Loans taken down to refinance existing, higher-interest loans were not consumer debts in the absence of evidence to the contrary, the Ninth Circuit said.
The decision is nonprecedential. Were it precedential, the November 15 opinion might enable some consumer debtors in the Ninth Circuit to refinance existing loans, wait a few months, then discharge debts immediately in chapter 7 rather than wait five years to pay off creditors in chapter 13.
The facts recited by the Ninth Circuit panel were sparse. Sometime before filing, the debtor had refinanced four preexisting loans. The lender moved to dismiss the debtor’s chapter 7 petition under Section 707(b)(1) by alleging that the debtor had “primarily consumer debts.”
“Consumer debt” is defined in Section 101(8) to mean “debt incurred by an individual primarily for a personal, family, or household purpose.”
Were the debts primarily consumer, the bankruptcy court would have dismissed the chapter 7 petition, or the debtor could have converted the case to chapters 13 or 11.
The bankruptcy court denied the motion to dismiss, and the district court affirmed, as did the Ninth Circuit.
The Standard of Review
The circuit court first addressed the standard of review on appeal in a case with mixed questions of law and fact. Citing U.S. Bank Nat’l Ass’n v. Village at Lakeridge, 138 S. Ct. 960 (2018), the appeals court said that “our standard of review depends on whether the relevant inquiry [is] primarily legal or factual.” To read ABI’s report on Lakeridge, click here.
The appeals court undertook a review “for clear error” because “the bankruptcy court’s analysis mostly involved marshaling and weighing the existing evidence, so its decision was primarily factual.”
The Purpose of the Loans
On the merits, the appeals court said that the lender offered “essentially no evidence” about the purpose of the four loans. However, “[t]here was evidence that the four loans were used to pay off other loans, but there was no evidence as to the purpose of those original loans.”
Given “limited evidence,” the appeals court said that “the bankruptcy court looked to other facts in the record to determine the nature of the four loans.” In particular, the bankruptcy court “considered the fact that the four loans were used to pay off older, higher-interest loans, suggesting that [the debtor] did not use the four loans for ‘consumption,’ but rather for improvement of his economic position.”
Given “the lack of more definitive evidence,” the circuit court held that the bankruptcy court “did not clearly err in deciding that, on this record, the best conclusion is that the four loans do not reflect consumer debts.”
Burden-Shifting
The lender argued “that the [bankruptcy] court should have held the lack of more definitive evidence against [the debtor].”
The lender conceded that it bore the burden of proof on a motion to dismiss under Section 707(b)(1), but argued that it had made a prima facie showing that shifted the burden of persuasion to the debtor.
However, the lender cited no authority from the Ninth Circuit or elsewhere “establishing a burden-shifting requirement,” the panel said. Even if the burden could shift under Section 707(b)(1), the appeals courts said that the lender had “failed to offer evidence regarding the purpose of the loans that could satisfy such an initial burden here.”
The Ninth Circuit upheld denial of the motion to dismiss.
Loans taken down to refinance existing, higher-interest loans were not consumer debts in the absence of evidence to the contrary, the Ninth Circuit said.
The decision is nonprecedential. Were it precedential, the November 15 opinion might enable some consumer debtors in the Ninth Circuit to refinance existing loans, wait a few months, then discharge debts immediately in chapter 7 rather than wait five years to pay off creditors in chapter 13.
The facts recited by the Ninth Circuit panel were sparse. Sometime before filing, the debtor had refinanced four preexisting loans. The lender moved to dismiss the debtor’s chapter 7 petition under Section 707(b)(1) by alleging that the debtor had “primarily consumer debts.”
“Consumer debt” is defined in Section 101(8) to mean “debt incurred by an individual primarily for a personal, family, or household purpose.”
Were the debts primarily consumer, the bankruptcy court would have dismissed the chapter 7 petition, or the debtor could have converted the case to chapters 13 or 11.
The bankruptcy court denied the motion to dismiss, and the district court affirmed, as did the Ninth Circuit.