Janvey v. Romero

Decision Date21 February 2018
Docket NumberNo. 17-1197,17-1197
Citation883 F.3d 406
Parties Ralph JANVEY, Creditor–Appellant, v. Peter ROMERO, Debtor–Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

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.

Before GREGORY, Chief Judge, and WILKINSON and HARRIS, Circuit Judges.

Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Chief Judge Gregory and Judge Harris joined.

WILKINSON, Circuit Judge:

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 11 U.S.C. § 707(a). The bankruptcy court denied the motion, and the district court affirmed the bankruptcy court's order. We focus only on the matter before us—that is, whether Romero's decision to file for bankruptcy rises to the level of bad faith and therefore constitutes cause for dismissal under § 707(a). Because the bankruptcy court did not abuse its discretion in denying Janvey's motion to dismiss, we affirm.

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.

The Securities and Exchange Commission sued Stanford, its affiliated entities, and its leadership in the Northern District of Texas. That court appointed Ralph Janvey to be the receiver in the litigation. Pursuant to his duties as receiver, Janvey sued Romero to recover for victims of the scheme the payments Romero had received while consulting for Stanford. Romero participated in mediation and offered to settle with Janvey. But mediation proved unsuccessful, and Janvey rejected the settlement offer without proposing a counteroffer. Romero ultimately lost at trial, and Janvey was awarded approximately $1.275 million in damages, interest, and fees. Romero appealed the judgment to the Fifth Circuit with no success. See Janvey v. Romero , 817 F.3d 184 (5th Cir. 2016). While the appeal was pending, he again offered to settle with Janvey, who again rejected the offer without a counteroffer. Janvey instead moved for leave to register the judgment in California under 28 U.S.C. § 1963 on the belief that Romero had property there. The district court granted the motion.

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 approximately $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 her illness and he because he had been unable to find work after the Stanford scheme was discovered. Their combined monthly income came entirely from Romero's State Department pension plan, their two rental properties, social security, and long-term disability.

More than six months after Romero filed for bankruptcy, Janvey moved to dismiss his petition under 11 U.S.C. § 707(a) on the ground that Romero had abused the bankruptcy process to avoid Janvey's judgment. The bankruptcy court denied the motion. See In re Romero , 557 B.R. 875 (Bankr. D. Md. 2016). It acknowledged that bad faith can constitute cause for dismissal under § 707(a), but it found that Romero had not acted in bad faith. In doing so, it applied the eleven bad-faith factors set forth in McDow v. Smith , 295 B.R. 69 (E.D. Va. 2003). The bankruptcy court acknowledged that Romero's "primary motivation in filing the petition was to address [Janvey]'s judgment" but that he also "faced the inability to earn a living, his wife's illness and care needs, the pending termination of two disability policies, and aggressive and costly litigation tactics by [Janvey]." Romero , 557 B.R. at 883–84. The court also noted that Romero had twice tried and failed to settle the matter in the course of the underlying litigation. Id. at 884. It observed that most of Romero's assets were statutorily exempt and that he "lives a comfortable, but not exorbitant, lifestyle. Perhaps his primary discretionary expense is eating out at restaurants. He belongs to no country clubs or social clubs." Id. at 883. The court accordingly denied Janvey's motion to dismiss and ultimately granted Romero a discharge under 11 U.S.C. § 727.

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, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974) (quoting Burlingham v. Crouse , 228 U.S. 459, 473, 33 S.Ct. 564, 57 L.Ed. 920 (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, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting Grogan v. Garner , 498 U.S. 279, 286, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). This fresh start allows the debtor to "restructure [his] financial obligations, discharge [his] pre-existing debt, and emerge from bankruptcy with a new capital structure that better reflects financial reality." Bosiger v. U.S. Airways , 510 F.3d 442, 448 (4th Cir. 2007). To ensure that a debtor is able to receive this fresh start, the Code prevents creditors from making claims on certain assets. See 11 U.S.C. § 522. These so-called exemptions ensure that individuals are able to actually rehabilitate themselves after the bankruptcy process has concluded.

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...

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