Th eHonorable James G. Mixon, Chief Judge, United States Bankruptcy Court for th e 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 *

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- John P. Ladika, * * Debtor - Appellant, * Appeal from th e United States * Bankruptcy Court f or the

v. * EasternDistrict o f Arkansas * Internal Revenue Service, * * Creditor - Appellee *

_______________________ Submitted: January 13, 1998 Filed: January 30, 1998

________________________ Be fore KOGER, Chief Judge, KRESSEL, and SCHERMER, Bankruptc y Judges. KOGER, Chief Judge. The debtor, John F. Ladika, appeals from a decision by t he bankruptcy court to convert the debtors’ Chapter 13 case to a 1 Ch apter 7 case after a hearing on the motion to convert filed2

by the Internal Revenue Service. For the following reasons , we affirm.Although at the conclus ion 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 onl y 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 , Gerald ine A. Ladika, filed a voluntary petition for relie f under Ch apter 13 of the Bankruptcy Code. The filing wa s precipitatedby the Internal Revenue Service’s (the “IRS”) lev y upon an investment account owned by the debtors with a balance of approximately $170,000.00 seeking the payment of unpai d income taxes, penalties and interest for tax years 1980 throug h 1989. In their schedules, the Ladikas listed the IRS as a creditor and the IRS filed a proof of claim asserting a secure d claim in the amount of $346,143.00; an unsecured priority clai m inthe 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 th e de btors’ Chapter 13 case or in the alternative to convert the
case t o a Chapter 7. On September 4, 1997, the bankruptc y court held a hearing on the IRS’s motion to dismiss or convert inaddition to hearing a motion for relief from the automatic stayfiled by the IRS; a motion filed by the debtors fo r de termination of tax liability; the debtors’ objection to the IRS’s proof of claim; and an adversary proceeding for th e turnover of the funds levied upon by the IRS. At th e co nclusion of the hearing the bankruptcy court ruled from the be nchon all of the foregoing matters. John Ladika appeal s onlyf rom the bankruptcy court’s decision to convert th e Chapter 13 case to Chapter 7, which is memorialized in an orde r filedon September 10, 1997, and which incorporates the reason s statedin open court. Geraldine Ladika did not appeal from any of the bankruptcy court’s rulings. 2appeal 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 th e brief and by John Ladika in his brief and reply brief. The evidence at the hear ing revealed that the debtors did t pay federal income taxes for tax years 1980 through 1989. On tember 13, 1990, the debtors voluntarily filed fo r

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 deb t s fo tax liabilities as “fictitious and fraudulent concocted b ig norant s to make themselves look as though The debt 7 bankruptcy on January 22, 1991.

J anuary 1992, John Ladika received a settlement in personal injury action in the amount of $700,000.00. Afte pa ying 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 purchase d home in Cleb urne County, Arkansas for $178,000.00 cash. Pr ior to purchasing the home, the debtors incorporated Ladika elaware. Ladika Industries, Inc. s a non-operating corporation that does absolutely n o siness in the state of Arkansas or elsewhere. Although the debtor purchased the home with their personal funds, the y ika Industries, Inc. At the hearing, n th5

were to die, it would not be tied up in probate for a coupl e of years.” The debtors have lived in the home continuousl y since they bought it, and claim this property as thei r homestea din their 1997 bankruptcy schedules. On March 12 , 1992, the debtors bought vacation property in Van Buren County , Arkan sas for $900.00 cash. The debtors also titled thi s propertyin the name of Ladika Industries, Inc. The debtor s invested the rest of the net proceeds of the settlement in an inv estment account with Pershing, a division of Donaldson , Lufkin& Jenrette Securities Corporation. After the IRS levie d
on this investment account on February 12, 1997, it receive d
a chec k for the outstanding balance in the account in th e amoun t of $170,957.81. The IRS was unable to levy on th e invest ment account prior to February 12, 1997, because th e mun icipal bonds in which the debtors invested did not matur e un til that time. On April 16, 1992, the debtors deeded their former residence in Orange County, California to one of6

their sons and his wife. The deed states that “this is a bonafide gift and the grantor rece ived nothing in return.” In their 1990 bankruptcy schedules the debtors showed equity o f $20,000.00 in this property. At the hearing, John Ladik a test ifiedthat the debtors transferred the Orange Count y pr operty for “a handshake and a Hundred Dollars” to their son who also took over the $97,000.00 mortgage. John Ladika state d that at the time of the transfer, the debtors possibly ha d $50,000.00 equity in the Orange County property.

