In re: Paul Richard Cherrett and Colleen Courtney Cherrett
O P I N I O N
Appeal from the United States Bankruptcy Court for the Central District of California
Before: DUNN, KIRSCHER, and TAYLOR, Bankruptcy Judges.
DUNN, Bankruptcy Judge:
Appellant Aspen Skiing Company (“Aspen“) appeals the bankruptcy court‘s order denying its motion to dismiss Paul and Colleen Cherretts’ (the “Cherretts“) chapter 7 case under
I. FACTUAL BACKGROUND
A. Pre-Bankruptcy Events
Paul Cherrett (“Paul“)2 works in the hospitality industry and has worked for a number of employers during his career. Apparently, Paul is good at what he does, and his compensation historically has been high.
Beginning in 1998, Paul‘s employment compensation packages have included loans to assist him in securing housing. On January 16, 1998, Paul‘s new employer at that time, Four Seasons Hotel - Austin, provided, through its owner, two interest-free loans totaling $150,000 to the Cherretts to assist them in purchasing a residence in Austin, Texas. The Cherretts subsequently sold their Austin residence on August 9, 2002, for a profit after repaying the senior secured loan and the “employer-sponsored”
On August 12, 2002, Paul‘s new employer, Four Seasons Hotel - Jackson Hole, provided, through its owner, an interest-free loan to assist the Cherretts in acquiring a residence in Jackson, Wyoming (the “Jackson Residence“). When the Cherretts ultimately sold the Jackson Residence in 2009, they realized a profit of approximately $250,000 after paying all liens on the property, including the employer-sponsored loan.
Paul first was contacted by Aspen in December 2006 to consider an employment opportunity, but since the open position was essentially comparable to his current job, he thanked Aspen‘s representative but indicated that he was not interested. Approximately three months later, Paul received an e-mail from a “headhunter” about a position with Aspen of substantially greater responsibility. He expressed interest and went through the job interview process.
Apparently, Aspen liked what they heard in his interviews, and Paul entered into employment negotiations with Aspen. The initial salary proposed by Aspen, at least from Paul‘s perspective, did not cover the high cost of living/housing in the Aspen, Colorado area. Ultimately, Paul accepted a written offer of employment from Aspen that included a $300,000 salary, a “signing bonus” of $75,000, participation in an incentive plan for potential additional compensation annually, and the following provisions for a “housing loan” (“Housing Loan“):
Your offer includes a housing loan of up to $500,000, which would be second to your primary mortgage. This program will include an annual bonus guaranteed to offset your tax liability for the interest on this loan, calculated at a 35% tax rate. You will receive a guaranteed annual bonus of up to $33,750 to offset the annual interest on this loan, as well as your tax liability ($25,000 in interest, $8,750 for taxes, assuming principal of $500,000). This bonus will be paid simultaneous to the date upon which annual interest on the loan is due, to ensure you have no annual out of pocket expenses related to the financing of this loan. You will not be required to repay any additional interest on this loan, if your employment with [Aspen] continues through 2015.
In addition, Paul agreed with Aspen that if his employment with Aspen terminated (other than as a result of death or disability) or he ceased to reside at the property purchased with the Housing Loan (either alternative designated as a “Repayment Event“) prior to December 31, 2015, Paul would be required to pay the following amounts in addition to repayment of the Housing Loan:
If the Repayment Event occurs in years 1-2, the reimbursement amount will be $140,000[;] If the Repayment Event occurs in years 3-4, the reimbursement amount will be $120,000; If the Repayment Event occurs in years 5-6, the reimbursement amount will be $100,000; If the Repayment Event occurs in years 7-8, the reimbursement amount will be $80,000.
An aspect of Paul‘s prospective employment with Aspen that particularly interested him was the potential for participating in expanding the “Little Nell Hotel” brand beyond the Aspen, Colorado area. Aspen owned one Little Nell Hotel, but there was a project already under way to build a new Little Nell Hotel in Jackson Hole, Wyoming. One of Paul‘s roles with Aspen was “to grow the [Little Nell] brand.”
