In re Johnson

546 B.R. 83

In re: John Joseph Louis Johnson, III, Debtor.

Case No. 14–57104

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus .

Signed February 26, 2016

Daniel A. DeMarco, Rocco I. Debitetto, Cleveland, OH, Marc J. Kessler, Hahn Loeser & Parks LLP, Columbus, OH, for Debtor.

OPINION AND ORDER DENYING MOTION OF THE DEBTOR AND DEBTOR IN POSSESSION SEEKING TO CONVERT HIS CHAPTER 11 CASE TO CHAPTER 7 (DOC. 167)

John E. Hoffman, Jr., United States Bankruptcy Judge

Table of Contents

I. Introduction ...88

II. Jurisdiction and Constitutional Authority ...90

III. Procedural Background ...90

IV. Findings of Fact ...98

A. The Primary Nature of the Debtor's Debt ...99

1. Background ...99

2. Debt Owed to Creditors Other than the Objecting Creditors...102

3. Debt Owed to the Objecting Creditors ...102

4. The Testimony of the Debtor and the Johnsons Generally ...103

5. Specific Testimony Relating to the Intent of the Debtor and the Johnsons/the Provisions of the Loan Documents Regarding the Purpose of the Loans ...105

6. The Use of the Loan Proceeds ...109

a. Amounts Predating the First Loan from an Objecting Creditor ...112

b. Inaccurate Transcription and Duplication of Amounts from the Bank Statements ...113c. Unwarranted Assumption that Withdrawals Resulted in Expenditures ...114

d. Unwarranted Assumption that Certain Payments Were Made for Consumer Goods or Services ...115

i. Diamonds and Gold/Finished Jewelry ...116

ii. Mrs. Johnson's Other Business Venture ...117

iii. Business Investments by Mr. Johnson ...117

e. Synopsis of Schedule 1's Shortcomings ...118

f. An Additional Gross Overstatement by the Objecting Creditors ...119

7. Summary of the Court's Findings Concerning the Primary Nature of the Debtor's Debt ...120

B. The Debtor's Bad Faith ...122

C. The Debtor's Bad Faith During the Case ...122

1. Failure to Retain Forensic Accountant Before Filing the Conversion Motion ...124

2. Failure to Object to the Claims of the Objecting Creditors Before Filing the Conversion Motion ...125

3. Failure to Negotiate with the Objecting Creditors in Good Faith ...129

4. Failure to Promptly Sell Depreciating Assets ...137

5. Failure to Disclose Transfers to or on Behalf of the Debtor's Parents and to Fully Investigate Assets of the Parents ...138

a. Failure to Disclose Transfers ...138

b. Failure to Fully Investigate Assets of the Johnsons ...140

6. Postpetition Support of the Debtor's Parents and Brother Using Resources of the Bankruptcy Estate ...142

7. Failure of the Debtor to Control His Own Expenses ...146

D. The Debtor's Prepetition Conduct ...152

E. Summary of the Court's Findings Relating to the Debtor's Bad Faith ...155

V. Legal Analysis ...156

A. Section 707(a) of the Bankruptcy Code...156

B. Application of the Relevant Factors ...161

1. The Debtor's Conduct Prior to Bankruptcy ...161

2. The Debtor's Conduct After Bankruptcy ...161

C. The Connection Between the Court's Bad–Faith Analysis and the Debtor's Request to Convert His Chapter 11 Case to Chapter 7 ...166

D. Section 707(b) of the Bankruptcy Code...166

VI. Conclusion ...172

I. Introduction

John Joseph Louis "Jack" Johnson, III (the "Debtor"), a professional hockey player with the Columbus Blue Jackets, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code more than a year ago. Since then, he has owed the creditors of his bankruptcy estate the same fiduciary duties that, absent the appointment of an independent trustee, are imposed on all Chapter 11 debtors—from small businesses to Fortune 500 companies, and from individuals with moderate incomes to those who, like the Debtor, are highly compensated. But if the Debtor commenced this bankruptcy case intending to comply with his fiduciary duties and use his income to provide creditors with a meaningful recovery, at some point he went astray. Indeed, this case was in its early stages when the Debtor's attorneys began researching issues bearing on the conversion of the case to Chapter 7, including whether any of the Debtor's substantial post-bankruptcy earnings would be available to his creditors if the case were converted.

