Centennial Bank v. Kane
| Decision Date | 22 July 2022 |
| Docket Number | 21-CV-04597-WHO |
| Parties | CENTENNIAL BANK, Appellant, v. EVANDER KANE, Appellee. |
| Court | U.S. District Court — Northern District of California |
ORDER ON BANKRUPTCY APPEAL
This is an appeal from a bankruptcy court order denying appellant Centennial Bank's motion to dismiss appellee Evander Frank Kane's bankruptcy case as an abuse of the provisions of Chapter 7. Section 707(b) of the Bankruptcy Code allows for the dismissal of a Chapter 7 case filed by an individual debtor whose debts are primarily consumer debts if it finds that granting relief would be an abuse of the chapter. A threshold issue is whether the debts are “primarily consumer debts.” The bankruptcy court did not err in the legal standard used or burden of proof imposed in deciding whether Kane's debts were primarily consumer debts. Its well-reasoned conclusion was that they were not consumer debts. Its decision is AFFIRMED.
On January 9, 2021, Kane, a professional hockey player who at the time played for the San Jose Sharks, filed for Chapter 7 bankruptcy with the United States Bankruptcy Court for the Northern District of California. See Appellant's Excerpts of R. (“ER”) [Dkt. No. 10-1] 002-008.[1]In his petition, Kane checked two boxes stating that his debts were not primarily consumer debts and were primarily business debts. Id. at 007. He left blank Question 16c, which directed him to “[s]tate the type of debts you owe that are not consumer debts or business debts.” Id.
On January 28, 2021, Kane filed amended Schedules D and E/F listing his total debt obligations at $28,191,340. Id. at 076, 082, 093. As considered by the bankruptcy court, the total debt consisted of the following:
On March 29, 2021, Centennial Bank moved to dismiss Kane's Chapter 7 case under section 707(b), arguing that granting Kane relief would be an abuse because his debts were primarily consumer debts. See id. at 138-155. In support, Centennial Bank submitted evidence including portions of its Rule 2004 examination of Kane, during which he testified that the purpose of the Centennial Bank Professional Bank, and Zions loans was to pay off preexisting loans, and that he did not use them to buy real estate, or invest in or purchase a business. See id. at 165-167, 172-73, 177, 180-183, 185. Centennial Bank also challenged Kane's statement on his Chapter 7 petition that his debts were “primarily business debts,” saying it was belied by Kane's testimony and Schedules. See id. at 145.
On May 28, 2021, the Hon. Stephen L. Johnson of the United States Bankruptcy Court for the Northern District of California denied the motion to dismiss. Id. at 396. He issued an amended order on June 1, 2021. Id. at 412.[2] The bankruptcy court first noted that the Bankruptcy Code “does not provide much help for interpreting the definition of consumer debt.” Am. Order Denying Mot. to Dismiss (“Order”) at 5:7-8. Relying on dictionary definitions, the court determined that “implicit in the concept of ‘consumer debt' is the notion that the debt is incurred to buy a good or service that the debtor both intends for personal use—that is, destroying or exhausting the good or service to satisfy personal, family, or household needs—and has no intention of reselling.” Id. at 5:17-20. Conversely, debts “incurred in profit-seeking activities” are “incurred to effect a transaction that results in more revenue than expense, or an increase in economic value.” Id. at 5:20-22.
Next, the court adopted the rational set forth in In re Garcia, 606 B.R. 98 (Bankr. D.N.M. 2019), which recognized a “gray area” of debt that was not clearly consumer and not clearly nonconsumer. Id. at 6:1-22. It determined that when debt fell into this gray area, to determine whether that debt is consumer or non-consumer, a court must examine the “totality of the circumstances to determine whether the debtor's purpose in incurring the debt was for consumption, or some other purpose.” Id. at 7:17-20. Those circumstances include the “possibility of reselling whatever the debt was used to purchase” and whether the transaction “resulted in an economic benefit to the debtor.” Id. at 7:20-22.
