In re Myers, 2013 WL 587311 (S.D.Miss., Feb. 14, 2013).

Opinion 2013 Mississippi Bankruptcy 2013MississippiMeyers

In re Myers, 2013 WL 587311 (S.D.Miss., Feb. 14, 2013).

United States Bankruptcy Court, S.D. Mississippi.

In re Rick MYERS Tina Myers d/b/a P & L Properties d/b/a Express Personnel

Kimberly R. Lentz, Trustee

Rick Myers and Tina Myers, d/b/a Express Personnel, d/b/a P & L Properties, Infinity Services of Mississippi, Inc.,1Liberty Mutual Insurance Company, Fox Everett Underwriters, Ltd. and Steve Lee.

Attorneys and Law Firms

Derek A. Henderson, Jackson, MS, Attorneys for Debtors.

Robert Gambrell, Oxford, MS, David Baria, Bay St. Louis, MS, Michael T. Jaques, Ridgeland, MS, Kimberly R. Lentz, Gulfport, MS, for Chapter 7 Trustee.

William J. Little, Jr., Gulfport, MS, Attorney for Chapter 7 Trustee.

Robert Alan Byrd, Biloxi, MS, Clifford K. (Ford) Bailey, III, Kelly D. Simpkins, Ridgeland, MS, Attorneys for Liberty Mutual Insurance Co.

Edward J. Currie, Jr., Jackson, MS, Thomas E. Schwab, New Orleans, LA, Attorneys for Fox–Everett Underwriters, LTD. and Steve Lee.

MEMORANDUM OPINION ON THE COMPLAINT FOR DECLARATORY JUDGMENT

EDWARD ELLINGTON, Chief Judge.

PAGE_1 THIS MATTER came before the Court on November 29–30, 2011, for trial on the following pleadings filed in the above-styled adversary proceeding:

1. Complaint for Declaratory Judgment (# 1) filed by the Chapter 7 Trustee, Kimberly R. Lentz;

2. Joint Answer and Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee to Trustee's Complaint for Declaratory Judgment (# 6);

3. Defendants Rick Myers and Tina Myers d/b/a Express Personnel, d/b/a P & L Properties ("Debtors") Motion to Dismiss, Motion to Dismiss Parties, Answer, and Affirmative Defenses (# 7);

4. Defendant Infinity Services of Mississippi, Inc. Motion to Dismiss, Motion to Dismiss Parties, Answer, and Affirmative Defenses (# 9);

5. Plaintiff's Response to Defendants' Answer and Motion to Dismiss (of Rick Myers and Tina Myers) (# 12) filed by the Chapter 7 Trustee, Kimberly R. Lentz;

6. Plaintiff's Response to Defendants' Answer and Motion to Dismiss (of Infinity Services of Mississippi, Inc.) (# 13) filed by the Chapter 7 Trustee, Kimberly R. Lentz;

7. Defendant Rick and Tina Myers dba Express Personnel dba P & L Properties Answer and Affirmative Defenses to Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee (# 52); and

8. Defendant Infinity Services of Mississippi, LLC's Answer and Affirmative Defenses to Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee (# 53).

After considering all pleadings, the exhibits and testimony from the trial and the briefs filed by the parties, the Court finds that the Debtors, Rick and Tina Myers, converted their Chapter 13 case to a Chapter 7 case in bad faith, and, therefore, all property held by the Debtors as of the date of conversion is property of their bankruptcy estate. The Court further finds that estate assets and/or proceeds were used to create Infinity Services of Mississippi, LLC, and is itself property of the Debtors' bankruptcy estate.

FACTS2

The following recitation of facts is from the In re Myers3 opinion this Court entered in the Myers' bankruptcy case in which the Court denied motions to settle. While all of the facts are not pertinent to the issues currently before the Court, it details what has occurred in the main bankruptcy case (No. 00–53489EE) and in two other adversary proceedings (Adv. No. 06–05064EE and 07–05011EE). The facts quoted below begin with the commencement of the bankruptcy case and end at the conclusion of the trial on the then pending settlement offers. In the conclusions of law section, the Court will supply additional findings of fact regarding the transfer of assets and the formation of Infinity Services of Mississippi, LLC.

