In re: Stephen Scott Lokan AND Brenda Leigh Lokan

FILED
NOT FOR PUBLICATION JUN 14 2023
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
OF THE NINTH CIRCUIT
In re: BAP No. OR-22-1249-CLB
STEPHEN SCOTT LOKAN and
BRENDA LEIGH LOKAN, Bk. No. 6:20-bk-62593-TMR
Debtors.
VANESA PANCIC, Chapter 7 Trustee, MEMORANDUM*
Appellant,
v.
STEPHEN SCOTT LOKAN; BRENDA
LEIGH LOKAN,
Appellees.
Appeal from the United States Bankruptcy Court
for the District of Oregon
Thomas M. Renn, Chief Bankruptcy Judge, Presiding
Before: CORBIT, LAFFERTY, and BRAND, Bankruptcy Judges.
INTRODUCTION
Chapter 71 trustee and appellant Vanesa Pancic, seeks to overturn the
bankruptcy court’s determination that debtors Stephen and Brenda Lokan 2
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 For ease of reference we refer to Mr. Lokan as Stephen and Mrs. Lokan as
converted their chapter 13 bankruptcy case to a chapter 7 in good faith.
Because the bankruptcy court did not err, we AFFIRM.
FACTS
A. Chapter 13 filing
The Lokans filed a chapter 13 bankruptcy petition on November 23,
2020, with the goal of preserving their business, a convenience store and
deli in Oakridge, Oregon, and equity in real property. Unsecured creditors
filed proofs of claim totaling approximately $100,000. The Lokans’ chapter
13 plan, which required monthly payments of $150.00, was confirmed on
March 24, 2021.
B. Inheritance
On November 9, 2021, more than 11 months after the Lokans filed
their bankruptcy petition, Stephen’s brother died intestate. Stephen and his
sister were the only two intestate heirs. Additionally, Stephen was the sole
beneficiary of his brother’s accounts. Stephen received approximately
$395,000 in funds3 directly from his brother’s savings and retirement
accounts. Stephen knew that he was the sole beneficiary of his brother’s
accounts at least a month before his brother died.
In December 2021, with help of probate counsel, Stephen opened a
probate case to administer his brother’s estate. Through probate, Stephen
Brenda. No disrespect is intended.
3 Stephen received checks for some of the funds in December 2021 and the
remainder no later than February 1, 2022.
2
also inherited a fifty-percent ownership interest in real property located in
Vida, Oregon valued at $500,000.
C. Conversion from chapter 13 to chapter 7
On February 9, 2022, the Lokans disclosed the inheritance to their
bankruptcy attorney; on March 18, 2022, the Lokans’ attorney filed a
motion to convert the Lokans’ chapter 13 case to a chapter 7. The
bankruptcy court granted the motion on March 21, 2022.
The Lokans filed their conversion schedules on April 1, 2022. The
Lokans referenced the inheritance on schedule A/B stating, that “Debtor 1
is beneficiary of his brother’s estate (Not property of the estate, Debtor's
brother passed on 11/9/2021, more than 180-days after the date of the
peittion) [sic].” The asset was listed as having an “unknown” value.
On April 25, 2022, at the § 341 meeting of creditors, in response to the
chapter 7 trustee’s inquiry as to why they chose to convert to chapter 7, the
Lokans’ responded that they converted the case on advice of counsel. Later,
in the stipulated pre-trial order, the Lokans also identified a decrease in
revenue from their business and a desire to retire as reasons for conversion.
According to the Lokans, by “converting the case to chapter 7 and
excluding the inheritance from property of their Bankruptcy Estate,
Debtors would have sufficient means to close their store and retire, given
their investments in the business and land on their own are not likely to
provide Debtors with the means to retire.”
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D. Chapter 7 trustee’s motion
After the chapter 7 trustee realized that the Lokans had funds from
the inheritance sufficient to fully pay all unsecured creditors, the trustee
filed a motion seeking an order of the bankruptcy court that the inheritance
remained property of the Lokans’ bankruptcy estate even after the case was
converted to a chapter 7. The trustee also sought turnover of the
inheritance pursuant to § 521(a)(4).
