McDow v. Smith

• Decision Date: 23 June 2003
• Docket Number: No. CIV.A. 03-30-A.,CIV.A. 03-30-A.
• Citation: 295 B.R. 69
• Court: U.S. District Court — Eastern District of Virginia
• Parties: W. Clarkson MCDOW, Jr., U.S. Trustee, Appellant, v. William Carl SMITH, Appellee.

295 B.R. 69

W. Clarkson MCDOW, Jr., U.S. Trustee, Appellant, v. William Carl SMITH, Appellee.

No. CIV.A. 03-30-A.

United States District Court, E.D. Virginia, Alexandria Division.

June 23, 2003.

COPYRIGHT MATERIAL OMITTED

Jack Ira Frankel, Office of United States Trustee, Alexandria, VA, for Plaintiff.

Stephen E. Leach, Leach Travell P.C., McLean, VA, for Defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

In this bankruptcy appeal, the appellee, a debtor with a significant debt to the Internal Revenue Service ("IRS"), seeks to discharge this debt even though, by any fair standard, his annual income is munificent, and he spends much of it on private education for his children and the rental of his large and expensive family home. This case, one of first impression in this circuit, presents the following novel questions: (1) whether "cause" for dismissal under 11 U.S.C. § 707(a) includes a debtor's lack of good faith; and if so, (2) whether the facts presented here reflect a lack of good faith on the part of this debtor.

I.¹

Appellee, William Carl Smith ("debtor"), is fifty-seven years old, married with five children, four of whom reside with him and his current spouse at their home.² His current spouse does not work outside the home.

The debtor attended both college and graduate school, earning a bachelor's degree from Georgia Tech University and an M.B.A. from Stanford University. Thereafter, since the early 1970's, he has been engaged in commercial real estate ventures, including development and ownership of several commercial office buildings in Washington, D.C. Although he prospered for some period of time, the 1989 real estate market decline apparently caused the debtor to suffer some economic setbacks that led to a significant loss of income, and in 1991, to the loss of his home to foreclosure. In 1996, he surrendered his various real estate partnership interests to his business partners in order to satisfy debts secured by those interests. This surrender was a taxable event resulting in a significant federal income tax liability of approximately $3.2 million, which, with penalties and interest, has now grown to approximately $5.1 million.

In 1998, the debtor submitted a proposal to the IRS offering to pay approximately $80,000 of the total tax debt owed. This amount constitutes two cents on the dollar, and is the same proportional amount he agreed to pay in the settlement of his state tax debt with the Virginia Department of Taxation. The IRS declined this offer, and the debtor appealed, but his offer was again refused. The IRS made a counteroffer: the debtor would be allowed to satisfy his entire tax debt by paying $289,000, if paid within 90 days or $580,000 if paid over a longer period of time. The debtor refused this counteroffer.

The debtor's total debt to all creditors is $5,461,986.85, the lion's share of which is the $5,135,464.66 owed to the IRS. The IRS debt is largely unsecured, and moreover, the debtor has few assets to which an IRS lien might attach.

The debtor is currently employed by Peterson Companies, a real estate development firm. He is a salaried employee, without an ownership interest, and his annual compensation is $250,000. He also receives incentive bonuses that raise his annual salary to $454,000. His schedule of income filed in this case states that his monthly take-home pay is $28,843. His filings also reflect that his savings consist of a small 401(k), with a balance net of loans of slightly under $80,000. His monthly living expenses total $31,993, which sum includes the following expenditures: $6,618 per month for rental of a four-bedroom house situated on a two-acre lot in Great Falls, Virginia;³ $6,060 per month in credit card payments; $1,700 per month in recreation expenses;⁴ and $4,903 per month in support of his dependents, which is composed chiefly of private school tuition.

Of the debtor's four children who reside with him, three are enrolled in private schools, and a fourth in public school. One child is enrolled in a local Catholic parochial high school, where the annual tuition is $7,000 per year; a second child is enrolled in a private girls' school in McLean, Virginia, where the tuition is $25,000 per year; and, the third, his son, is enrolled in an out-of-state private academy that specializes in children with learning disabilities.⁵ The tuition at this school is $36,000 per year. The total cost of private schooling for the debtor's children is $68,000 per year.