As mentioned above, the debtors’ history with the IR S beganwith their refusal to pay federal income taxes for ta x year 198 0. For tax years 1980 through 1989, the debtor s refused to pay federal income taxe s under the belief that John La dika “is and was an american [sic] worker on the america n [sic] market, not living abroad, and exempt from a direc t unapp ortionedtax.” For tax years 1980 through 1986 th e debtors did not file federal income tax returns and for eac h of those years the IRS prepared su bstitute returns in order to calculat e the debtors’ income tax liability. For tax year s 1987 through 1989 the debtors did file income tax returns upon which the IRS based the debtors’ i ncome tax liability for each of t hose years. The United States Tax Court mad e determ inations of federal income tax liability for tax year s 1980, 1981, 1983, 1984, 1986 and 1 989 (the “tax court years”). The United States Tax Court decisions for those years wer e admittedas evidence at the hearing. The tax years 1982, 1985 , 1987 and 1988 were non-tax court years. Certified copies o f IRS tr anscripts of the Form 1040 United States Individua l Income Tax Accounts of John P. and Geraldine Ladika that showe d the inc ome tax due for each of the non-tax court years plu s penalties and interest, in additio n to transcripts for the tax court years, were admitted as evidence at the hearing

. Certifie dcopies of the federal tax liens filed in Cleburn e County , Arkansas and Van Buren County, Arkansas were als o7

adm ittedas evidence in support of the IRS’s secured portio n of its claim. The IRS transcripts of accounts do reflect that starti ng in December 1990, the debtors began making smal l pa yments to the IRS on the unpaid income taxes. However, the de btors failed to make even a noticeable dent in the unpai d income taxes, penalties and interest due the IRS. In 1994 th e debtors did tender federal income tax returns to the IRS fo r tax year s 1980 through 1986, but the IRS did not process th e re turns contending that the tax liability for tax years 1980, 1981, 1983, 1984 and 1986 had been previously determined by th e 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 th eir Chapter 13 plan, the debtors proposed to pa y $2,256 .00 per month for sixty months and $3,903.00 semi

an nually for five years to the Chapter 13 Trustee to fund the plan. The bankruptcy court confirmed the debtors’ plan on Jun e 4, 1997. There were no objections to confirmation. The Chapte r 13 plan provided that the IRS would be paid $2,106.00 per mont h
onits secured claim, which the debtors showed as $99,102.00. The o nly other secured creditor listed was Sears, with a secured debt of $1,000.00. The de btors also proposed to apply the $3,903.00 semi-annual payments to the secured claims of th e IR S and Sears, and to pay the nonpriority unsecured creditors
a 100% distribution. In addition to the IRS, the debtor s listed as unsecured nonpriority creditors the City of Orang e Financ e, Discover Card, Master Card, and the State o f California Franchise Tax Board. The IRS is by far the debtors ’ larges t creditor. The debtors showed no unsecured priorit y creditor s in their schedules, and made no provision for th e payment of unsecured priority clai ms in their Chapter 13 plan.
At the September 4, 199 7, hearing, the IRS asserted that the debtors’ Chapter 13 case should be either dismissed o r converted to a Chapter 7 case for several reasons. First, the IRS cont ended that the debtors could not propose a feasibl e pl an because the plan would require about a $3,500.00 payment per month for 60 months just to pa y off the secured portion of the IRS’s claim, which the debtors were unable to make

. Second, the IRS argued that the un secured portion of its claim exceeded the unsecured debt limits for Chapter 13 eli gibility. 3 Fin ally, the IRS argued that the pre-petition actions of th e debtors demonstrated that they acted in bad faith by filing th e9

Chapter 13 bankruptcy petition, pa rticularly the 1992 transfer of the Orange County, California p roperty to one of their sons and his wife and the 1992 purchase of the Cleburne County , Arkansas and Van Buren County, Ark ansas properties in the name of Ladika Industries, Inc, which the IRS asserted was just an at tempt by the debtors to protect their assets from the IR S when they knew they were substantially indebted to the IRS.10

At the conclusion of the hearing the bankruptcy cour t co nverted 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 pro testor, filed frivolous returns and made frivolou s contentions, a nd that these penalties are, no doubt, totally warranted.
That being The Court’s finding, that the clai m [of the IRS] is correct, means that the debtor is not elig ible for Chapter Thirteen relief. The questio n then becomes whether or not to dismiss the cas e or to co nvert it to Chapter Seven. I don’t think th e debtor is proceeding in good faith.
Th is idea that you can title your persona l re sidence in a non-existent, non-functionin g co rporationfor purposes of avoiding probate i s absurd. It do esn’t accomplish that at all. And the on lypurpose of titling property in a defunct, non

op erating corporation is to try to hinder and dela y an davoid the efforts of the Government to collec t their taxes. The Government, unlike creditors i n general, has the ability under Federal Law to levy on an dsell a debtor’s homestead, whereas a regula r creditor could n’t do that, a non-government creditor couldn’t do that in this state.
So The Court finds that the personal residenc e is not corporate property, that this is all a sham , that the residence belongs to the debtor, as d oes the lot at Fairfield Bay [in Van Buren County]. That’ s the debtors’ property, not the corporation’s

