Stacey L Friedrich

UNITED STATES BANKRUPTCY COURT

WESTERN DISTRICT OF WISCONSIN

______________________________________________________________________________

In re:

Case No. 19-13843-13

STACEY L. FRIEDRICH,

Debtor.

______________________________________________________________________________

MEMORANDUM DECISION

The question presented is whether Stacey L. Friedrich (“Debtor”) is

eligible for relief under a Chapter 13 bankruptcy. He filed a Chapter 13 petition

on November 15, 2019. Less than two weeks later, State Bank of Cross Plains

(the “Bank”) moved to dismiss the bankruptcy case (the “Motion”).

The Bank seeks dismissal pursuant to 11 U.S.C. § 1307(c) for lack of

good faith in filing the petition, and because the Debtor’s noncontingent,

liquidated unsecured claims exceed the statutory amount of $419,275 set forth

in 11 U.S.C. § 109(e). Debtor opposes the Motion.

BACKGROUND

The facts are largely undisputed. Debtor is the sole member and owner of

Total Body Laser Center, LLC (the “LLC”), a Wisconsin limited liability

company. The LLC is indebted to the Bank by virtue of three commercial loans

(collectively, the “Notes”) signed in 2018. The Notes are secured by all the LLC’s

assets. The Debtor personally guaranteed the LLC’s repayment through a

Commercial Guaranty. He did not pledge any collateral to secure the Notes. He

is not a maker on the Notes. As of October 15, 2019, the total balance due on

the Notes was $620,121.97.

The LLC failed to make timely payments and defaulted under the Notes.

In October 2019, the Bank filed a lawsuit against the LLC and the Debtor in

Dane County Circuit Court seeking, among other things, the appointment of a

receiver under Chapter 128 of the Wisconsin Statutes.1 A receivership hearing

was scheduled for November 15, 2019.

On the day of the hearing, Debtor dissolved the LLC and executed an

Assignment of All Assets and Debts of the LLC to the Members Pursuant to the

Corporate Dissolution (the “Assignment”). The Debtor states the reason for the

dissolution and transfer was “to stay any further action by the bank’s attempts

to replevin the business assets.” The receivership hearing went on as scheduled

and the Dane County Circuit Court entered an Order appointing a receiver.

Debtor also filed his personal Chapter 13 petition on the same day.

The Bank asserts it did not consent to the transfer of its collateral from

the LLC to the Debtor. The Bank argues the LLC’s assets are not part of the

Debtor’s bankruptcy estate as the Assignment is void and ineffective under

Wisconsin law. The Bank also argues that even if the Assignment was

successful, the LLC’s assets do not qualify as part of the Debtor’s secured debt

in his Chapter 13 case. In other words, the Assignment did not change the

Debtor’s obligation to the Bank—flowing from the personal guaranty on the

Notes—from an unsecured to a secured debt. As a result, the Bank believes its

unsecured claim against the Debtor stands at $620,121.97. Debtor counters

that the Bank’s $620,121.97 claim is secured against the Debtor by virtue of

1 Case No. 19-CV-2957.

the transfer of all the LLC’s assets and liabilities to himself personally. Debtor

believes the Bank has an in rem claim that can be administered within the

Debtor’s Chapter 13 Plan.

This decision does not address the Bank’s argument for dismissal under

11 U.S.C. § 1307(c) for lack of good faith in filing the petition. The parties were

ordered to file briefs on the eligibility argument raised under section 109(e).

While the described chain of events relating to the LLC’s dissolution and the

transfer of its assets appears troublesome, the Court limits its findings to the

Debtor’s eligibility to continue with his Chapter 13 bankruptcy.

DISCUSSION

A. 11 U.S.C. § 109(e) Is Not Jurisdictional

The courts are split on whether the question of eligibility under section

109(e) is jurisdictional or merely an eligibility requirement for those seeking

Chapter 13 relief. “The vast majority of courts . . . have found that the eligibility

requirements of section 109(e) are not jurisdictional.” In re Olivares, 2017

Bankr. LEXIS 1846, at *7, 2017 WL 3638198 (Bankr. S.D. Fla., Feb. 8, 2017).

See also In re Jones, 134 B.R. 274, 280 (N.D. Ill. 1991) (“An examination of the

Code’s language and structure reveals that Congress had no intention of

establishing section 109(e) as a jurisdictional statute.”).

