In re Tibbens

In re: Mark David Tibbens, Debtor.

Case No. 19-80964

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA DURHAM DIVISION

March 19, 2021

Chapter 11

MEMORANDUM OPINION REGARDING ORDERS: (1) GRANTING MOTION TO CONVERT; AND (2) DENYING MOTION TO EXTEND THE DEADLINES UNDER §§ 1188 AND 1189

This case came before the Court on August 26, 2020, on Debtor Mark David Tibbens' ("Debtor") Motion for Order to Convert a Case Under Chapter 13 to a Case Under Chapter 11 Subchapter V, ECF No. 55 (the "Motion to Convert"), and on September 30, 2020, on Debtor's Motion for Entry of Order Extending Deadlines for Status Conference and Filing of a Plan. ECF No. 90 (the "Motion to Extend Deadlines"). The Court granted the Motion to Convert and denied the Motion to Extend Deadlines, and indicated that it would supplement its orders with this opinion further setting out its findings of fact and conclusions of law. ECF Nos. 76 and 213, respectively. The following, along with the findings on the record, shall constitute the Court's findings of fact and conclusions of law with respect to these orders under Bankruptcy Rule 7052.

I. Jurisdiction and Authority

The Court has jurisdiction over these proceedings under 28 U.S.C. 1334(b). Under 28 U.S.C. § 157(a), the United States District Court for the Middle District of North Carolina has referred this case and these proceedings to this Court by its Local Rule 83.11. These are statutorily core proceedings under 28 U.S.C. § 157(b)(1), (b)(2)(A), and (b)(2)(O). The Court has constitutional authority to enter its orders as reflected herein.

II. Factual and Procedural Background

The President signed the Small Business Reorganization Act of 2019 (the "SBRA" or the "Act") on August 23, 2019, thereby effectuating its enactment. Pub. L. No. 116-54, 133 Stat. 1079 (2019). The SBRA became effective on February 19, 2020. Id. at § 5. In its central purpose, the SBRA added a new subchapter V to chapter 11 as an elective chapter for small business debtors for whom the existing provisions of chapter 11 were not providing effective relief.

Three months after the President enacted the SBRA, but two months before it became effective, Debtor commenced this case byfiling a voluntary petition under chapter 13 on December 29, 2019. ECF No. 1. On the same day, Debtor filed his first proposed chapter 13 plan (the "First Chapter 13 Plan"). ECF No. 2. On his Schedules I and J, Debtor listed monthly income of $1,070.94 and $2,020.31 in expenses, exclusive of any plan payment. ECF No. 1 at 29-32, Schedules I and J, respectively.¹ The First Chapter 13 Plan proposed: (a) a 36 month plan period² with monthly plan payments of $152.00; (b) no priority claims other than $4,500.00 in attorney's fees for Debtor's attorney; (c) no payment to unsecured creditors; (d) no secured claims; and (e) no contracts or leases to be assumed. Additionally, in Section 9, the First Chapter 13 Plan provided as follows:

Real property located at 849 Moose Tracks Trail, Cedar Grove, NC 27231, which is owned solely by debtor, will be sold to Angel Barnes, via private sale for $130,000 free and clear of all liens. Motion to sell property free and clear of liens via 11 USC 363(b) will be filed within 45 day of voluntary petition filing date. Proceeds from sale minus $35,000 homestead exemption shall be disburse according to priority by Chapter 13 trustee.

ECF No. 2 at 4.³

On February 26, 2020, Debtor filed his Motion to Sell Real Property Free and Clear of Liens Pursuant to 11 U.S.C. § 363, 849 Moose Tracks Trail, Cedar Grove, North Carolina (the "Sale Motion"). ECF No. 16. The Sale Motion recited four liens on the Property as follows: (1) a first lien held by Capital Bank and recorded April 9, 2009, for an equity line deed of trust in the amount of $37,615.92; (2) a second lien held by Elizabeth Botts, arising from a judgment docketed on February 20, 2013, in the amount of $35, 010.50; (3) a third lien held by Argos Ready Mix, LLC, arising from a judgment docketed on February 20, 2019, in the amount of $46,188.92; and (4) a fourth lien held by Merchants National Bonding Co. ("Merchants") and recorded June 12, 2019, for a collateral mortgage deed of trust in the amount of $567,917.98. Id. ¶ 4. The Sale Motion proposed to sell the Property to Angel Barnes, but it did not provide any information about the proposed purchaser other than her name. The Court set a March 26, 2020 hearing on the Sale Motion. ECF No. 17.

On February 28, 2020, the Richard M. Hutson, II, as standing chapter 13 trustee (the "Trustee"), filed an objection to confirmation of the First Chapter 13 Plan. ECF No. 20. The Trustee objected to confirmation because: (1) the Sale Motion was not filed within the time proposed under the First Chapter 13 Plan; (2) the First Chapter 13 Plan was not feasible under 11 U.S.C. § 1325(a)(6) due to Debtor's income; and (3) Debtor failed todemonstrate that the First Chapter 13 Plan was properly served on creditors despite receiving a notice of deficiency of service from the Office of the Clerk on December 30, 2019 [ECF No. 8].