The matter currently before the Court is one in a long line of matters litigated between Rick and Tina Myers (Debtors), Liberty Mutual Insurance Company, Fox–Everett Underwriters, LTD., Steve Lee and the Chapter 7 Trustee, Kimberly R. Lentz (Trustee). In order to put the issues before the Court in context, it is necessary to give a rather detailed background of what has occurred between the parties up to this time.

PAGE_2 On August 17, 2000, the Debtors filed a petition under Chapter 13 case of the United States Bankruptcy Code styled Rick and Tina Myers dba P & L Properties dba Express Personnel in the Gulfport Divisional Office of the Southern District of Mississippi. The case was assigned to the Honorable Edward R. Gaines. P & L Properties (P & L) was a limited liability corporation wholly owned by Rick Myers. P & L provided temporary employees to businesses and operated through a franchise with Express Services, Inc. On March 2, 2001, the Debtors converted their case to one under Chapter 7 of the United States Bankruptcy Code.

On October 25, 2001, an Order Approving Trustee's Report of No Distribution was entered in which the Chapter 7 Trustee, C. Thomas Anderson, certified that there were no assets to administer for the benefit of the creditors of the estate.4 The Debtors received their Discharge of Debtor also on October 25, 2001, and their case was closed on October 29, 2001.

On October 21, 2002, the Debtor, Rick Myers, and Infinity Services of Mississippi, LLC (collectively, Myers) filed a complaint against Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd., and Steve Lee (collectively, Liberty Mutual) in the Circuit Court of the First Judicial District of Hinds County, Mississippi (State Court Litigation). Infinity Services of Mississippi, LLC (Infinity) was a limited liability company established by Rick Myers on or around March 30, 2001. Infinity was a labor subcontracting company which supplied skilled labor to industrial and marine contractors both inside and outside of Mississippi. In the lawsuit, Myers basically contends that Liberty Mutual failed to procure and to provide Infinity with workers' compensation insurance coverage and that Myers relied upon false representations made by Steve Lee and Fox–Everett during the solicitation and sale of the policy for workers' compensation insurance. As a result of the actions of Liberty Mutual, Myers alleges that Infinity eventually went out of business. Myers asserts various causes of action, including breach of contract, gross negligence, breach of duty of good faith and fair dealing, and emotional distress along with several other counts.

On May 25, 2004, Liberty Mutual removed the State Court Litigation to the United States District Court for the Southern District of Mississippi5 alleging that the causes of action were property of the Myers' bankruptcy estate (District Court Action). In support of its contention that the District Court Action is property of the Debtors' bankruptcy estate, Liberty Mutual asserts that in late 2000, Myers requested that Steve Lee, an agent for Fox–Everett, assist him in procuring a workers' compensation policy to cover workers subject to the U.S. Longshore & Harbor Workers' Compensation Act (USL & H).6 Mr. Lee obtained coverage for Myers through the Mississippi Workers' Compensation Assigned Risk Plan. The assigned risk plan was administered by Compensation Insurance Services (CIS). Once CIS approved P & L's application, it assigned Liberty Mutual Insurance Company as the plan's servicing carrier for the policy.

PAGE_3 According to Liberty Mutual, as the servicing carrier, Liberty Mutual "issued and administered the policy and any claims arising thereunder in accordance with the guidelines of the plan and the National Council on Compensation Insurance ("NCCI")....Liberty subsequently issued its policy ... to P & L for the policy period of 12/16/00–12/16/01....Mississippi was the only state listed in the USL & H endorsement."7

Liberty Mutual alleges that in January of 2001, Myers began "surreptitiously transferring P & L's cash, accounts receivable, business contacts and other assets to Infinity Services and thereby depriving his creditors of the only realistic chance they had of recovering at least some portion of their claims against Myers (sic) bankruptcy estate.... In the midst of these transactions, on March 2, 2001, he converted his bankruptcy to a Chapter 7." Id. at p. 4. In light of the actions of Myers, Liberty Mutual asserts that the Debtors' conversion to a Chapter 7 was in bad faith, that Infinity is a successor in interest of P & L, and therefore, the District Court Action is property of the Debtors' bankruptcy estate.