Paul went to work for Aspen in the spring of 2007. When he accepted the job,
In June 2007, the Cherretts purchased a condominium in Basalt, Colorado (“Colorado Residence“) for $995,000, and Paul began living in it. The Cherretts contributed cash, borrowed $417,000 secured by a first trust deed on the Colorado Residence, and borrowed $500,000, the Housing Loan, from Aspen secured by a second trust deed, to fund the purchase of the Colorado Residence. When he bought the Colorado Residence, Paul hoped that it would appreciate in value so that when it was sold, the Cherretts would realize a profit. Initially, at least, Paul considered the Colorado Residence to be a “place holder until we got settled.” The Cherretts purchased the Colorado Residence at the “very peak of the real estate bubble.”
When the Cherretts bought the Colorado Residence, Mrs. Cherrett (“Colleen“)3 continued to reside in the Jackson Residence. The Colorado Residence was a 1400 square feet, two bedroom condominium. The Jackson Residence was a 4,000 square feet, four bedroom house. The Cherretts have two children. At the time that they bought the Colorado Residence, their son was graduating from high school and would be off to college in the fall. However, their daughter had two years more in high school, and Colleen stayed with her at the Jackson Residence until she graduated from high school, by which time, the Jackson Residence was sold. Colleen did not move to the Colorado Residence until June or July 2009.
In the meantime, 2008 brought the recession, and Aspen “pulled the plug” on expanding the Little Nell Hotel brand to Jackson Hole. In addition, the value of the Colorado Residence plummeted, and the Cherretts’ hopes of realizing a profit on resale evaporated. Paul remained with Aspen until 2011, when he resigned from Aspen to go to work for Talisker Mountain Company (“Talisker“) in Park City, Utah, at a higher level of compensation. He worked for Talisker for a year and then attempted to start his own business. In April 2013, he accepted employment with a Hilton company and moved to California.
B. The Cherretts’ Bankruptcy Proceedings
The Cherretts filed their chapter 7 petition in the bankruptcy court for the Central District of California on August 30, 2013. In their petition, the Cherretts stated that their debts were primarily “consumer debts,” as defined in
On November 27, 2013, Aspen filed a motion to dismiss (“Motion to Dismiss“) the Cherretts’ chapter 7 case as an abuse under
On December 4, 2013, the Cherretts amended their bankruptcy petition to state that their debts were primarily business debts. On the same day, the Cherretts filed their opposition to the Motion to Dismiss, arguing that their debts (focusing on the Housing Loan debt) were primarily “Non-Consumer” debts. Consequently,
Aspen filed a reply on December 11, 2013, challenging the Cherretts’ credibility and reiterating its position, based on In re Kelly, that debts incurred for the purchase of a personal residence are consumer debts.
The bankruptcy court scheduled an evidentiary hearing (“Hearing“) for January 22, 2014 on the Motion to Dismiss, limited to the issue of “whether the debt owed to [Aspen] is a consumer debt or non-consumer debt.” The parties subsequently exchanged discovery; Aspen‘s counsel took the deposition of Paul; and the parties filed trial briefs and evidentiary submissions.
At the Hearing, Paul testified and was examined at length by counsel for both Aspen and the Cherretts. The bankruptcy court then heard argument and engaged in extensive colloquy with counsel. At the conclusion of the Hearing, the bankruptcy court announced its findings and conclusions orally. Specifically, the bankruptcy court found that Paul‘s purposes in securing the Housing Loan were primarily employment and business purposes. Accordingly, the bankruptcy court determined that the Housing Loan was not consumer debt and denied the Motion to Dismiss.
On February 3, 2014, the bankruptcy court entered an order (“Order“) denying the Motion to Dismiss for the reasons stated on the record at the Hearing. Aspen filed a timely Notice of Appeal.
