In re Snyder
MEMORANDUM OPINION
Physician Groups, L.C. d/b/a Medical Group of Missouri (“Movant”) moved to dismiss or convert the Debtor’s Chapter 7 case for lack of good faith. The Court held a final hearing on the motion on March 4, 2014. Being sufficiently advised, ttle Court concludes that the motion should be denied.
I. FINDINGS OF FACT
The Debtor filed a voluntary petition under Chapter 7 on August 16, 2013 (the “Petition Date”).
Debtor, a licensed medical doctor, is 63 years old. He is married. He and his wife have two adult daughters, neithеr of whom lives with the Debtor.
Debtor practiced obstetric medicine for many years in the St. Louis, Missouri area. He was a sole practitioner who made about $100,000 per year.
In or about June 2010 Debtor gave up his sole practice and entered into an employment agreement with Movant.
Movant terminated the Debtor’s employment in December 2010, for reasons never explained to the Court.
Debtor strongly disputed Movant’s deсision to terminate his employment agreement so soon after it was signed. Debtor believes Movant destroyed his medical practice, left him unemployed and, by forcing him to relocate for work, caused him to realize a substantial loss (about $40,000) on his Missouri house.
Debtor moved to Roswell, New Mexico in 2011. Since mid-2011, Debtor has been employed as an obstetrician by Roswell Clinic Corporation.
After terminating Debtor’s employment, Movant demanded that Debtor purchase a “tail” malpractice insurance policy. The requirement to buy the tail policy apparently is in the employment agreement. The cost of the tail policy was $145,254.
Debtor did not buy the tail policy, so Movant did.
Debtor retained counsel and defended the Missouri state action for a period of time, but ran out of money and cоuld no longer pay his counsel. Debtor’s state court counsel withdrew from the representation and on March 13, 2013, the Missouri state court entered a default judgment against Debtor for $170,854.09.
Movant domesticated the Missouri judgment in New Mexico in June 2013 and obtained a writ of garnishment on or about August 6, 2013, prompting Debtor to file this bankruptcy case. Debtor’s wife did not file for bankruptcy relief.
Debtor’s schedules list two secured claims (car loans), both of which have been reaffirmed.
The Debtor’s only other listed creditor is Movant.
Debtor’s current salary is about $290,000 per year.
At his current salary, Debtor likely will have about $5,000 per month available after paying living expenses. These excess funds could be used, inter alia, to pay Movant over time, or to save for retirement.
On the Petition Date, Debtor owned a 401k account with a value of $119,808.47. Debtor testified, and the Court finds, that Debtor is worried about his retirement, wishes to save as much money as he can in the next several years, and does nоt believe he can both pay Movant $170,000 and save enough money to retire before he is too old to work.
Debtor’s wife owns jewelry that is worth between $25,000-$60,000. His counsel advised Debtor not to list his wife’s jewelry on his bankruptcy schedules because the jewelry was the wife’s separate property.
Debtor disclosed his wife’s jewelry to the Chapter 7 trustee at his § 341
The Debtor does not own any real estate.
The Debtor has no non-exempt property except his wife’s jewelry, to the extent some of it may be community property.
The Debtor has not taken any vacations for the past five years except than to visit his children in Missouri.
The Debtor is giving $650 per month to his youngest daughter to aid her living expenses. This support will stop in June when she gets married.
Thе Debtor paid for his older daughter’s wedding and is saving to contribute $10,000 towards his youngest daughter’s wedding.
Debtor made no substantial attempt to settle with Movant. It is clear that Debtor does not believe he should have to pay Movant anything, although he acknowledges his legal obligation to do so.
Debtor appeared and testified at the final hearing on the Motion. The Court found him credible.
Movant’s representative, Stephen A. Thompson, was nоt an officer or employee but the lawyer who brought the suit
II. DISCUSSION
A. Dismissal Under § 707(a).
Section 707(a) provides:
The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under chapter 123 of title 28;
(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.
1. Bad Faith Can Constitute “Cause” for § 707(a) Dismissal. Although not listed as one of the enumerated events constituting “cause” for dismissal under § 707(a), most courts have held that proof of the debtor’s “bad faith” in filing a Chapter 7 case constitutes “cause.” Indus. Ins. Services, Inc. v. Zick (In re Zick),
The Eighth Circuit adopted a much narrower view about whether bad faith can constitute cause for § 707(a) dismissal. In In re Huckfeldt,
[T]he court in [In re ] Khan4 urged that bad faith under § 707(a) be limited to extreme misconduct falling outside the рurview of more specific Code provisions, such as using bankruptcy as a “scorched earth” tactic against a diligent creditor, or using bankruptcy as a refuge from another court’s jurisdiction. Khan,172 B.R. at 624-26 .