In In re Fishel, this Court examined the split and sided with the majority

view that eligibility under 11 U.S.C. § 109(e) is not jurisdictional. 583 B.R. 474,

476 (Bankr. W.D. Wis. 2018). The Court agreed with a Sixth Circuit Court of

Appeals decision finding that “the eligibility requirements of § 109(e) create a

gateway into the bankruptcy process, not an ongoing limitation on the

jurisdiction of the bankruptcy courts.” Glance v. Carroll (In re Glance), 487 F.3d

317, 321 (6th Cir. 2007). This simply means that the Court has jurisdiction to

hear and consider matters arising in this case. It is not, however, the end of the

inquiry about eligibility as the Debtor suggests.

B. Dismissal Under 11 U.S.C. § 1307(c)

The overarching goal of the Bankruptcy Code is to grant honest but

unfortunate debtors a fresh start. Chapter 13 is one tool that enables such

debtors to obtain relief under the Code. That said, Chapter 13 bankruptcies are

reserved for relatively small debtors who wish to retain their property while

making scheduled payments to creditors. The Code provides the following

eligibility criteria:

Only an individual with regular income that owes, on the date of the

filing of the petition, noncontingent, liquidated, unsecured debts of

less than $419,275 . . . may be a debtor under chapter 13 of this

title.

11 U.S.C. § 109(e).

Section 1307(c) provides for the conversion or dismissal of a Chapter 13

case “for cause.” The Code does not define “cause,” but 11 U.S.C. § 1307(c)(1)-

(11) provides a list of circumstances that constitute “cause” for dismissal or

conversion. The Seventh Circuit has ruled that the enumerated list in section

1307(c) is non-exhaustive. See In re Love, 957 F.2d 1350 (7th Cir. 1992); In re

Smith, 848 F.2d 813, 816 n.3 (7th Cir. 1988). Bankruptcy courts in this Circuit

have found a debtor’s ineligibility under section 109(e) to constitute cause for

dismissal. See, e.g., In re Bailey-Pfeiffer, 2018 Bankr. LEXIS 2076, 2018 WL

1896307 (Bankr. W.D. Wis. Mar. 23, 2018); In re McGovern, 122 B.R. 712, 717

(Bankr. N.D. Ind. 1990); In re Dobkin, 12 B.R. 934 (Bankr. N.D. Ill. 1981).

The Seventh Circuit has yet to explicitly acknowledge that ineligibility

under section 109(e) constitutes “cause” under section 1307. But by affirming

lower courts’ dismissals of cases based on ineligibility under section 109(e), the

Court of Appeals has implicitly confirmed that ineligibility is indeed a ground

for dismissal. See, e.g., In re Sidebottom, 430 F.3d 893 (7th Cir. 2005); In re

Knight, 55 F.3d 231 (7th Cir. 1995); In re Day, 747 F.2d 405 (7th Cir. 1984).

Section 1307(c) provides that “the court may convert . . . 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) (emphasis added). “The decision to

convert or to dismiss a Chapter 13 case is a matter of discretion for the

bankruptcy court.” Fishel, 583 B.R. at 478 (citing In re Handy, 557 B.R. 625,

628 (Bankr. N.D. Ill. 2016)).

1. The Debtor’s Bankruptcy Estate

The Bank asserts the Assignment is ineffective under state law and the

LLC’s assets never became part of the Debtor’s bankruptcy estate. Section

541(a) of the Code provides that the filing of a petition creates a bankruptcy

estate, which includes “all legal or equitable interests of the debtor in property

as of the commencement of the case.” 11 U.S.C. § 541(a)(1). “Although the

bankruptcy estate is a creation of federal law, its res is a creature of state law:

whether the debtor has an interest in property . . . and the nature of [such an]

interest are questions generally determined by state law.” First Nat’l Bank v.

Gruber (In re Gruber), 2014 Bankr. LEXIS 1686, at *7, 2014 WL 1584204

(Bankr. E.D. Wis. Apr. 16, 2014) (citation omitted; internal quotation marks

omitted). The bankruptcy estate “only encompasses the interests in property

that a debtor holds as a matter of state law” on the petition date. Id. As a

result, this Court must look to Wisconsin law under Wis. Stat. Ch. 183 to

determine whether the LLC’s assets became part of the Debtor’s bankruptcy

estate.

In Wisconsin, “property of a limited liability company . . . may be

transferred by an instrument of transfer executed by any member in the name

of the limited liability company.” Wis. Stat. § 183.0702(1) (2019-2020).2 But the

authority to transfer that property is not unlimited. Wis. Stat. § 183.0607

provides, in pertinent part:

A limited liability company may not declare or make a distribution

to any of its members if, after giving effect to the distribution, . . . (a)

The limited liability company would be unable to pay its debts as

they become due in the usual course of business.

