In re Woody
MEMORANDUM OPINION GRANTING MOTION TO DISMISS
This case came before the Court for hearing on October 10, 2017, on the Motion to Dismiss Proceeding or Convert to Chapter 11 [Doc. #74] (“Motion to Dismiss”) filed by Wells Fargo Advisors, LLC (“WFA”) on September 8, 2017. At the hearing
L Procedural and Factual Background
Debtor' commenced this case by filing the Chapter 7 Voluntary Petition [Doc. # 1] (“Petition”) on April 12, 2017 (the “Petition Date”), WFA filed the Motion to Dismiss on September 8, 2017, and Debtor filed the Response [Doc. # 78] (“Debtor’s Response”) on September 21, 2017. WFA filed its Reply in Support of the Motion to Dismiss [Doc. #80] (“WFA’s Reply”) the next day.
WFA filed a claim in this case for an unsecured debt in the amount of $451,412.99, based on four promissory notes (the “Notes”). Motion to Dismiss, pp. 1-2; Claim No. 8-1. Between the fall of 2013 and the spring of 2015, Debtor signed the Notes, identified as Exhibits A through D in the Motion to Dismiss.
In the Motion to Dismiss, WFA moves the Court to dismiss this case for cause pursuant to 11 U.S.C. § 707(a) or, in the alternative, to convert the case to one under Chapter 11 pursuant to § 706. Motion to Dismiss, pp. 1, 5. WFA argues that Debtor’s singling out WFA’s debt for discharge, failure to make lifestyle adjustments or otherwise reduce expenses, and use of chapter 7 to keep a significant amount of assets while “walking away” from his debts constitutes a lack of good faith in the filing of the Petition that warrants dismissal. Id. at 2-6. Debtor contends in response that his principal purpose for seeking bankruptcy relief was to avoid a protracted and costly arbitration proceeding. Debtor’s Response, p. 1. Despite his education and training as a financial advisor, his acceptance in full of the proceeds of the Notes, and the clear terms of the Notes, Debtor disputes his liability on the Notes, claiming that WFA misrepresented the terms of his employment, enticed Debtor to leave his prior employment to work for WFA, and ultimately obtained Debtor’s signature on the Notes through fraudulent inducement. Id. at 2-3. Regardless of the validity of the Notes, the Debt- or argues that WFA has mischaracterized the assets of the estate and Debtor’s financial standing by drawing inferences out of context. Id. at 6.
H. Jurisdiction and Authority
The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 as a matter arising under title 11. Under 11 U.S.C. § 167(a), the United States District Court for the Middle District of North Carolina has referred this case and this proceeding to this Court by its Local Rule 83.11. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F), in which this Court has statutory and constitutional authority to enter final judgments.
III. Discussion
Under Section 707(a), a court may dismiss a chapter 7 case after notice and a hearing for cause. 11 U.S.C.
(1) unreasonable delay by the debtor that is prejudicial to creditors; (2) nonpayment of any fees or chаrges required under chapter 123 of title 28; and (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.
Id. Cause for dismissal under this section includes a lack of good faith in the filing of the petition. See In re Stancil, No. 12-08950-8-SWH,
To determine the presence of bad faith or the absence of good faith under section 707(a), courts both in and out of the Fourth Circuit have assembled and adopted a non-exclusive, totality of the circumstances test. See, e.g., In re Marino,
1.The debtor reduces creditors to a single creditor in the months priоr to the filing of the petition;
