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Bad Faith Chapter 13 plan: case filed 10 days after property transferred: Johnson

In Re: Walter Johnson Bk 08-14477 Judge Bucki April 21, 2010. This Chapter 13 case was filed October 9, 2008. According to the decision, Roger Dulski transferred the real estate at 1985 Genesee Street, Buffalo, to the debtor ten days earlier. Dulski himself had filed Chapter 13 in 2000 and again in 2005, both of which cases had been dismissed. During the eight years he owned the property, Dulski failed to pay property taxes, water bills or sewer charges, and the property accumulated $70,000 in secured taxes and fees. Dulski then transferred the property to Johnson, who is described as a "tenant" in the building, operating a car repair facility there. Johnson then immediately filed his Chapter 13 case, proposing to value the property at $32,000 and avoid all the tax liens and fees in excess of that amount. Unsecured creditors would receive a distribution of 5%.

The City of Buffalo filed an objection to the plan, based on the good faith requirement of Sect. 1325(a). Specifically, Sect. 1325(a)(3) requires that "the plan has been proposed in good faith and not by any means forbidden by law" and Sect. 1325(a)(7) "the action of the debtor in filing the petition was in good faith."

The Court noted that these are two separate requirements, that the plan be proposed in good faith and that the petition be filed in good faith. As for the first requirement, the court found that the plan was filed in good faith: "The present facts do not necessarily indicate a lack of good faith with respect to the proposal of a plan, as needed to comply with section 1325(a)(3). No matter how ambitious or even aggressive in its assertion of rights, a plan is generally proposed in good faith when it seeks nothing more that what the law would allow. See In re Cavaliere, 238 B.R. 247 [Judge Bucki] (Bankr. W.D.N.Y. 1999)."

However, the court found the petition was not filed in good faith. The court noted that Johnson was not personally liable on the secured debt related to the Genesee Street property, acquired the property immediately prior to filing bankruptcy, and had made no effort to deal with the financial problems of the property outside of bankruptcy. In other words, the property was acquired exclusively to cram down the secured creditors in bankruptcy, and the bankruptcy was filed exclusively for the same purpose. "Essentially, therefore, the present bankruptcy attempts to resolve problems that are not of Johnson's making, but which were transferred to Johnson for the purpose of compromising the rights of another person's creditors."

For that reason, the objection was upheld and the plan as filed not approved. As a post-decision note, the debtor filed an amended plan a week after this decision was filed, calling for full payment with interest to all the property tax and fees secured creditors and 100% repayment to unsecured creditors. This plan was confirmed.


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