532 B.R. 710
Bankr. N.D. Ill.2015Background
- Michael and Aseneta Schwartz filed a Chapter 7 petition after Michael failed to pay a FINRA arbitration award in favor of Barclays arising from a $400,000 forgivable loan in his employment package.
- Michael’s reported monthly gross wages were $11,008.94, net take-home pay about $7,349.52, plus $2,200 rental income for total monthly income ≈ $9,549.52.
- Schedule J listed monthly expenses that exceeded income by about $1,560; significant recurring items included $850 Range Rover payment, $1,000 in charitable contributions, and $18,000/year private kindergarten tuition.
- Barclays moved to dismiss under 11 U.S.C. § 707(a) and (b); the court elected to decide dismissal for cause under § 707(a) without litigating whether debts were primarily consumer debts for § 707(b).
- The bankruptcy court found no evidence of bad faith or prepetition dissipation but concluded the Schwartzes’ substantial income and continued luxury expenditures post-petition made Chapter 7 an improper use of the Code and constituted cause to dismiss under § 707(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 707(a) authorizes dismissal for causes beyond technical/procedural violations | Barclays: § 707(a) is broad and permits dismissal for abuse based on totality of circumstances (e.g., substantial income, lifestyle) | Schwartzes: § 707(a) should be read narrowly; misconduct or abuse is addressed by other provisions (§ 523, § 727, § 707(b)) | Court: § 707(a) is not limited by the illustrative list; "includes" is non‑limiting and dismissal for cause can be based on other factors |
| Whether the Schwartzes’ circumstances constitute cause to dismiss under § 707(a) | Barclays: high income and ongoing luxury expenditures post‑petition show misuse of Chapter 7 and warrant dismissal | Schwartzes: no bad faith; expenses reflect lifestyle, not improper intent; other remedies could address creditor claims | Court: Held cause exists—their income and continued lifestyle while seeking a Chapter 7 discharge justify dismissal under § 707(a) |
| Whether bad faith is required to dismiss under § 707(a) | Barclays: bad faith is one possible ground but not required to find cause | Schwartzes: dismissal should require bad faith or other specific statutory violations | Court: No finding of bad faith necessary; court dismissed on misuse/abuse grounds without concluding bad faith |
| Whether conversion to Chapter 11 or 13 can be compelled | Barclays: urged dismissal; conversion could be an alternative | Schwartzes: asked to remain in Chapter 7; conversion involuntary is not permissible | Court: Did not compel conversion; suggested Chapter 11 as an option but could not force conversion to 11 or 13 |
Key Cases Cited
- Perlin v. Hitachi Capital Am. Corp., 497 F.3d 364 (3d Cir.) (discusses scope of § 707(a) and bad‑faith dismissal)
- Industrial Ins. Servs., Inc. v. Zick, 931 F.2d 1124 (6th Cir.) (treats § 707(a) cause scope)
- In re Padilla, 222 F.3d 1184 (9th Cir.) (addresses whether bad faith supports dismissal under § 707(a))
- In re Huckfeldt, 39 F.3d 829 (8th Cir.) (cautions against focusing solely on bad faith; analyzes § 707(a))
- In re Lombardo, 370 B.R. 506 (Bankr. E.D.N.Y.) (Chapter 7 is for the "honest but unfortunate" debtor; lifestyle may inform dismissal)
- Connecticut Nat'l Bank v. Germain, 503 U.S. 249 (1992) (statutory‑construction principle that Congress says what it means)