In re Friedrich

618 B.R. 274

IN RE: Stacey L. FRIEDRICH, Debtor.

Case No. 19-13843-13

United States Bankruptcy Court, W.D. Wisconsin.

Signed May 5, 2020

Wade M. Pittman, Pittman & Pittman Law Offices, LLC, Madison, WI, for Debtor.

Jennifer K. Niemeier, Office of the United States Trustee, Madison, WI, for U.S. Trustee.

MEMORANDUM DECISION

Catherine J. Furay, U.S. Bankruptcy Judge

The question presented is whether Stacey L. Friedrich ("Debtor") is eligible for relief under a Chapter 13 bankruptcy. He filed a Chapter 13 petition on November 15, 2019. Less than two weeks later, State Bank of Cross Plains (the "Bank") moved to dismiss the bankruptcy case (the "Motion").

The Bank seeks dismissal pursuant to 11 U.S.C. § 1307(c) for lack of good faith in filing the petition, and because the Debtor's noncontingent, liquidated unsecured claims exceed the statutory amount of $419,275 set forth in 11 U.S.C. § 109(e). Debtor opposes the Motion.

BACKGROUND

The facts are largely undisputed. Debtor is the sole member and owner of Total Body Laser Center, LLC (the "LLC"), a Wisconsin limited liability company. The LLC is indebted to the Bank by virtue of three commercial loans (collectively, the "Notes") signed in 2018. The Notes are secured by all the LLC's assets. The Debtor personally guaranteed the LLC's repayment through a Commercial Guaranty. He did not pledge any collateral to secure the Notes. He is not a maker on the Notes. As of October 15, 2019, the total balance due on the Notes was $620,121.97.

The LLC failed to make timely payments and defaulted under the Notes. In October 2019, the Bank filed a lawsuit against the LLC and the Debtor in Dane County Circuit Court seeking, among other things, the appointment of a receiver under Chapter 128 of the Wisconsin Statutes.¹ A receivership hearing was scheduled for November 15, 2019.

On the day of the hearing, Debtor dissolved the LLC and executed an Assignment of All Assets and Debts of the LLC to the Members Pursuant to the Corporate Dissolution (the "Assignment"). The Debtor states the reason for the dissolution and transfer was "to stay any further action by the bank's attempts to replevin the business assets." The receivership hearing went on as scheduled and the Dane County Circuit Court entered an Order appointing a receiver. Debtor also filed his personal Chapter 13 petition on the same day.

The Bank asserts it did not consent to the transfer of its collateral from the LLC to the Debtor. The Bank argues the LLC's assets are not part of the Debtor's bankruptcy estate as the Assignment is void and ineffective under Wisconsin law. The Bank also argues that even if the Assignment was successful, the LLC's assets do not qualify as part of the Debtor's secured debt in his Chapter 13 case. In other words, the Assignment did not change the Debtor's obligation to the Bank—flowing from the personal guaranty on the Notes—from an unsecured to a secured debt. As a result, the Bank believes its unsecured claim against the Debtor stands at $620,121.97. Debtor counters that the Bank's $620,121.97 claim is secured against the Debtor by virtue of the transfer of all the LLC's assets and liabilities to himself personally. Debtor believes the Bank has an in rem claim that can be administered within the Debtor's Chapter 13 Plan.

This decision does not address the Bank's argument for dismissal under 11 U.S.C. § 1307(c) for lack of good faith in filing the petition. The parties were ordered to file briefs on the eligibility argument raised under section 109(e). While the described chain of events relating to the LLC's dissolution and the transfer of its assets appears troublesome, the Court limits its findings to the Debtor's eligibility to continue with his Chapter 13 bankruptcy.

DISCUSSION

A. 11 U.S.C. § 109(e) Is Not Jurisdictional

The courts are split on whether the question of eligibility under section 109(e) is jurisdictional or merely an eligibility requirement for those seeking Chapter 13 relief. "The vast majority of courts ... have found that the eligibility requirements of section 109(e) are not jurisdictional." In re Olivares , 2017 Bankr. LEXIS 1846, at *7, 2017 WL 3638198, at *3 (Bankr. S.D. Fla., Feb. 8, 2017). See also In re Jones , 134 B.R. 274, 280 (N.D. Ill. 1991) ("An examination of the Code's language and structure reveals that Congress had no intention of establishing section 109(e) as a jurisdictional statute.").

In In re Fishel , this Court examined the split and sided with the majority view that eligibility under 11 U.S.C. § 109(e) is not jurisdictional. 583 B.R. 474, 476 (Bankr. W.D. Wis. 2018). The Court agreed with a Sixth Circuit Court of Appeals decision finding that "the eligibility requirements of § 109(e) create a gateway into the bankruptcy process, not an ongoing limitation on the jurisdiction of the bankruptcy courts." Glance v. Carroll (In re Glance) , 487 F.3d 317, 321 (6th Cir. 2007). This simply means that the Court has jurisdiction to hear and consider matters arising in this case. It is not, however, the end of the inquiry about eligibility as the Debtor suggests.

