RALPH JANVEY, Creditor - Appellant, v. PETER ROMERO, Debtor - Appellee.
No. 17-1197
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
Argued: December 6, 2017 Decided: February 21, 2018
Before GREGORY, Chief Judge, and WILKINSON and HARRIS, Circuit Judges.
PUBLISHED. Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Chief Judge Gregory and Judge Harris joined. ARGUED: Kevin Marshall Sadler, BAKER BOTTS L.L.P., Palo Alto, California, for Appellant. Kevin Gerald Hroblak, WHITEFORD TAYLOR & PRESTON, L.L.P., Baltimore, Maryland, for Appellee. ON BRIEF: Scott D. Powers, Stephanie F. Cagniart, BAKER BOTTS L.L.P., Austin, Texas, for Appellant.
Appellee Peter Romero filed a Chapter 7 bankruptcy petition after he was found liable for $1.275 million to the victims of a multibillion-dollar Ponzi scheme. Appellant Ralph Janvey, the receiver in the Ponzi scheme litigation, moved to dismiss Romero‘s bankruptcy petition for cause under
I.
A.
We begin with the facts of the underlying litigation, which hover above and around the present action but do not strictly pertain to the question before us. They are, to borrow a term from film, the McGuffin in this case.1
Peter Romero had a storied career in the Foreign Service. He served for twenty-four years with the State Department, most prominently as an Ambassador and as Assistant Secretary of State for Western Hemisphere Affairs. Upon retiring from the Foreign Service, Romero founded a private consulting company to advise companies that do business overseas. One of his clients was the Stanford Financial Group (Stanford). Romero consulted for Stanford for approximately seven years. He earned a total of $700,000 in fees plus reimbursements for travel expenses and returns on his own Stanford investments. While Romero was working for Stanford, the company was being used to carry out a multibillion-dollar Ponzi scheme. The scheme was unearthed in 2009, at which point Romero cut ties with Stanford.
B.
And so we arrive at the present bankruptcy action. Romero voluntarily filed a Chapter 7 bankruptcy petition in the District of Maryland the day after the judgment against him was certified in California. At the time, Romero‘s financial situation was as follows:
Assets: Romero‘s assets totaled more than $5.348 million. The majority of these assets, however, were statutorily exempt. Nobody challenged these claimed exemptions. Among Romero‘s exempt assets were three real properties he owned with his wife as tenants by the entirety, one of which was their home and the others of which were rental properties. Romero also claimed as exempt pension, retirement, and benefit plans. Romero‘s nonexempt assets included one car and two boats, which he turned over to the Chapter 7 trustee for administration. The trustee sold both the car and one of the boats, and Romero agreed to pay the docking and insurance fees for the other boat until it was sold.2
Unsecured Debts: Janvey‘s judgment accounted for roughly 90% of Romero‘s unsecured debt when he filed for bankruptcy. The remainder was composed of debts with two law firms for unpaid legal fees totaling approximаtely $150,000.3
Expenses: Most prominent among Romero‘s expenses were his wife‘s medical costs, which averaged $12,000 per month. Romero‘s wife had contracted a bacterial brain infection in 2013 that left her incapacitated and in need of extensive care. Until recently, the majority of Romero‘s wife‘s medical expenses were covered by her three disability policies and Romero employed a live-in caretaker. After Romero filed for bankruptcy, however, two of his wife‘s three disability policies were terminated; meanwhile, her condition slightly improved and Romero was able to scale back to daily care. Romero also listed entertainment expenses of $1,000 per month, most of which went to the docking and other costs for the boat he had turned over to the trustee.
