United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
_________________________
No. 97-6084EA
_________________________
In re: *
*
John P. Ladika, Geraldine A. Ladika, *
*
Debtors *
---------------------------------------------------------------
-
John P. Ladika, *
*
Debtor - Appellant, * Appeal from the
United States
* Bankruptcy Court for the
v. * Eastern District of
Arkansas
*
Internal Revenue Service, *
*
Creditor - Appellee *
_______________________
Submitted: January 13, 1998
Filed: January 30, 1998
________________________
Before KOGER, Chief Judge, KRESSEL, and SCHERMER, Bankruptcy
Judges.
KOGER, Chief Judge.
The debtor, John F. Ladika, appeals from a decision by the
bankruptcy court1 to convert the debtors’ Chapter 13 case to a
Chapter 7 case after a hearing on the motion to convert filed
1
The Honorable James G. Mixon, Chief Judge, United States Bankruptcy Court for the
Eastern and Western Districts of Arkansas.
by the Internal Revenue Service. For the following reasons,
we affirm.
2
FACTS
On February 28, 1997, John P. Ladika and his spouse,
Geraldine A. Ladika, filed a voluntary petition for relief
under Chapter 13 of the Bankruptcy Code. The filing was
precipitated by the Internal Revenue Service’s (the “IRS”) levy
upon an investment account owned by the debtors with a balance
of approximately $170,000.00 seeking the payment of unpaid
income taxes, penalties and interest for tax years 1980 through
1989. In their schedules, the Ladikas listed the IRS as a
creditor and the IRS filed a proof of claim asserting a secured
claim in the amount of $346,143.00; an unsecured priority claim
in the amount of $3971.00; and an unsecured nonpriority claim
in the amount of $312,473.16.
On June 19, 1997, the IRS filed a motion to dismiss the
debtors’ Chapter 13 case or in the alternative to convert the
case to a Chapter 7. On September 4, 1997, the bankruptcy
court held a hearing on the IRS’s motion to dismiss or convert
in addition to hearing a motion for relief from the automatic
stay filed by the IRS; a motion filed by the debtors for
determination of tax liability; the debtors’ objection to the
IRS’s proof of claim; and an adversary proceeding for the
turnover of the funds levied upon by the IRS. At the
conclusion of the hearing the bankruptcy court ruled from the
bench on all of the foregoing matters. John Ladika appeals
only from the bankruptcy court’s decision to convert the
Chapter 13 case to Chapter 7, which is memorialized in an order
filed on September 10, 1997, and which incorporates the reasons
stated in open court. Geraldine Ladika did not appeal from any
of the bankruptcy court’s rulings.2
2
Although at the conclusion of the hearing held on September 4, 1997, the bankruptcy court
made oral rulings from the bench concerning all of the matters before it at that hearing, the only
written order that has been filed with the clerk of the court and which is contained in the record on
3
The evidence at the hearing revealed that the debtors did
t pay federal income taxes for tax years 1980 through 1989.
On tember 13, 1990, the debtors voluntarily filed for
under Chapter 7 of the Bankruptcy Code in the Unite
States Bankruptcy Court for .
In heir schedules filed in connection with this Chapter 7
nkruptcy, the debtors listed the IRS as a creditor with
debt s
fo
tax liabilities as “fictitious and fraudulent concocted b
ignorant s
to make themselves look as though
The debt 7
bankruptcy on January 22, 1991.
January 1992, John Ladika received a settlement in
personal injury action in the amount of $700,000.00. Afte
paying attorney’s fees and reimbursing workers’ compensation,
hn Ladika received the net amount of about $350,000.00 from
tha settlement. On January 22, 1992, the debtors purchased
home in Cleburne County, Arkansas for $178,000.00 cash.
Prior to purchasing the home, the debtors incorporated Ladika
elaware. Ladika Industries,
Inc. s a non-operating corporation that does absolutely no
siness in the state of Arkansas or elsewhere. Although the
debtor purchased the home with their personal funds, they
ika Industries, Inc. At the
hearing, n
th
appeal is the order filed on September 10, 1997, in which the bankruptcy court converted the debtors’
that the remaining oral rulings have not yet been reduced
to We will only consider the issues
raised context of the conversion of the debtors’ case and it is not necessary to address the
brief and by John Ladika in his brief and
reply brief.