Before the Court is the Debtor's motion seeking to convert his case from Chapter 11 to a Chapter 7 case under which (in his view) all of his post-bankruptcy earnings—including those he earned before conversion—would be shielded from the creditors of his bankruptcy estate. A group of creditors asserting claims in the aggregate amount of approximately $14 million objected to the conversion motion, arguing that the Court should decline to convert the Debtor's case for two reasons. The objecting creditors first contend that if his case were converted it would be subject to dismissal as an "abuse" of the provisions of Chapter 7 within the meaning of § 707(b) of the Bankruptcy Code. A case may be dismissed for abuse under § 707(b)only if the debtor has primarily consumer debts. But the objecting creditors have grossly misconstrued certain evidence relating to the nature of the Debtor's indebtedness and have failed to carry their burden of proving that he has primarily consumer debts.

The creditors objecting to conversion also contend that the Debtor has exhibited bad faith and that the Court should deny his request for that reason. Attempting to place the blame for his financial predicament on the objecting creditors, the Debtor alleges that their claims arose out of predatory lending practices involving his parents. He also contends that the objecting creditors have refused to accept anything less than full or nearly full payment on their claims, purportedly blocking his path to a successful reorganization. In light of those allegations, an effort by the Debtor to obtain the disallowance of these creditors' claims would have served multiple purposes: (1) gaining leverage in his negotiations with the objecting creditors; (2) forging a path to confirmation of a Chapter 11 plan without their consent if the negotiations failed to garner the agreement of those necessary to confirm a consensual plan; and (3) facilitating the Debtor's proposal of a plan providing for a significant distribution to those creditors holding millions of dollars of other claims that he concedes are legitimate. Despite the strategic benefits of seeking the disallowance of the objecting creditors' claims, the Debtor had chosen not to do so at the time he moved for conversion. Nor had he engaged in good-faith negotiations with these creditors before seeking conversion. At that time, the Debtor also had failed to employ a forensic accountant to undertake the analysis that his own attorney represented to the Court was necessary to formulate a plan of reorganization.

Furthermore, the Debtor neglected to take other steps that are necessary to reorganize his financial affairs. The Debtor's postpetition earnings are property of his bankruptcy estate, and his future income clearly constitutes the single-most important source of funding for the repayment of creditors' claims—including claims that the Debtor concedes are legitimate. Yet by making unnecessary and excessive expenditures, he has failed to conserve this estate property. In addition, the Debtor has not promptly disposed of depreciating assets that he said he intended to sell and thus has unnecessarily imposed the costs of retaining those assets on the bankruptcy estate. And in spite of his contention that his parents are partly to blame for his financial distress, he has made payments to or on behalf of his parents and younger brother using cash belonging to the bankruptcy estate, while at the same time failing to observe his obligation to disclose the nature and extent of his prepetition transfers to his parents. The Debtor's failure to conserve estate resources has not been limited to making inappropriate expenditures on behalf of others. He also has continued to devote an inordinate amount of his postpetition earnings to personal expenditures. The Debtor's conduct during this case is consistent with his pre-bankruptcy laissez-faire approach to his finances. Before bankruptcy, the Debtor engaged in excessive spending and permitted his parents to use his income or loan proceeds to fund their own lavish expenditures even after he knew that he was having difficulty servicing the debt he had incurred.

In short, after failing to reduce his expenses in an effort to repay his debt before bankruptcy, the Debtor filed a Chapter 11 case in which he has neglected his fiduciary duties and has failed to administer his case in a manner that might have resulted in a significant distribution to his creditors. Instead, he seeks to keep for himself millions of dollars of post-bankruptcy income, while leaving his creditors with a small recovery (if any) from his unencumbered, non-exempt assets. Because the evidence demonstrates the Debtor's bad faith, the Court denies his motion to convert this case to Chapter 7.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157and 1334and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) and (O).

There is some question whether an order denying a Chapter 11 debtor's motion to convert his case to Chapter 7 is a final order. Compare United Phosphorus Ltd. v. Fox (In re Fox), 241 B.R. 224, 229–30 (10th Cir. BAP 1999)(holding that an order denying a creditor's motion to convert an individual Chapter 11 debtor's case to Chapter 7 was not final) with Copper v. Copper (In re Copper), 314 B.R. 628, 630 (6th Cir. BAP 2004)(holding that an order denying a debtor's request to convert a Chapter 7 case to Chapter 13 is a final order), aff'd , 426 F.3d 810 (6th Cir.2005). But even if this order is final, the Court has the constitutional authority to enter it after Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), because the decision whether or not to convert a case "stems from the bankruptcy itself." Ster...