II. JURISDICTION
The bankruptcy court had jurisdiction under
We have jurisdiction to hear bankruptcy appeals from final orders, judgments and decrees. See
Generally, an order denying a motion to dismiss is interlocutory. Hickman v. Hana (In re Hickman), 384 B.R. 832, 836 (9th Cir. BAP 2008) (citing Sherman v. SEC (In re Sherman), 491 F.3d 948, 967 n.24 (9th Cir. 2007) (reviewing
The Ninth Circuit has not yet specifically addressed the finality of orders denying motions to dismiss chapter 7 cases for abuse under
If [orders denying dismissal for substantial abuse] cannot be appealed, bankruptcy proceedings must ‘be completed before it can be determined whether they were proper in the first place.’ In re Christian, 804 F.2d at 48. Requiring trustees to complete Chapter 7 proceedings before appealing
denial of their § 707(b) motions wastes debtor resources that should be used to pay creditors, and forces trustees and bankruptcy courts to expend their scarce institutional resources on abusive Chapter 7 petitioners. Thus ‘the policies of judicial efficiency and finality are best served’ by allowing prompt appellate review of§ 707(b) denials. Zolg v. Kelly (In re Kelly), 841 F.2d at 911.
We agree with the reasoning of the circuits that have addressed the issue regarding the finality of orders denying
Alternatively, even if the Order is interlocutory, we have jurisdiction to review it because we earlier granted leave to appeal to the extent necessary under
III. ISSUE
When denying the Motion to Dismiss for abuse under
IV. STANDARDS OF REVIEW
We review de novo issues of statutory construction and conclusions of law, including a bankruptcy court‘s interpretation of the Bankruptcy Code. Samson v. W. Capital Partners, LLC (In re Blixseth), 684 F.3d 865, 869 (9th Cir. 2012) (per curiam).
We review a bankruptcy court‘s findings of fact for clear error. Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010) (quoting Leichty v. Neary (In re Strand), 375 F.3d 854, 857 (9th Cir. 2004)). “We will affirm a [bankruptcy court‘s] factual finding unless that finding is illogical, implausible, or without support in inferences that may be drawn from the record.” U.S. v. Hinkson, 585 F.3d 1247, 1263 (9th Cir. 2009) (en banc). See also Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574 (1985) (“Where there are two permissible views of the evidence, the factfinder‘s choice between them cannot be clearly erroneous.“). We must accept a bankruptcy court‘s findings of fact unless we have a definite and firm conviction that a mistake has been committed. In re JTS Corp., 617 F.3d at 1109.
We review de novo mixed questions of law and fact. Id.
Under
Only the first
Given Aspen‘s contentions, this appeal turns on whether we agree with the bankruptcy court‘s characterization of the Housing Loan as non-consumer debt. We therefore begin our analysis by examining the definition of “consumer debt” under
Section 101(8) defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.” Consumer debt includes both unsecured and secured debt. Kelly, 841 F.2d at 912. Whether a particular secured debt is or is not characterized as consumer debt under
Aspen insists that Kelly definitively classified all mortgage debt as consumer debt. It points out that this holding in Kelly was reinforced in Price v. U.S. Trustee (In re Price), 353 F.3d 1135, 1139 (9th Cir. 2004). The Kelly holding therefore is the rule of law in the Ninth Circuit.
In Kelly, the debtors filed a petition under chapter 7. They scheduled $181,350 in assets, $147,000 in debt secured by mortgages against their home and $25,000 in unsecured debt owed to certain defendants in a state court action which the debtors lost. Kelly, 841 F.2d at 910. The bankruptcy court sua sponte found that the debtors owed primarily consumer debts and that granting them chapter 7 relief would be a substantial abuse because they could easily pay all of their debts. It accordingly dismissed the debtors’ chapter 7 case. After moving for reconsideration with the bankruptcy court, which was denied, the debtors appealed to the BAP, which reversed the bankruptcy court on the ground that the debtors did not have primarily consumer debts because most of their debts were secured by real estate mortgages. Kelly v. Solot (In re Kelly), 70 B.R. 109, 111-12 (9th Cir. BAP 1986).
On appeal, the debtors argued that debts secured by real property were never consumer debts. Because 85% of their debts was secured by their home, the debtors maintained that they could not have primarily consumer debts. Dismissal under
The Ninth Circuit disagreed with this contention because a literal reading of
Upon review of the debtors’ mortgage debts, the Ninth Circuit determined that $95,000 consisted of a lien the debtors assumed in purchasing their home and $32,000 represented a home equity line of credit incurred for home improvements and the repayment of credit card debts. Id. It concluded that all of those debts “fit comfortably within the [Bankruptcy] Code‘s definition of consumer debt.” Id.