Income: Romero reported monthly income approximately $350 less than his monthly expenses. Romero and his wife were both unemployed—she because of
More than six months after Romero filed for bankruptcy, Janvey moved to dismiss his petition under
Janvey appealed the denial of his motion to dismiss and—by inference, at least—the eventual discharge of Romero‘s debt to the district court, which affirmed the order of the bankruptcy court. He now appeals to this court. We, like the district court, review the bankruptcy court‘s denial of a motion to dismiss for abuse of discretion, its factual findings for clear error, and its legal conclusions de novo. See In re Jenkins, 784 F.3d 230, 234 (4th Cir. 2015); In re Piazza, 719 F.3d 1253, 1271 (11th Cir. 2013). Janvey‘s claims boil down to an accusation that Romero has abused the bankruptcy process and should therefore be ineligible for its protections. For the reasons that follow, we do not agree.
II.
A bit of background may be helpful in understanding the operation of the relevant statutes. The Bankruptcy Code balances the interests of both creditors and debtors in the distribution of an insolvent party‘s assets. The purpose of the Code is therefore twofold: “to convert the estate of the bankrupt into cash and distribute it among creditors and then to give the bankrupt a fresh start.” Kokoszka v. Belford, 417 U.S. 642, 645-46 (1974) (quoting Burlingham v. Crouse, 228 U.S. 459, 473 (1913)). The Code serves the interests of creditors by “consolidat[ing] the debtor‘s assets into a broadly defined estate from which, in an equitable and orderly process, the debtor‘s unsatisfied obligations to creditors are paid to the extent possible.” In re Andrews, 80 F.3d 906, 909-10 (4th Cir. 1996) (footnote omitted).
At the same time, the Code aims to “grant a ‘fresh start’ to the ‘honest but unfortunate debtor.‘” Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 286, 287 (1991)). This fresh start allows the debtor to “restructure [his] financial obligations,
Although the interests of creditors and debtors are at odds during insolvency—the creditor would like to be paid in full and the debtor would like to pay as little as possible—as a general matter, the Code‘s balance benefits creditors and debtors alike. See generally Douglas C. Baird, Bankruptcy‘s Uncontested Axioms, 108 Yale L.J. 573, 583-86 (1998); Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393, 1424-47 (1985). If debtors had to pay their creditors no matter what, or if they were forced to give up all their assets before they could discharge their debts, individuals and businesses would be less likely to borrow money. In protecting certain assets from creditor claims, the Code incentivizes individuals to incur debt and thereby suppоrt both creditors and our capital markets. Similarly, by ensuring that creditors receive a fair and predictable distribution of assets, the Code reduces the risks creditors face and allows creditors to account for the risk that a borrower will fail to repay. The benefit of these decreased risks is then passed on to debtors in the form of lower interest rates. The fresh start policy is therefore “of public as well as private interest.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
In furtherance of this dual mandate, the Code supplies various avenues of relief to debtors seeking to discharge their debts. Relevant here is Chapter 7, whiсh allows debtors to discharge their outstanding debts in exchange for liquidating their nonexempt assets and distributing them to their creditors. Chapter 7 also supplies various tools for bankruptcy courts to use in policing the Code‘s enduring tension between debtors and creditors. This case involves
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 chaрter 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.
“Cause” is an open-ended term. It is not defined in
A.
For the most part, courts have recognized that a debtor‘s bad faith in filing may constitute cause for dismissal under
We think the majority view is the sounder one, because it is the most helpful in preventing serious abuses of the bankruptcy process. But acknowledging that bad faith may constitute “cause” under
B.