The Debtors filed a motion to reopen their Chapter 7 bankruptcy case on September 23, 2004. On October 1, 2004, an order was entered reopening their case. Kimberly R. Lentz was appointed the Chapter 7 Trustee.

On March 22, 2005, Judge Henry T. Wingate entered an order in the District Court Action denying Myers' motion to remand. In denying the motion to remand, Judge Wingate addressed the issue of whether the lawsuit was property of the Debtors' bankruptcy estate. Judge Wingate stated that "this court is convinced at this stage that defendants have produced enough proof to show that Myers' claims in the lawsuit sub judice arose prior to and during Myers' bankruptcy proceedings."8 Based on the same reasoning, Judge Wingate also denied Myers' motion to abstain on March 24, 2005.

The District Court Action remains pending before Judge Wingate; however, on October 6, 2005, all discovery was stayed in the District Court Action pending resolution in this Court of the issue of whether the cause of action is property of the Debtors' bankruptcy estate.

Liberty Mutual has filed two proof of claims in the Debtors' bankruptcy case. On May 2, 2005, Liberty Mutual filed a claim in the amount of $977,753.46 (claim # 1).

The stated basis for this claim is "assigned risk premium." On April 23, 2007, Liberty filed a second proof of claim in the amount of $977,798.46 (claim # 24). The stated basis for this claim is "money loaned."

At some point after the bankruptcy case was reopened, the Trustee reached an agreement with Liberty Mutual to settle the District Court Action. On May 4, 2005, the Trustee filed Trustee's Motion for Authority to Compromise (Liberty Mutual Settlement). The Liberty Mutual Settlement entailed Liberty Mutual paying the Trustee $60,000 in exchange for the Trustee dismissing the District Court Action. However, this settlement was contingent upon a finding that the Debtors converted their Chapter 13 case in bad faith. The Debtors objected to this settlement.9

PAGE_4 Subsequently on August 25, 2006, the Trustee filed an adversary proceeding (Trustee's Adversary Proceeding) [Adv. No. 06–05064EE] against the Debtors.10 The complaint contains two counts. In Count I, the Trustee prayed for a monetary judgment against the Debtors for the $20,000 the Debtors received shortly after the conversion of their case to a Chapter 7 for the sale of a franchise agreement. The Trustee alleged that on Schedule B–Personal Property, the Debtors listed the value of P & L and the franchise of Express Personnel Services as zero. However, less than two weeks after the Debtors converted their case to a Chapter 7, the Debtors received $20,000 for the sale of the Express Services franchise back to Express Services. In Count II the Trustee alleged that Infinity was a mere continuation of the business of P & L ... Infinity had the exact same employees, same address and phone numbers and the same insurance coverage as P & L. The Trustee sought a declaratory judgment that Infinity was the successor in interest of P & L, and therefore, all of the assets of Infinity were property of the Debtors' bankruptcy estate.

_ [Additional background information: The second adversary proceeding filed in this case was filed on March 20, 2007, by Liberty Mutual (Adversary No. 07–05011EE). In this adversary proceeding, Liberty Mutual alleges that the Debtors are indebted to Liberty Mutual for unpaid workers' compensation premiums totaling approximately $977,798.46. Liberty Mutual asserts that this debt is nondischargeable pursuant to 11 U.S.C. sec. 523(a)(2)(A).11 This adversary is still pending.]

On May 30, 2007, Judge Gaines recused himself from hearing the Trustee's Adversary. Thereafter, the Trustee's Adversary Proceeding was transferred to the Jackson Divisional Office of the Southern District of Mississippi. The Trustee's Adversary Proceeding was assigned to the undersigned judge.

The Trustee and the Debtors agreed to settle the Trustee's Adversary Proceeding, and on August 22, 2007, the Trustee filed Motion to Approve Compromise (Debtors' Adversary Settlement). In the Debtors' Adversary Settlement, the basic terms are that the Debtors agreed to pay the Trustee a sum of $20,000 and that the Trustee agreed to dismiss Count I and II of the adversary proceeding and to withdraw the Liberty Mutual Settlement. Liberty Mutual objected to the Debtors' Adversary Settlement and stated that it was willing to purchase from the Trustee the causes of action against the Debtors.

