Debtors Who Transferred Rental Property to their Daughter 4 Years Pre-petition Passed Marrama’s Good-Faith Test and Could Convert to Chapter 13

Debtors Who Transferred Rental Property to their Daughter 4 Years Pre-petition Passed Marrama’s Good-Faith Test and Could Convert to Chapter 13

[nnmember]The issue before the court is whether debtors, who transferred a rental property to their daughter four and a half years pre-petition, are acting in good faith by seeking conversion from a chapter 7 bankruptcy to a chapter 13.

On April 26, 2017, the chapter 7 trustee, (“Trustee“) conducted the first meeting of creditors where potential assets were discovered, which were noted on the Court’s docket. Min. Entry 4/26/2017. On June 8, 2017, Trustee filed a Notice of Assets, Notice to Creditors and Other Parties in Interest of the Need to File Claims setting a deadline of September 11, 2017 to file claims. The total amount of allowed general unsecured claims is $18,363.55.

On June 13, 2017, Trustee filed an adversary complaint against Debtors’ daughter, Nereida, seeking to avoid the transfer of the Property. The Trustee alleged that Debtors conveyed the Property to Nereida on September 27, 2012, but that Debtors retained control or possession of the Property, pay the ad valorem taxes and maintenance, and receive all the rental income from the Property. Id. at 2. Further, Trustee alleged that Debtors concealed assets by failing to adequately disclose their interest in the Property on the SOFA, Schedule I, and Means Test.

On July 4, 2017, Debtors filed their Motion to Convert to Chapter 13(the “Motion“) in response to Trustee’s adversary complaint asserting that “[r]ather than trying to defend against Trustee’s complaint, Debtors desire to convert their case to Chapter 13 and pay their creditors in full or pay the value of the property in question.”  Debtors suggest that because the Property was transferred to Nereida more than four years pre-petition they were not required to disclose the Property. Id. at 2. Further, Debtors note that they fully disclosed the rental income received from the Property and listed the Property on the SOFA to show the source of the rental income. Id.

On July 14, 2017, Trustee filed a Response to the Motion (“Response“), which asserts that Debtors have not properly disclosed their interest in the Property. ECF No. 27. Trustee notes that Debtors do not list expenses for the Property on Schedule J or the Means Test. Id. at 2. Further, Trustee asserts that Debtors did not list the rental income on their SOFA, but that the rental income and expenses are listed on Debtors’ tax returns. Id. Trustee contends that Debtors may not convert to a chapter 13 because they do not qualify as chapter 13 debtors because they will not be able to propose a feasible chapter 13 plan. Id. at 3-4. Finally, Trustee asserts that Debtors have not acted in good faith and that the Court should deny the Motion. Id. at 4.

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