The concept of bad faith “does not lend itself to a strict formula.” Piazza, 719 F.3d at 1271. Courts must consider the totality of the circumstances underlying each case to determine whether a debtor has acted in bad faith. To aid in this effort, bankruptcy courts have developed a number of multifactor tests. See, e.g., McDow, 295 B.R. at 79 n.22 (proposing eleven factors); In re Griffieth, 209 B.R. 823, 827 (Bankr. N.D.N.Y. 1996) (proposing six factors); In re Spagnolia, 199 B.R. 362, 362, 365 (Bankr. W.D. Ky. 1995) (proposing fourteen factors). These tests are meant to be guides only. A bankruptcy cоurt need not mechanically tick off each factor and tally up its tick-marks at the end. It may be the case that many factors are relevant, or it may be the case that relatively few of them are. It all depends. Evaluating these factors and their comparative relevance is a discretionary exercise that is best left to bankruptcy judges. After all, many of the potentially pertinent factors involve credibility determinations or exercises in fact-finding. See, e.g., Griffieth, 209 B.R. at 827
The bankruptcy court in this case employed the eleven-factor bad-faith test set forth in McDow, 295 B.R. at 79 n.22. Those eleven faсtors represent a distillation of the various “totality of the circumstances test[s]” courts have applied in determining whether a debtor‘s actions amounted to bad-faith cause for dismissal. Id. at 79. They are meant to represent the “factors [that] are typically considered” in that analysis. Id. at 79 n.22. Among them are “[t]he debtor‘s lack of candor and completeness in his statements and schedules“; “[t]he debtor has sufficient resources to repay his debts, and leads a lavish lifestyle“; “[t]he debtor‘s motivation in filing is to avoid a large single debt incurred through conduct akin to fraud, misconduct, or gross negligence“; and “[t]he debtor‘s lack of attempt to repay creditors.” See
Careful consideration of the McDow factors here—aided by lengthy briefing from the parties, dozens of exhibits, and a three-hour evidentiary hearing—led the bankruptcy court to conclude that Romero had not acted in bad faith. While Janvey‘s judgment may have been Romero‘s “primary motivation in filing,” the bankruptcy court found that it was not the only reason he filed. Romero, 557 B.R. at 883. Romero‘s wife was suffering from a brain infection that required extensive care and left her “100% incapacitated for work.” Id. at 879. The bankruptcy court found that this infection had impaired her motor skills, balance, and eyesight to such an extent that she and Romero had to remodel their home so that she could live on the first floor. Id. It also found that Romero‘s wife‘s condition had at one point necessitated employment of a live-in caretaker and that it still required “a daily home caregiver, except for Sundays and part of Saturdays when [Romero] manages his wife‘s care on his own.” Id. Moreover, the court noted that two of Romero‘s wife‘s disability policies—which together comprised the majority of her disability payments—were about to end when he filed for bankruptcy. Id. at 879, 883-84. It predicted that the subsequent termination of thesе policies would result in an increase in the couple‘s out-of-pocket medical expenses, which were already steep at $55,000 in the year before Romero filed. Id. at 884.
The bankruptcy court also found that, as a result of his affiliation with Stanford, Romero had “found it impossible to obtain work.” Id. at 883. And he still owed approximately $150,000 in legal fees from the underlying litigation, in which Janvey had employed “aggressive and costly litigation tactics.” Id. at 884. The bankruptcy court commended Romero for being candid, forthcoming, timely, and cooperative throughout both the instant and the underlying litigation. It explained that he had surrendered his nonexempt assets and twice attempted to settle with Janvey. The bankruptcy court also found that Romero‘s lifestyle was “comfortable, but not exorbitant.” Id. at 883. And it found nothing duplicitous about Romero‘s desire to preserve
IV.
Janvey raises three primary objections to the bankruptcy court‘s denial of his motion to dismiss. First, he argues that Romero should not be allowed to benefit from the Code‘s protections because he filed for bankruptcy solely to avoid Janvey‘s judgment. Second, he suggests that Romero‘s efforts to settle the underlying litigation betrayed his bad-faith motive. And finally, Janvey maintains that Romero‘s petition ought to be dismissed on the basis of his substantial assets and attendant ability to pay the judgment. Each of these objections is rooted in a factor that may well prove relevant to the bad-faith analysis. See McDow, 295 B.R. at 79 n.22 (listing as potentially relevant factors “[t]he debtor‘s motivation in filing is to avoid a large single debt incurred through” improper conduct; “[t]he debtor‘s lack of attempt to repay creditors“; and thе debtor‘s “sufficient resources to repay his debts“). But there is a risk in elevating any single factor above all others as the sine qua non of bad faith. And yet this is precisely what Janvey‘s objections would have us do.