2. The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle;
3. Debtor filed the case in response to a Judgment[or] pending litigation ...;4
4. The debtor made no efforts to repay his debts;
5. The unfairness of the use of Chapter 7;
6. The debtor has sufficient resources to pay his debts;
7. The debtor is paying debts to insiders;
8. The schedules inflate expenses to disguise financial well-being;
9. The debtor transferred assets;
10. The debtor’s overly utilizing the protections of the Code to the unconscionable detriment of creditors;
11. The debtor employed a deliberate and persistent plan of evading a single major creditor;
12. The debtor failed to make candid and full disclosure;
13. The debts are modest in relation to assets and inсome; and
14. There are multiple bankruptcies or other procedural “gymnastics.”
Marino,
Courts use these factors as guidelines, applying them as needed to the facts at hand. While the presence of any single factor likely will not be sufficient for a finding of bad faith, the presence of multiple factors, when taken together, may suffice. See Stancil,
A. The debtor essentially is attempting to discharge a single creditor
This case is essentially a two-party dispute between Debtor and WFA. Of the $506,144.20 nonpriority unsecured debt Debtor scheduled on his petition, WFA held $500,000. See Petition, pp. 8, 32. At the hearing, the Debtor testified that, pri- or to filing the Petition, he was making payments “most of the time” on an American Express credit account that constituted approximately $4,000 of the remaining unsecured debt. See Audio Transcript of October 10, 2017, Hearing [Doc. #88] (“Audio Transcript”) at 1:47:00. WFA argues that Debtor’s paying down other debts while attempting to discharge WFA’s entire claim amounts to unfair and preferential treatment of its claim and evidences Debtor’s motive of singling out WFA’s debt as the reason Debtor filed for chapter 7 relief. Debtor counters that this factor does not apply in this case because he did not “reduce” or otherwise manipulate his creditors into a single creditor in the months leading up to the petition.
The United States Bankruptcy Court for the Eаstern District of North Carolina recently rejected a similar counter argument. In In re Edwards, the creditor contended, inter alia, that there was cause to dismiss the debtor’s chapter 7 case because “the filing appeared] to be directed toward discharging two large business debts .,. (totaling 71% of the scheduled debt).” No. 16-06436-5-SWH,
Here, Debtor openly admits that this case was filed solely to avoid the arbitration with WFA and to discharge that debt, which makes up approximately 99% of his total scheduled debt. Debtor filed the Petition nearly two years after leaving WFA. In the interim, Debtor continued to make payments on various mortgages and at least one credit card, but simultaneously made no payments whatsoever on his obligations to WFA and continued to dispute any liability to WFA based on a contention that WFA fraudulently induced Debtor to sign the Notes. Though Debtor and WFA attempted to resolve this issue through negotiations in the fall of 2015, the parties were unable to reach an agreement. See Ex. 22. To date, Debtor has not made any payments to WFA on the Notes since his termination and continues to dispute the validity of the debt in the pending arbitration and in his filings with this Court. See Debtor’s Response, p. 3. There is nothing in the record to indicate that Debtor has contested any other secured or unsecured
B. The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle
Debtor has failed to make lifestyle adjustments in this case. Debtor’s schedules reflect a combined monthly income of $18,546.71 and monthly expenses of $18,242.54. Petition, pp. 37-40, Debtor owns multiple real properties, including two rental properties. Id. at 10-12. Debtor testified at the hearing that neither of the rental properties were currently generating income, and had only been sporadically rented to tenants that often did not pay rent regularly and, in one case, caused significant damage to the рroperty. Audio Transcript, 45:00, 1:38:40. Debtor’s Schedule J reflects a monthly expense in the amount of $1,000 for “Miscellaneous Expenses on Rentals.” Petition, p. 40. Debtor testified that one of the real properties, 2910 Cromwell Road, required approximately $15,000 to $20,000 in repairs, but it was unclear whether any of the repairs had been made or paid for and, if so, whether the scheduled $1,000 per month in rental expenses was an accurate reflection of the cost of such repairs. Audio Transcript, 1:42:00. In addition to the two rental properties in Greensboro, Debtor owns a small beach house located at 27Í Sam Allen Road in Roper, NC, which is used exclusively by Debtor and his family, with the exception of a one month short-term rental to a tenant in the fall of 2016. Id. This beach house generates no other income, and Debtor made no showing that he attempted to rent or sell the property to further his chapter 7 liquidation. Each of the properties is subject to outstanding mortgages, for which the monthly payments on all Debtor’s reаl property obligations total $2,603.03. Petition, pp. 39-40.
In addition to his real properties, Debtor also owns six vehicles. Id. at 13-14. One of the vehicles is an inoperable, older model with high mileage, and two of the vehicles are Debtor’s sons’ primary vehicles. Moreover, approximately one month before filing the petition, and after WFA had initiated an arbitration proceeding against him, Debtor traded in his ownership interest in his 2013 Chevrolet Tahoe to lease a 2017 model. Audio Transcript, 1:45:30. Debtor testified at the heаring, consistent with the information on Schedule J, that he continues to make payments of $421 per month towards the new lease. Id.; Petition, p. 40. In Edwards, the debtors similarly traded in a late-model model vehicle to purchase two newer vehicles. See Edwards,
Debtor’s monthly expenses include $4,153.03 for Debtor’s various mortgages and real property maintenance and repair costs, $1,000 for food and housekeeping supplies, $2,000 for childcare and education costs, $1,000 for entertainment, and $1,421 for transportation and monthly payments on vehicles. Id. at 39-40. Without regard to whether these expenses are “lavish,” they are certainly “expansive.” In In re Gilman, the court determined that the debtors’' monthly expenses of approximately $17,500, including significant expenditures on food and children’s costs, were “significant indicia of an excessive lifestyle,” and weighed in favor of finding cause to dismiss. No. 11-06036-8-SWH,
Debtor urges the Court to follow the Third Circuit’s reasoning in Perlin v. Hitachi Capital America Corp. wherein the court held that a bankruptcy court’s good faith determination is “not without limitations” and cautioned that dismissal under § 707(a) should be used only in “egregious cases.”