The Debtors' Adversary Settlement was cross-indexed from the adversary and into the Debtors' bankruptcy file. On October 29, 2007, Judge Gaines also recused himself from hearing the matters in the main bankruptcy case. The main bankruptcy case was assigned to the undersigned judge. At that point, the Debtors' main bankruptcy case and related adversary proceedings were all pending before this Court.

On March 17, 2008, a Consent Judgment12 was entered in the Trustee's Adversary Proceeding in which the Trustee agreed to dismiss Count I of the complaint. The judgment further held that Count II was dismissed but that no adjudication was being made as to whether Infinity Services, LLC is property of the Debtors' bankruptcy estate.13

PAGE_5 The Court set January 15, 2009, as the date of the trial on the Liberty Mutual Settlement. At the pretrial conference, the parties agreed to mediation before the Honorable David W. Houston, III, United States Bankruptcy Judge for the Northern District of Mississippi. The mediation did not result in the parties reaching a global settlement of all of the pending matters. However, Myers and the Trustee reached an agreement to resolve the dispute over whether the causes of action in the District Court Action were property of the Debtors' bankruptcy estate.

....

On May 4, 2009, the Response to Trustee's Motion to Compromise and Motion of Liberty Mutual Insurance Company and Fox–Everett Underwriters, LTD., to Compromise (Response) was filed.... Liberty Mutual and Fox–Everett propose a counter-offer to the Trustee (Liberty Mutual Counter–Offer)....

A trial on the Myers' Settlement and the Liberty Mutual Counter–Offer was held on August 12, 2009. At the conclusion of the trial, the Court took the matter under advisement and instructed the parties to submit briefs supporting their respective positions.

On September 11, 2009, the parties entered into an Agreed Order in which the Trustee withdrew the Liberty Mutual Settlement. Therefore, the only settlement offers currently pending in this case is the Myers' Settlement and the Liberty Mutual Counter–Offer, both of which are the subject of this opinion.14

The Court did not approve either the Myers' Settlement or the Liberty Mutual Counter–Offer. The Court found that the Myers' Settlement was not fair or equitable and was not in the best interests of the bankruptcy estate. The Court found the Liberty Mutual Counter–Offer was contingent and was not in the best interests of the bankruptcy estate. In the last paragraph of its opinion, the Court stated "that it is time for the Trustee to take the appropriate action to move the case forward and to have the bad faith conversion/property of the estate issues finally determined."15

Third Adversary Proceeding

Heeding the Court's instructions, the Trustee initiated the above-styled adversary proceeding on April 6, 2010, with the filing of her Complaint for Declaratory Judgment (# 1) (Complaint). In Count I of the Complaint, the Trustee seeks an adjudication by the Court of whether the causes of action pursued by Rick Myers and Infinity Services of Mississippi, LLC against Liberty Mutual and others in the District Court Action are property of the Debtors' bankruptcy estate. In Count II of the Complaint, the Trustee seeks a determination of whether Infinity Services of Mississippi, LLC is a successor in interest to the Debtors and Express Personnel d/b/a P & L Properties. The Trustee asserts that if Infinity Services of Mississippi, LLC is a successor in interest, then the Trustee "has control and ownership of any causes of action set forth in the [District Court Action] which are the property of Infinity Services, LLC."16

Liberty Mutual's Answer

PAGE_6 On May 21, 2010, Liberty Mutual filed its Joint Answer and Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee to Trustee's Complaint for Declaratory Judgment (# 6) (hereinafter, as to the answer only, Liberty Mutual Answer). In the Liberty Mutual Answer, Liberty Mutual asserts that this Court is bound by Judge Wingates' ruling that the underlying claims of the District Court Action accrued prior to and during the Debtors' bankruptcy proceeding. Therefore, Liberty Mutual asserts that the District Court Action is property of the bankruptcy estate.

