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Hackerman v. Demeza

United States District Court, M.D. Pennsylvania

August 22, 2017



          William W. Caldwell, United States District Judge

         I. Introduction

         Presently before the court is an appeal from the United States Bankruptcy Court for the Middle District of Pennsylvania filed by appellant Richard Hackerman (“Hackerman”), an unsecured creditor in the underlying Chapter 13 bankruptcy case. (Doc. 1). The appellee is the debtor, Donald Linwood Demeza (“Demeza”). Hackerman has appealed the bankruptcy court's February 21, 2017 order (Doc. 1-1 at 11) denying his motion to convert the bankruptcy case to Chapter 7, as well as the bankruptcy court's February 23, 2017 amended order (Doc. 1-1 at 13) confirming Demeza's Chapter 13 plan and overruling Hackerman's objection to the plan.[1] (Doc. 1 at 1). For the following reasons, the court will vacate the February 23, 2017 order and remand this matter to the bankruptcy court for further consideration in accordance with this opinion.

         II. Background [2]

         Demeza, the debtor, resides at 500 Orrtanna Road, Orrtanna, Adams County, Pennsylvania (the “Property”), which is best described as a “farmette” or small farm. Demeza is self-employed as a horse trainer, and agreed to board Hackerman's pregnant mare at the Property. While in Demeza's care, the broodmare began foaling, but due to injuries sustained during the foaling process both the broodmare and foal suffered significant injuries and had to be euthanized. Hackerman asserts that Demeza is liable for the death of the horses.

         By letter dated December 12, 2012, Hackerman's attorney notified Demeza of Hackerman's intent to pursue a claim for the deaths of the broodmare and her foal. (Designated Record of Appellant, Doc. 2-1 [hereinafter “R.”] at 96). Demeza responded to this letter via email on December 26, 2012, indicating that he was not insured and that he intended to hire an attorney to defend against any claims. (R. at 98-99). On January 7, 2013, Demeza provided his attorney's contact information to Hackerman's counsel via email. (R. at 98).

         On February 5, 2013, Demeza transferred a one-half interest in the Property to his adult daughter, Ashley Demeza (“Ashley”), to be held as joint tenants with the right of survivorship. (R. at 103-05). This transfer of ownership was undertaken so that Demeza could qualify for a loan, secured by the Property, as Demeza had inadequate income to qualify for the loan by himself and needed Ashley as a joint obligor on the note and mortgage. On June 6, 2013, Ashley executed a Power of Attorney, giving Demeza authority to, among other things, mortgage the Property. (R. at 108-09). On June 17, 2013, Demeza took out a loan for approximately $125, 000 secured by the Property. (R. at 111-24). Prior to this June 17, 2013 mortgage, the Property was owned solely by Demeza and was unencumbered. (See R. at 174-75; Tr. of Dec. 6, 2016 Hr'g on Mot. to Convert Case to Chapter 7, at 29-30).

         With the proceeds from this loan, Demeza paid various debts totaling $31, 000, including personal credit card debt and $22, 500 of a student loan incurred for Ashley's education.[3] Three thousand dollars was also used to pay down Ashley's credit card. Demeza used the remaining funds to cover expenses related to the maintenance of several of his horses, as well as to pay for legal and personal expenses. As of December 6, 2016, the approximately $87, 000 cash payout Demeza received from the loan had been entirely depleted.

         On October 1, 2013, Hackerman's counsel sent a demand letter to Demeza's attorney seeking $135, 000 “for the mare and foal who died as a result of the gross negligence of Mr. Demeza.” (R. at 126). Apparently, a settlement could not be reached, and on November 26, 2013, Hackerman filed suit in the district court, asserting a claim sounding in tort against Demeza and his business. Hackerman v. Demeza, No. 1:13-cv-02883 (M.D. Pa. Nov. 26, 2013), ECF No. 1. The case was litigated until a suggestion of bankruptcy was filed, and on July 11, 2016, the case was stayed due to Demeza's bankruptcy filing. Id., ECF Nos. 104, 105.

         Hackerman filed a second lawsuit on June 15, 2016, alleging, among other things, fraud, fraudulent conveyance under Pennsylvania's Uniform Fraudulent Transfer Act, conspiracy, and unjust enrichment. Hackerman v. Demeza, No. 1:16-cv-01154 (M.D. Pa. June 15, 2016), ECF No. 1. This lawsuit is based on the transfer of the one-half interest in the Property to Ashley shortly after Demeza received notice of Hackerman's claims. Id. This case was also stayed in light of Demeza's bankruptcy filing. Id., ECF No. 24.