C. The debtor has sufficient resources to pay his debts
Debtor’s financial circumstances establish that he has sufficient resources to pay a sizeable portion of the debt owed to WFA. In the Motion to Dismiss and at the hearing, WFA raised concerns regarding certain of Debtor’s expenses that could be reduced or removed, including without limitation
D. The debtor transferred assets
As of the Petition Date, Debtor owned 2910 Cromwell Road, Greensboro, NC as a tenancy by the entirety with his spouse. Audio Transcript, 11:00. Debtor inherited this property from his parents in 2005. Id. The property was titled solely in Debtor’s name until Debtor deeded the property to himself and his spouse in October 2015, one month following the breakdown of negotiations between Debtor and WFA for repayment of the Notes. Id. at 12:00. Debt- or testified at the hearing that the property was transferred after meeting with an estate planner for the purpose of creating a will, but offered no other explanation why this was necessary. Id.
If unavoidable, this transfer potentially shielded the real property from WFA. “[R]eal property owned as tenants by the entirety in North Carolina is not subject to a claim by a creditor against only one spouse.” In re Knapp,
Debtor does not dispute that he filed this case in response to WFA’s arbitration proceeding. Audio Transcript, 18:30. In Debtor’s Response, Debtor stated that he anticipated the arbitration would cost him over $100,000 in legal fees. Debtor’s Response, p. 1. Debtor also confirmed this expected expense through his testimony at the hearing and stated that the arbitration was “extremely” time-consuming. Audio Transcript, 19:00. However, Debtor also testified that the only documents filed on his behalf in the arbitration were an answer and'counterclaim, and that he had spent approximately $10,000 on representation. Id. at 39:00. In Edwards, the court granted a motion to dismiss, partly in consideration of the fact that creditors had sent the debtors demand letters indicating litigation may be forthcoming, although no lawsuits had been filed as of the petition date. Edwards,
F. The debtor made no efforts to repay his debt to WFA
After Debtor terminated his employment with WFA, Debtor and WFA engaged in negotiations regarding payment of the outstanding balance of the Notes. See Ex. 22. These negotiations did not result in an agreement between the parties on the amount to be repaid or any payment schedule, and WFA commenced the arbitration proceeding as a result. At the hearing, Debtor argued that he asked WFA to continue to work with him on finding a compromise acceрtable to both sides but that WFA was unwilling to cooperate. In contrast, WFA argued it was in fact Debtor who was not participating in good faith to resolve the dispute. Regardless of the status of negotiations, WFA contends the pending arbitration is the proper mechanism to reach a resolution of the issues surrounding the Notes, but instead Debtor has chosen to seek a discharge of the entire debt rather than substantively participate in the arbitration process. Both parties claim they were open to further negotiation outside of formal court proceedings, but simultaneously claim it was the other party who stymied such efforts. In any event, Debtor did not present any evidence of efforts to repay the WFA obligations, and this factor therefore weighs in favor of dismissal.
G. The totality of circumstances standard requires dismissal
The Court did not find Debtor’s testimony at the hearing credible. In particular, the Court found it implausible that this Debtor, as a financial planner, did not read or understand the terms of the Notes that he signed in exchange for the receipt of over one half million dollars. The Eastern District of North Carolina has noted that the fourteen-factor, totality of the cireum-stances
IV. Conclusion
For the reasons set forth above, the Court will enter an order granting WFA’s Motion to Dismiss,
SO ORDERED.
Notes
. WFA attached its Proof of Claim [Claim No. 8] to the Motion to Dismiss as "Exhibit A,” but also attached the Notes with exhibit stickers listing the Notes as Exhibits A through D. For the purposes of this Order, the Court will consider the first of four Notes as “Exhibit A.”
. The numbered exhibits in this Order refer to the exhibits contained in the trial binder jointly submitted by the parties and admitted into evidence at the October 10, 2017, hearing.
. The first Note was the transition bonus; the remaining three Notes were asset and performance bonuses. Exs. A-D,
. This factor is more clearly stated as: "[T]he debtor filed the case in response to a judgment, pending litigation, or a collection action See e.g., In re Piazza,
. This transfer not only indicates an expansive lifestyle, but also reduced the assets available for execution by WFA. See Section III, D., infra.