In re Lobera

• Decision Date: 16 March 2011
• Docket Number: No. 7–10–13203 SL.,7–10–13203 SL.
• Citation: 454 B.R. 824
• Parties: In re Alex LOBERA, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

454 B.R. 824

In re Alex LOBERA, Debtor.

No. 7–10–13203 SL.

United States Bankruptcy Court, D. New Mexico.

March 16, 2011.

Christopher M. Gatton, Law Office of George Dave Giddens, PC, Albuquerque, NM, for Debtor.

MEMORANDUM OPINION REGARDING GILA REGIONAL MEDICAL CENTER'S MOTION TO DISMISS OR CONVERT CASE TO CHAPTER 11

JAMES S. STARZYNSKI, Bankruptcy Judge.

This matter came before the Court for final hearing on a Motion 1) to Dismiss under Section 707(a) or 2) to Convert to Chapter 11 under Section 706(b) (the “Motion”) filed by creditor Gila Regional Medical Center (“GRMC”) (docs 14, 16) to which Debtor objected (doc 19). GRMC is represented by its attorney Thuma & Walker, P.C. (David T. Thuma and Merrie Chappell). Debtor is represented by his attorney the Law Office of George (“Dave”) Giddens, P.C. (Christopher M. Gatton). Creditor Barton and Associates, Inc. (“Barton”) did not formally join in GRMC's motions, but filed a brief in support (doc 27). Barton is represented by its attorney Modrall Sperling Roehl Harris and Sisk, P.A. (Jason C. Bousliman). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). For the reasons set forth below, the Court finds that both motions should be denied.

INTRODUCTION

The issues in this case involve examining the provisions of the dismissal (11 U.S.C. § 707) ¹ and conversion ( Section 706) sections of the Bankruptcy Code as applicable to business, non-consumer, individual chapter 7 debtors. Neither the Court of Appeals for the Tenth Circuit or the Tenth Circuit Bankruptcy Appellate Panel have addressed the specific issue of whether there is a good faith filing requirement for business, non-consumer, individual chapter 7 debtors or, if there is, what the requirement is or how it would relate to “cause”.

There is currently a split in the circuits on these issues. The Third ² and Sixth ³ Circuits have found a good faith filing requirement for Chapter 7 which failure to meet is a cause for dismissal. Many bankruptcy courts have also so found. See In re Khan, 172 B.R. 613, 620 (Bankr.D.Minn.1994) (collecting cases)(hereafter “Minnesota Khan ⁴”). The consensus of these cases is either that 1) while excess disposable income alone is not “cause” under section 707(a) it may be considered as a factor in determining bad faith, which is “cause” or 2) a debtor's good faith (as defined by that case on its particular facts) is a prerequisite to Chapter 7 bankruptcy relief.

On the other hand, the Eighth ⁵ and Ninth ⁶ Circuit have found no good faith filing requirement for chapter 7 debtors.

FINDINGS OF FACT

Debtor filed this voluntary Chapter 7 proceeding on June 25, 2010. The petition states that Debtor's debts are not primarily consumer debts ⁷. Schedule I states that Debtor is a physician. He is a single person but has lived with his companion since 2007. The household also includes seven children ⁸ ranging in age from two to eighteen. Schedule J lists Debtor's expenses and shows that he has $18,579 of excess monthly income. Schedule F lists unsecured debts of over $1.3 million.

The Motion (filed July 21, 2010) states that the case should be dismissed for “cause” or converted to Chapter 11. The “cause” listed in the Motion is that Debtor's income exceeds claimed expenses by $18,579, that the expenses listed are “excessive ⁹”, that Debtor's claimed expenses are inflated, and that Debtor claims expenses related to an automobile but owns no automobile. Therefore, under a totality of the circumstances, it would be contrary to the best interests of creditors to allow Debtor to obtain a discharge. The Motion seeks dismissal with a one year bar for refiling. Alternatively, the Motion seeks conversion to Chapter 11 because Debtor could “easily” pay creditors $33,000 per month.

Debtor objected to the Motion on August 8, 2010. Debtor's first argument is that Section 707(a) requires “cause” and none of the facts alleged by GRMC constitute “cause.” Debtor claims that the facts alleged by GRMC are relevant only to Section 707(b) which requires the Court to dismiss a case for abuse if there is sufficient excess monthly income. However, Section 707(b) applies only to consumer debtors, not to non-consumer debtors. Therefore, Debtor claims that his excess income and alleged overstated expenses are not relevant ¹⁰. Debtor also claims that since the filing of his bankruptcy, he has learned of tax debts of approximately $798,000 for which he is liable.

The Court held a preliminary hearing on August 23, 2010, fixing September 16, 2010 as the date for a final hearing. GRMC deposed Debtor on September 8, 2010.