In the motion, the trustee pointed out that pursuant to § 1306(a)(1),
Stephen’s inheritance was necessarily property of the Lokans’ chapter 13
bankruptcy estate as of the date of conversion even though Stephen’s
brother died more than 180 days after the date on which the Lokans filed
their bankruptcy petition. Nevertheless, the trustee conceded that if the
Lokans’ conversion to chapter 7 was in good faith, then pursuant to
§ 348(f)(1)(a), the inheritance would not be property of the converted
bankruptcy estate because it was acquired after the Lokans’ original
petition date. But, the trustee argued, because the Lokans converted in bad
faith, § 348(f)(2), not § 348(f)(1), controlled. Under § 348(f)(2), property of
the bankruptcy estate in the converted case consists of property as of the
date of conversion, not as of the petition date, and therefore include the
inheritance.
The trustee argued that the Lokans’ conversion was in bad faith
because they unfairly manipulated the Bankruptcy Code and had engaged
in egregious behavior by failing to turnover their tax return as required
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under the terms of their chapter 13 plan, failing to timely inform the
chapter 13 trustee of the inheritance, and attempting to remove the
inheritance from the bankruptcy estate by converting to a chapter 7 to the
detriment of creditors. The Lokans opposed the motion.
E. Denial of trustee’s motion
The bankruptcy court held an evidentiary hearing on the trustee’s
motion and thereafter issued an oral ruling denying the trustee’s motion.
The bankruptcy court explained that it must look at the totality of
circumstances and consider the four factors laid out in Leavitt v. Soto (In re
Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999) (“Leavitt factors”) to determine
whether the Lokans converted in bad faith.
The bankruptcy court agreed with the trustee that there were “a
number of situations where [the Lokans] were not being transparent.”
Specifically, the court found that the Lokans (1) should have “informed the
trustee earlier” of the inheritance, (2) should have “amended their
schedules and more clearly described the rights to the bank accounts and
the inherited funds,” and (3) should not have “simply ignored the tax
refund.”
Despite its concerns, the bankruptcy court found that “the debtors
provided [the court] with a sufficient explanation for how they handled
[the inheritance],” and “that the debtors did not act in bad faith.” The
bankruptcy court found important the fact that the Lokans did not hide the
inheritance; rather they informed their bankruptcy attorney of it before the
5
motion to convert was filed. According to the bankruptcy court, any failure
to disclose after that was “on the attorney’s shoulders rather than the
debtors.” Additionally, the court found that the inheritance was disclosed
in the conversion schedules and the trustee had the opportunity to inquire
at the first meeting of creditors. Moreover, the bankruptcy court dismissed
the trustee’s allegation that the Lokans’ reasons for converting were
evidence of manipulating the bankruptcy system by reminding the parties
that § 1307(a) “gave the debtors the absolute right to convert their case at
any time.”
Because the bankruptcy court found that the Lokans converted to
chapter 7 in good faith, the court denied the trustee’s motion for turnover
of the inheritance.
The oral ruling was followed by a written order entered on December
19, 2022. The trustee timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (E). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err in finding that the Lokans converted in
good faith?
STANDARDS OF REVIEW
We review the bankruptcy court's legal conclusions, including its
interpretation of provisions of the Bankruptcy Code, de novo. Dale v.
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Maney (In re Dale), 505 B.R. 8, 10 (9th Cir. BAP 2014). We review the
bankruptcy court's factual findings regarding debtors' lack of good faith for
clear error. Ellsworth v Lifescape Med. Assoc. (In re Ellsworth), 455 B.R. 904,
914 (9th Cir. BAP 2011).
DISCUSSION
A. Conversion and the bankruptcy estate
Debtors are accorded an absolute right to convert a chapter 13 case to
a chapter 7 case at any time. Section 1307(a) states “[t]he debtor may
convert a case under this chapter to a case under chapter 7 of this title at
any time. Any waiver of the right to convert under this subsection is
unenforceable.” See Harris v. Viegelahn, 575 U.S. 510, 514, (2015) (“Congress
accorded debtors a nonwaivable right to convert a Chapter 13 case to one
under Chapter 7 ‘at any time.’”) (citing § 1307(a)). Importantly, conversion
does not commence a new bankruptcy case, nor does conversion “effect a
change in the date of filing the petition.” § 348(a).