We agree with the narrow, cautious approach to bad faith adopted in Khan. Congress has defined the ultimate issue in § 707(a) cases as whether the Chapter 7 petition should be dismissed “for cause.” As this case illustrates, some conduct constituting сause to dismiss a Chapter 7 petition may readily be characterized as bad faith. But framing the issue in terms of bad faith may tend to misdirect the inquiry away from the fundamental principles and purposes of Chapter 7. Thus, we think the § 707(a) analysis is better conducted under the statutory standard, “for cause.” If the bankruptcy court elects instead to act under the inherent judicial power to punish a bad faith litigant, that action should not be taken under § 707(a).
Bаd faith may be found when the debtor has a frivolous, noneconomic motive for filing a bankruptcy petition, when there is a sinister or unworthy purpose, or when there is an abuse of the judicial process. That the debtor is merely taking advantage of its legal rights is not, by itself, sufficient to support a finding of bad faith.
Id. The Ninth Circuit has ruled that bad faith cannot constitute cause for dismissal under § 707(a):
The Bankruptcy Code’s language and the protracted relationship between reorganization debtors and their creditors lead us to conclude that bad faith per se can properly constitute “cause” for dismissal of a Chapter 11 or Chapter 13 petition but not of a Chapter 7 petition under § 707(a)
In re Padilla,
The Court adopts the view that bad faith can constitute cause for dismissal under § 707(a). The Court acknowledges, however, the risk of using bad faith as “a loose cannon which is to be pointed in the direction of a debtor whose values do not coincide precisely with those of the court.” Huckfeldt,
2. The Court Must Examine the Totality of the Circumstances. To determine whether a chapter 7 case was filed in bad faith, courts must review the “totality of the circumstances.” Piazza,
3. Conduct Relevant to § 523 or § 727 Should Not Be Considered. The conduct giving rise to bad faith cannot be the type that would support a denial of discharge under § 727 or nondischarge-ability action under § 523. This consideration follows from the rule of statutory cоnstruction that requires “that where both a specific and a general statute address the same subject matter, the specific one takes precedence regardless of the sequence of the enactment, and must be applied first. Therefore, a debtor’s misconduct should be analyzed under the most specific Code provision that addresses that type of misconduct.” Padilla,
4. Bad Faith Dismissal is a Severe Step. Dismissing Chapter 7 cases for lack of good faith is a severe step, and should only be taken in “egregious eases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a single dеbt based upon conduct akin to fraud, misconduct or gross negligence.” In re Perlin,
5. Ability to Pay Creditors is Not Enough. A debtor’s ability to pay creditors is not enough to support a finding of bad faith. In In re Marks,
The section does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal. To permit dismissal on that ground would be to enact a non-uniform mandatory chapter 13, in lieu of the remedy of bankruptcy.5
In In re Goulding,
6. Factors. Not surprisingly, various factors have been identified and applied to determine whether bad faith exists. The factors identified by previous courts include:
1. Whether the debtor’s manipulations (if any) had the effect of frustrating one particular creditor;
2. The absence of an attempt to pay creditors;
3. The debtor’s failure to make significant lifestyle changes;
4. Whether the debtor has sufficient resources to pay a substantial portion of debts;
5. "Whether the debtor inflated expenses to disguise financial well-being;
6. Whether the debtor is overutilizing protections of the Bankruptcy Code to the conscious detriment of creditors;
7. Whether the debtor reduced his creditors to a single creditor in the months prior to filing his petition;
8. Whether the debtor failed to make lifestyle adjustments or continued living an exрansive or lavish lifestyle;
9. Whether the debtor filed the case in response to a judgment in pending litigation;
10. The unfairness of using Chapter 7;
11. Whether the debtor is paying debts to insiders;
12. Whether the debtor transferred assets;
13. Whether the debtor employed a deliberate and persistent pattern of evading a single major creditor;
14. Whether the debtor failed to make candid and full disclosure;
15. Whether the debts are modest in relation to assets and income; and
16. Whether there are multiple bankruptcy filings or other procedural “gymnastics.”
In re Lombardo,
7. Applying the Law to the Facts.
The Court weighs the Lombar-do/O’Brien/Quinn factors as follows:
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Movant reliеs on Debtor’s high income, his failure or refusal to try to pay or settle Movant’s debt, his failure to schedule his wife’s jewelry, his use of historical average expenses on his Schedule J, and the fact that Movant is Debtor’s only unsecured creditor.
Debtor, in turn, relies on his age, his lack of retirement savings, his modest lifestyle, and his compliance with his obligations under the Bankruptcy Code. Debt- or’s position is that he has the legal right to discharge Movant’s debt if he files for bankruptcy relief and turns his non-exempt property over to a Chapter 7 trustee. All things considered, Debtor deemed it more prudent, and within his rights, to file a Chapter 7 case rather than pay Movant its $170,000 judgment.
Debtor’s current income is very high by New Mexico standards, $290,000 per year. As shown above, however, a high income is not sufficient for a bad faith/cause finding under § 707(b).