Liberty Mutual's Cross–Claim

Liberty Mutual also asserts a cross-claim in its Joint Answer and Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee to Trustee's Complaint for Declaratory Judgment (# 6) (hereinafter, as to the cross-claim only, Cross–Claim). In its Cross–Claim, Liberty Mutual recites the facts which it contends proves that the claims are property of the bankruptcy estate. Liberty Mutual states that the claims of the Debtor and Infinity Services of Mississippi, LLC in the District Court Action are property of the bankruptcy estate on at least three independent grounds:

(1) the previous holding of Judge Wingate that all of [Myers'] claims are property of the estate if he converted to Chapter 7 in bad faith, (2) [Myers'] claims accrued prior to Myers conversion to Chapter 7 on March 2, 2001, and are property of the estate if he converted in bad faith, as provided by section 348(f)(2) of the Bankruptcy Code, and (3) Infinity is a continuation of P & L or a successor in interest, created with assets of P & L that were not disclosed to the bankruptcy court and its alleged claims are property of the bankruptcy estate....17

Debtors' Answer

The Defendants Rick Myers and Tina Myers d/b/a Express Personnel, d/b/a P & L Properties ("Debtors") Motion to Dismiss, Motion to Dismiss Parties, Answer, and Affirmative Defenses (# 7) and the Defendant Infinity Services of Mississippi, Inc. Motion to Dismiss, Motion to Dismiss Parties, Answer, and Affirmative Defenses (# 9),18 were both filed on May 26, 2010, and are substantially identical pleadings. For reasons explained shortly, the Court will refer to these pleadings as the Debtors' Answer. In the Debtors' Answer, the Debtors assert as defenses some of the same grounds which were previously ruled upon and denied in the Court's judgment dismissing the motions to dismiss. In addition, the Debtors list various defenses against the Complaint such as the doctrine of laches, denial of constitutional rights, estoppel, prohibition against double recovery, to name a few. Further, the Debtors allege that the causes of action are not property of the bankruptcy estate in any event because the assets had been abandoned from the bankruptcy estate.

Trustee's Responses

On June 17, 2010, the Trustee filed two identical general denial responses to the Debtors' Answer: Plaintiff's Response to Defendants' Answer and Motion to Dismiss (of Rick Myers and Tina Myers) (# 12) and Plaintiff's Response to Defendants' Answer and Motion to Dismiss (of Infinity Services of Mississippi, Inc.) (# 13).

Debtors' Response to Cross–Claim

PAGE_7 On November 23, 2011, Defendant Rick and Tina Myers dba Express Personnel dba P & L Properties Answer and Affirmative Defenses to Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee (# 52); and Defendant Infinity Services of Mississippi, LLC's Answer and Affirmative Defenses to Cross–Claim of Liberty Mutual Insurance Company, Fox–Everett Underwriters, Ltd. and Steve Lee (# 53) were filed. These responses are likewise substantially identical to each other and are also substantially verbatim to the previously filed Debtors' Answer.

Debtors' Motion to Dismiss

The Court set the motions to dismiss for hearing on March 11, 2011. After the parties presented their respective positions to the Court, the Court ruled from the bench and denied the motions to dismiss. On March 14, 2011, the Court entered a Final Judgment Denying the Motions to Dismiss (# 29). Also on March 14, 2011, the Court entered a Scheduling Order (# 28) on the Complaint and the various answers/responses.

Debtors' Summary Judgment Motion

On June 14, 2011, Defendants Rick Myers and Tina Myers d/b/a Express Personnel, d/b/a P & L Properties and Infinity Services of Mississippi, Inc.'s19 Motion for Summary Judgment (# 36) was filed. In their summary judgment motion, the Debtors state that they are entitled to a judgment as a matter of law as to Count I of the Complaint. The Debtors assert that the causes of action in the District Court Action belong to Infinity Services of Mississippi, LLC and Rick Myers and are not property of the bankruptcy estate because the causes of action did not accrue until Liberty Mutual denied insurance coverage in April of 2002. Since the causes of action did not exist until after the Debtors had received their discharge and their bankruptcy case was closed, the Debtors assert that the District Court Action is not property of the bankruptcy estate and that the issue of whether they converted their case in bad faith is moot.