         In April of 2016, Demeza contacted a bankruptcy attorney and, several months later, filed a Chapter 13 petition and plan on July 5, 2016. The Chapter 13 Trustee initially objected to the plan, but subsequently withdrew his objection. Hackerman also objected to the plan, arguing that the bankruptcy petition was filed in bad faith, that the Chapter 13 plan was proposed in bad faith in violation of 11 U.S.C. § 1325(a)(3), that the Chapter 13 plan fails to pay as much to unsecured creditors as they would receive in a Chapter 7 liquidation in violation of 11 U.S.C. § 1325(a)(4), that Demeza has failed to dedicate all of his disposable income to his plan as required by 11 U.S.C. § 1322(a)(1), and that the Chapter 13 plan is not feasible due to Demeza's lack of income, ostensibly in contravention of 11 U.S.C. § 1325(a)(6). (R. at 80-89).

         On September 4, 2016, the same day Hackerman filed his objection, he also filed a motion to covert the Chapter 13 case to Chapter 7 (“motion to convert”). In the motion to convert, Hackerman's primary contentions were that (1) the Chapter 13 petition was not filed in good faith; (2) the Chapter 13 plan was not proposed in good faith; and (3) the Chapter 13 plan fails to pay as much to unsecured creditors as they would receive in a Chapter 7 liquidation in violation of 11 U.S.C. § 1325(a)(4). In re Demeza, No. 1:16-bk-02789 (Bankr. M.D. Pa. July 5, 2016), ECF Nos. 28, 74. An evidentiary hearing on the motion was held on December 6, 2016, after which the parties submitted further briefing. In his subsequent briefing, Hackerman renewed the primary arguments contained in his motion to convert. (R. at 976-89). In particular, Hackerman asserted, in great detail, that a Chapter 7 liquidation would result in a greater payout to unsecured creditors than the proposed Chapter 13 plan, thus rendering the plan unfit for confirmation under 11 U.S.C. § 1325(a)(4). (R. at 1024-26).

         On February 21, 2017, in a written opinion, the bankruptcy court denied Hackerman's motion to convert. In re Demeza, 567 B.R. 473, 480 (Bankr. M.D. Pa. 2017). After a thorough analysis regarding good faith in Chapter 13 proceedings, the court held that Demeza's petition had been filed in good faith. Id. at 476-80. The court also found “that the record supports a finding that the Chapter 13 plan was filed in good faith, ” but reserved making a final determination on that issue, “particularly in regard to [Demeza]'s ability to fund the plan, until the hearing on confirmation.” Id. at 480.

         On February 22, 2017, the bankruptcy court held the Chapter 13 confirmation hearing. In re Demeza, No. 1:16-bk-02789 (Bankr. M.D. Pa. July 5, 2016), ECF No. 92. At that hearing, the court determined that Demeza would be given an opportunity to make payments under the Chapter 13 plan-despite potential income issues-and confirmed the plan, implicitly finding that the plan had been filed in good faith. Id., ECF No. 109 at 2-8. On February 23, 2017, the court issued its order confirming the Chapter 13 plan and overruling Hackerman's objection. Id., ECF No. 94.

         Hackerman timely filed a notice of appeal on March 2, 2017, id., ECF No. 98, and the appeal was docketed in this court the following day, (Doc. 1). The parties have each filed a designated record, and the appeal has been fully briefed. Neither party has requested oral argument.

         III. Standard of Review

         This court has jurisdiction to hear the instant appeal under 11 U.S.C. § 158(a)(1). On appeal, the district court will “review the bankruptcy court's legal determinations de novo, its factual findings for clear error[, ] and its exercise of discretion for abuse thereof.” In re Klaas, 858 F.3d 820, 827 (3d Cir. 2017) (quoting In re Trans World Airlines, Inc., 143 F.3d 124, 131 (3d Cir. 1998)). Pursuant to Federal Rule of Bankruptcy Procedure 8019(b)(3), [4] the court will issue a decision without oral argument.

         IV. Discussion

         In his notice of appeal, Hackerman indicates that he is appealing both the bankruptcy court's denial of his motion to convert, as well as the confirmation of Demeza's Chapter 13 plan. He confines the issues on appeal, however, to “[w]hether the Chapter 13 Plan proposed by [Demeza] complies with the requirements [of] 11 USC [§] 1325(a) which requires (3) the plan has been proposed in good faith and not by any means forbidden by law and (4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.]” (Doc. 6 at 3).

         Hackerman's briefing also fails to address the bankruptcy court's denial of the motion to convert. Furthermore, the relief he requests speaks only to the bankruptcy court's confirmation of the Chapter 13 plan. Accordingly, because Hackerman has waived any challenge to the denial of the motion to convert by failing to address it in his briefing, this court will not disturb the bankruptcy court's order denying this motion. See infra Section IV. A. (discussing waiver on appeal). Rather, the court will address, in turn, the two issues regarding the Chapter 13 plan that Hackerman designates as the relevant issues for this appeal.

         A. Good Faith of the Plan Requirement Under 11 ...

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