Zick, In re

• Decision Date: 03 May 1991
• Docket Number: No. 90-1376,90-1376
• Citation: 931 F.2d 1124
• Parties: , Bankr. L. Rep. P 74,057 In re David G. ZICK, Debtor. INDUSTRIAL INSURANCE SERVICES, INC., Plaintiff-Appellee, v. David G. ZICK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1124

931 F.2d 1124

21 Bankr.Ct.Dec. 1174, Bankr. L. Rep. P 74,057

In re David G. ZICK, Debtor INDUSTRIAL INSURANCE SERVICES, INC., Plaintiff-Appellee, v. David G. ZICK, Defendant-Appellant.

No. 90-1376.

United States Court of Appeals Sixth Circuit.

Argued Nov. 26, 1990.

Decided May 3, 1991.

Paul H. Steinberg (argued), Goldstein, Bershad, Steinberg & Fried, Southfield, Mich., for debtor.

Jay L. Welford (argued), Jaffe, Snider, Raitt & Heuer, Detroit, Mich., for plaintiff-appellee.

Before NORRIS, Circuit Judge, WELLFORD ^*, Senior Circuit Judge, and BALLANTINE ^**, Chief District Judge.

WELLFORD, Senior Circuit Judge.

This suit is based on a principal creditor's motion to dismiss a Chapter 11 bankruptcy petition under 11 U.S.C. Sec. 707(a). David Zick, a former employee of Industrial Insurance Services (IIS), signed a nonsolicitation agreement with IIS which provided that he would not take IIS' trade secrets or solicit customers of the company for himself upon termination or separation. The following year, Zick left IIS voluntarily, started his own company in competition, and solicited its former customers. A court-induced mediation award of $600,000 was rendered to IIS on its claim of deliberate breach of contract and consequent damages. A few days later, Zick petitioned for Chapter 7 bankruptcy relief seeking dischargeability principally on the IIS debt. IIS objected to the dischargeability of its debts under Zick's Chapter 7 petition and moved to dismiss Zick's Chapter 7 petition alleging that it was brought in bad faith based upon data in the Chapter 7 filing itself. The bankruptcy court granted the motion and the district court affirmed. ¹ This appeal from denial of dischargeability of the IIS debt ensued. Zick also moved for a stay pending appeal in bankruptcy court. The motion for stay was denied by the bankruptcy court on the basis that Zick was unlikely to succeed on the merits and that there had been sufficient opportunity to present evidence to the bankruptcy judge. ²

Zick then requested a stay from the district court which also denied the request. The district court entered a memorandum opinion and order affirming the decision of the bankruptcy court to dismiss Zick's Chapter 7 petition, from which this appeal was taken.

A bankruptcy court decision to dismiss pursuant to 11 U.S.C. Sec. 707(a) will be reversed only for abuse of discretion. In re Atlas Supply Corp., 857 F.2d 1061, 1063 (5th Cir.1988) ("Since equitable principles may be applied under the present Bankruptcy Code, the decision whether to grant a motion to dismiss a petition in bankruptcy lies within the discretion of the bankruptcy judge.").

11 U.S.C. Sec. 707(a) provides as follows:

(a) 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; and

(3) failure of the debtor in a voluntary case to file ... the information required by paragraph (1) of section 521....

(emphasis added). IIS argues that this statute allows the bankruptcy court to consider "good faith" as a basis for dismissal of a Chapter 7 petition, and that it was not an abuse of discretion for the bankruptcy court to conclude that good faith was lacking in this petition for Chapter 7 relief.

We are satisfied that the word "including" is not meant to be a limiting word. See 11 U.S.C. Sec. 102(3); In Re Jones, Debtor, 114 B.R. 917, 924 (Bankr.N.D.Ohio 1990). A lack of good faith, furthermore, has been recognized in a number of bankruptcy cases as a valid cause of dismissal under Sec. 707(a). See, e.g., In re Sky Group Int'l, Inc., 108 B.R. 86 (Bankr.W.D.Pa.1989) (a showing of bad faith can result in dismissal under 11 U.S.C. Sec. 707(a)); In re Maide, 103 B.R. 696 (Bankr.W.D.Pa.1989); In re Brown, 88 B.R. 280 (Bankr.D.Hawaii 1988) (good faith is an implicit jurisdictional requirement and requires inquiry into any abuse of the provisions, the purpose of the spirit of the bankruptcy law and into whether the debtor requires the liberal protection of the Code); In re Bingham, 68 B.R. 933 (Bankr.M.D.Pa.1987) (where debtor's good faith is put into question, the debtor bears the burden of proving that the filing was made in good faith); In re Kragness, 63 B.R. 459, 465 (Bankr.D.Or.1986) ("That concept [good faith] is not open to serious debate."); In re Khan, 35 B.R. 718 (W.D.Ky.) (Chapter 7 does not in express words require good faith, but good faith is an implicit jurisdictional requirement), remanded for clarification, 751 F.2d 162 (6th Cir.1984). ³

Zick seeks to distinguish these cases and, in addition, relies upon In re Latimer, 82 B.R. 354 (Bankr.E.D.Pa.1988). Latimer concluded that " 'cause' does not include a consideration of whether the debtor has 'substantially abused' the provisions of Chapter 7 or has proceeded in 'bad faith.' " Id. at 356. ⁴ Latimer was rejected by the district court and the bankruptcy court, and it is the principal case that Zick cites for the proposition that bad faith is not grounds for dismissal. We are persuaded that there is good authority for the principle that lack of good faith is a valid basis of decision in a "for cause" dismissal by a bankruptcy court.

