628 B.R. 756
Bankr. W.D. Pa.2021Background
- Debtor Kevin S. Moser filed a voluntary Chapter 13 petition on October 3, 2017; creditor Innovative Building Solutions, LLC (IBS) had sued Moser in state court on July 28, 2017.
- Initial schedules listed assets at about $438,000 (including $200,000 business equipment and $180,000 residence) and listed IBS as a disputed, $0 claim for notice only.
- IBS filed a proof of claim for $324,248; the Debtor proposed a Chapter 13 plan to pay 100% of uncontested unsecured claims but could not confirm and the case converted to Chapter 7 on January 8, 2020.
- The Court’s conversion order required any challenge to the “good faith” of conversion to be filed by January 28, 2020; no party timely objected.
- Debtor amended schedules on February 13, 2020, sharply reducing asset values (residence to $75,000; business equipment under $20,000); the Chapter 7 trustee sold nonexempt assets to IBS for $15,500.
- IBS took a Rule 2004 exam (July 28, 2020) and then moved to dismiss the case under 11 U.S.C. § 707(a) on September 15, 2020, alleging the bankruptcy was filed in bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of §707(a) motion | IBS: No statutory deadline; motion brought after conversion is permissible and timely given late discovery of overvaluation and bad-faith evidence. | Moser: Conversion order required challenges by Jan 28, 2020; IBS failed to timely object and even supported conversion, so motion is untimely/estopped. | Court: Motion is time-barred under the conversion order; IBS knew or should have known of valuation issues earlier and cannot wait; denial on timeliness grounds. |
| Whether filing was in bad faith (§707(a)) | IBS: Timing (petition soon after state suit), Debtor’s admission filings were motivated by the lawsuit, and asset overvaluations show abuse of process. | Moser: Filed with legitimate reorganization purpose (Chapter 13 plan, plan payments, objections to claim); conversion to Chapter 7 and liquidation undercuts IBS’s claim of abuse. | Court: On the merits, bad-faith dismissal denied — totality of circumstances shows a bona fide bankruptcy purpose and not the sort of egregious misconduct warranting dismissal. |
| Candor / misrepresentation of assets | IBS: Debtor overstated asset values and amended only after conversion; this demonstrates lack of candor. | Moser: Overvaluation resulted from using replacement rather than fair-market value and was disclosed at Nov. 13, 2019 hearing; errors were not concealment. | Court: Lack of candor factor does not support dismissal — errors appear inadvertent/misunderstood, disclosed before conversion, and did not place assets beyond creditors' reach. |
| Alternative remedies / creditor conduct (insurance, nondischargeability) | IBS: Debtor should have tendered claim to insurance or negotiated; IBS need not have filed nondischargeability actions earlier because bad faith became clearer after Rule 2004. | Moser: IBS had or should have had insurance info, never sought relief from stay or nondischargeability in timely fashion, and benefited from liquidation. | Court: IBS’s failure to pursue nondischargeability or insurance remedies undermines its dismissal claim; creditor’s inaction factors against dismissal. |
Key Cases Cited
- Tamecki v. Frank, 229 F.3d 205 (3d Cir. 2000) (§707(a) dismissal for lack of good faith allowed but should be confined to egregious cases involving concealment, misrepresentation, fraud).
- Perlin v. Hitachi Capital Am. Corp., 497 F.3d 364 (3d Cir. 2007) (good-faith inquiry is fact-intensive; absence of concealment or fraud weighs against dismissal).
- Myers v. United States Trustee, 491 F.3d 120 (3d Cir. 2007) (timing, motive, and totality-of-circumstances guide bad-faith analysis; filing during related litigation not dispositive).
- Indus. Ins. Servs., Inc. v. Zick, 931 F.2d 1124 (6th Cir. 1991) (dismissal for bad faith reserved for egregious conduct such as misrepresentation or fraud).
- Glunk v. United States Trustee, 342 B.R. 717 (Bankr. E.D. Pa. 2006) (useful framework of factors for §707(a) bad-faith analysis, noting some factors carry greater weight).
- Marks v. Estate of Lerner, 174 B.R. 37 (E.D. Pa. 1994) (most bad-faith dismissals involve concealment, misrepresentation, or transfers to evade creditors).