The Ninth Circuit Bankruptcy Appellate Panel showed its propensity once again for classifying living expenses as business debts if they are intertwined with a profit motive. On the continuum between consumer and business debts incurred by individuals, the opinion does not indicate where one begins and the other ends.
Two years ago, the appellate panel held that a home mortgage can be a business debt. In a July 22 opinion, the same court decided that money borrowed to pay ordinary living expenses also can be a business debt.
The new case revolved around Section 523(d), which allows recovery of attorneys’ fees after defeating an objection to dischargeability of a “consumer debt.” Section 101(8) defines “consumer debt” to mean a debt incurred “for a personal, family, or household purpose.”
An author borrowed money from a friend to pay living expenses while he wrote a book. If the book sold, the lender and the author were to split the royalties. If the book did not sell, the lender could demand payment of the note, which he did.
In the author’s chapter 7 case, the lender objected to dischargeability of the $150,000 debt and lost because he did not file the complaint on time. When the author sought recovery of his attorneys’ fees under Section 523(d), the bankruptcy judge ruled against the author, holding that the loan was not a consumer debt.
It is settled in the Ninth Circuit, the appellate panel said in its per curiam opinion, that “the purpose for which the debt was incurred affects” its classification as a consumer or business debt. If “incurred for business ventures or other profit-seeking ventures,” it is not a consumer debt, the panel said.
To no avail, the debtor contended that use of the borrowed money is determinative.
The panel relied on its 2014 decision in Aspen Skiing Co. v. Cherrett (In re Cherrett), holding that a home mortgage was a business debt because the debtor purchased the home to take a new job in another city and hoped to make a profit on selling the home later. In Cherrett, the mortgage was a business debt because “it was an integral part of [the debtor’s] employment.”
The panel rejected the debtor’s “use” test as “unworkable” because it would obviate the “court’s consideration of the debtor’s motive.” Also, the opinion says that focusing on use would enable a debtor to “convert the character of a debt from business to consumer (and vice versa) by simply using the funds for a purpose different than the original purpose.”
Since the purpose of the loan was to make a profit from writing and selling a book, the appellate panel held that the bankruptcy court did not commit clear error in classifying the obligation as a business debt, thus precluding the debtor from recovering attorneys’ fees under Section 523(d).
If the author had obtained the same loan from a bank that would not share in royalties from the book, would the debt have been considered consumer in nature? Was the result influenced by the general American antagonism to fee-shifting, as exemplified in the bankruptcy context in Baker Botts LLP v. ASARCO LLC?