were to die, it would not be tied up in probate for a couple
of years.” The debtors have lived in the home continuously
since they bought it, and claim this property as their
homestead in their 1997 bankruptcy schedules. On March 12,
1992, the debtors bought vacation property in Van Buren County,
Arkansas for $900.00 cash. The debtors also titled this
property in the name of Ladika Industries, Inc. The debtors
invested the rest of the net proceeds of the settlement in an
investment account with Pershing, a division of Donaldson,
Lufkin & Jenrette Securities Corporation. After the IRS levied
on this investment account on February 12, 1997, it received
a check for the outstanding balance in the account in the
amount of $170,957.81. The IRS was unable to levy on the
investment account prior to February 12, 1997, because the
municipal bonds in which the debtors invested did not mature
until that time. On April 16, 1992, the debtors deeded their
former residence in Orange County, California to one of
5
their sons and his wife. The deed states that “this is a
bonafide gift and the grantor received nothing in return.” In
their 1990 bankruptcy schedules the debtors showed equity of
$20,000.00 in this property. At the hearing, John Ladika
testified that the debtors transferred the Orange County
property for “a handshake and a Hundred Dollars” to their son
who also took over the $97,000.00 mortgage. John Ladika stated
that at the time of the transfer, the debtors possibly had
$50,000.00 equity in the Orange County property.
As mentioned above, the debtors’ history with the IRS
began with their refusal to pay federal income taxes for tax
year 1980. For tax years 1980 through 1989, the debtors
refused to pay federal income taxes under the belief that John
Ladika “is and was an american [sic] worker on the american
[sic] market, not living abroad, and exempt from a direct
unapportioned tax.” For tax years 1980 through 1986 the
debtors did not file federal income tax returns and for each
of those years the IRS prepared substitute returns in order to
calculate the debtors’ income tax liability. For tax years
1987 through 1989 the debtors did file income tax returns upon
which the IRS based the debtors’ income tax liability for each
of those years. The United States Tax Court made
determinations of federal income tax liability for tax years
1980, 1981, 1983, 1984, 1986 and 1989 (the “tax court years”).
The United States Tax Court decisions for those years were
admitted as evidence at the hearing. The tax years 1982, 1985,
1987 and 1988 were non-tax court years. Certified copies of
IRS transcripts of the Form 1040 United States Individual
Income Tax Accounts of John P. and Geraldine Ladika that showed
the income tax due for each of the non-tax court years plus
penalties and interest, in addition to transcripts for the tax
court years, were admitted as evidence at the hearing.
Certified copies of the federal tax liens filed in Cleburne
County, Arkansas and Van Buren County, Arkansas were also
6
admitted as evidence in support of the IRS’s secured portion
of its claim. The IRS transcripts of accounts do reflect that
starting in December 1990, the debtors began making small
payments to the IRS on the unpaid income taxes. However, the
debtors failed to make even a noticeable dent in the unpaid
income taxes, penalties and interest due the IRS. In 1994 the
debtors did tender federal income tax returns to the IRS for
tax years 1980 through 1986, but the IRS did not process the
returns contending that the tax liability for tax years 1980,
1981, 1983, 1984 and 1986 had been previously determined by the
United States Tax Court.
7
In their Chapter 13 plan, the debtors proposed to pay
$2,256.00 per month for sixty months and $3,903.00 semi-
annually for five years to the Chapter 13 Trustee to fund the
plan. The bankruptcy court confirmed the debtors’ plan on June
4, 1997. There were no objections to confirmation. The Chapter
13 plan provided that the IRS would be paid $2,106.00 per month
on its secured claim, which the debtors showed as $99,102.00.
The only other secured creditor listed was Sears, with a
secured debt of $1,000.00. The debtors also proposed to apply
the $3,903.00 semi-annual payments to the secured claims of the
IRS and Sears, and to pay the nonpriority unsecured creditors
a 100% distribution. In addition to the IRS, the debtors
listed as unsecured nonpriority creditors the City of Orange
Finance, Discover Card, Master Card, and the State of
California Franchise Tax Board. The IRS is by far the debtors’
largest creditor. The debtors showed no unsecured priority
creditors in their schedules, and made no provision for the
payment of unsecured priority claims in their Chapter 13 plan.
At the September 4, 1997, hearing, the IRS asserted that
the debtors’ Chapter 13 case should be either dismissed or
converted to a Chapter 7 case for several reasons. First, the
IRS contended that the debtors could not propose a feasible
plan because the plan would require about a $3,500.00 payment
per month for 60 months just to pay off the secured portion of
the IRS’s claim, which the debtors were unable to make.
Second, the IRS argued that the unsecured portion of its claim
exceeded the unsecured debt limits for Chapter 13 eligibility.3
Finally, the IRS argued that the pre-petition actions of the
debtors demonstrated that they acted in bad faith by filing the
3
Section 109(e) of the Bankruptcy Code states in relevant part that “Only an individual with
regular income that owes, on the date of the filing of the petition, noncontingent, liquidated,
unsecured debts of less than $250,000 . . . may be a debtor under chapter 13 of this title.” 11 U.S.C.