Responses to the motion for summary judgment were filed by Liberty Mutual and the Trustee. Liberty Mutual and the Trustee both denied that the Debtors were entitled to a judgment as a matter of law as to Count I because Judge Wingate had previously adjudicated that the cause of action accrued prior to the date the Debtors converted to a Chapter 7 case.

On September 1, 2011, the Court entered its Memorandum Opinion on the Defendants Rick Myers and Tina Myers d/b/a Express Personnel, d/b/a P & L Properties and Infinity Services of Mississippi, Inc.'s Motion for Summary Judgment (# 48). In denying the motion for summary judgment, the Court once again found that Judge Wingate clearly adjudicated in the District Court Action that the cause of action accrued prior to the Debtors' conversion to a Chapter 7. Judge Wingate held: "Accordingly, this court finds that the cause of action is core since: (1) the cause of action accrued prior to the conversion, (2) it is property of the bankruptcy estate if the conversion was fraudulent, and (3) it effects the liquidation of the assets of the bankruptcy estate."20

Trial of the Third Adversary Proceeding

PAGE_8 The Court set the Complaint and responses for trial on November 29, 2011, and November 30, 2011. The transcript of the trial was filed with the Court on January 26, 2012. After the initial Order Regarding Post–Trial Briefs (# 62) was entered on February 1, 2012, the briefing schedule was extended at the request of the parties by agreed order six times. The final brief was filed on August 22, 2012, and the Court took the matter under advisement at that time.

CONCLUSIONS OF LAW

This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. sec. 1334 and 28 U.S.C. sec. 157. This is a core proceeding as defined in 28 U.S.C. sec. 157(b)(2)(A), (B) and (O).

II.

Under sec. 1306, property of the estate in a Chapter 13 case includes the property specified in sec. 541 and any after-acquired property, that is, property acquired after the commencement of the Chapter 13 case. Upon conversion to a Chapter 7 case, the general rule is that "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." 11 U.S.C. sec. 348(f)(1)(A). Therefore, by definition, the general rule is that upon conversion from a Chapter 13 case, after-acquired property does not become property of the Chapter 7 estate.

However, there is an exception to the general rule. Pursuant to sec. 348(f)(2), if the debtor is found to have converted his/her case 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." 11 U.S.C. sec. 348(f)(2). Liberty Mutual contends that the Debtors converted their case on March 2, 2001, in bad faith, and therefore, the District Court Action pursued by the Debtors and Infinity Services of Mississippi, LLC is property of the Debtors' bankruptcy estate. Of course, the Debtors contend otherwise.

This case has a convoluted and tortuous history, and the Court is poised to reach the ultimate issues of whether the Debtors converted their case in bad faith, and, if so, whether Infinity Services of Mississippi, LLC (and its claims against Liberty Mutual in the District Court Action) are property of the Debtors' bankruptcy estate. However, before addressing these issues, the Court must first determine if assets were claimed as exempt from the bankruptcy estate and, thus abandoned by the Trustee as alleged by the Debtors. If they were abandoned, then it is unnecessary for the Court to reach the issue of bad faith conversion.

A. Were P & L and other assets claimed as exempt abandoned from the Debtors' estate?

_ [Omitted for brevity]

B. Did the Debtors convert to a Chapter 7 Case in bad faith?

_ [Omitted for brevity]

Having found that the conversion was not motivated by an inability to make Chapter 13 plan payments, that the Debtors have not been forthcoming, and that the Debtors acted with an interested or sinister motive, the Court finds that the Debtors' converted their Chapter 13 case to a Chapter 7 case in bad faith. Therefore, the property of the Chapter 7 estate includes property held by the Debtors as of March 2, 2001, the date they converted to a Chapter 7 case.

The Court now turns to the issue of whether Infinity LLC is property of the bankruptcy estate. The Debtors allege that Infinity LLC was a totally separate entity created after they converted to a Chapter 7 case, whereas Liberty Mutual alleges that Infinity is a successor in interest to P & L, and therefore, it is property of the bankruptcy estate.

C. Is Infinity Services of Mississippi, LLC property of the Chapter 7 estate?

5 Section 541(a) details what property comprises the bankruptcy estate once a petition is filed. With a few exceptions, the property of the estate includes all legal or equitable interests held in property by the debtor as of the commencement of the case. Of particular relevance here, sec. 546(a)(6) provides that property of the estate includes: "(6) [p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. sec. 541(a)(6).