The parties do not dispute that the inheritance was an asset of the
chapter 13 bankruptcy estate. § 1306(a)(1). The dispositive question is
whether the inheritance remained an asset of the bankruptcy estate upon
the Lokans’ conversion to chapter 7.
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1. Scope of the bankruptcy estate after a good faith conversion
Bankruptcy Code § 348(f)(1)(A)4 describes the scope of property of
the estate in a case converted in good faith from chapter 13 to chapter 7.
Section 348(f)(1)(A) states, “property of the estate in the converted case
shall consist of property of the estate, as of the date of filing of the petition,
that remains in the possession of or is under the control of the debtor on
the date of conversion.” In other words, under § 348(f)(1)(A), if the debtor
owns an item of property on the chapter 13 petition date and retains it on
the date of conversion to chapter 7, the property becomes part of the
converted chapter 7 estate and is subject to administration by the chapter 7
trustee. Harris, 575 U.S. at 517 (Ҥ 348(f) limits a converted Chapter 7 estate
to property belonging to the debtor[s] ‘as of the date’ the original Chapter
13 petition was filed.”). But absent a bad faith conversion, property that the
debtor acquires between the petition date and the conversion date is not
4
The Third Circuit in Bobroff v. Cont'l Bank (In re Bobroff), 766 F.2d 797 (3d
Cir.1985) (collecting cases) found that the legislative history of § 348(f) demonstrated
that it was added for the purpose of encouraging repayment plans instead of
liquidation. The Bobroff court explained:
If debtors must take the risk that property acquired during the course of
an attempt at repayment will have to be liquidated for the benefit of
creditors if chapter 13 proves unavailing, the incentive to give chapter
13—which must be voluntary—a try will be greatly diminished.
Conversely, when chapter 13 does prove unavailing no reason of policy
suggests itself why the creditors should not be put back in precisely the
same position as they would have been had the debtor never sought to
repay his debts.
In re Bobroff, 766 F.2d at 803 (quotation marks omitted).
8
property of the converted chapter 7 estate. See id. at 517-18 (analyzing
exclusion of postpetition wages from the estate); § 348(f)(1)-(2).
Thus, according to § 348(f)(1)(A), if the Lokans converted in good
faith, the property in their converted case would not include the
inheritance because it only includes the Lokans’ property as of the date
they filed their chapter 13 petition. § 348(f)(1)(A); Harris, 575 U.S. at 517.
2. Scope of the bankruptcy estate upon a bad faith conversion
If the Lokans converted to their chapter 7 case in bad faith, however,
then pursuant to § 348(f)(2), the inheritance remained property of the
bankruptcy estate in the converted case. This is because where the
conversion is in bad faith, the relevant date for determining what assets are
included is the date of the Lokans’ conversion, not the date of filing the
original petition. § 348(f)(2).5
B. Determining bad faith when converting from chapter 13 to chapter
7
Neither good faith nor bad faith is defined in the Bankruptcy Code.
Accordingly, after considering the totality of the circumstances, courts
must determine on a case-by-case basis, whether a debtor converted in bad
faith. In re Leavitt, 171 F.3d at 1224 (citing cases). As part of the analysis, the
5
“If the debtor coverts a case under chapter 13 of this title to a case under
another chapter of this title in bad faith, the property of the estate in the converted case
shall consist of the property of the estate as of the date of conversion.” § 348(f)(2).
9
Ninth Circuit instructs courts to consider the following four Leavitt factors
when determining whether a debtor acted in bad faith:
(1) whether the debtor misrepresented facts in his petition or
plan, unfairly manipulated the Bankruptcy Code, or otherwise
filed his Chapter 13 petition or plan in an inequitable manner;
(2) the debtor’s history of filings and dismissals;
(3) whether the debtor only intended to defeat state court
litigation; and
(4) whether egregious behavior is present.