Movant’s second major point, that Debt- or made no effort to pay the Movant’s debt, also is not well taken. Debtor could not afford to defend himself in the Mis
For most people with Debtor’s age, experience, and current income, choosing to file a Chapter 7 bankruptcy case would be prohibitively expensive. In Debtor’s case the cost to him was $80,000 plus attorney fees. Although not all individuals would have made this choice, it is not indicative of bad faith.
Movant next points to Debtor’s decision not to list his wife’s jewelry on his bankruptcy schedules as evidence of bad faith. The Court dоes not believe this indicates bad faith, for three reasons. First, the Debtor readily disclosed the jewelry to the Chapter 7 trustee at the § 341 meeting. Second, the Debtor had a good faith basis for asserting that he did not have to disclose the jewelry, since it could be that under Missouri law the jewelry is separate property. Third, his decision not to disclose the jewelry was based on advice of counsel.
Debtor’s actions when faced with the Chapter 7 Trustee’s demand for turnover are consistent with good faith. Debtor promptly settled with the Trustee for what appears to be a very reasonable amount. Movant will receive all of these proceeds, less the trustee’s commission.
Movant next complains that Debtor inflated his Schedule J monthly expenses. This complaint has some merit, but Debt- or’s explanation was plausible. Debtor’s Schedule J expenses arе accurate historical average expenses for the year before the Petition Date. Debtor got the figures from Quicken or similar financial software. In most cases, the method Debtor used yields accurate information about current expenses. In Debtor’s case, the figures included many nonrecurring expenses, so Debtor’s monthly expenses were overstated. The Court does not find that this was the result of bad faith.
Finally, Movant argues that the fact it is the Debtor’s only unsecured creditor should be held against Debtor. The Court does not see it that way. The Debtor does not have a history of credit problems or failure to pay debts when due. On the contrary, the evidence indicates that Mov-ant’s judgment may be the only unpaid debt Debtor has ever had. Debtor’s refusal to pay a debt he does not think justly due, even if stubborn and/or wrong on the law, is not bad faith, so long as the requirements of the Bankruptcy Code are met.
Based on the totality of the circumstances and duly weighing the factors listed above, the Court finds that there is no bad faith or other cause under § 707(a) to dismiss Debtor’s Chapter 7 case.
B. Conversion Under § 706(b),
Section 706(b) provides: “On request of a party in interest and after notice and a hearing, the court may con-
The Court should take into account whether there would be grounds to dismiss the case once it has been converted to Chapter 11 under 11 U.S.C. § 1112(b). In re Hardigan,
Two New Mexico cases have addressed whether to convert a Chapter 7 case to Chapter 11 even though there are insufficient bad faith grounds to dismiss the case under § 707(a). In Quinn, the court denied the motion to convert because the movant relied on the same evidence under § 706(b) as it did for its request under § 707(a). Quinn held: “Under these circumstances, it is not appropriate to compel the same end result through conversion to Chapter 11 when it is not appropriate to dismiss the Chapter 7 case_”
A similar analysis was applied in In re Lobera, where the court denied a § 706(b) request, stating: “[The movants] do not suggest any additional reasons for converting the case to Chapter 11 than they do for dismissing it under Section 707(a).” Id. at 854. See also In re Hardigan,
Furthermore, as pointed out in Lobera there are potential constitutional problems with compelling an individual Chapter 7 debtor to convert to Chapter 11.
Here, the evidence relied on to support conversion under § 706(b) was identical to the evidence supporting § 707(a) dismissal. Following Quinn, Lobera, and Hardigan, the Court will not do indirectly what Mov-ant has failed to show should be done directly. Even if such a showing had been made, the Court thinks dismissal is the only reasonable alternative, rather than conversion, unless the Debtor freely agrees to reorganize under Chapter 11. The Court, therefore, will deny the motion to the extent it seeks conversion.
III. CONCLUSION
Dismissing a Chapter 7 case for “bad faith” should be done only in exceptional
The Court will deny the Motion. A separate order consistent with this Memorandum Opinion will be entered.
Notes
. The purchase turned out to have been pra-dent, since a malpractice claim was brought
. All statutory references are to 11 U.S.C.
. Court does not know, and does not rule on, whether Debtor’s views about Movant’s claim have any merit.
.
. Reprinted in Collier on Bankruptcy, 16th Ed., Appendix D, pt. 4(e)(1), p. 2044.
. Had Debtor filed for bankruptcy relief shortly after Movant fired him, he would havе been unemployed. At that time, it seems no bad faith argument could have been made. It is fair to conclude, therefore, that the main fact Movant is focused on is Debtor’s current income.
. The Motion refers to § 707(b) as the basis for conversion. At the hearing, counsel for Movant stated that the section was cited in error. All argument at the hearing referred tó § 706(b) rather than § 707(b), without objection. The Court will therefore address the motion to convert as being brought under § 706(b).