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Williams v. Swimelar

April 18, 2008


The opinion of the court was delivered by: Hon. Norman A. Mordue, Chief U.S. District Judge



Jeffrey L. Williams ("Debtor") appeals under 28 USC § 158(a) from an Order of Chief U.S. Bankruptcy Court Judge Stephen D. Gerling denying confirmation of his Amended Chapter 13 Plan. Chief Judge Gerling based the denial on his conclusion that the Debtor failed to establish that the plan complies with section 1325(a)(4) of the U.S. Bankruptcy Code ("Code"), 11 U.S.C. § 1325(a)(4). For the reasons set forth below, the Court affirms the Order.



On Schedule B to his voluntary Chapter 13 petition, the Debtor listed his ownership interest in Williams Insurance Agency ("Agency") as having zero market value. The Debtor's original plan proposed payments to the Chapter 13 Trustee in the amount of $531 per month for 60 months, totaling $31,860. Harold W. McGill, an unsecured creditor, objected on the ground that the Debtor had undervalued a number of assets. The Trustee objected on the ground that the Debtor was delinquent in payments to the Trustee. Thereafter, the Debtor filed an Amended Chapter 13 Plan proposing three monthly payments to the Trustee of $531, followed by 57 payments of $550, for a total of $33,350.60. This would amount to payment to unsecured creditors of 6.8% of their claims.

The Trustee filed a supplemental objection to the Amended Chapter 13 Plan. Among the objections was the following: "The Trustee requests information regarding the value of the business since upon information and belief, the business has value of $90,000 due to the potential sale of policies but schedule B lists a value of $0." McGill again objected on various grounds, including the valuation of the Agency at zero. McGill noted that the Debtor's submissions listed annual commission income of $150,000, and stated that "[t]he agency standard in determining the market value of insurance agencies is at minimum one and a half times the gross commissions" or at least $225,000. In a second supplemental objection, the Trustee stated the plan "fails to satisfy the liquidation test as set forth in 11 U.S.C. § 1325(a)(4) since it appears that unsecured creditors would receive $100,000 from non-exempt equity in the business in a Chapter 7." In other words, the Trustee opined that the Agency had sufficient value that, if it were liquidated and the proceeds distributed to the unsecured creditors, they would receive more than they would receive under the Debtor's proposed Amended Chapter 13 Plan.


Chief Judge Gerling held an evidentiary hearing on confirmation of the Amended Chapter 13 Plan. The parties agreed that the issue before the court was "what a Chapter 7 trustee could sell this agency for."

The Debtor testified that he had purchased two insurance agencies: one from McGill in 1994 or 1995, and the second from Melinda Stevenson in 1997. According to the Debtor, the purchase price of McGill's agency was not based on a multiple of gross receipts but rather on how much the Internal Revenue Service ("IRS") would accept to satisfy its payroll tax claims against McGill. The Debtor said he had wanted to purchase the business as a going concern, because if IRS had seized the McGill's book of business, the insurers would have cancelled the contracts, and there would be "nothing left." The Debtor did not remember what he paid for Stevenson's business, but said it was not based on gross receipts. He had made a down payment and agreed to pay the balance over time. Both McGill and Stevenson had signed agreements not to compete.

The Debtor explained that, based on its contract with an insurance company, an insurance agency receives a commission when it sells an insurance policy and an additional commission every time the customer renews the policy. On his schedule of assets, the Debtor listed $1,200 as accounts receivable, representing commissions earned but not yet received. About 90% of the Agency's earnings resulted from renewals of policies. The Debtor explained the personal effort he expended to obtain renewals from policy holders. He stated that when he bought McGill's and Stevenson's businesses, he had to contact the insurers and obtain their authorization for him to sell their policies. Essentially, what he bought in both cases was the book of business. He did not pay cash for the businesses, but paid over time, because "no bank would loan money to buy an agency, to my knowledge."

The Debtor's gross proceeds in 2004, as reflected on 1099 forms supplied to him by the insurance companies which paid him commissions, were $162,214. He could not explain why his tax return for 2004 listed gross receipts of only $118,899.

The Debtor stated his Agency was properly valued at zero because a Chapter 7 trustee would get no value from the book of business. He explained as follows: "[I]f the agency is forced into liquidation, the companies will ...

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