In re Mills

539 B.R. 879

In re: Ryan D. Mills, Debtor.

Case No. 14–12601

United States Bankruptcy Court, D. Kansas.

Signed October 29, 2015

Mark J. Lazzo, Wichita, KS, for Debtor.

MEMORANDUM OPINION

Robert E. Nugent, United States Chief Bankruptcy Judge

The parties to this matter all agree that valid grounds exist to dismiss or convert this chapter 13 case for cause under § 1307(c). They differ on whether the Court can convert a chapter 13 case to chapter 7 after the debtor has requested dismissal under § 1307(b) and, second, whether it would better serve the interests of the creditors to dismiss this case or convert it to chapter 7. If, as a matter of law, the debtor's motion to dismiss must be granted, whether the case should be converted is a moot point.

11 U.S.C. § 1307(b) says that the court “shall” grant the request of the debtor to dismiss his case “at any time.” But subsection (c) provides that the court “may” dismiss a chapter 13 case for cause or convert it to chapter 7 if that would be in the best interests of the creditors and estate. Mills says that the statute's mandate to dismiss the case trumps the discretionary power to convert his case. Creditors Jason Appell, Kevin Law, and Robert Law, joined by Kanza Bank (and the trustee, at least in the beginning) assert that “Debtor's absolute right to dismiss is qualified by an implied exception for bad faith conduct and/or abuse of the bankruptcy process.”¹ Given the explicit mandatory language of § 1307(b), the limits the Supreme Court has placed on the scope of § 105(a), and the voluntary nature of chapter 13 relief, I find no “implicit exception” to the debtor's unqualified right of dismissal. The motion to convert is moot and Ryan Mills' case must be dismissed.²

Procedural History

Mills filed his chapter 13 case on November 20, 2014. He submitted a 36–month plan that proposed monthly payments of $1,500. After the debtor's first meeting of creditors on December 19, the trustee filed her initial objections to the plan on December 22. Appell and the Laws filed theirs on January 27, 2015 along with a motion to extend their time in which to file a dischargeability complaint. In February, the Internal Revenue Service amended its proof of claim, increasing it from $11,615 to $79,883. In March, the trustee filed her supplemental objection that questioned Mills' eligibility due to exceeding the debt limit. At trial, both the debtor's and the trustee's counsel stated that the debtor had agreed to dismiss his case after the supplemental objection was filed.³ But no such order was entered and then, on April 23, the trustee moved to convert the case to chapter 7. On May 5 the debtor objected to that motion and, on May 14, the debtor moved to dismiss. Appell and the Laws objected to debtor's motion and, in their response, joined in the trustee's motion to convert. All of these matters were called for trial on August 18, after Appell and the Laws conducted only document discovery. At trial, the trustee stood mute on the motion to convert, leaving Appell and the Laws to prosecute it. Because Mills has asked to voluntarily dismiss his case, objections to the confirmation of his chapter 13 plan are moot, leaving only his motion to dismiss and Appell's and the Laws' motion to convert before me today.

Facts

The underlying question here is one of law: can the court deny a debtor's motion to dismiss his chapter 13 case for bad faith conduct and/or an abuse of the bankruptcy process? But because bad faith or abuse of the process is largely a factual matter, some background is necessary.

Ryan Mills was in the construction and real estate development business before he filed his case. In 2011 he formed a company called RDM Properties LLC, d/b/a Mills Construction. In 2012, he organized M & L Development Group LLC with Mickey Lynch.⁴ Mills also did construction work individually.⁵ M & L Development's activities between 2012 and 2014 coincided with the development of Walker's Bar/Jetty's Pizza on Commerce Street in Wichita. Mills remains in the construction business.

The Walker's Bar/Jetty's Pizza project is the centerpiece of the parties' dispute. Ryan Mills acquired a 50% interest in The Tree Guys LLC in 2010. That entity purchased two old buildings located at 220 and 222 S. Commerce Street (the “Commerce Property”) from Michael McGill. In the fall of 2011, Mills and McGill formed Commerce Street Developers, LLC (CSD) to acquire the Commerce Property from The Tree Guys.⁶ CSD planned to develop the Commerce Property into Walker's/Jetty's by renovating the old buildings. Sometime later in 2012 or 2013, Robert “Rusty” Law, who owns Pacific Coast Pizza in northeast Wichita, introduced Mills to Mickey Lynch and Lynch joined the venture acquiring a 51% membership interest in CSD. The bar and restaurant opened in late December of 2013.