Aspen contends that the Cherretts base their characterization of the Housing Loan as non-consumer debt on Aspen‘s purpose in providing the Housing Loan. According to Aspen, the Cherretts argue that the purpose of the Housing Loan was to augment Paul‘s compensation. In making such an argument, the Cherretts focus on the lender‘s motive. But, Aspen asserts, the debtor‘s purpose, not the lender‘s purpose, is the controlling determinant under
Aspen further argues that the Cherretts did not incur the Housing Loan for a business purpose. The Housing Loan did not become a non-consumer debt simply because it was part of Paul‘s compensation. Also, Aspen claims, the Housing Loan was not a condition for his employment.
At the Hearing, the bankruptcy court found that “[Paul‘s] purpose of securing that debt, or incurring that debt, was for employment purposes. The man needed to make money. He wanted to take the job. He knew he - to leave a [secure] position, he wanted to make more money.” Tr. of Jan. 22, 2014 hr‘g, 103:15-19. It concluded that Paul incurred the Housing Loan for a business purpose; he “did it so he could work at a very prestigious, top of the line, equal to the Four Seasons, equal to the best hotels in the world [employer] . . . .” Tr. of Jan. 22, 2014 hr‘g, 104:5-7. The bankruptcy court therefore ruled that “primarily this loan was incurred for a business purpose.” Tr. of Jan. 22, 2014 hr‘g, 103:20. Based on the record before us, we perceive no error in the bankruptcy court‘s conclusion that Paul‘s primary purpose in obtaining the Housing Loan was for business (i.e., employment).
As Aspen recognizes, the key factor in determining whether secured debt is consumer debt lies in the debtor‘s purpose in incurring the secured debt. Where the debt was incurred for more than one purpose, the primary purpose of the debt will determine its nature. See, e.g., Price, 353 F.3d at 1139; Swartz v. Strausbaugh (In re Strausbaugh), 376 B.R. 631, 639 (Bankr. S.D. Ohio 2007) (quoting 2 Collier on Bankruptcy ¶ 101.08, at 101-47 (Lawrence P. King ed., 15th ed. rev. 2004) (“If a debt is incurred partly for business purposes and partly for personal, family or household purposes, the term ‘primarily’ in the definition suggests that whether the debt is a ‘consumer debt’ should depend upon which purpose predominates. Presumably, this determination would normally turn on the purpose for which most of the funds were obtained.“)). Based on the record before us, the bankruptcy court did not err in finding that Paul‘s primary purpose in obtaining
Paul repeatedly asserted that he obtained the Housing Loan to purchase the Colorado Residence, not only in hopes of realizing a profit on resale, but also because it was an integral part of his entering into employment with Aspen. He testified at the Hearing that he believed the Housing Loan “was both compensation and [he] certainly expected to profit from appreciation.” Tr. of Jan. 22, 2014 hr‘g, 15:16-18.
When he decided to accept employment with Aspen, Paul “look[ed] at everything in totality[.]” Tr. of Jan. 22, 2014 hr‘g, 53:13. He considered the salary offered by Aspen, along with the Housing Loan; together, the salary and the potential for appreciation in the Colorado Residence “[were] considerably more than [he] was making” with his previous employer. Tr. of Jan. 22, 2014 hr‘g, 53:14.
In his declaration attached to the Cherretts’ opposition to the Motion to Dismiss, Paul asserted that accepting the position with Aspen required that he move from Jackson, Wyoming to Aspen, Colorado. Because real estate was expensive in Aspen, Colorado, and his income with Aspen would not allow him to buy real estate there, Aspen offered to help Paul in the purchase of housing. Specifically, he stated that “in lieu of a higher salary, extended in the offer of employment, [Aspen offered] an interest-free loan tied to [his] employment and to be secured by a trust deed against the [real estate] he was to purchase.” Paul further asserted that, “given the initial salary offered, and in lieu of a higher salary, and specifically to compensate for the higher cost of housing in [Aspen, Colorado], Aspen offered to pay the difference between the purchase price and the amount [he and Colleen] could afford to pay.”