The court then found that Centennial Bank had not met its burden of proof in establishing the requisites of section 707(b)—specifically, that Kane's debts were primarily consumer debts. Id. at 8:1-9:14. At most, it wrote, Centennial Bank's evidence only shows that Kane's debts were not incurred for a business or profit-seeking purpose—a non-consumer category of debt. Id. at 8:24-27. That did not, however, “affirmatively place the Centennial debt or business loans in the consumer debt category.” Id. at 9:1.
In any case, the court held, the Centennial debt and business loans were not consumer debt. Id. at 10:20-13:11. The court found that Centennial Bank had not proffered evidence showing that Kane's purpose in incurring the debt was consumer, and inferred from the evidence available— including that these debts were used to pay off prior, high-interest loans, that no good or service was consumed, and that the documents for the Zions and South River loans characterized them as business loans—that they were non-consumer debt. See id.
Centennial Bank filed its notice of appeal on June 8, 2021. Dkt. No. 1. For the purposes of this Order, I will focus on the bankruptcy court's amended order denying the motion to exist, though my findings apply with equal weight to both the original and amended orders.
A district court has jurisdiction to hear appeals from a bankruptcy court's final judgments, orders, and decrees. 28 U.S.C. § 158(a)(1); see also In re Cherrett (“Cherrett II”), 873 F.3d 1060, 1065 (9th Cir. 2017) (). On appeal, a bankruptcy court's conclusions of law are reviewed de novo and its findings of fact according to a “clearly erroneous” standard. Continental Cas. Co. v. Chatz, 591 B.R. 396, 409-10 (N.D. Cal. 2018) (citations omitted). Mixed questions of law and fact are generally reviewed de novo, but may be reviewed under the more deferential clear error standard “depending on the nature of the inquiry involved.” Cherrett II, 873 F.3d at 1066 (citation omitted).
Under section 707(b) of the Bankruptcy Code, a court “may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts . . . if it finds that the granting of relief would be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). The moving party must therefore show that (1) the debtor owes primarily consumer debts and (2) granting Chapter 7 relief would represent a substantial abuse of the chapter. See In re Price, 280 B.R. 499, 501 (9th Cir. BAP 2002).
Only the first element is at issue here. The bankruptcy court denied Centennial Bank's section 707(b) motion after finding that Kane's debt was primarily non-consumer debt it did not reach the question of abuse. See Order at 14:12-15.
“Consumer debt” is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8). The statute does not define what is not consumer debt, but the Ninth Circuit has held that debt “incurred for business ventures or other profit-seeking activities is plainly not consumer debt for purposes of section 707(b).” In re Kelly, 841 F.2d 908, 913 (9th Cir. 1988).
The Ninth Circuit has also held that the “key factor” in determining whether debt is consumer debt is the debtor's purpose in incurring that debt. In re Cherrett (“Cherrett I”), 523 B.R. 660, 670 (9th Cir. BAP 2014). If the debt was incurred for more than one purpose, “the primary purpose of the debt will determine its nature.” Id. “Courts determine the debtor's purpose as of the time the debt was incurred.” Cherrett II, 873 F.3d at 1067.
Centennial Bank's appeal presents three primary issues. First, did the bankruptcy court apply the wrong legal standard in evaluating whether Kane's debts were primarily consumer debts? Appellant's Opening Brief [Dkt. No. 10] 6. Next, did the court impose the correct burden of proof in so deciding? Id. And third, did the court err in determining that the Centennial, Zions, and Professional Bank loans were primarily not consumer debts? Id. at 5.
When a bankruptcy court “must settle on a legal test” to make a determination, “an appellate panel reviews such a legal conclusion without the slightest deference.” U.S. Bank Nat'l Ass'n v. Vill. at Lakeridge, LLC, 138 S.Ct. 960, 965 (2018). In other words, the bankruptcy court's decision is reviewed de novo.
Centennial Bank argues that the bankruptcy court erred in relying upon the analysis set forth in Garcia in determining that Kane's debts were primarily non-consumer debts. See Appellant's Opening Brief at 21. It contends that in doing so, the court “applied the incorrect legal rule” and ignored Ninth Circuit precedent stating that a debtor's purpose in incurring debt is the key factor in determining the nature of the debt. See id. at 23. Regardless, Centennial Bank asserts...
To continue reading
Request your trial