Id. (cleaned up); Ho v. Dowell (In re Ho), 274 B.R. 867, 876 (9th Cir. BAP
2002). No one factor is determinative. A finding of bad faith does not
require fraudulent intent by the debtor, nor is evidence required of the
debtor’s ill will directed at creditors, or that the “debtor was affirmatively
attempting to violate the law – malfeasance is not a prerequisite to bad
faith.” In re Leavitt, 171 F.3d at 1224-25. “The Leavitt factors are simply tools
that the bankruptcy court employs in considering the totality of the
circumstances.” Khan v. Barton (In re Khan), 523 B.R. 175, 185 (9th Cir. BAP
2014). 6
6
Bad faith is analyzed in a variety of bankruptcy contexts including voluntary
conversion (as in this case), involuntary conversion, (as was the case in In re Khan),
voluntary and involuntary dismissal (In re Ellsworth, 455 B.R. at 917-18), and plan
proposal (Nelson v. Burchard (In re Nelson), 334 F. App'x 65 (9th Cir. 2009). Yet,
regardless of context, most courts apply the Leavitt factors when determining the
existence of bad faith.
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C. Lokans’ good faith
In this case, the bankruptcy court applied the correct legal standard;
it analyzed bad faith by looking at the totality of circumstances and
considered the Leavitt factors. On appeal, the trustee acknowledges that
only the first and fourth Leavitt factors are at issue, that is, whether the
debtors misrepresented facts or unfairly manipulated the Bankruptcy
Code, and whether the debtors engaged in egregious behavior.
Misrepresentation and unfair manipulation of the Code have been
found when a debtor’s dishonesty pervades the bankruptcy proceedings,
such as when a debtor fails to fully disclose assets and financial dealings
and fails to correct disclosure or offer an explanation for his conduct. See In
re Leavitt, 171 F.3d at 1225; In re Tomlin, 105 F.3d 933, 941 (4th Cir. 1997).
Similarly, egregious conduct has been found where debtor’s conduct
demonstrates a blatant disregard for bankruptcy process, such as refusing
to fully and accurately disclose financial affairs, concealing information
from the court, violating injunctions, and obstructing the trustee in his
duties. See In re Leavitt, 171 F.3d at 1225; In re Tomlin, 105 F.3d at 936-37;
Jones v. Avery (In re Jones), CC-15-1211-KuDTa, 2016 WL 1704742, at *10 (9th
Cir. BAP Apr. 25, 2016); Yan Sui v. Marshack (In re Yan Sui), CC-12-1223-
KiPaD, 2013 WL 1397416, at *8 (9th Cir. BAP Apr. 4, 2013), aff'd, 582 F.
App’x 739 (9th Cir. 2014); In re Chabot, 411 B.R. 685, 705 (Bankr. D. Mont.
2009).
11
After reviewing the two applicable Leavitt factors, and considering
the totality of the circumstances, the bankruptcy court found insufficient
evidence of bad faith. On appeal, the trustee argues that the bankruptcy
court failed to give sufficient weight to the undisputed facts she argues
demonstrated the Lokans’ bad faith. We disagree.
The bankruptcy court found the Lokans’ explanation as to the delay
in disclosing the inheritance was sufficient to allay any of its concerns.
Because the trustee did not include the transcript of the evidentiary hearing
as part of the record before the court, we do not know precisely the
reasoning given by the Lokans for their delay. However, the record
demonstrates that the Lokans (1) disclosed the inheritance (albeit delayed)
to their bankruptcy attorney prior to conversion, (2) listed the inheritance
in their conversion schedules, and (3) answered the trustee’s questions
about the inheritance at the post-conversion meeting of creditors.
Therefore, based on the record, we cannot find that the bankruptcy court’s
factual finding that “the debtors provided [the court] with a sufficient
explanation for how they handled” the inheritance was illogical,
implausible, or without support.
Additionally, the bankruptcy court correctly noted that, pursuant to
§ 1307(a), the Lokans had an absolute statutory right to convert their case to
a chapter 7 regardless of their rationale for the conversion. Accordingly, the
bankruptcy court properly refused to impute bad faith to the reasons given
by the Lokans for wanting to convert (such as wanting to retire). The
12
trustee’s disagreement with the bankruptcy court’s consideration of those
factors does not make the bankruptcy court’s findings illogical,
implausible, or without support in the record.
In short, the bankruptcy court’s finding that the Lokans did not act in
bad faith in converting their chapter 13 case to a chapter 7 case is
supported by the record. Therefore, the bankruptcy court correctly denied
the trustee’s motion.
CONCLUSION
Because the bankruptcy did not err, we AFFIRM.
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