B. Dismissal Under 11 U.S.C. § 1307(c)

The overarching goal of the Bankruptcy Code is to grant honest but unfortunate debtors a fresh start. Chapter 13 is one tool that enables such debtors to obtain relief under the Code. That said, Chapter 13 bankruptcies are reserved for relatively small debtors who wish to retain their property while making scheduled payments to creditors. The Code provides the following eligibility criteria:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $419,275 ... may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

Section 1307(c) provides for the conversion or dismissal of a Chapter 13 case "for cause." The Code does not define "cause," but 11 U.S.C. § 1307(c)(1)-(11) provides a list of circumstances that constitute "cause" for dismissal or conversion. The Seventh Circuit has ruled that the enumerated list in section 1307(c) is non-exhaustive. See In re Love , 957 F.2d 1350 (7th Cir. 1992) ; In re Smith , 848 F.2d 813, 816 n.3 (7th Cir. 1988). Bankruptcy courts in this Circuit have found a debtor's ineligibility under section 109(e) to constitute cause for dismissal. See, e.g. , In re Bailey-Pfeiffer , 2018 Bankr. LEXIS 2076, 2018 WL 1896307 (Bankr. W.D. Wis. Mar. 23, 2018) ; In re McGovern , 122 B.R. 712, 717 (Bankr. N.D. Ind. 1990) ; In re Dobkin , 12 B.R. 934 (Bankr. N.D. Ill. 1981).

The Seventh Circuit has yet to explicitly acknowledge that ineligibility under section 109(e) constitutes "cause" under section 1307. But by affirming lower courts' dismissals of cases based on ineligibility under section 109(e), the Court of Appeals has implicitly confirmed that ineligibility is indeed a ground for dismissal. See, e.g. , In re Sidebottom , 430 F.3d 893 (7th Cir. 2005) ; In re Knight , 55 F.3d 231 (7th Cir. 1995) ; In re Day , 747 F.2d 405 (7th Cir. 1984).

Section 1307(c) provides that "the court may convert ... or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate , for cause[.]" 11 U.S.C. § 1307(c) (emphasis added). "The decision to convert or to dismiss a Chapter 13 case is a matter of discretion for the bankruptcy court." Fishel , 583 B.R. at 478 (citing In re Handy , 557 B.R. 625, 628 (Bankr. N.D. Ill. 2016) ).

1. The Debtor's Bankruptcy Estate

The Bank asserts the Assignment is ineffective under state law and the LLC's assets never became part of the Debtor's bankruptcy estate. Section 541(a) of the Code provides that the filing of a petition creates a bankruptcy estate, which includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "Although the bankruptcy estate is a creation of federal law, its res is a creature of state law: whether the debtor has an interest in property ... and the nature of [such an] interest are questions generally determined by state law." First Nat'l Bank v. Gruber (In re Gruber) , 2014 Bankr. LEXIS 1686, at *7, 2014 WL 1584204, at *3 (Bankr. E.D. Wis. Apr. 16, 2014) (citation omitted; internal quotation marks omitted). The bankruptcy estate "only encompasses the interests in property that a debtor holds as a matter of state law" on the petition date. Id. As a result, this Court must look to Wisconsin law under Wis. Stat. Ch. 183 to determine whether the LLC's assets became part of the Debtor's bankruptcy estate.

In Wisconsin, "property of a limited liability company ... may be transferred by an instrument of transfer executed by any member in the name of the limited liability company." Wis. Stat. § 183.0702(1) (2019-2020).² But the authority to transfer that property is not unlimited. Wis. Stat. § 183.0607 provides, in pertinent part:

A limited liability company may not declare or make a distribution to any of its members if, after giving effect to the distribution, ... (a) The limited liability company would be unable to pay its debts as they become due in the usual course of business.

Wis. Stat. § 183.0607(1)(a) (emphasis added). Moreover, Wis. Stat. § 183.0905 "establishes the priority for distributing the assets of an LLC as it winds up its business. Assets ... must first be distributed to the LLC's creditors, then to the LLC's members, and lastly to former members of the LLC." Protective Life Ins. Co. v. B & K Enterprizes LLC , 2010 U.S. Dist. LEXIS 31650, at *12, 2010 WL 1368660, at *4 (E.D. Wis. Mar. 31, 2010). Wis. Stat. § 183.0905. Lastly, a limited liability company's dissolution does not automatically "[t]ransfer title to the [LLC's] property." Wis. Stat. § 183.0903(3)(a).

Here, it is clear the LLC was unable to pay its debts as they came due. The attempted transfer of all the LLC's assets further impaired its ability to pay its debts to the Bank. The LLC's attempted distribution of its assets occurred...