In re Cook

599 B.R. 323

IN RE: Jane Catherine COOK, Debtor

No. 5:18-bk-72190

United States Bankruptcy Court, W.D. Arkansas, Fayetteville Division.

Signed May 2, 2019

David G. Nixon, Nixon Law Firm, Springdale, AR, for Debtor.

Bianca Rucker, Rucker Law PLLC, Fayetteville, AR, for Trustee.

ORDER AND OPINION DENYING MOTION TO CONVERT OR DISMISS

Ben Barry, United States Bankruptcy JudgeOn August 16, 2018, the debtor filed the above-captioned chapter 7 bankruptcy case. On November 23, 2018, creditor Bankers Healthcare Group [BHG] filed its Motion to Convert Case to Chapter 11 or in the Alternative Dismiss, with Notice of Opportunity to Object. On December 12, 2018, the debtor filed an objection to BHG's motion. On December 17, 2018, chapter 7 trustee Bianca Rucker filed a response to BHG's motion. The Court held a hearing that began on January 9, 2019, and concluded on March 11, 2019.¹ David Nixon appeared on behalf of the debtor; Stanley Bond and Emily Henson appeared on behalf of BHG; and Bianca Rucker appeared on her own behalf. Patti Stanley appeared on behalf of the United States Trustee but did not actively participate in the hearing. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons stated below, the Court denies BHG's motion to convert or dismiss in its entirety.

Background

The debtor is a pediatric radiologist employed by Arkansas Children's Hospital and Sheridan Radiology. She is married and has two sons. Her older son is 23 years old and attending his final year of college; her younger son is 17 years old and still living at home. The debtor's husband is not currently employed but owns a business that allows him to contribute to household expenses on a sporadic basis. The debtor claims her husband and two sons as dependents. The debtor's gross income is $ 28,948 per month. Her bankruptcy schedules state that her monthly net income is $ 16,041 and her monthly expenses are $ 16,242–a figure that includes rent for $ 2750; $ 1300 for food and housekeeping supplies; $ 300 for personal care products and services; $ 200 for a housekeeper; and $ 200 for travel and vacation expenses.²

Prior to moving to Arkansas in 2018, the debtor lived in Florida, where she was worked as a radiologist for Sheridan Radiology, Pensacola Radiology Consultants, PA, and Orlando Hospital.³ In January 2014, the debtor created a professional association called Centre D'Elle, PA [the PA] for the purpose of opening a medical aesthetics spa. The debtor testified that a medical aesthetics spa (sometimes referenced as a "med spa") provides services such as medical grade chemical peels, micro-needling, and "modalities to tighten skin and reduce cellulite" such as CoolSculpting® and Z-wave machines. The debtor testified that she had planned to leave her radiology practice to perform vein procedures at the med spa once it was making enough money to allow her to quit her radiology position.

To fund the business, the PA obtained loans from BHG and Suntrust Bank [Suntrust], all of which the debtor personally and unconditionally guaranteed.⁴ The med spa–Centre D'Elle–opened in July 2015. After the spa opened, the debtor continued her employment at Orlando Hospital but testified at trial that she was "very, very involved" with the med spa and used several weeks of her allotted vacation time from the hospital to work at the spa, in addition to working there on the nights and weekends that she was not at the hospital. Despite the debtor's efforts, the spa's clientele began diminishing in October 2016 and the spa was closed by December 2016. The debtor said that she found out that running a med spa was difficult, due in part to the high rate of turnover among aestheticians.

After the med spa failed, the debtor paid approximately $ 300,000 of her "own money" toward debts incurred by the business.⁵ Trial Tr. vol II, 41, Mar. 11, 2019. The record does not reflect how much of this sum was paid to Suntrust and BHG but, in any event, both lenders threatened to file suit to collect the money owed by the PA and guaranteed by the debtor. In response, on March 31, 2017, the debtor filed a chapter 7 bankruptcy case in the Middle District of Florida, indicating on her petition that her debts were primarily business debts rather than consumer debts.⁶ Cook Ex. B. In December 2017, the debtor's Florida bankruptcy case was dismissed.⁷ Also in December 2017, the debtor pulled her son from Ole Miss and enrolled him in a less expensive university in Florida to cut down on her expenses. In early 2018, the debtor hired an attorney to try to negotiate settlements with Suntrust and BHG. Settlement offers were exchanged with Suntrust and BHG–to no avail–and SBA began garnishing the debtor's wages to recoup the amount that it had paid on one of the Suntrust loans. Around the same time, the debtor moved to Arkansas to begin her current position at Arkansas Children's Hospital.

