In re Bushyhead
525 B.R. 136
Bankr. N.D. Okla2015Background
- Bow and Lynn Bushyhead personally guaranteed a $345,400 business loan to their LLC (Planet Beach Spa); the spa failed and closed in Feb 2013, leaving the guarantors unpaid. A state-court judgment was later entered against them for roughly $253,792 plus interest and charges.
- After the spa closed, Bow obtained high-paying employment (annual income $350,000) and received a large bonus; the couple had substantial household income in 2013 but made no payments on the spa debt and incurred significant discretionary spending (luxury lease, furniture, travel, horses).
- The Bushyheads filed a joint Chapter 7 petition in December 2013 listing the guaranteed spa debt as their largest unsecured liability; most of their scheduled assets were claimed exempt. They later amended schedules to correct disclosures and surrendered $15,000 to the Chapter 7 trustee.
- The U.S. Trustee moved to dismiss under 11 U.S.C. § 707(a), alleging the Chapter 7 filing was in bad faith because the debtors had the ability to pay, made no effort to settle or repay, and initially filed inaccurate/incomplete schedules.
- The bankruptcy court held an evidentiary hearing and the district court (Chief Judge Terrence L. Michael) reviewed whether § 707(a) permits dismissal for bad faith when the debtor has ability to pay business (non-consumer) debt and whether the UST met its burden to show "cause."
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (Bushyheads) | Held |
|---|---|---|---|
| Whether § 707(a) permits dismissal for bad-faith Chapter 7 filings based on debtor's ability to pay | Ability to pay and refusal to pay constitute bad faith and are "cause" to dismiss | Ability to pay alone is not cause; debtors may invoke Chapter 7 discharge rights; errors were unintentional and corrected | Dismissal denied — ability to pay alone is not cause; § 707(a) does not generally permit dismissal for that reason |
| Whether the debtor's pre-petition conduct (luxury spending, avoiding negotiations) supports dismissal for "abuse" under § 707(a) | Debtors continued a lavish lifestyle, avoided settlement, and incurred spending instead of paying creditors — showing misuse of Chapter 7 | Such conduct mostly reflects ability to pay and is addressed by other Code provisions (e.g., § 523, § 727); § 707(a) is not a substitute for adversary proceedings | Court held most factors relied upon by other courts are inappropriate; dismissal for "cause" under § 707(a) should be rare and limited to conduct abhorrent to Chapter 7's purposes |
| Whether initial disclosure errors justify dismissal under § 707(a) | Failures to fully disclose indicate bad faith and justify dismissal | Errors were, the debtors say, minor, unintentional, and corrected; disclosure issues go to denial of discharge under § 727, not dismissal | Court found disclosure errors do not warrant dismissal; nondisclosure is a ground for denial of discharge or adversary proceedings, not § 707(a) dismissal |
| Proper remedy for alleged misconduct (dismissal vs. adversary) | Dismissal is an appropriate remedy to prevent abuse of bankruptcy discharge | Specific remedies (adversary proceedings under §§ 523 or 727, trustee avoidance actions) are the correct procedures | Court held parties should pursue specific Code remedies (adversary actions, trustee claims); § 707(a) is not a substitute for those remedies |
Key Cases Cited
- Shangraw v. Etcheverry (In re Etcheverry), 242 B.R. 503 (D. Colo. 1999) (court refused to read a good-faith filing requirement into § 707(a))
- In re Huckfeldt, 39 F.3d 829 (8th Cir. 1994) (ability to pay alone is not sufficient cause to dismiss under § 707(a))
- Padilla v. Commonwealth (In re Padilla), 222 F.3d 1184 (9th Cir. 2000) (bad-faith dismissal under § 707(a) is inappropriate where specific Code provisions address the misconduct; consumer-abuse claims belong under § 707(b))
- In re Baird, 456 B.R. 112 (Bankr. M.D. Fla. 2010) (bankruptcy court’s multi-factor test for bad faith dismissal under § 707(a))
- Piazza v. Nueterra Healthcare (In re Piazza), 719 F.3d 1253 (11th Cir. 2013) (endorses totality-of-the-circumstances test; bad faith may support § 707(a) dismissal in some cases)
- In re Kane & Kane, 406 B.R. 163 (Bankr. S.D. Fla. 2009) (refused to dismiss Chapter 7 despite creditor judgment; recommended specific Code remedies)
- In re Frieouf, 938 F.2d 1099 (10th Cir. 1991) (limits on barring future access to bankruptcy court under § 109(g))