartmann" who with Robert, the debtor claims, took "protective action on behalf of frightened elderly people." The debtor also contends that he should be credited for having undertaken an "orderly retrieval" of his fraudulently-conveyed property, even though he either placed all of the orderly-retrieved property beyond the reach of his creditors, by various devices, or spent it, in anticipation of the new filing⁽⁹⁾.

This court has the power under § 105(a) to dismiss any bankruptcy case that was not filed in good faith. See In re Rubenstein, 71 B.R. 777, 778-79 (9th Cir. BAP 1987)⁽¹⁰⁾. Good faith depends on the totality of circumstances. See In re Warren, 89 B.R. 87 (9th Cir. BAP 1988) (discussing the confirmation requirement of § 1325 that debtor's plan be proposed in good faith). Under § 349(a), the court may, for cause, dismiss the case with prejudice.

Here, the court holds that the totality of circumstances present warrants a dismissal with prejudice.

The circumstances include:

1) The debtor's filing of the first case following a series of fraudulent conveyances;

2) The debtor's filing of false and misleading schedules in the first case;

3) The debtor's use of credit (here, proceeds of the home loans) to buy exempt property; see In re Armstrong, 931 F.2d 1233, 1237 (8th Cir. 1991);

4) The debtor's conversion of a great amount of property, id.;

5) The debtor's filing of misleading schedules in the second case;

6) The debtor's seeking to mislead creditors and the court by justifying the second filing on the ground that circumstances had changed because he had lost his job;

7) The debtor's giving false and misleading testimony at the meeting of creditors in the second case; and

8) The debtor's use of chapter 13 to discharge debt that would colorably be nondischargeable in a chapter 7 case.

The court finds the debtor's rationalizations to be unconvincing and inadequate⁽¹¹⁾. Certainly, the debtor's age, fear, or alleged confusion does not entitle him to hide assets (or profit from the hiding of assets by others), to omit or misrepresent facts repeatedly in his bankruptcy papers, or to give misleading testimony at the meeting of creditors.

As to the conversion activity after the first case was dismissed, it is well established that a debtor's ability to engage in prebankruptcy conversion of non-exempt to exempt assets is not without limitation. As early as 1911, the Ninth Circuit recognized that the actions of a debtor who converted non-exempt funds to exempt assets in between two separate bankruptcy filings warranted denial of the claimed exemptions. In re Gerber, 186 F. 693 (9th Cir. 1911) (holding "no court acting upon equitable principles should sustain such a transaction"). See also In re Glass, 60 F.3d 565, 570 (9th Cir. 1995).

Moreover, as noted above, the debtor's use of borrowed funds to obtain exempt property, and the magnitude of the conversion transactions, are indicative of fraud. Armstrong, 931 F.2d at 1237. Finally, the court notes that the debtor engaged in the conversion transactions in question after he had obtained a dismissal of a first bankruptcy case, a case that was replete with false representations, and that such false representations may have deprived the creditors of any incentive or meaningful opportunity they might have had to seek conversion of that chapter 13 case to chapter 7 pursuant to § 1307(c). Such a conversion would have resulted in the appointment of an independent trustee, who could have sought avoidance for the benefit of the estate of any fraudulently transferred property, including the $207,000 that Robert was then holding.

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For the foregoing reasons, the court will issue its order dismissing this case, with prejudice. In order to provide any interested creditors with an opportunity to request conversion to chapter 7 as an alternative, the court will reserve jurisdiction to hear any motions to convert, rather than dismiss, filed within 10 days following service hereof.

Date: August 19, 1999

______________________________

Edward D. Jellen

United States Bankruptcy Judge

1. Under Bankruptcy Code § 349(a), the court may, for cause, dismiss a case with prejudice such that a future case will not discharge any debts that were dischargeable in the earlier case. Except as otherwise noted, all further section references herein are to the United States Bankruptcy Code, 11 USC § 101 et. seq.

2. Unless otherwise noted, the facts presented here are based on the Reply to Objections to Confirmation of Debtor's Chapter 13 Plan, filed by the debtor June 8, 1999.

3. Community property belonging to a debtor and the debtor's nonfiling spouse is included in the debtor's bankruptcy estate. Bankruptcy Code § 541(a)(2).

4. The debtor now admits in both his Memorandum and an accompanying amendment to his schedules that at various times, the proceeds of the real estate loans and stock sales were held in various accounts, subsequently closed, before being transferred to Robert.

5. The court is not privy to the advice given by counsel,
but notes that any property of the debtor that had been fraudulently conveyed to Robert, or that Robert was secretly holding for the debtor's benefit, would have not been eligible for exemption from the debtor's estate, even if the transfers had been avoided as fraudulent conveyances. See Bankruptcy Code § 522(g).

6. The debtor gave no explanation, and none was required, for the voluntary dismissal. See Bankruptcy Code § 1307(b).

7. According to the objecting creditors, they obtained default judgments against the debtor for conversion and fraud totaling approximately $160,000. The debtor's papers do not controvert the creditors' assertion.

8. No per se rule exists that prohibits successive bankruptcy filings by the same debtor, as long as they are in good faith. One factor that the Ninth Circuit has cited as being an indicator of the debtor's good faith is the fact that "changed circumstances" occurred between the two filings. In re Chisum, 847 F.2d 597, 599 (9th Cir. 1988), cert. denied sub nom. Mortgage Mart, Inc. v. Rechnitzer, Trustee in Bankruptcy, 488 U.S. 892 (1988).

9. The court is not suggesting that the transfers between the first and second filings are not subject to avoidance as a matter of bankruptcy law, nonbankruptcy law, or both.

10. The 1986 Amendment to § 105(a), adding the second
sentence, is widely recognized as a response to cases such as In re Gusam Restaurant Corp., 737 F.2d 274 (2nd Cir. 1984), which held that a bankruptcy court lacked the power to dismiss a case sua sponte.

11. Although the court makes no specific finding, it appears that the debtor also may have transferred some community property into Mary's name, e.g., the annuity, prior to the second filing without disclosing the transfer in his current statement of affairs, which he signed under penalty of perjury, see p. 4, supra. Because the undisputed facts amply justify dismissal, the court sees no need to hold an evidentiary hearing as to the debtor's many false statements and omissions.

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