Opinion
Case No. 12-59427
07-22-2013
In re: Marc D. DeVincent Theresa DeVincent, Debtors.
Chapter 13
Judge Caldwell
Hearing Date: August 26, 2013, 2:00 p.m.
MEMORANDUM OPINION AND ORDER REGARDING TRUSTEE'S OBJECTION TO
EXEMPTIONS AND MOTION TO CONVERT OR DISMISS (DOC. NOS. 24 AND 25)
AND ORDER TO SHOW CAUSE FOR DISMISSAL WITH PREJUDICE, THE
IMPOSITION OF DISCHARGE RESTRICTIONS AND DISPOSITION
OF ANY PLAN PAYMENTS
This Memorandum Opinion and Order serves as the Court's findings of facts and conclusions of law for the Objection to Exemptions and Motion to Convert Case to Chapter 7 or Alternatively Dismiss Case filed by Jeffrey P. Norman ("Trustee") and Responses filed on behalf of Marc D. DeVincent and Theresa DeVincent ("Debtors"). Based upon the evidence and statements of counsel the Court has determined that the claimed exemptions are improper and that there is cause for dismissal of this case with prejudice and other relief. The Court's ruling follows.
The Debtors sold their former residence in Ohio on October 26, 2012, and they received net proceeds of $21,438.31. On that same day, the Debtors paid $6,485.74 for rental of a home for three months. Three days later on October 30, 2012, the Debtors withdrew $2,900 in cash to pre pay moving expenses. The next day, October 31, 2012, the Debtors opened Roth IRA accounts in their respective names, and contributed $6,000 each.
The Debtors filed this Chapter 13 case on October 31, 2012, and they scheduled assets of $40,370 and liabilities of $145,233.94. They listed in the Statement of Affairs their sale of the former residence, and the Debtors scheduled and claimed as exempt the two Roth IRA accounts. However, the Debtors failed to disclose the sale proceeds received just five days prior.
The Debtors financial problems emanate from their failed development of a business to catalogue and organize life-stories. They hired a software development company to construct and assist in marketing a web-based application that would apparently automate some, if not all, of their business processes. The Debtors funded the software development from three sources: (1) a buyout from Mr. DeVincent's employer, (2) Ms. DeVincent returned to work as a nurse, and (3) Mr. DeVincent's retirement savings. The software development was costly and took longer than expected. In addition, the Debtors had a difficult time funding the business in Columbus, and believed another location would be better. These events prompted the Debtors to sale their home and move out of state.
The Trustee raises three issues. First, he objects to the exemption of the two Roth IRAs. The Trustee argues that that while the Debtors purchased them on the day of the bankruptcy filing (October 31, 2012) the requisite funds did not transfer from their bank account until the day after (November 1, 2012). Because the retirement accounts were not funded until one day after the filing, the Trustee argues that on the day of filing there was no interest to exempt under Ohio law (O.R.C. § 2329.66(A)(10)(c)). Second, the Trustee claims the exemptions should be denied because they were manufactured on the eve of bankruptcy filing to defeat recovery by creditors. Third, the Trustee argues that the case should be dismissed or converted to Chapter 7 based upon the Debtors' pre-petition conduct and failure to disclose all assets, as discussed above.
On the exemption objections, the Trustee prevails. The Ohio exemption only shields "...the person's rights or interests in the assets held in..." covered retirement accounts. On the date the Debtors filed bankruptcy, the funds were still held in the Debtors' checking account, and were not applied to the retirement accounts until the next day. 11 U.S.C. § 522(b)(3)(A); O.R.C. § 2329.66(A)(10)(c); see also In re Bunnell, 322 B.R. 331 (Bankr. N.D. Ohio 2005) (holding that where no exemption exists, the Court cannot create one). Further, the Ohio exemption expressly excludes transactions that are motivated purely to shield assets from creditors. O.R.C. § 2329.66(A)(10)(c).
To determine whether assets have been shielded from creditors, the Court looks to badges of fraud, which include using the proceeds of secured property to acquire exempt property; the proximity in time between the conversion of assets into exempt form and filing of bankruptcy, and high value assets placed beyond the reach of creditors. Staats v. Beckman (In re Beckman), 104 B.R. 866, 870-871 (Bankr. S.D. Ohio 1989). The Court finds and concludes that Debtors' attempt to spend $12,000 of the sale proceeds on retirement accounts for themselves was motivated to preserve their interests at the expense of their creditors.
Turning to the Trustee's third and final argument, debtors are obligated to file and prosecute their bankruptcy cases in good faith. 11 U.S.C. § 1325(a)(3); see also Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030 (6th Cir. 1988), See In re Werts, 410 B.R. 677, 689-90 (Bankr. D. Kan. 2009). The good faith analysis for plan confirmation includes looking at pre-petition conduct, whether debtors are sincere in seeking Chapter 13 relief, and whether debtors are attempting to "abuse the spirit of the Bankruptcy Code." Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 859-60 (6th Cir. 1988). Intentional bad faith conduct is found where actions taken immediately prior to filing adversely impact creditors. In re Henry, 328 B.R. 529, 541 (Bankr. S.D. Ohio 2004). The goal is to provide debtors with a fresh-start not a head start. See In re Wadsworth, 383 B.R. 330, 334 (Bankr. N.D. Ohio 2007). Where debtors willfully fail to follow court orders or appear in proper prosecution of their cases, the court can dismiss bankruptcy proceedings with prejudice for a period of six months. 11 U.S.C. §109(g). The Court may also impose a bar to filing for a longer duration, and/or place restrictions upon the future discharge of obligations. 11 U.S.C. §349(a).
In addition to the good faith requirements, debtors are obligated to disclose all assets in a timely manner, and debtors sign their bankruptcy documents under penalty of perjury. 11 U.S.C. § 521. When Debtors fail to properly list their assets, or omit and misstate assets and liabilities on their schedules, they can be subject to criminal penalties and dismissal of their bankruptcy case for bad faith. 18 U.S.C. § 152; see also In re Alt, 305 F.3d 413, 418-19 (6th Cir. 2002).
Just a few days before filing this bankruptcy case the Debtors sold their home, paid three months' rent in advance, opened two retirement accounts and attempted to prepay moving expenses. Regarding the receipt of the sale proceeds, the schedules were silent. The Debtors failed to amend their bankruptcy filing until February 26, 2013. This was the day the Court conducted the hearing on the Trustee's exemption objection and motion to convert or dismiss. Finally, Mrs. DeVincent failed to attend the combined confirmation hearing and the hearings on the Trustee's two motions discussed above.
For the above reasons, the Court SUSTAINS the Trustee's exemption objection.
IT IS FURTHER ORDERED that confirmation is DENIED, and that cause for dismissal of this case has been established.
IT IS FURTHER ORDERED that on August 26, 2013, 2:00 p.m., in Courtroom B, 170 North High Street, Columbus, Ohio, the Court will conduct a hearing for the Debtors to show cause why this case should not be dismissed with a six month bar to filing, or for a longer period including restrictions upon the future discharge of obligations. 11 U.S.C. §§109(g) and 349(a). At that time, the Court will also consider the appropriate disposition of any plan payment currently held by the Trustee. The Debtors and Counsel shall appear.
IT IS SO ORDERED.
Copies to:
All Creditors and Parties in Interest