§ 109(e), as amended by the Bankruptcy Reform Act of 1994.
8
Chapter 13 bankruptcy petition, particularly the 1992 transfer
of the Orange County, California property to one of their sons
and his wife and the 1992 purchase of the Cleburne County,
Arkansas and Van Buren County, Arkansas properties in the name
of Ladika Industries, Inc, which the IRS asserted was just an
attempt by the debtors to protect their assets from the IRS
when they knew they were substantially indebted to the IRS.
9
At the conclusion of the hearing the bankruptcy court
converted the debtors’ Chapter 13 case to a Chapter 7 for the
following reasons:
[T]he evidence is, again, substantially, substantial
and overwhelming that the debtor, as a tax protestor,
filed frivolous returns and made frivolous
contentions, and that these penalties are, no doubt,
totally warranted.
That being The Court’s finding, that the claim
[of the IRS] is correct, means that the debtor is not
eligible for Chapter Thirteen relief. The question
then becomes whether or not to dismiss the case or to
convert it to Chapter Seven. I don’t think the
debtor is proceeding in good faith.
This idea that you can title your personal
residence in a non-existent, non-functioning
corporation for purposes of avoiding probate is
absurd. It doesn’t accomplish that at all. And the
only purpose of titling property in a defunct, non-
operating corporation is to try to hinder and delay
and avoid the efforts of the Government to collect
their taxes. The Government, unlike creditors in
general, has the ability under Federal Law to levy on
and sell a debtor’s homestead, whereas a regular
creditor couldn’t do that, a non-government creditor
couldn’t do that in this state.
So The Court finds that the personal residence
is not corporate property, that this is all a sham,
that the residence belongs to the debtor, as does the
lot at Fairfield Bay [in Van Buren County]. That’s
the debtors’ property, not the corporation’s.
Therefore, the debtor appears here in this Court of
Equity acting in bad faith. And that warrants, I
think, conversion of the case to a Chapter Seven.
The other reason I want to convert it to Chapter
Seven is the debtor has played, I call it, a game
with the Internal Revenue Service for all these
10
ars, avoiding the payment of taxes, and have n
reason to think that the debtor would not continue to
gage in this type of cleverness. And, so, if
were to dismiss the case, that would leave the debtor
th the option of refiling at strategic points i
time, e
Government to
property ,
the case will be converted to a Chapter Seven.
11
Ladika appeals the bankruptcy court’s ruling
nverting the Chapter 13 case to a Chapter 7. In it
appellate d
after converted that it incorrectly calculated the
its claim and concedes that
the debtors do meet the debt limit
to file a Chapter 13 bankruptcy.4
maintains that this Court should u
decision e
shows that the debtors’ filed their Chapter 13 bankruptcy
JURISDICTION
John Ladika timely filed his notice of appeal on Septemb
16, 1 See Fed. R. Bankr. P. 8002(a). The bankruptc
court’s a
Chapt 7 case is a final order over which this Court has
jurisdiction. See In re Nielsen, 211 B.R. 19 (B.A.P
8th Cir. 1997).
ISSUE RAISED ON APPEAL
use the IRS concedes that the debtors meet the deb
limit requirements and are e
bankru court did not address the feasibility of the
re this Court is whether the
ba
4
IRS does not disclose to this Court the correct amount of the unsecured portion of its
, however, this Court certainly expects the IRS to file an amended proof of claim with th
bankruptcy court as soon as possible, if it has not already done so.
12
Chapter 13 petition in bad faith thus warranting conversion to
Chapter 7.
13
STANDARD OF REVIEW ON APPEAL
The bankruptcy court’s determination that the debtors
acted in bad faith by filing their Chapter 13 bankruptcy
petition is a factual finding reviewed under the clearly
erroneous standard. See Noreen v. Slattengren, 974 F.2d 75,
77 (8th Cir. 1992); Handeen v. LeMaire (In re LeMaire), 898
F.2d 1346, 1350 (8th Cir. 1990); Nielsen, 211 B.R. at 21. A
bankruptcy court’s finding of fact is clearly erroneous when
the reviewing court is left with a “‘definite and firm
conviction that a mistake has been committed.’” In re Waugh,
95 F.3d 706, 711 (8th Cir. 1996) (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L.
Ed. 2d 518 (1985)). The appellant bears the burden of proving
that the bankruptcy court’s determination was clearly
erroneous. See U.S. Machinery Movers v. Beller, 280 F.2d 91,
95 (8th Cir.), cert. denied, 364 U.S. 903, 81 S. Ct. 236, 5 L.
