In re Snyder

• Decision Date: 04 April 2014
• Docket Number: No. 7–13–12719 TR.,7–13–12719 TR.
• Citation: 509 B.R. 945
• Parties: In re Scott Walter SNYDER, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

509 B.R. 945

In re Scott Walter SNYDER, Debtor.

No. 7–13–12719 TR.

United States Bankruptcy Court,

D. New Mexico.

Filed April 4, 2014.

Daniel Andrew White, James A. Askew, Askew & Mazel, LLC, Albuquerque, NM, for Edward Alexander Mazel, Trustee.

Edward Alexander Mazel, Askew & Mazel, LLC, Albuquerque, NM, Trustee.

Elizabeth Leigh Hightower, Sanders, Bruin, Coll, & Worley, PA, Roswell, NM, for Debtor.

MEMORANDUM OPINION

DAVID T. THUMA, Bankruptcy Judge.

Physician Groups, L.C. d/b/a Medical Group of Missouri (“Movant”) moved to dismiss or convert the Debtor's Chapter 7 case for lack of good faith. The Court held a final hearing on the motion on March 4, 2014. Being sufficiently advised, the Court concludes that the motion should be denied.

I. FINDINGS OF FACT

The Debtor filed a voluntary petition under Chapter 7 on August 16, 2013 (the “Petition Date”).

Debtor, a licensed medical doctor, is 63 years old. He is married. He and his wife have two adult daughters, neither of whom lives with the Debtor.

Debtor practiced obstetric medicine for many years in the St. Louis, Missouri area. He was a sole practitioner who made about $100,000 per year.

In or about June 2010 Debtor gave up his sole practice and entered into an employment agreement with Movant.

Movant terminated the Debtor's employment in December 2010, for reasons never explained to the Court.

Debtor strongly disputed Movant's decision to terminate his employment agreement so soon after it was signed. Debtor believes Movant destroyed his medical practice, left him unemployed and, by forcing him to relocate for work, caused him to realize a substantial loss (about $40,000) on his Missouri house.

Debtor moved to Roswell, New Mexico in 2011. Since mid–2011, Debtor has been employed as an obstetrician by Roswell Clinic Corporation.

After terminating Debtor's employment, Movant demanded that Debtor purchase a “tail” malpractice insurance policy. The requirement to buy the tail policy apparently is in the employment agreement. The cost of the tail policy was $145,254.

Debtor did not buy the tail policy, so Movant did.¹

Movant sued Debtor in Missouri state court in 2012, seeking to recover the cost of the tail policy.

Debtor retained counsel and defended the Missouri state action for a period of time, but ran out of money and could no longer pay his counsel. Debtor's state court counsel withdrew from the representation and on March 13, 2013, the Missouri state court entered a default judgment against Debtor for $170,854.09.

Movant domesticated the Missouri judgment in New Mexico in June 2013 and obtained a writ of garnishment on or about August 6, 2013, prompting Debtor to file this bankruptcy case. Debtor's wife did not file for bankruptcy relief.

Debtor's schedules list two secured claims (car loans), both of which have been reaffirmed.

The Debtor's only other listed creditor is Movant.

Debtor's current salary is about $290,000 per year.

At his current salary, Debtor likely will have about $5,000 per month available after paying living expenses. These excess funds could be used, inter alia, to pay Movant over time, or to save for retirement.

On the Petition Date, Debtor owned a 401k account with a value of $119,808.47. Debtor testified, and the Court finds, that Debtor is worried about his retirement, wishes to save as much money as he can in the next several years, and does not believe he can both pay Movant $170,000 and save enough money to retire before he is too old to work.

Debtor's wife owns jewelry that is worth between $25,000–$60,000. His counsel advised Debtor not to list his wife's jewelry on his bankruptcy schedules because the jewelry was the wife's separate property.

Debtor disclosed his wife's jewelry to the Chapter 7 trustee at his § 341 ² meeting. The trustee disputed Debtor's position that the jewelry was not property of the estate. The parties settled the dispute by Debtor and/or his wife paying the trustee $30,000 in cash.

The Debtor does not own any real estate.

The Debtor has no non-exempt property except his wife's jewelry, to the extent some of it may be community property.

The Debtor has not taken any vacations for the past five years except than to visit his children in Missouri.

The Debtor is giving $650 per month to his youngest daughter to aid her living expenses. This support will stop in June when she gets married.

The Debtor paid for his older daughter's wedding and is saving to contribute $10,000 towards his youngest daughter's wedding.

Debtor made no substantial attempt to settle with Movant. It is clear that Debtor does not believe he should have to pay Movant anything, although he acknowledges his legal obligation to do so.³

Debtor appeared and testified at the final hearing on the Motion. The Court found him credible.

