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January 17, 2010

Chapter 13 Plan Cannot Force a Sale of Property by Co-Owner to Debtor

Brief by my associate and UWLA graduate Roksana Moradi

In re Dahlgren, 418 B.R. 852 (Bkrtcy N.J. Nov. 2009)

Judge Raymond Lyons

This chapter 13 Debtor's plan proposed to treat his “former paramour's interest in their jointly owned real property as a claim to be satisfied through the plan, leaving him as the sole owner.”  Confirmation of the plan was denied. 

The debtor and his girlfriend bought a farm to board horses and “there was an agreement between the two that the [girlfriend] would manage the properties, the Debtor would contribute capital and make improvements, and the two would both benefit from any profits.”  Later they separated and the girlfriend filed a partition action in state court.  Judgment was entered ordering the sale of the Farm, with the proceeds to be held in trust until “further determination by the court of the proper distribution thereof (which was later scheduled for April 9, 2009, the day the Debtor filed for bankruptcy).”  The property was in foreclosure at the time.  The girlfriend moved for dismissal of the bankruptcy “for reasons of bad faith filing in light of the totality of the circumstances pursuant to Section 1307(c) of the Bankruptcy Code… Alternatively, the [girlfriend] contends that the Debtor's plan should not be confirmed pursuant to Sections 1325(a)(3) and 1325(a)(7) of the Bankruptcy Code because the plan was not proposed in good faith and the petition was not filed in good faith.” 

The bankruptcy court looked at the motion to dismiss first; under Section 1307(c) the facts “must be assessed on a case-by-case basis in light of the totality of the circumstances.” And “whether the filing is fundamentally fair.”  The factors are “[T]he nature of the debt, including the question of whether the debt would be nondischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.” 

The girlfriend argued that the Debtor was solvent and the only reason he filed for bankruptcy was to avoid the sale of the Farm.  The Debtor testified “that he has filed for relief under chapter 13 in good faith, for the purposes of saving the Farm from mortgage foreclosure and the involuntary forced sale ordered by the state court and ‘to reorganize all of his debts in a meaningful manner.’” 

The Court denied the motion pointing out that “dismissal should be saved for “those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.”  The Court said “the Debtor did not engage in frivolous overspending prior to filing, and he can point to a serious injury to explain his current debt situation.  Although the timing of the Debtor's bankruptcy petition and apparent forum shopping are suspicious, the circumstances do not rise to the level of bad faith.  “Additionally, the court does not find that dismissal of the Debtor's case is in the best interest of the creditors or the estate, a consideration implicit in Section 1307 analysis…If this case were dismissed, the Debtor [is] facing imminent mortgage foreclosure, in which case they are likely to realize less profit from the sale than if they were to sell the Farm to a buyer such as the one procured by the Movant prior to the filing of this motion.  This scenario would result in the unsecured creditors losing equity under the plan.”   

As to confirmation of the plan, the Court found the “Debtor's plan to be patently unconfirmable based on his proposed treatment of the [girlfriend’s] interest in the Farm….The Debtor's proposed treatment of the Movant's interest in their mutually owned property is not permitted under Section 1322 and the Debtor has provided no authority to support the proposition that a Chapter 13 debtor has the right to divest a joint property owner of her interest in the property and fix that interest as a monetary claim.”  “[T]he Debtor has not cited any authority for the remedy he proposes-that an owner of real property may force his co-owner to sell the co-owner's interest to him, rather than to a third party.  It is conceivable that a state court might order such a remedy despite the lack of precedent, but the problem here is that the Debtor had the opportunity to request such a remedy in the pending state court action, but failed to do so. Bankruptcy does not afford him a second chance to seek novel relief that he missed in state court.”

The Court denied the requested confirmation of the plan.

January 17, 2010 in Other Circuit Briefs | Permalink

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Comments

Sale of property for back taxes is creating a huge opportunity for investors in today's foreclosure market. These properties are stellar investments because of one major factor: they almost never have a mortgage.

Posted by: Property for Sale in Ireland | Nov 12, 2010 1:37:51 AM

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