Wis. Stat. § 183.0607(1)(a) (emphasis added). Moreover, Wis. Stat. § 183.0905

“establishes the priority for distributing the assets of an LLC as it winds up its

business. Assets . . . must first be distributed to the LLC’s creditors, then to

the LLC’s members, and lastly to former members of the LLC.” Protective Life

Ins. Co. v. B&K Enterprizes LLC, 2010 U.S. Dist. LEXIS 31650, at *12, 2010 WL

1368660 (E.D. Wis. Mar. 31, 2010). Wis. Stat. § 183.0905. Lastly, a limited

2 All references to the Wisconsin Statutes are to the 2019-2020 version unless

otherwise noted.

liability company’s dissolution does not automatically “[t]ransfer title to the

[LLC’s] property.” Wis. Stat. § 183.0903(3)(a).

Here, it is clear the LLC was unable to pay its debts as they came due.

The attempted transfer of all the LLC’s assets further impaired its ability to pay

its debts to the Bank. The LLC’s attempted distribution of its assets occurred in

violation of Wis. Stat. § 183.0607(1)(a). It also violated the established priority

for distribution of assets under Wis. Stat. § 183.0905. During its wind-up

stage, the LLC’s assets must have first been distributed to its creditors, such as

the Bank, and not to its sole member, the Debtor. Further, the sole purpose of

the distribution was to hinder and delay a secured creditor. And thus, the

Debtor should not, by definition, have received distribution of assets from the

LLC.

Because the Debtor should not have received the LLC’s assets in

violation of Wis. Stat. Ch. 183, and the LLC’s dissolution did not automatically

transfer title of its property, the Court could conclude that the Debtor did not

own the LLC’s assets at the time of his bankruptcy petition. The Court does not

need to determine that all attempted asset distributions made in violation of

Wis. Stat. Ch. 183 are void under Wisconsin law. The Court is viewing this

issue within the narrow context of what assets belong to this Debtor’s

bankruptcy estate and limits its findings to the unusual facts and

circumstances of this case. The Court is deeply troubled by the sequence of

events prior to the Debtor’s bankruptcy petition. The Debtor sought to keep

assets belonging to the LLC to avoid the statutory distribution scheme and to

remove assets from the reach of the LLC’s secured creditor. While there may be

circumstances in which this is appropriate, the facts here belie the Debtor’s

motives. The dissolution of the LLC and the attempted transfer of the assets

occurring so close in time to the state court hearing, the admission that the

transfer was done to impede action by the Bank to replevin LLC assets, and the

filing of the bankruptcy petition suggest the sole reason for the dissolution and

transfer was to hinder or delay the Bank from realizing on its collateral and to

circumvent the procedures and the protections afforded to creditors in Chapter

11 proceedings.

The Debtor argues the attempted transfer is not void. But whether the

attempted transfer is void or not does not change the Court’s analysis and

findings regarding the Debtor’s eligibility to remain in a Chapter 13

bankruptcy.

2. The Bank’s Secured Creditor Status

The Bank argues that even if the Assignment was valid, the transferred

LLC assets do not qualify as part of a secured debt in the current Chapter 13

case because the Debtor now owns assets subject to the Bank’s liens. Mere title

to the asset does not create secured debt. Put differently, the Debtor’s

acquisition of assets did not convert the Bank’s position and status as an

unsecured creditor in his case to that of a secured creditor.

Wis. Stat. Ch. 409, adopting Article 9 of the Uniform Commercial Code

(UCC), governs the procedural steps a party must take to enjoy the benefits

afforded to secured creditors and to obtain superior interests to other creditors.

Wis. Stat. § 409.101; Wis. Stat. § 409.109(1)(a); Nat’l Operating, L.P. v. Mut. Life

Ins. Co. of N.Y., 2001 WI 87, ¶31, 244 Wis. 2d 839, 630 N.W.2d 116

(“Wisconsin has adopted each section of the U.C.C[.] This includes all of Article

9, which is embodied in Chapter 409 of the Wisconsin Statutes.”).

For the purpose of Chapter 409, a debtor is a person having an interest

in the collateral. Wis. Stat. § 409.102(1)(gs)1. A secured party is a person “in

whose favor a security interest is created or provided for under a security

agreement, whether or not any obligation to be secured is outstanding.” Wis.

Stat. § 409.102(1)(rs)1. A security agreement “is effective according to its terms

between the parties, against purchasers of the collateral, and against

creditors.” Wis. Stat. § 409.201(1).

The Bank secured repayment of the Notes through multiple Commercial

Security Agreements, in which the LLC granted the Bank a security interest in

all its assets. The Debtor did not sign a security agreement granting a security

interest in any assets he owned. At the time a security interest was granted to

the Bank, he did not have any interest in the collateral. It belonged to the LLC.