Along with his work for CSD, Mills did business as “Commerce Street Operators,” a sole proprietorship. In 2012, he solicited a $120,000 loan from Appell and the Law brothers for development of the Commerce Property. He gave them a promissory note dated April 26, 2012 by which he agreed to repay the loan in 75 days by paying the three $40,000 each. In October of 2012, Mills borrowed another $140,000 from the Law brothers (but not Appell), offering to assign a 50% membership interest in CSD with Mills to keep the other 50%. He represented that the buildings were subject to valuable and transferable historical tax credits (HTCs) from both the federal government and the state of Kansas. Mills received money from the Laws, but never executed the assignments to them.⁷

Mills defaulted on the April note. He began to improvise. He offered Appell a “royalty” on Walker's operating revenue in exchange for Appell's forbearing to sue him for his portion of the April note. He convinced Appell to loan him another $60,000 in August of 2013, giving him note from Mills and CSD, the same to be payable in 30 days in the amount of $66,000.⁸

Mills met Lynch during this period of time. Lynch agreed to invest in the project and became a member of CSD in 2013, acquiring what may have been McGill's 51% interest in that company for an initial $250,000 cash investment. Mills found another investor, 222 Commerce LLC, and assigned it a 25% membership from his holdings. As of October 15, 2013 Mills owned 24%, Lynch owned 51% and 222 Commerce owned 25% interest in CSD.

Walker's and Jetty's opened in late 2013, but due to a lack of parking and other issues, did not flourish. By March of 2014, Mills had only paid Appell $20,000 of the $60,000 he had borrowed on the second note. Appell and the Law brothers sued Mills in state court in September, seeking judgment on the notes and claiming that Mills had fraudulently induced them to lend and/or invest in the enterprise. The bar and restaurant both closed by August.

In July of 2014, Mike McGill, who had previously owned this property, became interested in acquiring it again. Mills and CSD were still indebted to McGill on the purchase money mortgage notes that Tree Guys had granted to McGill when it acquired the property from him in 2010. McGill formed Uncondemned Properties, LLC (“UP”) in July of 2014 to reacquire the Commerce Property from CSD. He was UP's managing member and owned 86% of it; Mills owned the other 14%.⁹ UP purchased the Commerce Property for $523,900 under an asset purchase agreement executed on August 28, 2014, and assumed Mills' and CSD's indebtedness to McGill which, according to the reinstatement documents signed by Mills, amounted to about $440,000 for which Mills remained personally liable.¹⁰ At closing, funds were to be distributed to several mechanics' lien claimants, to Sedgwick County for past-due ad valorem taxes, and to Garden Plain State Bank to release a prior mortgage. Mickey Lynch received $100,000, and 222 Commerce LLC $243,000 to retire their respective interests in CSD. Mills assigned 100% of CSD's state and federal historic tax credits to Lynch. This left Mills the sole member of CSD, but CSD no longer held any assets.

Even after transferring his 51% interest in CSD, Lynch executed a deed on September 4 as a “member” of CSD, conveying the Commerce Property to UP. At closing, Lynch received 14% of UP, Mills' interest increased to 35%, and McGill retained 51%.¹¹ Lynch could not say what, if any, consideration he paid for his interest in UP or how he acquired it. McGill testified that a side deal made at closing changed the members' percentages and granted Lynch his 14% interest in UP.¹² Lynch paid nothing for it.

Then, shortly after the closing on September 4, UP bought out Mills' 35% interest in it for $42,000 cash and forgave Mill's personal liability on the Tree Guys $440,000 debt. McGill conceded that there was no writing that evidenced the release of Mills.¹³ We cannot tell whether this transfer occurred before or after Appell and the Law brothers filed their state court suit against Mills on September 9, 2014.

Appell and the Law brothers say that this series of transactions should be examined by a trustee and, possibly, avoided for the benefit of Mills' creditors, even though most of the transfers appear to involve the property of entities, not of Mills individually. They also say that Mills filed his bankruptcy case in bad faith and abused the legal process because he filed this case immediately after the state court pretrial discovery conference in their suit and because his bankruptcy pleadings reflect some inconsistencies. For example, Mills discloses that he sold his 35% interest in UP to McGill for $42,000, but does not refer to his being forgiven on the Tree Guys debt. He failed to append exhibits referenced in his statement of financial affairs that would have detailed his pending lawsuits and business interests. At trial, though, Mills said he provided these exhibits to the trustee at the first meeting of creditors and no one contradicted that testimony. Mills' declaration on Schedule B that he retained...