On September 14, 2010, Barton filed a Memorandum in Support of the Motion (doc 27). Barton argues that “cause” exists to dismiss the case, citing In re Hammonds, 139 B.R. 535 (Bankr.D.Colo.1992) because the filing was done in bad faith and was made in an effort to deny payment to creditors despite an ability to pay. Barton also argues that this case is “substantial abuse” because a debtor's ability to pay a substantial portion of debt is grounds for dismissal. It further argues that courts have commonly dismissed non-consumer cases under section 707(a) for “bad faith” for reasons paralleling the factors of “substantial abuse” under section 707(b). Barton argues that Debtor's business status should have no bearing on the Court's decision.

On September 14, 2010, Debtor also filed a Memorandum in Support of his objection to the Motion (doc 28). Debtor's primary argument is that because his debts are primarily business, the “means test” and his ability to pay are explicitly not relevant and cannot be grounds for dismissal or conversion. Debtor quotes section 707(a)'s examples of “cause” that justify dismissal as including: 1) unreasonable delay prejudicial to creditors, 2) nonpayment of fees or charges required, and 3) failure of debtor to file required information (but only on motion by the United States Trustee). Debtor argues that ability to pay is fundamentally different from the items specified and should not be included as a ground. Debtor then states that when courts look to the legislative history of section 707 to determine what is “cause”, they find that the legislative history specifically states that ability to repay debts in whole or in part does not constitute cause for dismissal (quoting H.R. No. 95–595, 95th Cong., 1st Sess. 380 (1977) and S.R. No. 95–989, 95th Cong., 2d Sess. 94 (1978)).

Debtor does concede, doc 28 p. 4, that some courts hold that while ability to pay alone is not cause, it can be a factor considered in a totality of circumstances (citing McDow v. Smith, 295 B.R. 69, 79 (E.D.Va.2003)). However, Debtor argues that the only ground listed in the Motion is Debtor's ability to repay debt.

Regarding conversion to Chapter 11, Debtor argues that the same factors should be considered to deny GRMC's motion to convert. Ordering conversion would allow a creditor to circumvent the consumer debtor element necessary to find abuse.

On September 15, 2010, GRMC filed its Brief in Support of the Motion (doc 32). By this date, GRMC had a transcript of the Debtor's deposition. The Motion focused on Debtor's income and expenses. The Brief, however, changes the primary focus away from Debtor's income to “the Debtor's petition, schedules, statement of affairs, and anticipated amendments” and asks the Court to conclude that Debtor's “antics” are cause for dismissal. GRMC argues that the papers on file contain inconsistencies and are incomplete. For example, the petition failed to disclose Debtor's full name, the Debtor failed to list cash transferred to his companion's account, he failed to list a watch, he failed to list an Army pension, he failed to list stock in Lobera Imaging, Inc. or Microsoft stock, he failed to list an interest in his father's estate, he failed to list four vehicles, and he failed to list an $18,000 bonus. The Brief does reiterate the fact that Debtor makes a “ton” of money and informs the Court that Debtor testified at his deposition that he has not curbed his lifestyle. GRMC claims that the most telling evidence of bad faith was Debtor's failure to list his 2008, 2009 and year to date 2010 income on the Statement of Financial Affairs, or to disclose payments, gifts and transfers to insiders, or to disclose his involvement with a business.

GRMC argues that the Court must engage in a case-by-case analysis to determine what constitutes “cause” to warrant dismissal. Citing several cases, GRMC also argues that lack of good faith in commencing a Chapter 7 case is cause for dismissal under section 707(a). GRMC also argues that all of these factors permit conversion to Chapter 11.

On September 15, 2010, Debtor also filed an Amended Statement of Financial Affairs (“SFA”), doc 33, and Amended Schedules B, D, E and F, doc 34. The Amended SFA discloses Debtor's income for 2008, 2009, and 2010 year to date; it discloses on question 9 [sic, should be question 10] a transfer of a house valued at $100,000.00 on Mary Stewart Street in El Paso, Texas to his father Alejandro Lobera; discloses Debtor's involvement with a business, Lobera Imaging; and lists a former spouse on question 16.

The Amended Schedule B adds Debtor's interest in stock of Lobera Imaging, Inc. (value $0.00), and Microsoft (value $0.00); his interest in a retirement account (value $1,331.81); his interest in a 401–K account (value $11,000.00) and an Ameritrade account (value $400.00).

The Amended Schedule D transfers the debt owed to Barton from Schedule F (unsecured) to Schedule D (secured). The Amended Schedule E adds $733,945.00 of priority tax debt owed to the IRS and State of New Mexico. Amended Schedule F deletes the Barton debt.

THE FINAL HEARING

The Motion came on for hearing on September 16, 2010. As the first item of business the Court raised the issue of the change in focus from the Motion, which had focused only on excess income, to the Brief, which raised the new allegations of bad...