On May 2, 2002, the debtor filed a voluntary Chapter 7 petition, accompanied by his schedules and statement of financial affairs. Thereafter, on August 7, 2002, the appellant, W. Clarkson McDow, Jr., the United States Trustee ("Trustee"), filed a motion to dismiss, pursuant to 11 U.S.C. § 707(a), in United States Bankruptcy Court in the Eastern District of Virginia ("bankruptcy court"). In support of this motion, the Trustee argued that there was "cause" to dismiss the debtor's case because he filed his petition for bankruptcy in bad faith. More specifically, the Trustee argued that "cause" under § 707(a) includes filing a petition in bad faith and that the definition of "bad faith" should include circumstances where the debtor leads a "lavish lifestyle" and accordingly, is capable of satisfying his debts over time were he to modify his lifestyle. On November 19, 2002, the bankruptcy court denied the Trustee's motion to dismiss, holding that the "mere ability to repay...is simply insufficient grounds,...to allow dismissal of the case." While the debtor had the ability to repay his debts over time and enjoyed a "lifestyle that would undoubtedly be the envy of the vast majority of those who are compelled by financial circumstances to file in [bankruptcy] court," the debtor's case presented none of the "egregious circumstances" that were present in other bankruptcy cases. The bankruptcy court concluded that the ability to repay one's debts must be coupled with some other "egregious circumstances" to warrant dismissal for lack of good faith. See In re William Carl Smith, Case No. 02-82137 (Bankr.E.D. Va. October 23, 2002) (Transcript).

On December 2, 2002, the Trustee filed a notice of appeal of the bankruptcy court's decision, and oral argument was heard on May 2, 2003. The matter is now ripe for disposition.

II.

A district court's scope of review of a bankruptcy court's decision is clear and well-established: A bankruptcy court's findings of fact are reviewable only for clear error, while its conclusions of law are subject to de novo review. See In re Johnson, 960 F.2d 396, 399 (4th Cir.1992). Mixed questions of law and fact are also reviewed de novo. See Litton v. Wachovia Bank, 330 F.3d 636, 641-42 (4th Cir.2003).

The bankruptcy court's factual findings, which are recited in Part I, are not in dispute; indeed, the debtor's financial information is derived from the schedules he filed with his bankruptcy petition. Thus, at issue and subject to de novo review here are the bankruptcy court's legal conclusions (1) that "cause" under § 707(a) includes bad faith on the part of a debtor, and (2) that this debtor's ability to repay his debts and his "lavish lifestyle" alone, without other evidence of wrongdoing or egregious circumstances, was insufficient "cause" for dismissal of a Chapter 7 petition.

A.

No Fourth Circuit decision squarely addresses these questions. Given this, the search for an answer to the first question properly begins with an examination of § 707(a) itself, which provides that "[t]he court may dismiss a case under this chapter only after notice and a hearing and only for cause, including." The statute then goes on to provide three examples of "cause" for discretionary dismissal:

(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; 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, but only on a motion by the United States trustee.

11 U.S.C. § 707(a) (emphasis added).

"Cause" is not expressly defined in § 707(a); stated instead are three non-exclusive,⁶ illustrative grounds for dismissal. In these circumstances, the sensibly settled construction canon of ejusdem generis is a reliable guide to what other grounds may qualify as "cause" under § 707(a). This canon holds that "the meaning of an ambiguous term may be determined by reference to other terms accompanying it in the statute." United States v. Davis, 872 F.Supp. 1475, 1480 (E.D.Va.1995); United States v. Parker, 30 F.3d 542, 553 n. 10 (4th Cir.1994) (applying ejusdem generis to interpret general statutory terms "in light of the specific terms that surround it") (quoting Hughey v. United States, 495 U.S. 411, 419, 110 S.Ct. 1979, 109 L.Ed.2d 408 (1990)). In other words, "where an enumeration of specific words is supplemented by a more general reference, the general term may be limited to the class suggested by the enumerated words." Davis, 872 F.Supp. at 1480 (citing Harrison v. PPG Industries, Inc., 446 U.S. 578, 588, 100 S.Ct. 1889, 64 L.Ed.2d 525 (1980)). Thus, the next step in the analysis is to ask whether a debtor's bad faith falls within the same class as the three illustrative examples of "cause" enumerated in § 707(a). It does.

In general, a debtor's "bad faith" or "lack of good faith" is evidenced by the debtor's deliberate acts or omissions that constitute a misuse or abuse of the provisions, purpose, or spirit of the Bankruptcy Code.⁷ Similarly, a debtor's unreasonable delay, failure to pay required fees and failure to meet filing deadlines are all acts or omissions that may reflect a debtor's misuse of the bankruptcy process; in the absence of inadvertence or excusable neglect, they bespeak a debtor's lack of good...