. Th erefore, the debtor appears here in this Court o f 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 i t to Chapter Se venis the debtor has played, I call it, a gam e with t he Internal Revenue Service for all thes e11

ars, avoiding the payment of taxes, and have n reason to think that the debtor would not cont inue to gage in this type of cleverness. And, so, if were to dismiss the case, that would leave the debtor ththe option of refiling at strategic points i ti me, e Government to pr operty , 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 rulin g nverting the Chapter 13 case to a Chapter 7. In it appell ate d after converted that it incorrectly calculated th e 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 decisi on e shows that the debtors’ filed their Chapter 13 bankruptc y

JURISDICTION John Ladika timely filed his notice of appeal on Septemb 16, 1 See Fed. R. Bankr. P. 8002(a). The bankruptc
cour t’s a Chapt 7 case is a final order over which this Court ha s

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 th e re this Court is whether the ba13

Chapter 13 petition in bad faith t hus warranting conversion to Chapter 7.14 STANDARD OF REVIEW ON APPEAL

Th e bankruptcy court’s determination that the debtor s acted in bad faith by filing their Chapter 13 bankruptc y petiti onis a factual finding reviewed under the clearl y err oneous standard. See Noreen v. Slattengren , 974 F.2d 75 , 77 (8th Cir. 1992); Handeen v. LeMaire (In re LeMaire) , 89 8 F.2d 1 346, 1350 (8th Cir. 1990); Nielsen , 211 B.R. at 21. A bankru ptcycourt’s finding of fact is clearly erroneous whe n the re viewing court is left with a “‘definite and fir m con victionthat 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 th at the bankruptcy court’s determination was clearl y er roneous. 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 pertine nt part:
[O]n request of a party in interest or the Unite d St ates trustee and after notice and a hearing, th e court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case unde r this chapter, whichever is in the bes t interests of c reditors and the estate, for cause . .

. . 11 U.S.C. § 1307(c). In In re Molitor , 76 F.3d 218, 220-2 1 (8th Cir. 1996), the Eighth Circuit Court of Appeals opined:15

[A] Chapter 13 petition filed in bad faith may b e

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 o f circumstances, specifically: (1) whether th debtor has sta ted his debts and expenses accurately; ntation to mislead16

the ba nkruptcy court; or (3) whether he has unfairl y manipulatedthe bankruptcy code. In re LeMaire , 898 F.2d 1346 , 1349 (8th Cir. 1990).

See al so LeMaire , 898 F.2d at 1353 (citations omitted ) (“‘[G]ood faith should be evaluate d on a case-by-case basis in li ght of the structure and general purpose of Chapter 13.’” .

. . “T here are no ‘precise formulae or measurements to b e deployed in a mechanical good fait h 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 motivat ion and sincerity in seeking chapter 13 relief.”); In re Bayer , 210 B.R. 794, 795-96 (B.A.P

. 8th C ir. 1997) (discussing the good faith inquiry in th e context of appellate review of the bankruptcy court’s dismissa l of the debtor’s Chapter 13 case).

In LeMaire the Eighth Circuit opined:
[W] henever a Chapter 13 petition appears to b e tainted with a questionable purpose, it is incumbent upon the bankruptcy courts to examine and questio n the debtor’s motives. If the court discover s unmistakable manifestations of bad faith, as we d o here, confirmation must be denied. Unmistakable manifestations of bad faith nee d no t be based upon a finding of actual fraud , re quiring proof of malice, scienter or an intent t o defrau d. We simply require that the bankruptc y co urts preserve the integrity of the bankruptc y process by refusing to condone its abuse.
LeMaire , 898 F.2d at 1352 n.8 (alteration in original) (quotin g 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, th e 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 a18

re ceived the net amount of approximately $350,000.00 from the sett lement of a personal injury action. Instead of payin g their debt to the IRS at that time, in January 1992 the debtor s mo ved from California to Arkansas where they used $178,000.00 of the settlement proceeds to purchase homestead property i n Cleburne County, Arkansas that they titled in the name o f Ladika Industries, Inc., which is a non-operating corporation. The de btors also purchased vacation property in Van Bure n County, Arkansas for $900.00, which they likewise titled in th e name of Ladika Industries, Inc. Also in early 1992, th e debtor s transferred the almost $50,000.00 in equity in thei r fo rmer homestead in Orange County, California to one of their
so ns and his wife for no consideration. The debtors invested
a larg e portion of John Ladika’s settlement proceeds i n munici pal bonds, which did not mature until February 1997

. Since at least 1992, the debtors have engaged in a scheme t o pl ace their assets beyond the reach of the IRS and the filing of the Chapter 13 bankruptcy petit ion was just another step in their plot. The debtors’ actions “constitute a clear abus e of the legal process set forth in the Bankruptcy Act to aid an d assist honest debtors,” see Molitor , 76 F.3d at 221, and th e bankruptcy court correctly put a s top to their sham activities designedto thwart the collection of the income taxes by th e IRS.

CONCLUSION

For t he reasons stated, we affirm the decision of th e bankruptcy court.
A true copy.

Attest:19 CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE