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Midstate Finance Company, Inc. v. Peoples

United States District Court, E.D. Tennessee, Winchester

March 31, 2018




         This matter comes before the Court on appeal from the Bankruptcy Court. Appellant Midstate Finance Company (“Midstate”) appeals the Bankruptcy Court's order, entered on November 29, 2016, confirming Appellees Justin and Cathy Peoples's (the “Debtors”) Chapter 13 plan. The Court heard oral arguments in this matter on March 14, 2018. For the reasons stated herein, the Court will AFFIRM in part and REVERSE in part the Bankruptcy Court's order and will REMAND the case to the Bankruptcy Court for further proceedings consistent with this opinion.

         I. BACKGROUND

         This case began as a Chapter 7 proceeding. On October 30, 2015, the Debtors filed a voluntary Chapter 7 petition. On Schedule A of the petition, they listed certain real property they owned at that time: “Mobile Home/24x28 Shop/5 Acre Lot.” (Doc. 10 at 23.) The Debtors assigned a value of $43, 000 to the lot. Schedule C of the petition set forth the claimed homestead exemption under Tenn. Code Ann. § 26-2-301(e), in the amount of $20, 000. (Id. at 28.)

         The appointed Trustee, Trudy Edwards, filed a Motion to Approve Compromise and Settlement (“Original Sale Motion”) on May 23, 2016. (Id. at 46.) The motion included the appraised value of the Debtor's real property, as determined by appraiser and real estate agent Wendell Hanson, at $21, 000, or $3, 500 per acre. The Trustee stated she intended to accept the Debtors' offer of $18, 000, or $3, 000 per acre, as this was the highest offer received. The Bankruptcy Court approved the settlement.

         Midstate-one of the unsecured creditors[1]-responded in opposition to the Original Sale Motion on May 26, 2016. (Id. at 50.) Midstate pointed out that the Debtors actually owned two tracts of land instead of the one tract disclosed in the Chapter 7 petition: (1) the one-third acre tract upon which the Debtors' mobile home and shop sat (the “Improved Tract”) and (2) an adjacent unimproved lot of approximately five acres (the “Unimproved Tract”) (together, the “Property”). Midstate also included in its response an offer to purchase the Unimproved Tract for a sum of $21, 000.

         When the Debtors learned of Midstate's offer, they initially informed the Trustee that they wished to convert their case to Chapter 13 to keep their property. Rather than converting, however, the Debtors sought additional financing and matched Midstate's offer of $21, 000.

         A hearing on the Original Sale Motion was held on June 20, 2016, at which the Bankruptcy Court authorized the Trustee to conduct an auction to sell the Unimproved Tract. (Id. at p. 62.) Midstate submitted a new offer for the Unimproved Tract of $31, 000, contingent upon inspection of the property. The Debtors responded by matching Midstate's offer but with no contingencies. The Bankruptcy Court reset the hearing on the Original Sale Motion for August 15, 2016. Prior to that hearing, Midstate submitted a new offer: $66, 000 for the entire Property, [2] provided that it be allowed to inspect the Property within thirty days of the hearing date and to close on the sale within sixty days. (Id.)

         At the August 15, 2016 hearing, the Trustee testified that in light of Mr. Hanson's lower appraisals, she was concerned that Midstate was artificially inflating the values of the lots. (Doc. 11 at 7.) This concern stemmed from the fact that Midstate held about 80% of the unsecured debt and would thus significantly benefit from the sale of the Property. The Debtors also testified that they had offered to purchase the Unimproved Tract three times, two of which were in response to Midstate's offers, but because the target kept moving, they were unsure how to save their property. With a new offer to purchase both tracts on the table, the Bankruptcy Court ordered that the Trustee file a motion to set a more formal auction to sell the whole Property.

         The Trustee filed the motion on August 17, 2016 (the “Amended Sale Motion”), and the final auction was set for August 29, 2016. (Doc. 10 at 64.) Midstate responded to the Amended Sale Motion on August 19, 2016. (Id. at 67.) It its response, Midstate again requested access to the Property for inspection prior to the auction.

         On August 24, 2016, just days before the auction date, the Debtors filed a motion to convert their Chapter 7 case to a Chapter 13 case, which the Bankruptcy Court granted and confirmed on September 20, 2016. (Doc. 10 at 77.) In the Debtors' original Chapter 13 plan (the “Original Plan”), they proposed $33, 000 in payments over sixty months, with $2, 500 in attorneys' fees and $30, 500 going to general unsecured creditors for an approximate 21.8% recovery for unsecured nonpriority claims. (Id. at p. 75.) Midstate filed an objection to the Original Plan, arguing it did not satisfy the “best interest of the creditors” test. (Id. at p. 80.)

         A hearing was held (the “Confirmation Hearing”) on Midstate's objection on November 21, 2016. At this time, the Debtors submitted a revised Chapter 13 plan (the “Chapter 13 Plan”), providing for $41, 700 in payments over sixty months, with $11, 238.51 in attorneys' fees and priority claims, leaving $30, 461.49 (with a guarantee of $30, 000) for unsecured creditors. (Id. at p. 84.) This left roughly the same 21.8% return for unsecured creditors as the Original Plan. The parties agreed that the only issue to be resolved at the hearing was whether the Chapter 13 Plan satisfied the best interest of the creditors test.

         The President of Midstate, Kim Klonaris, was the first witness to testify at the Confirmation Hearing. He confirmed that Midstate's original offer was contingent upon first inspecting the Property. (Id. at p. 128.) He then stated that Midstate was prepared to remove the contingency entirely, offering $66, 000 with no strings attached. (Id.) On cross examination, Mr. Klonaris was asked whether Midstate would still give $66, 000 for the Property if it turned out that there was a meth lab in the mobile home. (Id. at 129.) Mr. Klonaris hesitated, explaining that the offer was based primarily on the land, rather than the structures-prompting counsel for the Debtors to ask why an inspection of the mobile home was necessary to begin with if Midstate was only concerned with the land. To this, Mr. Klonaris responded that “they just wanted to know what they were buying.” (Id.)

         The Bankruptcy Court confirmed the Chapter 13 Plan in an oral ruling at the conclusion of the hearing. (Id. at p. 138.) It noted it did not find the testimony of Mr. Klonaris particularly credible, as he had explained that Midstate was primarily concerned with the land, but hesitated when asked if Midstate would follow through with the offer if a meth lab was discovered on the Property. The Bankruptcy Court ultimately found that the Debtors had demonstrated the ...

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