In re Schwartz

• Decision Date: 25 March 1986
• Docket Number: Bankruptcy No. 84 B 11433.
• Citation: 58 BR 923
• Parties: In re Joseph Balfour SCHWARTZ, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

58 B.R. 923 (1986)

In re Joseph Balfour SCHWARTZ, Debtor.

Bankruptcy No. 84 B 11433.

United States Bankruptcy Court, S.D. New York.

March 25, 1986.

Lance Spodek, New York City, for debtor.

Raucher, Ehrlich & Laracuente, P.C., New York City, pro se; David N. Raucher, of counsel.

DECISION AND ORDER

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

The debtor, Joseph Balfour Schwartz (the "debtor"), filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code ("the Code"), 11 U.S.C. § 701 et seq. (1984) on October 5, 1984. He now moves for the dismissal of his petition without prejudice. The two largest creditors of the estate oppose the motion.

I.

The two major creditors are law firms. Seymour Ostrow, P.C. represented the debtor's wife in a pre-petition matrimonial action and had been awarded fees and expenses by the state court in the amount of $21,718.75. This Court has previously ruled that this debt is nondischargeable under § 523(a)(5) of the Code. Seymour Ostrow, P.C. v. Schwartz (In re Schwartz), 53 B.R. 407 (Bankr.S.D.N.Y.1985). Farber, Raucher, Goldberg & Ehrlich, P.C., now known as Raucher, Ehrlich & Laracuente, P.C. ("Raucher, Ehrlich"), represented the debtor in the same matrimonial action. It has filed a claim in the sum of $25,819.86 for fees and expenses in that engagement. Prior to the filing of the petition, Raucher, Ehrlich had commenced an action in the state court based on its claim for attorneys fees. The petition was filed before trial was held.

In urging dismissal of his petition, the debtor claims that the creditors would not be prejudiced since they would retain their rights to pursue their actions against the debtor in the New York State courts. In opposing the dismissal, both creditors assert that the debtor has not shown cause for dismissing the petition. They add the allegation that the debtor fraudulently transferred certain stock to his father at or about the time that the bankruptcy petition was filed.

On that basis, Raucher, Erlich has commenced a proceeding seeking to deny the debtor his discharge under § 727 of the Code. That matter is scheduled to be tried shortly. Both creditors assert that it would be inequitable for the debtor to seek the protection of the bankruptcy laws and then subsequently move to dismiss upon the discovery of facts that are alleged to indicate that a fraudulent conveyance has occurred and that assets which possibly had previously been hidden might have been discovered. Additionally, Raucher, Ehrlich claims that it would be prejudiced if the case was dismissed. To it, dismissal would cause a delay in prosecuting the fraudulent conveyance action against the debtor and his father, which would then have to be done under state law.¹ It also claims that dismissal would result in a distribution of the debtor's assets that would be neither fair nor orderly, since it will result in a race to attack the assets which Raucher, Ehrlich claims to have uncovered during the course of its proceeding seeking to deny the debtor a discharge. The trustee of this estate has taken no position with respect to the motion.

II.

While the debtor is free to file for bankruptcy, ". . . he does not enjoy the same discretion to withdraw his case once it has been commenced." In re Klein, 39 B.R. 530, 532 (Bankr.E.D.N.Y.1984). Section 707(a) of the Code provides that the court may dismiss a Chapter 7 case ". . . only after notice and a hearing and only for cause . . ." Cause includes, but is not confined to, an unreasonable delay by the debtor that is prejudicial to creditors, or the non-payment of fees and charges pursuant to 28 U.S.C. § 123. 11 U.S.C. § 707(a); 4 Collier on Bankruptcy § 707.01, pp. XXX-X-XXX-X (15th ed. 1985). Although the Code does not specifically address whether § 707(a) applies to a debtor seeking voluntary dismissal of his own petition, case law so provides. In re Mathis Insurance Agency, Inc., 50 B.R. 482, 486 (Bankr.E.D.Ark.1985); In re Klein, supra. Bankruptcy Rule of Procedure 1017(a) confirms that conclusion in providing that the cause requirement applies to a nonconsensual dismissal of both voluntary and involuntary cases. Advisory Committee Note to Rule 1017(a).

In determining whether cause exists, the test is whether dismissal is in the best interest of the debtor and his creditors. As to a debtor, best interest lies generally in securing an effective fresh start upon discharge and in the reduction of administrative expenses leaving him with resources to work out his debts. As to creditors, the issue is one of prejudice, and if delay is said to have prejudiced them, whether, as § 707(a) provides, the delay has been unreasonable. They are generally not prejudiced by dismissal since they will no longer be stayed from resorting to the state courts to enforce and realize upon their claims. But creditors can be prejudiced if the motion to dismiss is brought after the passage of a considerable amount of time and they have been forestalled from collecting the amounts owed to them. A prejudicial delay also creates the appearance that such an abusive practice is implicitly condoned by the Code. In re Klein, 39 B.R. at 533.

Other forms of potential abuse must be guarded against. Dismissal of a bankruptcy petition that was filed principally to forestall creditors should not be permitted after the delay sought has been achieved. Nor should dismissal be ordered where it is contemplated that the case might be refiled in another forum far from creditors. Mathis, 50 B.R. at 487. Similarly, dismissal of a case after it has appeared that the debtor failed to account honestly for his assets is not to be sanctioned, for such a failure indicates the likelihood of further questionable practices to the detriment of creditors. As stated in Klein, It may be reasonably inferred from debtor's questionable behavior inside of sic bankruptcy that such conduct will persist in derogation of the creditor's rights in the event this court were to order the dismissal of debtor's petition.

39 B.R. at 533.

Similarly, a strong possibility that additional assets of the estate may be discovered argues against dismissal and for retention of jurisdiction in order to assure the equitable and full distribution of newly discovered assets and voidable transfers to all creditors. In re Klein, 39 B.R. at 533; In re Ross, 21 B.R. 5 (Bankr.E.D.N.Y. 1982).

In the end, the Court is to assess the vagaries of each case. Here, it is plainly apparent that the bankruptcy process lost considerable meaning for this debtor upon this court's October, 1985 ruling that Ostrow's claim is non-dischargeable. His fresh start has been significantly impaired. It also appears that this is not a case that was filed primarily to delay and forestall creditors. The debtor scheduled hard assets of $7,132.00 as against liabilities of $58,128.61. He cannot pay his debts. The other asset appearing on the schedules is a malpractice claim against Raucher, Ehrlich in the amount of $80,000. The notion that that claim should be tried together with Raucher's claim for attorneys fees in the state court has appeal.

Counseling against dismissal is both the delay that has occurred and the allegation of the debtor's having fraudulently transferred stock to his father. The delay does not appear to be attributable to the debtor; nor does it appear to be unreasonable. Although the motion to dismiss was filed on the eve of trial of the dischargeability action, it was also filed only a few months after this Court's ruling that the Ostrow claim was non-dischargeable. That significant impairment of the debtor's hoped-for fresh start is a patently reasonable ground for the motion. More disturbing is the alleged fraudulent transfer. To date, the trustee has not commenced a proceeding under § 548 of the Bankruptcy Code to set it aside. Instead, he has reported that the case is a no-asset case. Nor has any creditor petitioned this Court for...