Thus, the Bank was not a secured creditor of the Debtor. The security interest

between the LLC and the Bank satisfied the requirements for attachment.

Attachment . . . generally depends on three things: (1) the debtor

must sign a security agreement identifying the collateral; (2) the

creditor must give the debtor value in exchange for the collateral;

and (3) the debtor must have rights in the collateral.

Attorney’s Title Guar. Fund, Inc. v. Town Bank, 2014 WI 63, ¶28, 355 Wis. 2d

229, 850 N.W.2d 28. See also Nat’l Exch. Bank v. Mann, 81 Wis. 2d 352, 358,

260 N.W.2d 716 (1978) (“The requirements that the debtor sign a security

agreement describing the collateral, that the creditor give value[,] and that the

debtor have rights in the collateral must all exist to give rise to an enforceable

security agreement.”).

A party obtains superior interest to other creditors by perfecting its

security interest. Wis. Stat. § 409.308(1). The statutory perfection requirements

depend on the type of collateral, but generally, “a financing statement must be

filed to perfect all security interests[.]” Wis. Stat. § 409.310(1). Perfection

requires attachment of the security interest. “A security interest attaches to

collateral when it becomes enforceable against the debtor with respect to the

collateral[.]” Wis. Stat. § 409.203(1). The Bank took the steps necessary to

perfect its security interest in the collateral pledged by the LLC.3 Thus, the

Bank holds a perfected security interest that is properly attached to the LLC’s

assets—making the Bank a secured creditor of the LLC protected by the

provisions of Wis. Stat. § 409.201(1) described above.

The LLC’s attempted transfer of the Bank’s collateral to the Debtor does

not mean the Debtor has pledged assets to the Bank. The Assignment did not

change the Debtor’s relationship with the Bank. Assuming the Assignment was

valid, the Debtor—as the new owner of the LLC’s assets—now owns assets

subject to the Bank’s liens.

As a general rule, the holder of a perfected security interest has an

interest in the secured property which is superior to the interests of

3 ECF No. 15 Exhibit B.

the debtor, unsecured creditors of the debtor and subsequent

purchasers of the secured property.

Daniel v. Bank of Hayward, 144 Wis. 2d 931, 936, 425 N.W.2d 416 (1988)

(emphasis added).

Even if the attempted transfer is not void, the Debtor’s liability to the

Bank remains unchanged. The wrongful transfer, made in violation of Wis.

Stat. Ch. 183, would give the Bank additional claims against the LLC and the

Debtor. As the sole member of the LLC, the Debtor could be personally liable to

the LLC’s creditors for the improper winding up of the company. See New

Horizons Supply Coop. v. Haack, 224 Wis. 2d 644, 590 N.W.2d 282, 1999 Wisc.

App. LEXIS 108 (Wis. Ct. App. 1999) (finding that the defendant failed to take

appropriate steps under Wis. Stat. Ch. 183 to shield herself from personal

liability for an LLC’s debts).

However, the imposition of additional claims would not change the

Debtor’s original obligation to the Bank. Put differently, the additional claims

would be independent of, and in addition to, the Debtor’s existing obligation to

the Bank under his personal guaranty.4 If the transfer was not void, the Debtor

merely owns assets that are the subject of a prior perfected and enforceable

security interest. Any independent claims that might exist as a result of an

improper transfer are not subject to a security interest because there has been

no security agreement between a debtor and a secured party to create such a

4 The Court’s record is devoid of any evidence that additional claims have been levied

against the Debtor for the LLC’s improper distribution of assets during its winding up

stage.

security interest. Neither does the transfer create a security agreement between

the Debtor and the Bank.

As the guarantor of the Notes, the Debtor’s liability is still an unsecured

obligation to the Bank in the amount of $620,121.97.5 Debtor’s noncontingent,

liquidated unsecured claims exceed the statutory amount of $419,275 set forth

in 11 U.S.C. § 109(e). Debtor is prohibited from obtaining relief under a

Chapter 13 bankruptcy case.

3. The Fishel Decision Does Not Support The Debtor’s Position.

Debtor asserts the Bank has not been substantially harmed by the filing

of his petition and will receive the value of its collateral through a Chapter 13

Plan. Debtor’s brief cites this Court’s decision in In re Fishel, 583 B.R. 474

(Bankr. W.D. Wis. 2018), for the proposition that the Court should overlook the

eligibility requirements of section 109(e) and allow him to continue with his

Chapter 13 bankruptcy. Debtor believes the current Chapter 13 case is his best

shot at a fresh start. The Court understands the Debtor’s misfortunes, but his

circumstances are clearly distinguishable from the debtor in Fishel.

