The ability of high-income individuals in chapter 7 to pay their debts is not dispositive on motions to dismiss for “cause” when debtors primarily have business debts.
The case before Bankruptcy Judge Cynthia C. Jackson of Orlando, Fla., involved a doctor who filed a chapter 7 petition when faced with a $740,000 deficiency judgment arising from a business mortgage he guaranteed. In total, he had nine creditors asserting more than $1 million in claims. His debts were primarily business, Judge Jackson said. The debtor claimed over $800,000 in exempt property.
The mortgage lender filed a motion to dismiss for “cause” under Section 707(a), contending that the doctor filed bankruptcy in a bad faith attempt at evading payment of the deficiency judgment. The lender could not pursue dismissal alleging a presumption of “abuse” under Section 707(b) because that subsection pertains only to debtors with primarily consumer debts.
Citing the Eleventh Circuit’s holding that courts can dismiss under Section 707(a) “based on prepetition bad faith,” Judge Jackson denied the dismissal motion in her opinion on July 28. She said that a “totality-of-the-circumstances approach is the correct legal standard.” Following a decision by Bankruptcy Judge Erik P. Kimball of West Palm Beach, Fla., she said that tests employed on dismissal motions in chapters 11, 12 and 13 do not necessarily apply.
For an individual debtor with mostly business debts, Judge Jackson said there must be a “deliberate act or omission” showing bad faith or abuse of the Bankruptcy Code. The doctor was guilty of no such misconduct, the judge said. If filing to avoid payment of a debt were grounds for dismissal, she said that “no debtor would ever be able to file a bankruptcy case.”
Even though the doctor had almost $16,000 in monthly income, Judge Jackson said that his income was “of little significance where his debts are primarily business debts.” If she were to dismiss, the judge said that dismissal would “only favor” the lender over other creditors.