Hamm v. Manfredi (In Re Manfredi)Hamm v. Manfredi (In Re Manfredi)
OPINION 1
I.Procedural History
Louis A. Manfredi and Charlotte M. Manfredi, (hereinafter collectively known as “the Debtors”) filed their Chapter 13 petition on November 18, 2009. On February 8, 2010, Richard Hamm filed a Motion to Dismiss. An evidentiary hearing was held on March 18, 2010. This matter was subsequently taken under advisement and a briefing schedule was set. As both Briefs have been filed, this matter is now ripe for adjudication. For the reasons set forth below, I find that the Debtors’ bankruptcy petition was filed in good faith and deny the Motion to Dismiss.
II.Background
Prior to the Debtors’ bankruptcy filing, Mr. Manfredi and Mr. Hamm had been engaged in network marketing together. Hr’g Tr. 71-72, March 18, 2010. Their business relationship began in 1992, with the formation of a partnership called Integrated Financial Resource Group, also known as IFRG. Hr’g Tr. 27, 71. In 1993, the IFRG partnership got involved doing network marketing for a company called Market America. Hr’g Tr. 74. Mr. Man-fredi was responsible for the marketing side of the partnership which involved the “up-front legwork” as well as handling and recruiting distributors. Hr’g Tr. 72. Mr. Hamm handled administrative duties and financing the partnership’s operations. Hr’g Tr. 72. In 2009, Mr. Hamm and Mr. Manfredi dissolved the IFRG partnership. Hr’g Tr. 28.
A partnership dissolution agreement was entered into and signed by both Mr. Hamm and Mr. Manfredi on February 21, 2009. Resp’t Ex. 1.1. In addition, Mr. Manfredi executed two promissory notes totaling $416,000.00 with Mr. Hamm listed as the Payee. Resp’t Ex. 1.2 & 1.3. Shortly thereafter, on November 18, 2009, the Debtors, Mr. Manfredi and his wife, Charlotte, filed their Chapter 13 bankruptcy petition.
III.Discussion
Dismissal of a Chapter 13 bankruptcy case is governed by 11 U.S.C. § 1307(c)
2
, which allows the court to convert or dismiss a case for “cause”.
In re Dahlgren,
When a lack of good faith is shown, conversion is unnecessary because the good faith requirement in Chapter 13 and Chapter 7 cases is the same.
In re Myers,
A determination of good faith requires the court to look at the totality of the circumstances.
In re Myers,
[T]he nature of the debt ...; the timing of the petition; how the debt arose; the debtor’s motive in filing the petition; how the debtor’s actions affected creditors; the debtor’s treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors. Lilley,91 F.3d at 496 (quoting In re Love,957 F.2d 1350 , 1357 (7th Cir.1992)).
In analyzing the parties’ respective burdens and the totality of the circumstances, it is important to dismiss for “bad faith” only in narrow circumstances so as to avoid “... a risk of judicial usurpation of the legislative power to determine the scope of and eligibility for bankruptcy relief in general or under a particular chapter.”
In re Jensen,
First, we noted that a finding of lack of good faith “should not [be] lightly infer[red].” Second, we cautioned that dismissal should be “confined carefully” and utilized only in “egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.” Perlin v. Hitachi Capital America Corp.,497 F.3d 364 , 373 (3d Cir.2007) (internal citations omitted).
Mindful of these considerations, I will now consider each of the factors in analyzing whether the petition was filed in good faith.
A. The Nature of the Debt and How the Debt Arose.
This factor primarily looks at whether the incurring of a debt resulted from bad acts or intentions of the debtor.
See, e.g., In re Myers,
However, even assuming that everything that Mr. Hamm alleges is true, poor financial management and spending practices are evidence of “bad judgment, not bad faith.”
In re Jensen,
B. The Timing of the Petition and the Debtors’ Motive in Filing the Petition.
Mr. Hamm argues that the Debtors’ motive for filing their bankruptcy petition was to utilize funds that were to be payable to Mr. Hamm to fund a Chapter 13 plan. Mr. Hamm also questions whether the Debtors have established sufficient evidence to show that their motive for filing for bankruptcy protection was their deteriorating financial situation. While Mr. Hamm argues on page 22 of the Mov-ant’s Brief that “[t]he record is devoid of evidence as to acute financial distress”, Mr. Hamm’s own testimony shows that Mr. Manfredi was in distress prior to filing bankruptcy. Specifically, the IFRG partnership was allegedly dissolved because Mr. Manfredi was in financial difficulty and could get a loan to help him if the partnership was dissolved. Hr’g Tr. 77. Mr. Hamm characterized Mr. Manfredi’s debt as increasing for many years prior to the filing of the bankruptcy petition. Hr’g Tr. 76-77. Consistent with the characterizations by Mr. Hamm of Mr. Manfredi’s increasing debt, Mr. Manfredi testified that the exhaustion of his line of credit with Wachovia and his mounting tax debt, in excess of $100,000.00, led to his seeking of bankruptcy protection. Hr’g Tr. 59-60. Based on my analysis of the record, I do not find bad faith surrounding the timing of the petition or the Debtors’ motive in filing the petition.