On August 16, 2018, the debtor filed her current chapter 7 bankruptcy case, indicating on her Arkansas petition–as she had on her Florida petition–that her debts were primarily business debts rather than consumer debts. On November 23, 2018, BHG filed its motion to convert the debtor's case to chapter 11 pursuant to 11 U.S.C. § 706(b) or, in the alternative, dismiss her case under § 707(a) and (b). On December 12, 2018, the debtor filed an objection to BHG's motion and on December 17, 2018, the chapter 7 trustee filed her response to BHG's motion.

Arguments of the Parties

BHG's argument in favor of converting the debtor's chapter 7 case to a case under chapter 11 pursuant to § 706(b) is straightforward: as a doctor, the debtor has a high income and should not be allowed to rid herself of debts that she could afford to pay. Specifically, BHG argues that if the debtor were to reduce her voluntary retirement contributions, eliminate her travel and vacation savings, cease all gift-giving, stop paying for her older son's college tuition and expenses and stop saving for her younger son's upcoming college tuition and expenses, she would have money left over each month to pay a portion of what she owes to her creditors through a chapter 11 plan. Although BHG would prefer that the debtor's case be converted to a chapter 11, BHG moved in the alternative for dismissal of her case under § 707(a), which provides that a court may dismiss a chapter 7 case "for cause," and under § 707(b), which provides that a court may dismiss a consumer chapter 7 case if it finds that the debtor filed her petition in bad faith or that granting relief under the chapter would constitute abuse.

The chapter 7 trustee testified that she objects to the dismissal of the debtor's case because she has recovered assets that will result in a distribution to the debtor's creditors and she has not concluded her investigation into the debtor's affairs. Specifically, the trustee testified that the debtor has already turned over to her $ 44,991; she and the debtor are in the process of negotiating a buyback agreement for an additional $ 40,000; and the trustee has in her possession CoolSculpting® cartridges that she plans to sell for approximately $ 500 each and a Z-wave machine that she is already in the process of selling for $ 5000. In addition, the trustee testified that she intends to investigate and, if appropriate, pursue the recovery of pre-petition transfers made to the debtor's adult child and his university. The trustee opposes conversion of the debtor's case to a chapter 11 unless a trustee is appointed upon conversion, because, despite the debtor's cooperation with her thus far, she does not believe that the debtor, a busy doctor, would be an effective fiduciary for her creditors.

The debtor argues that the Court should not exercise its discretion to convert her chapter 7 case to chapter 11 under § 706(b) because she would not benefit from the conversion and, in any event, she believes that she would be unable to fund a plan because she has already minimized her expenses as much as she can and she believes she is obligated to pay for her sons' college tuition and expenses.⁸ She also argues that there is no cause to dismiss her case under § 707(a) and that her case is not subject to dismissal under § 707(b) because she has primarily business debts and § 707(b) applies only in consumer cases.⁹

Findings of Fact & Conclusions of Law

BHG seeks to prevent the debtor from obtaining chapter 7 relief under three code provisions: § 706(b), § 707(a), and § 707(b). Although conversion under § 706(b) and dismissal under § 707(a) are potentially applicable in all chapter 7 cases, dismissal under § 707(b) is restricted to chapter 7 cases in which the debtor has primarily consumer debts. 11 U.S.C. § 707(b)(1) ("the court ... may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts ....") (emphasis added). Therefore, the Court must determine whether the debtor in this case has primarily consumer or non-consumer debts before proceeding with its analysis. Consumer debt is defined as "debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. § 101(8). "Consumer debt can be both secured and unsecured debt." Cox v. Fokkena (In re Cox ), 315 B.R. 850, 855 (8th Cir. BAP 2004) (citing Zolg v. Kelly (In re Kelly ), 841 F.2d 908, 912 (9th Cir. 1988) ). To determine whether a debt should be classified as a consumer debt, courts examine the debtor's "purpose in incurring it." Lapke v. Mutual of Omaha Bank (In re Lapke ), 428 B.R. 839, 843 (8th Cir. BAP 2010). If a debt does not involve a "business transaction or potential profit motive" then it is generally categorized as a consumer debt. In re Palmer , 117 B.R. 443, 446 (Bankr. N.D. Iowa 1990).

In this case, the Court finds that the debtor has $ 431,666 in consumer debt¹⁰ and $ 1,071,312 in non-consumer debt comprised of business debt in the amount of $ 949,212¹¹ ; a domestic support obligation owed...