A.
Janvey first objects that bankruptcy should be unavailable to Romero because he seeks to avoid a single large debt—namely, Janvey‘s judgment against him. This objection is flawed for two reasons.
As a factual matter, it is simply not the case that Romero filed for bankruptcy solely to avoid the judgment. The bankruptcy court found that Romero filed for many reasons. Romero, 557 B.R. at 883-84. Chief among his motivations was his wife‘s medical condition, which left her totally incapacitated and entailed substantial expenses for her care. Additionally, Romero had multiple debts. Aside from to the $1.275 million he owed Janvey, he also owed debts to two separate law firms totaling approximately $150,000. The fact that Janvey‘s judgment accounted for roughly 90% of Romero‘s total debt does not negate those other claims. In fact, courts have declined to dismiss Chapter 7 petitions filed in response to debts that constitute similarly large fractions of the debtor‘s total debt. See In re Bage, No. 13-33367, 2014 WL 4749072, at *2, *5 (Bankr. N.D. Ohio Sept. 24, 2014) (denying a motion to dismiss where litigation-rеlated debt accounted for more than 90% of the total unsecured debt); In re Ajunwa, No. 11-11363 (ALG), 2012 WL 3820638, at *1, *9 (Bankr. S.D.N.Y. Sept. 4, 2012) (denying a motion to dismiss where one judgment “accounted for over 90% of the total claims listed“).
As a legal matter, the fact that a bankruptcy petition was filed in response to a single debt need not alone constitute bad-faith cause for dismissal. “Almost every bankruptcy case is filed because a creditor is pursuing a debtor.” In re Bushyhead, 525 B.R. 136, 149 (Bankr. N.D. Okla. 2015). The purpose of bankruptcy law, after all, “is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life.‘” Grogan, 498 U.S. at 286 (quoting Local Loan Co., 292 U.S. at 244). A person becomes insolvent when he is no longer able to meet his financial obligations as they become due. See
For these reasons, courts have frequently held that without additional evidence of fraud or misconduct, the fact that a debtor filed for bankruptcy in response to a single large debt is not sufficient for a finding of bad faith. See, e.g., In re Chovev, 559 B.R. 339, 347 (Bankr. E.D.N.Y. 2016); In re McVicker, 546 B.R. 46, 51 (N.D. Ohio 2016); In re Gutierrez, 528 B.R. 1, 15 (Bankr. D. Vt. 2014); In re Grullon, No. 13-11716 (ALG), 2014 WL 2109924, at *3 (Bankr. S.D.N.Y. May 20, 2014); In re Mazzella, No. 09-78449-478, 2010 WL 5058395, at *6 (Bankr. E.D.N.Y. Dec. 6, 2010); In re Glunk, 342 B.R. 717, 736 (Bankr. E.D. Pa. 2006).
None of this is to say that courts may not consider the nature of a debtor‘s motivation to file for bankruptcy. The fact that a bankruрtcy petition was filed to skirt the collection efforts of a single creditor may well prove relevant in the overall bad-faith analysis. See McDow, 295 B.R. at 79 n.22 (listing this factor among others); Griffieth, 209 B.R. at 827 (same); Spagnolia, 199 B.R. at 365 (same). Indeed, both the district and bankruptcy courts below took note of the fact that Janvey‘s judgment served as the catalyst for Romero‘s bankruptcy petition. But Janvey now attempts to transform this single factor into a per se test for bad faith. Because such an attempt would blind us to the totality of Romero‘s circumstances, we reject it.
B.
Janvey‘s second objection attributes bad-faith motivation to Romero‘s two attempts to settle the underlying judgment. He suggests that Romero was trying to pressure him into accepting a mere fraction of his judgment by casting bankruptcy as the alternative to settlement.