Zick also cites In re Markizer, 66 B.R. 1014 (Bankr.S.D.Fla. 1986), to support his contention that good faith is not a valid basis for Sec. 707(a) dismissals. Upon examination, we find that Markizer does not hold that the lack of good faith may not be grounds for dismissal under Sec. 707(a). It merely notes that Chapter 7 of the Bankruptcy Code does not explicitly make good faith a requirement for voluntary liquidation petitions. Markizer noted, moreover, that good faith has evolved as a threshold requirement in all bankruptcy cases, although primarily under Chapters 11 and 13, and went on to consider good faith in the context of Chapter 7 cases.

Having been persuaded that lack of good faith is a basis for dismissal under Sec. 707(a), we must examine Zick's claim that the bankruptcy court, nevertheless, abused its discretion under the circumstances of this case. ⁵ "The facts required to mandate dismissal based upon a lack of good faith are as varied as the number of cases." Bingham, 68 B.R. at 935 (citing In re Zahniser, 58 B.R. 530 (D.Colo.1986)); In re Brown, 88 B.R. at 284. We find particular merit in what is described as the "smell test" in Morgan Fiduciary, Ltd. v. Citizens and Southern Int'l Bank, 95 B.R. 232, 234 (S.D.Fla.1988). The factors relied on by the bankruptcy court are essential in appellate review, and should be set out in the bankruptcy court's decision. See, e.g., In re Khan, 751 F.2d 162 (6th Cir.1984) (case remanded to determine whether the bankruptcy court relied on former proceedings under Chapter 11 in its Chapter 7 dismissal). In this case, the court based its decision on (1) the debtor's manipulations which reduced the creditors in this case to one; (2) the debtor's failure to make significant lifestyle adjustments or efforts to repay; (3) the fact that the petition was filed clearly in response to IIS' obtaining a mediation award; and (4) the unfairness of the debtor's use of Chapter 7 under the facts in this case. We believe that the factors noted by the bankruptcy court may be sufficient to support its findings of bad faith. See In re Brown, 88 B.R. at 283-84 (single creditor, debtor capable of earning substantial income, ability to repay through adjustment of lifestyle, and intent to abuse Bankruptcy Code combined to move court to dismiss Chapter 7 claim); see also Kahn, 35 B.R. 718, remanded, 751 F.2d 162 (6th Cir.1984). Reliance on the factors indicated as cause for dismissal may be an appropriate exercise of discretion.

Zick's own statements submitted to the bankruptcy court indicated a continuing monthly income of at least $7,000 plus certain pension plan benefits. (His gross business income was approximately $361,000 annually). ⁶ His non-debtor spouse had additional income. Exclusive of real property and household goods, Zick listed other personal property of approximately $90,000. ⁷

We believe the following language from In re Krohn, 886 F.2d 123 (6th Cir.1989), aff'g 87 B.R. 926 (Bankr.N.D.Ohio 1988), while dealing with Sec. 707(b) of the Code, is instructive also as to Sec. 707(a):

Those courts which have reviewed the legislative history, have generally concluded that, in seeking to curb "substantial abuse," Congress meant to deny Chapter 7 relief to the dishonest or non-needy debtor.

....

The goals of bankruptcy are to provide an honest debtor with a fresh start and to provide for an equitable distribution to creditors. The debtor herein, although he has minimal assets, appears to be seeking a "head start" with no attempt to deal with creditors on an equitable basis.

886 F.2d at 126, 127-28.

A bankruptcy court's findings of fact may be set aside on appeal only if they are clearly erroneous. In re Rosinski, 759 F.2d 539, 541 (6th Cir.1985); Archer v. Macomb County Bank, 853 F.2d 497, 499 (6th Cir.1988). Zick alleges error since the bankruptcy court did not conduct a full-blown evidentiary hearing on the dismissal motion. Section 707(a) states that a "court may dismiss a case under this chapter only after notice and a hearing...." but it does not prescribe a particular type of hearing.

Zick argues that he "was not given the opportunity to present his defense to the motion to dismiss brought by Industrial." IIS counters that the factual findings of the bankruptcy court were supported by admissions and uncontested allegations on the record (as discerned by the district court). Zick replies that he had no opportunity to present further evidence as he would have in an evidentiary hearing. The district court stated that "[t]he Bankruptcy Court ... specifically found that although no live testimony was offered at the dismissal...