Ed. 2d 195 (1960).
DISCUSSION
Section 1307(c) of the Bankruptcy Code states in pertinent
part:
[O]n request of a party in interest or the United
States trustee and after notice and a hearing, the
court may convert a case under this chapter to a case
under chapter 7 of this title, or may dismiss a case
under this chapter, whichever is in the best
interests of creditors and the estate, for cause . .
. .
11 U.S.C. § 1307(c). In In re Molitor, 76 F.3d 218, 220-21
(8th Cir. 1996), the Eighth Circuit Court of Appeals opined:
14
[A] Chapter 13 petition filed in bad faith may be
onverted “for cause” under 11 U.S.C. §
13 In re Eisen .
19 curiam). Such cause includes filing a
ition in bad faith. See, e.g. Matter
of Smith ). The
bad faith determination focuses on the totality of
circumstances, specifically: (1) whether th
debtor has stated his debts and expenses accurately;
ntation
to mislead
15
the bankruptcy court; or (3) whether he has unfairly
manipulated the bankruptcy code. In re LeMaire, 898 F.2d 1346,
1349 (8th Cir. 1990).
See also LeMaire, 898 F.2d at 1353 (citations omitted)
(“‘[G]ood faith should be evaluated on a case-by-case basis in
light of the structure and general purpose of Chapter 13.’” .
. . “There are no ‘precise formulae or measurements to be
deployed in a mechanical good faith equation.’”); Nielsen, 211
B.R. at 22 (Additional relevant factors under the totality of
the circumstances approach include “the type of debt sought to
be discharged and whether such debt is dischargeable in a
chapter 7 and the debtor’s motivation and sincerity in seeking
chapter 13 relief.”); In re Bayer, 210 B.R. 794, 795-96 (B.A.P.
8th Cir. 1997) (discussing the good faith inquiry in the
context of appellate review of the bankruptcy court’s dismissal
of the debtor’s Chapter 13 case).
In LeMaire the Eighth Circuit opined:
[W]henever a Chapter 13 petition appears to be
tainted with a questionable purpose, it is incumbent
upon the bankruptcy courts to examine and question
the debtor’s motives. If the court discovers
unmistakable manifestations of bad faith, as we do
here, confirmation must be denied.
Unmistakable manifestations of bad faith need
not be based upon a finding of actual fraud,
requiring proof of malice, scienter or an intent to
defraud. We simply require that the bankruptcy
courts preserve the integrity of the bankruptcy
process by refusing to condone its abuse.
LeMaire, 898 F.2d at 1352 n.8 (alteration in original) (quoting
In re Waldron, 785 F.2d 936, 941 (11th Cir. 1986)).
16
Here, there is more than ample evidence to support th
bankruptcy court’s decision to convert the debtors’ Chapter 13
se to a Chapter 7 case on the grounds of bad faith. We d
not e
clea erroneous. By filing the Chapter 13 petition, the
btors have attempted to unfairly manipulate the Bankruptc
Code in their continued effort to evade the payment of federal
come taxes, penalties and interest, which have accumulate
from tax years 1980 a
received the net amount of approximately $350,000.00 from the
settlement of a personal injury action. Instead of paying
their debt to the IRS at that time, in January 1992 the debtors
moved from California to Arkansas where they used $178,000.00
of the settlement proceeds to purchase homestead property in
Cleburne County, Arkansas that they titled in the name of
Ladika Industries, Inc., which is a non-operating corporation.
The debtors also purchased vacation property in Van Buren
County, Arkansas for $900.00, which they likewise titled in the
name of Ladika Industries, Inc. Also in early 1992, the
debtors transferred the almost $50,000.00 in equity in their
former homestead in Orange County, California to one of their
sons and his wife for no consideration. The debtors invested
a large portion of John Ladika’s settlement proceeds in
municipal bonds, which did not mature until February 1997.
Since at least 1992, the debtors have engaged in a scheme to
place their assets beyond the reach of the IRS and the filing
of the Chapter 13 bankruptcy petition was just another step in
their plot. The debtors’ actions “constitute a clear abuse
of the legal process set forth in the Bankruptcy Act to aid and
assist honest debtors,” see Molitor, 76 F.3d at 221, and the
bankruptcy court correctly put a stop to their sham activities
designed to thwart the collection of the income taxes by the
IRS.
CONCLUSION
For the reasons stated, we affirm the decision of the
bankruptcy court.
A true copy.
Attest:
18
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
19