The Honorable James G. Mixon, Chief Judge, United States Bankruptcy Court for the

1

Eastern and Western Districts of Arkansas.

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 court to convert the debtors’ Chapter 13 case to a 1

Chapter 7 case after a hearing on the motion to convert filed
2

by the Internal Revenue Service. For the following reasons,

we affirm.
Although at the conclusion of the hearing held on September 4, 1997, the bankruptcy court 2

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

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
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.

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
5

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
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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
7

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.
Section 109(e) of the Bankruptcy Code states in relevant part that “Only an individual with 3

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

In their Chapter 13 plan, the debtors proposed to pay

$2,256.00 per month for sixty months and $3,903.00 semiannually 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
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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.
10

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, nonoperating 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
11

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.
 IRS does not disclose to this Court the correct amount of the unsecured portion of its 4

, 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

 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
13

Chapter 13 petition in bad faith thus warranting conversion to

Chapter 7.
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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:
15

[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
16

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)).
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
18

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:
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CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE