Either creating a circuit split or accentuating an existing split, a divided panel of the Ninth Circuit disagreed on the standard of appellate review on appeal from an order from the bankruptcy court deciding whether an obligation is a consumer or business debt under Section 707(b)(1).
The issue is akin to the question in U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), where the Supreme Court will decide this term whether the standard of appellate review for non-statutory insider status is de novo or clearly erroneous, or a combination of both.
The appeal in the Ninth Circuit turned in large part on that court’s own precedent in Zolg v. Kelly (In re Kelly), 841 F.2d 908, 911 (9th Cir. 1988). The majority and the dissent couldn’t even agree on what Kelly meant.
The majority read Kelly to mean that a home mortgage can be either a consumer or business debt, depending on the “primary purpose” of the loan. The dissent understands Kelly to mean that a home mortgage, as a matter of law, is always a consumer debt. The majority and dissent also disagree about the appellate standard prescribed by Kelly.
The Facts
A man who lived in Jackson, Wyo., had worked 25 years for a luxury hotel chain, earning $225,000 a year. Hoping for advancement to a more senior executive position, he applied for a job at a luxury resort in Aspen, Colo. Although offered a job in Aspen for $300,000, he could not afford either to rent or buy a home in Aspen, where home prices are higher than in Jackson.
The new employer sweetened the offer by granting him a $500,000 mortgage toward the purchase of a home in Aspen. The new employer also gave him a guaranteed annual bonus to cover the below-market interest on the loan.
He took the job, but his wife and children remained in Wyoming. The home he purchased in Aspen was too small for his entire family. He continued using banks in Wyoming and did not move the registration of his car to Colorado.
The man considered the house in Aspen to be a “placeholder” because his new employer was planning to develop a new resort in Jackson, allowing him to move back to Wyoming and join his family.
After the economy crashed in 2008, the new employer terminated plans for the new resort in Wyoming. Abandoning hope of returning to Wyoming, he sold his home in Jackson, and his family joined him in Aspen.
Four years after taking the job in Aspen, the man resigned and later filed a chapter 7 petition, owing $550,000 on the loan from his employer.
The employer moved to dismiss the chapter 7 petition for abuse under Section 707(b)(1), contending his debts were primarily consumer, thus making him ineligible and requiring him to convert the case to either chapter 13 or chapter 11 if he wanted a discharge eventually.
The bankruptcy judge held a trial and denied the motion to dismiss, concluding that the Colorado mortgage was a business debt, making him eligible for chapter 7 because his debts overall were “primarily” business debts. On appeal, the Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court.
The Majority Opinion
Writing for herself and Circuit Judge Marsha S. Berzon, Circuit Judge Morgan Christen upheld the BAP in an opinion on Oct. 16 that appears to mean that characterization of a debt as consumer or business is a fact to be found by the trial court and reviewed for clear error, not a legal conclusion that an appellate court can review de novo based on undisputed facts.
The employer contended that appellate review should be de novo because the underlying facts were undisputed. The employer also argued that a home mortgage is always a consumer debt. Judge Christen disagreed on both counts.
Judge Christen interpreted Kelly to mean that a court must divine the “primary purpose” of a debt in deciding whether the obligation is consumer or business. Kelly held, in her view, that home mortgages are usually but not always consumer debts. She disputed the dissenter’s understanding of Kelly to mean that home mortgages are always consumer debts.
The debtor’s “multiple motives” for taking the mortgage required the bankruptcy court to engage “primarily” in a “factual, rather than legal, inquiry.” Since the decision in the bankruptcy court was essentially a factual inquiry, the appellate standard is clear error, Judge Christen said.
Judge Christen admitted that the courts are split on the standard of review, with the Eighth Circuit BAP also holding “that the purpose of a debt is a factual finding reviewed for clear error.” The Fifth and Tenth Circuits, she said, hold to the contrary.
Judge Christen cited a number of undisputed facts to buttress the bankruptcy court’s conclusion that the mortgage primarily had a business purpose. She therefore concluded that the bankruptcy court did not clearly err in finding that the mortgage was “undertaken for a business purpose connected with furthering his career, rather than a personal, family or household expense.”
The Dissent
Circuit Judge Jacqueline H. Nguyen dissented, saying that the majority applied “the wrong standard of review, creating a circuit split in the process.”
Judge Nguyen interpreted Kelly as meaning, “in no uncertain terms,” that the trial court makes a predominantly legal determination subject to de novo review when the facts are not in dispute. She counted the Fourth, Fifth, Sixth and Tenth Circuits as also holding that the characterization of consumer debt is subject to de novo review.
Beyond the appellate standard, Judge Nguyen said that the majority were wrong on the merits, because she understood Kelly to mean that “all loans to purchase a home are consumer debt.”
Finality
Like the BAP, the appeals court addressed the question of whether denial of a motion to dismiss under Section 707(b) is a final order eligible for appeal to the circuit.
Without dissent from Judge Nguyen, Judge Christen followed the “majority of circuits” by holding that denial of a motion to dismiss under Section 707(b) is a final order because it conclusively determines a discrete issue resolving the debtor’s eligibility for a discharge in chapter 7.
Judges Christen and Nguyen were both appointed by President Barack Obama.
In a similar case, Bushkin v. Singer (In re Bushkin), 15-1285, 2016 BL 236937 (B.A.P. 9th Cir. July 22, 2016), the Ninth Circuit BAP classified living expenses as business debts if they were intertwined with a profit motive. The appeal to the circuit in Bushkin was being held in abeyance pending the decision in this case. To read ABI’s discussion of Bushkin, click here.