Movant's representative, Stephen A. Thompson, was not an officer or employee but the lawyer who brought the suit against Debtor in Missouri. Mr. Thompson testified, and the Court found him credible.

II. DISCUSSION

A. Dismissal Under § 707(a).

Section 707(a) provides:

The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—

(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;

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

1. Bad Faith Can Constitute “Cause” for § 707(a) Dismissal. Although not listed as one of the enumerated events constituting “cause” for dismissal under § 707(a), most courts have held that proof of the debtor's “bad faith” in filing a Chapter 7 case constitutes “cause.” Indus. Ins. Services, Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126–27 (6th Cir.1991) was the first circuit case address the issue. The Sixth Circuit held: “[T]he word ‘including’ is not meant to be a limiting word. A lack of good faith, furthermore, has been recognized in a number of bankruptcy cases as a valid cause of dismissal under 11 U.S.C. § 707(a).” 931 F.2d at 1126–27 (citation omitted). The other circuit courts agreeing with Zick are In re Tamecki, 229 F.3d 205, 207 (3d Cir.2000), and Piazza v. Nueterra Healthcare Physical Therapy, LLC (In re Piazza), 719 F.3d 1253, 1262 (11th Cir.2013). Lower courts include First Capital Bank of Kentucky v. Blok, 2012 WL 1682042, at *4 (S.D.Ind.2012); In re Shipman, 2012 WL 4498001, at *4 (D.Del.2012); In re Wagnitz, 2004 WL 626821, at *7 (N.D.Ill.2004); McDow v. Smith, 295 B.R. 69, 74 (E.D.Va.2003); In re Quinn, 490 B.R. 607, 614 (Bankr.D.N.M.2012).

The Eighth Circuit adopted a much narrower view about whether bad faith can constitute cause for § 707(a) dismissal. In In re Huckfeldt, 39 F.3d 829, 832 (8th Cir.1994), the court held:

[T]he court in [ In re ] Khan⁴ urged that bad faith under § 707(a) be limited to extreme misconduct falling outside the purview of more specific Code provisions, such as using bankruptcy as a “scorched earth” tactic against a diligent creditor, or using bankruptcy as a refuge from another court's jurisdiction. Khan, 172 B.R. at 624–26.

We agree with the narrow, cautious approach to bad faith adopted in Khan. Congress has defined the ultimate issue in § 707(a) cases as whether the Chapter 7 petition should be dismissed “for cause.” As this case illustrates, some conduct constituting cause to dismiss a Chapter 7 petition may readily be characterized as bad faith. But framing the issue in terms of bad faith may tend to misdirect the inquiry away from the fundamental principles and purposes of Chapter 7. Thus, we think the § 707(a) analysis is better conducted under the statutory standard, “for cause.” If the bankruptcy court elects instead to act under the inherent judicial power to punish a bad faith litigant, that action should not be taken under § 707(a).

39 F.3d at 832 (footnote omitted). The court elsewhere said:

[T]he court's approach in Khan is consistent with that urged in 4 Collier on Bankruptcy ¶ 707.03, at 707–10–11 (15th Ed. 1992):

Bad faith may be found when the debtor has a frivolous, noneconomic motive for filing a bankruptcy petition, when there is a sinister or unworthy purpose, or when there is an abuse of the judicial process. That the debtor is merely taking advantage of its legal rights is not, by itself, sufficient to support a finding of bad faith.

Id. The Ninth Circuit has ruled that bad faith cannot constitute cause for dismissal under § 707(a):

The Bankruptcy Code's language and the protracted relationship between reorganization debtors and their creditors lead us to conclude that bad faith per se can properly constitute “cause” for dismissal of a Chapter 11 or Chapter 13 petition but not of a Chapter 7 petition under § 707(a)

In re Padilla, 222 F.3d 1184, 1193 (9th Cir.2000). See also In re Lobera, 454 B.R. 824, 853 (Bankr.D.N.M.2011) (no good faith requirement for non-consumer business debtor to file Chapter 7). The Tenth Circuit has not ruled on the issue.

The Court adopts the view that bad faith can constitute cause for dismissal under § 707(a). The Court acknowledges, however, the risk of using bad faith as “a loose cannon which is to be pointed in the direction of a debtor whose values do not coincide precisely with those of the court.” Huckfeldt, 39 F.3d at 832 (quoting Sinkow v. Latimer (In re Latimer), 82 B.R. 354, 364 (Bankr.E.D.Pa.1988)). Dismissal for bad faith under § 707(a) therefore should be limited to extreme cases, e.g., where the debtor has a “frivolous, noneconomic motive for filing a bankruptcy petition, when there is a sinister or unworthy purpose, or when there is an abuse of the judicial process.” Id.

2. The Court Must Examine the Totality of the Circumstances. To determine whether a chapter 7 case was filed...