On March 6, 2020, Debtor filed Amended Schedules I and J, listing monthly income of $2,070.94 and expenses of $1,920.31, but still not disclosing household income beyond his own. ECF No. 23.

On March 17, 2020, Elizabeth Botts filed a response to the Sale Motion. ECF No. 25. In her response, Botts asserted a second lien against the Property in the amount of $45,737.99, with interest continuing to accrue thereon at the daily rate of $7.09. Id. ¶ 2. Botts further asserted that the tax value of the Property was $146,169.00, which exceeded the purchase price by $16,169.00. Id. ¶ 3. Nevertheless, to the extent that the sale would pay her in full, she would not object. Id. ¶ 5.

The Sale Motion came on for hearing on March 26, 2020. ECF No. 28. Immediately prior to the hearing, Debtor filed a proposed Exhibit, which was an email from the proposed buyer Angel Barnes, purporting to explain how she came to her offer of $130,000.00. ECF No. 27. The proposed Exhibit did not disclose any relationship between the Debtor and the proposed buyer.

At the March 26 hearing, counsel for Botts and Merchants appeared. The Court questioned counsel for Debtor about the discrepancy between the proposed sale price and the tax value of the Property, and counsel responded that the bank had not yetperformed an appraisal and referred the Court to the proposed exhibit from Barnes. Merchants, however, maintained its objection based on the proposed sale price. In response to a question from the Court about the proposed terms of the Debtor's plan, Debtor's counsel for the first time, "for full disclosure," disclosed that the proposed buyer is the "romantic partner" of Debtor, that she would be obtaining a loan to purchase the Property free and clear of loans, and that Debtor would be making a "minimum plan payment" after the sale. ECF No. 28, 5:10. This "full disclosure" came as a surprise to the Court and Merchants. Id. at 5:45. The disclosure changed Merchants' "evaluation of whether the valuation of the property was objective and accurate," and, as a result, Merchants asked for an opportunity to appraise the property. Id. The Court agreed, stating that the fact that the proposed transaction is not an arms' length transaction is a significant factor. Id. at 6:35. The Court continued the matter, stating, "At a minimum, sir, your motion needs to be amended to correctly identify the purchaser." Id. at 7:55. Debtor's counsel stated that he would amend the Sale Motion to disclose the relationship. Id.

Merchants thereafter filed an objection to both the Sale Motion and to confirmation of the plan. ECF Nos. 29 and 30. In its objection to the Sale Motion, Merchants objected because Debtor had failed to disclose his relationship with the buyer and asserted that the Sale Motion was not proposed in good faith. ECF No. 29¶¶ 13-17. Merchants raised similar objections to the First Chapter 13 Plan. ECF No. 30 ¶¶ 13-17.

On April 9, 2020, the Court conducted a confirmation hearing on the First Chapter 13 Plan. ECF No. 31. At the confirmation hearing, Debtor's attorney agreed that the sole purpose of the chapter 13 case was to sell the Property to the Debtor's romantic partner without payment to any creditor other than attorney's fees. Id. at 1:00 and 4:20. Debtor argued that the purpose of the filing was to permit his romantic partner to purchase the house for its true value and free of any liens so that Debtor could remain in the house with her. Id. at 6:40. The Court expressed serious doubt whether this constituted a proper purpose for chapter 13. Furthermore, and despite the Court's prior direction, Debtor had not amended the Sale Motion to disclose the relationship with the buyer. Id. at 1:50. Debtor's attorney stated that he was waiting on the results of the appraisal to amend the Sale Motion. Id. at 3:20. The Court denied confirmation of the First Chapter 13 Plan because the language of Section 9 was patently unconfirmable, regardless of the proper purpose of the filing. ECF No. 32. In denying confirmation, the Court did not provide additional time for Debtor to file another plan.

Almost two months later, on June 4, 2020, Debtor filed his First Amended Motion to Sell Real Property Free and Clear of Liens Pursuant to 11 U.S.C. § 363 849 Moose Tracks Tail [sic], CedarGrove, North Carolina (the "Amended Sale Motion"). ECF No. 34. The Amended Sale Motion states, "Angel Barnes is an insider to this transaction, in that she is the romantic partner of the debtor and lives with the debtor on the real property at issue in this motion." Id. ¶ 9.

A month later, on July 6, 2020, Debtor filed Amended Schedule J to remove any expenses for a mortgage or real property taxes. ECF No. 43. The next day, Debtor filed his Amended Notice to Creditors and Proposed Plan (the "Second Chapter 13 Plan"). ECF No. 44. The Second Chapter 13 Plan proposed: (1) 44 monthly plan payments of...