C. How the Debtor’s Actions Affected Creditors.
Mr. Hamm argues that this factor weighs in favor of dismissal because his claim was originally misstated as “contingent” and “unliquidated” in the schedules
Mr. Hamm also contends that the Debtors’ filing was in bad faith because they sought to reduce or even completely eliminate any payments to Mr. Hamm. The reduction of payments in a Chapter 13 to certain creditors is specifically contemplated by the Bankruptcy Code as an alternative to full payment. See, e.g., § 1322(a)(4). Nonetheless, this argument serves to attack the adequacy of a hypothetical plan rather than show a lack of good faith in filing. For the Debtors’ plan to be confirmed, it will have to be in good faith and treat all creditors in full compliance with the confirmation requirements of the Bankruptcy Code. See § 1325(a)(3).
D. The Debtors’ Treatment of Creditors Before and After the Petition was Filed.
Mr. Hamm does not specifically discuss this factor in his Brief. However, the Brief itself reflects upon Mr. Manfredi and Mr. Hamm’s relationship pre- and post-petition. Generally, this factor looks at actions taken by the debtor to frustrate creditors.
See, e.g., In re LeGree,
E. Whether the Debtor Has Been Forthcoming with the Bankruptcy Court and the Creditors.
The parties are in severe disagreement as to the facts related to this factor. Specifically, Mr. Hamm argues that omissions and inaccuracies in the schedules show that the Debtors have not been forthcoming. See Movant’s Br. 17-18. Mr. Hamm points specifically to errors alleged in his Motion and conceded at the Debtors’ § 341 meeting of creditors, which was transcribed and admitted as Movant’s Exhibit 1.
As noted in the context of a motion to dismiss, a Chapter 7 case by
In re Gonyer,
Mr. Hamm also takes issue with the Debtors’ claimed business expenses on the Debtors’ Amended Form B22C and the Amended Schedule J. Mr. Hamm argues that the itemization provided in both documents is insufficient and that the Debtors should provide more detail. Movant’s Br. 18-19. Mr. Hamm hypothesizes that the Debtors may be attempting to deduct the same expenses twice. Movant’s Br. 18-19. However, the record is devoid of evidence of the same.
Lastly, Mr. Hamm appears to argue that the potential for Mr. Manfredi to reduce his income generating activities supports the dismissal Motion. This argument is purely speculative on potential post-petition events and has no basis in the evidentiary record. Furthermore, changes to a debtor’s income or expenses, which are known or virtually certain, can be addressed at a Chapter 13 confirmation hearing.
Hamilton v. Lanning,
- U.S.-,
F. The Totality of the Circumstances.
In analyzing these factors, I am mindful that dismissal is not something to be considered lightly. Mr. Hamm met his initial burden in questioning the Debtors’ good faith by pointing to the misstatements and mistakes on the Debtors’ initial schedules. However, I also find that the Debtors have met their burden to establish their own good faith in filing based on the evidentiary record. There is nothing in this record that suggests that this bankruptcy was filed solely to oppress a single large creditor, such as Mr. Hamm. Furthermore, as discussed above, the Debtors appear to have been generally open and honest with regard to their financial situation, even disclosing the details of their financial difficulties prior to filing. While Mr. Hamm is concerned about how he might be treated within the confines of a confirmed plan, a plan has yet to be confirmed and such concerns are, at this point, solely hypothetical. Furthermore, while Mr. Hamm is a very large creditor relative to the remaining debts of the estate, the record demonstrates that he entered into the agreement which resulted in his claim with significant knowledge and understanding of the Debtors’ financial circumstances and spending proclivities. Therefore, after considering the totality of the circumstances, I find that the Debtors’ Chapter 13 petition was filed in good faith.
IV. Conclusion
For the reasons set forth above, the Motion to Dismiss is denied. An Order
. Drafted with the assistance of William C. Blasses, Esq., Law Clerk
Notes
. Unless otherwise noted, all future statutory references are to the Bankruptcy Code, 11 U.S.C. § 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 37 ("BAPCPA”).