At his December 6, 2013 deposition, Paul explained that, when discussing the terms of Aspen‘s employment offer, he expressed concern over the cost of living in Aspen, Colorado. He therefore asked Aspen, “[W]hat other ways could [he] be compensated, for instance, to allow [him] to live in the area[?]” Tr. of Dec. 6, 2013 deposition, 10:14-16. Paul explained that he had received benefits from his prior employer in Jackson, Wyoming, that he was not receiving from Aspen. He then went on to state that Aspen “offered the [Housing Loan] and the potential for appreciation in balance and bonus plan. So, you know, [he] was looking for a greater net return in time, and one of those - part of that was appreciation of the home.” Tr. of Dec. 6, 2013 deposition, 37:22-25, 38:1.
At the Hearing, Paul testified that the Housing Loan was made part of the negotiations for his employment with Aspen. He stated that he “assume[d] it was because [he] had to weigh the total compensation package, and it either [came] in the form of a salary or other things that convey[ed] with that.” Tr. of Jan. 22, 2014 hr‘g, 6:3-5. He emphasized later at the Hearing that “the solution to let‘s say the income that [he] needed to accept the position in Aspen [Colorado] and live in Aspen [Colorado] required that [Aspen] come up with a compensation package that included salary and something else. So, that‘s where the [H]ousing [L]oan came in in the form of a bonus.” Tr. of Jan. 22, 2014 hr‘g, 9:12-16. Paul testified that the Housing Loan was offered instead of a higher salary. He also testified that Aspen even had characterized the Housing Loan as “a deferred compensation bonus plan.” Tr. of Jan. 22, 2014 hr‘g, 40:21-22.
The written offer presented by Aspen supports Paul‘s view of the Housing Loan as part of his employment with Aspen. The written offer provided that it “include[d]
Paul further explained that he felt he had no choice but to purchase the Colorado Residence based on his compensation from Aspen. He testified that if he “wanted that compensation plan and [he] wanted that interest free loan, [he] needed to buy a home with that money.” Tr. of Jan. 22, 2014 hr‘g, 11:18-20. He believed that “[Aspen] said if [he] want[ed] to work here [in Aspen, Colorado], here‘s [his] compensation plan. This is what [he could] do with the money. So, [he] had to buy a home with it. There was no other way [the offer] was written.” Tr. of Jan. 22, 2014 hr‘g, 11:22-24. Paul explained that it “made more economic sense to [Aspen] to give [him] a housing loan and pay [him] a certain wage,” given the high cost of rent and the amount of compensation offered by Aspen. Tr. of Jan. 22, 2014 hr‘g, 38:25, 39:1-2. He thus purchased the Colorado Residence “because it just seemed like it was the most cost effective and . . . a financially advantageous route to take.” Tr. of Jan. 22, 2014 hr‘g, 39:2-4.
At his deposition, Paul stressed that the “only thing [he] could have benefitted from was the appreciation of the [Colorado Residence].” Tr. of Dec. 6, 2013 deposition, 39:5-6. “[T]he benefit to [him] would have been at the end when the [Colorado Residence] was sold that [he] had some type of appreciation.” Tr. of Dec. 6, 2013 deposition, 39:8-10. He further explained that he had a profit motive in purchasing the Colorado Residence because “at the time housing prices were skyrocketing, and so the opportunity there was to benefit from that increasing market.” Tr. of Dec. 6, 2013 deposition, 91:19-21.
Paul provided ample evidence that he obtained the Housing Loan for a business purpose with respect to his employment with Aspen. Given his testimony at the Hearing, his deposition and his declaration, as well as the written offer of employment from Aspen, the bankruptcy court had sufficient evidence to find that Paul‘s purpose in obtaining the Housing Loan was primarily related to his employment. We discern no clear error by the bankruptcy court in making that determination.
VI. CONCLUSION
To dismiss a chapter 7 case for abuse under