The Fifth Circuit addressed sec. 541(a)(6) in McLain v. Newhouse (In re McLain), 516 F.3d 301 (5th Cir.2008).45 In McLain, the Fifth Circuit held:

"This generous provision [sec. 541(a)(6) ] sweeps into the bankruptcy estate all interests held by the debtor—even future, non-possessory, contingent, speculative, and derivative interests." In re Dibiase, 270 B.R. 673, 676 (Bankr.W.D.Tex.2001). Congress intended this provision to be quite broad, not limited to the definition of "proceeds" set forth in the Uniform Commercial Code, "but encompassing any conversion in the form of property of the estate, and anything of value generated by property of the estate." In re Hanley, 305 B.R. 84, 86–87 (Bankr.M.D.Fla.2003) (quoting S.Rep. No. 95–989, at 82 (1978); H.R.Rep. No. 95–595, at 368 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787). The bankruptcy estate also includes "[a]ny interest in property that the estate acquires after the commencement of the case." 11 U.S.C. sec. 541(a)(7). "Congress enacted sec. 541(a)(7) to clarify its intention that sec. 541 be an 'all-embracing definition and to ensure that property interests created with or by property of the estate are themselves property of the estate.' " In re Hanley, 305 B.R. at 87 (quoting 124 Cong. Rec. H11096 (daily ed. Sept. 28, 1978) (statements of Rep. Edwards); 124 Cong. Rec. S17413 (daily ed. Oct. 6, 1978) (statements of Sen. DeConcini)). Thus, by virtue of these two provisions, if undisclosed pre-petition funds, i.e., property of the bankruptcy estate, were used to generate some type of property interest, that subsequent property interest is part of the bankruptcy estate and reachable by [the debtor's] creditors.

PAGE_21 In re McLain, 516 F.3d at 312 (emphasis added).

Since this Court has found that the Debtors converted their Chapter 13 case in bad faith, the Chapter 7 estate includes all legal and equitable interests in property held by the Debtors and includes all "[p]roceeds, product, offspring, rents, or profits of or from property of the estate"46 as of March 2, 2001.

The Court agrees with Rick Myers that Infinity LLC was not formally created until March 30, 2001, however, the Court finds that the date of formation is not dispositive because the record clearly shows that Rick Myers began doing business as Infinity (through P & L) long before Infinity LLC was formally created.

As listed in detail above, Rick Myers testified that the two vehicles he bought on February 10, 2001, with money from P & L's account were for use in Infinity's business and his personal use.47 In addition, on February 13, 2001, Rick Myers withdrew $3236.89 from P & L's account in order to buy equipment for employees who were working on the Cole job. He testified that money was part of the start-up money for Infinity.48 Therefore, at least by February 10, 2001, Rick Myers was using proceeds or profits and/or assets of P & L, which were clearly part of the Chapter 13 estate, in order to startup Infinity.

Rick Myers acknowledged that he received payments from Hiller and Meylan for work done by P & L's employees in the months of February and March of 2001. However, he deposited those funds into the account he opened around March 5, 2001, for the yet to be created Infinity LLC.49

After examining Infinity LLC's IRS Form 941,50 an employer's quarterly federal tax return, which Infinity LLC filed on April 19, 2001, Liberty Mutual's expert, James L. Henley, Jr., testified the return showed that Infinity LLC included wages paid by P & L during the quarter-the list of employees attached to the IRS Form 941 were the same employees who were paid by P & L. Mr. Henley stated that the form was proof that

it's the same company, and that's why [Infinity LLC] is reporting the wages for the whole quarter. Traditionally, what you would do if it was a real separate entity, you would have filed a separate return closing out the prior entity and then simply filed a return for the new entity for just that portion of the wages that were paid. In this case, it's a cumulative payment.

Transcript Vol. 1 at 81.