In Fishel, this Court denied a trustee’s motion to dismiss a Chapter 13

case on the grounds the debtor’s liquidated unsecured claims exceeded section

5 That the new owner of the LLC’s assets happens to be the guarantor of its Notes does

not change the secured and unsecured relationships established between the three

parties through the Notes and the Debtor’s personal guaranty. In Wisconsin, the law

“treats the liability of a guarantor as separate and distinct from the liability of the

borrower, arising not from the debt itself but from the terms of the guaranty contract.”

Bank Mut. v. S.J. Boyer Constr., Inc., 2010 WI 74, ¶54, 326 Wis. 2d 521, 785 N.W.2d

462.

109(e)’s statutory limit. Ms. Fishel was a true consumer debtor whose

unsecured debt amount was not clearly established under the presented facts.

Ms. Fishel was an above-median debtor with enough disposable income to

disqualify her from obtaining relief under a Chapter 7 bankruptcy. Her only

other option was to file a Chapter 11 petition which would have likely caused

significant portions of funds available for creditors to be paid towards the

United States Trustee quarterly fees and the administrative expenses

associated with Chapter 11 cases.

The Court found that a literal interpretation of section 109(e) would lead

to absurd and unintended results under the specific facts of Ms. Fishel’s case

and her lack of alternative options.

[I]t is in the best interests of [Ms. Fishel], the estate, and the

creditors that the Debtor be permitted to pursue confirmation of her

Chapter 13 Plan. The Court finds section 109 does not exclude [Ms.

Fishel] from relief on the set of facts here. To hold otherwise would

effectively exclude [her] from relief, and the congressional intent

behind limiting the availability of Chapter 13 through section 109(e)

is not applicable here. . . . The Court does not seek to determine the

preclusive effect of section 109(e) in all cases. Rather, the Court is

exercising its discretion under sections 105 and 1307 to review

issues arising under section 109 on a fact specific, case-by-case

basis. The Court is also disinclined to dismiss [Ms. Fishel’s] case

where the amount of unsecured debt is not clearly established.

Fishel, 583 B.R. at 479.

In Fishel, the debts were primarily consumer debts. Here, the debts are

primarily business debts resulting from the Debtor’s guaranty of the LLC’s

debts. This is an important fact that distinguishes the Debtor’s case from

Fishel. There was nothing unclear about the amount of the Debtor’s obligations

when this case was filed. When the LLC defaulted, he chose to engage in last

minute maneuvers for the purpose of “stay[ing] any further action by the

bank’s attempts to replevin the business assets.” Those actions do not comport

with acts of an honest but unfortunate debtor. Instead, it appears they were

calculated solely to remove LLC assets from the reach of the Bank and to delay

realization on the Bank’s collateral.

Unlike the debtor in Fishel, the Debtor’s options in this case are not as

limited. In fact, the Debtor’s brief concedes he might be able to avail himself of

some of the alternative options unavailable to the debtor in Fishel.6 Even so,

Debtor argues that an alternative Chapter 11 filing would likely fail under the

cumbersome requirements associated with Chapter 11 cases. Debtor provides

no reasoning or proof to support this assertion. He ignores the streamlined

procedures available to him or to the LLC under Subchapter V of Chapter 11.

No evidence has been presented to explain why the Debtor or the LLC would

not succeed in a hypothetical Chapter 11 case. And the Debtor is not a “true

consumer debtor” as his debts are primarily business debts.7 Lastly, unlike the

debtor in Fishel, the amount of this Debtor’s unsecured debts are clearly

established and exceed the limits under section 109(e).

The Court makes no findings on the Bank’s Motion to dismiss for cause

for lack of good faith in filing. This decision is merely a finding that the

Debtor’s $620,121.97 noncontingent, liquidated unsecured debt to the Bank

exceeds the statutory amount of $419,275 set forth in 11 U.S.C. § 109(e). The

6 ECF No. 55 at 4.

7 Official Form 101: Part 6.

Bankruptcy Code prohibits this Debtor from obtaining relief under a Chapter

13 case.

CONCLUSION

For these reasons, the Bank’s Motion to Dismiss the Bankruptcy Case is

granted. This decision shall constitute findings of fact and conclusions of law

pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil

Procedure.

A separate order consistent with this decision will be entered.

Dated: May 5, 2020

BY THE COURT:

4y

Hon. Catherine J. Furay

U.S. Bankruptcy Judge

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