Janvey was, of course, well within his rights to reject Romero‘s settlement offers. But we find groundless the notion that Romero‘s attempts to settle with a judgment creditor constitute cause to dismiss his case. The law encourages voluntary settlement of disputes. See United States v. Cannons Eng‘g Corp., 899 F.2d 79, 84 (1st Cir. 1990) (“[I]t is the policy of the law to encourage settlements.“); Bank of Am. Nat. Tr. & Sav. Ass‘n v. Hotel Rittenhouse Assocs., 800 F.2d 339, 344 (3d Cir. 1986) (describing “the strong public interest in encouraging settlement of private litigation“). Settlement yields both private and public benefits. It spares the parties substantial costs in terms of time and money, and it lightens the docket of a resource-strapped judicial system.
In line with these principles, debtors and creditors remain free to settle their debts among themselves outside the courtroom and before resorting to bankruptcy. The tools at their disposal are varied. A creditor, for instance, may choose to forbear from immediately collecting a debt and thereby offer the debtor a momentary reprieve. Or he may allow the debtor to refinance or modify his loan in order to provide a more permanent solution. Sеttlement is simply a way creditors and debtors
But the fact that parties often settle does not mean that the failure to settle should deprive debtors of the backstop provided by bankruptcy law. Far from amounting to “blackmail,” Appellant‘s Br. at 38, the backstop of bankruptcy encourages parties to come to the table to reach an agreement when debts cannot be paid in full. It is altogether right that the parties can rest assured that, should settlement fail, bankruptcy will provide a way for them to resolve their case.
There are, to be sure, limitations on settlement in bankruptcy, among them the prohibition on preferred treatment of certain creditors in the immediate prepetition period. See
C.
Janvey‘s final objection boils down to a belief that Romero should not be allowed to discharge his debts in bankruptcy because he has too much money. Janvey suggests that Romero should use his substantial assets—which were almost all exempt—to pay the judgment against him. This argument falters not only on its assumption that a debtor‘s ability to repay his debts alone constitutes cause for dismissal but also on its reliance on Romero‘s exempt assets. We address these flaws in turn.
A debtor‘s ability to repay debts does not alone amount to cause for dismissal. See Bushyhead, 525 B.R. at 148 (noting a “consensus among the courts” on this issue). As the House Report noted, “[t]he section [§ 707(a)] does not contemplate . . . that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal.”5 H.R. Rep. No. 95-595, at 380 (1977). Such a conclusion also follows logically from the Code‘s fresh-start philosophy. A penniless start is not a fresh start. Were absolute depletion of one‘s assets a prerequisite for bankruptcy relief, debtors and their families would be left destitute and without the means to become productive members of society. This would increase the strain on our social safety net by increasing the
Forcing a debtor to repay his debts using exempt assets before resorting to bankruptcy would also undercut the entire exemption scheme that Congress designed. The “historical purpose” of bankruptcy exemptions “has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge.” H.R. Rep. No. 95-595, at 126. Bankruptcy exemptions are meant to “afford the debtor some economic and social stability, which is important to the fresh start guaranteed by bankruptcy.” In re Morehead, 283 F.3d 199, 203 (4th Cir. 2002). They represent a careful balance of “the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors.” Schwab v. Reilly, 560 U.S. 770, 791 (2010). Janvey‘s suggestion that Romero should use his exempt assets to pay the judgment turns this carefully crafted scheme on its head. We reiterate that the ability to repay debts may be a relevant factor in the holistiс bad-faith analysis. See McDow, 295 B.R. at 79 n.22. But for the reasons stated above, we reject Janvey‘s attempt to transform it into a per se bar to bankruptcy relief.
V.
In ruling that the bankruptcy and district courts did not err in declining to dismiss Romero‘s petition, we remain aware that the bankruptcy process is subject to real abuse. See Robinson v. Worley, 849 F.3d 577, 583 (4th Cir. 2017) (denying debtor a discharge for “knowingly and fraudulently” making “a false oath or account” under
AFFIRMED.
WILKINSON
CIRCUIT JUDGE