While more examples of where assets, proceeds or profits from P & L were used to create Infinity LLC are previously listed in this opinion, the final example is the $20,000 the Debtors received on March 14, 2001, from the sale of their Express Services franchise. Rick Myers testified that he used those funds as seed money for Infinity.51

Consequently, the Court finds that the Debtors used property of the bankruptcy estate to start up and create Infinity LLC, and therefore, Rick Myers' interest in Infinity Services of Mississippi, LLC, is property of the Debtors' Chapter 7 estate.52

CONCLUSION

PAGE_22 The Debtors allege that P & L was abandoned from the Bankruptcy estate because no party objected to the Debtors' claimed exemption in P & L. However, since the Debtors dollar amount exemption was zero, the asset itself and any amount above the value of zero the Debtors claimed as exempt are property of the Debtors' bankruptcy estate pursuant to the Supreme Court case of Schwab v. Reilly, ––– U.S. ––––, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010).

When faced with a determination of whether a debtor has converted from a Chapter 13 case to a Chapter 7 case in bad faith pursuant to sec. 348(f)(2), "a court should look at the specific facts of the case to determine if there is fraud, deception, dishonesty, lack of disclosure of financial acts or an abuse of the provisions or spirit of the law." In re Siegfried, 219 B.R. at 587.

In the case at bar, the cumulative effect of the Debtors' (1) failure to disclose the monthly payments of $1722.94 they received from the sale of MMD; (2) failure to disclose the three vehicles bought by the Debtors; (3) failure to disclose the account at Keesler Federal Credit Union; (4) failure to disclose the $20,000 the Debtors received for the sale of the Express Personnel franchise; (5) failure to deal with the Court and the Chapter 7 case Trustees in a fully candid and truthful manner; and (6) use of estate assets or proceeds and/or profits from estate assets in order to create a new entity, namely Infinity LLC, have led the Court to find that the Debtors' actions show that "there has been an unfair manipulation of the bankruptcy system to the substantial detriment or disadvantage of creditors,"53 and therefore, the Debtors converted from a Chapter 13 case to a Chapter 7 case in bad faith.

Since the Court has found that the Debtors converted in bad faith, the Debtors' Chapter 7 estate includes all property held by the Debtors at the date of the conversion. The Debtors used proceeds, products or profits from and of P & L in order to create and then run another entity, Infinity LLC. Consequently, this "subsequent property interest is part of the bankruptcy estate." In re McLain, 516 F.3d at 312.

In his March 21, 2005, Order, Judge Wingate clearly held that the causes of action which are the subject of the District Court Action accrued prior to the time the Myers converted their Chapter 13 case to a Chapter 7 case. Judge Wingate further held that if the conversion is found to have been in bad faith, the causes of action would be property of the bankruptcy estate. This Court has found that the Debtors' conversion was in bad faith, and, consequently, the causes of action in the District Court Action are property of the Chapter 7 estate.

A separate judgment consistent with this opinion will be entered in accordance with Rules 7054 and 9021 of the Federal Rules of Bankruptcy Procedure.

United States Bankruptcy Court,

S.D. Mississippi.

Bankruptcy No. 00–53489EE.Adversary No. 10–05014EE.

Feb. 14, 2013.

Footnotes

 [Footnotes 1-45 are omitted for brevity]

The issue before the Fifth Circuit in McLain was "whether the use of undisclosed, pre-petition bankruptcy funds to make the first premium payment on a term life insurance policy renders all or some of the policy proceeds part of the bankruptcy estate." In re McLain, 516 F.3d at 305.

11 U.S.C. sec. 541(a)(6).

Transcript Vol. 2 at 33.

LMFE Exhibit # 70–2–2; Transcript Vol. 2 at 32.

Transcript Vol. 2 at 37–40.

LMFE Exhibit # 70–12–A.

Transcript Vol. 2 at 44.

In his deposition, Rick Myers stated that he was the only member of Infinity LLC. LMFE Exhibit 56 at 142 (actual transcript page 559). Since there are no other members of Infinity LLC, there is no question that the Trustee obtained all of Rick Myers' rights in Infinity LLC. In re Albright, 291 B.R. 538, 540 (Bankr.D.Colo.2003) ("Because there are no other members in the LLC, ... the Debtor's bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights....")

Id. at 585