Opinion
Case No. 1:03-CV-887
March 30, 2004
OPINION
This matter is before the Court to consider the appeal of the Bankruptcy Court's Order of December 14, 2003, which denied Grand Valley State University's Motion to Dismiss.
I. Facts and Procedural History
An examination of the Bankruptcy Court's record and the procedural history of this appeal reflects the following:
Appellee John W. Hodge is currently a professor at Appellant Grand Valley State University ("Grand Valley"). On December 1, 1994, he filed suit against Grand Valley, alleging the university had discriminated against him because of his race. Although Hodge originally prevailed in his claim, Grand Valley appealed this verdict, and the case was reversed and remanded. The parties then underwent a case evaluation, but Hodge rejected the recommended award. The case proceeded to trial, and the jury decided against Hodge. The court assessed case evaluation sanctions against Hodge because he rejected a mediation award that was more favorable to him than the final verdict. As a result, Hodge currently owes Grand Valley $380,000 in principal and interest on this judgment.
Hodge entered into negotiations with Grand Valley in an attempt to settle this debt. Hodge made a written settlement offer to pay either a lump sum of $15,000 or a payment of $20,000 over four years. However, Grand Valley refused to accept any settlement offer that did not include a provision that Hodge would leave his job at Grand Valley and seek employment elsewhere. On April 22, 2003, Grand Valley sent a letter to Hodge threatening to garnish his wages, file a lien against his home, and garnish his bank accounts unless he agreed to retire. On May 16, 2003, Hodge filed for bankruptcy under Chapter 7.
Grand Valley then filed a Motion to Dismiss for Cause pursuant to 11 U.S.C. § 707(a), alleging the petition was filed in bad faith. After a hearing at which both Hodge and his attorney testified, the United States Bankruptcy Court held that Hodge's Chapter 7 petition was not filed in bad faith and consequently denied Grand Valley's Motion to Dismiss. Grand Valley then appealed to this Court.
II. Standard of Review
When reviewing an appeal from a bankruptcy court's decision, "a district court applies a clearly erroneous test to findings of fact, but plenary review to questions of law." In re Charfoos, 979 F.2d 390, 392 (6th Cir. 1992). The district court will not set aside a bankruptcy court's finding of fact unless it is clearly erroneous. In re Rembert, 141 F.3d 277, 280 (6th Cir. 1998). A finding of fact is "clearly erroneous" if, "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. Ayen, 997 F.2d 1150,1152 (6th Cir. 1993) (quoting Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985) (internal citation omitted)).
III. Analysis
Grand Valley makes two arguments on appeal. First, it argues the Bankruptcy Court did not inquire into all factors contributing to a dismissal for cause. Second, it argues the Bankruptcy Court erred by not dismissing Hodge's petition because the petition did not demonstrate the hallmark attributes of bad faith.
A. Equality of Treatment
Grand Valley argues the Bankruptcy Court failed to inquire into all factors contributing to a dismissal for cause, as required under § 707(a) of the Bankruptcy Code. In particular, it argues the Bankruptcy Court did not consider whether Hodge's petition violated the principle of equality of treatment among creditors. Instead, Grand Valley claims the Bankruptcy Court inquired only into those factors reflecting Hodge's alleged misconduct.
Under § 707(a) of the Bankruptcy Code, a court may dismiss a case only for cause, which includes "unreasonable delay by the debtor that is prejudicial to creditors," nonpayment of fees or charges, and failure to meet filing requirements. 11 U.S.C. § 707(a). The Sixth Circuit Court of Appeals has found the list of factors in § 707(a) is not intended to be exclusive. In re Zick, 931 F.2d 1124, 1126(6th Cir. 1991) (hereinafter Zick II). Grand Valley argues Hodge's bankruptcy petition should be dismissed, even though it does not fall into one of the enumerated categories, because it violates the central policy of the Bankruptcy Code that creditors of equal priority should be treated equally. See Begier v. IRS, 496 U.S. 53, 58 (1990). In support of its claim, Grand Valley notes that it is the only unsecured creditor listed on Hodge's petition and that Hodge has reaffirmed his secured debts, including his home mortgage loan and car loan. However, Begier and other cases stand only for the proposition that creditors of equal priority must be treated the same. See In re Baldwin-United Corp., 43 B.R. 443, 457 (S.D. Ohio Aug. 31, 1984) ("the most significant policy in bankruptcy jurisprudence is equality of treatment of like-situated creditors") (emphasis added). Grand Valley has not identified any like-situated creditors or creditors of equal priority who are being treated differently by Hodge. Grand Valley's comparison to secured creditors is inapposite because Grand Valley is an unsecured creditor. Therefore, Grand Valley has not shown Hodge's petition should be dismissed for cause on the grounds that it was treated unequally.
B. Bad Faith
Grand Valley also argues Hodge's petition should be dismissed for cause because it was filed in bad faith. The Sixth Circuit recognized in Zick II that a lack of good faith may constitute a valid reason to dismiss a bankruptcy petition for cause. 931 F.3d at 1126-27. However, dismissal for a lack of good faith "should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence." Id. at 1129. The following factors may be used to analyze whether a petition for bankruptcy has been filed in good faith:
1. The debtor reduced his creditors to a single creditor in the months prior to filing the petition.
2. The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle.
3. The debtor filed the case in response to a judgment pending litigation, or collection action; there is an intent to avoid a large single debt.
4. The debtor made no effort to repay his debts.
5. The unfairness of the use of Chapter 7.
6. The debtor has sufficient resources to pay his debts.
7. The debtor is paying debts to insiders.
8. The schedules inflate expenses to disguise financial well-being.
9. The debtor transferred assets.
10. The debtor is over-utilizing the protection of the Code to the unconscionable detriment of creditors.
11. The debtor employed a deliberate and persistent pattern of evading a single major creditor.
12. The debtor failed to make candid and full disclosure.
13. The debts are modest in relation to assets and income.
14. There are multiple bankruptcy filings or other procedural "gymnastics."In re Spagnolia, 199 B.R. 362, 365 (Bankr. W.D. Ky. 1995). Generally, the presence of only one factor is insufficient to warrant dismissal under § 707(a). In re Emge, 226 B.R. 396,400 (Bankr. W.D. Ky. 1998).
Grand Valley argues Hodge's petition was filed in bad faith, for four reasons. First it argues Hodge is seeking to avoid his debt to only one creditor, Grand Valley. Second, it argues Hodge has made no reasonable effort to pay his debt to Grand Valley. Third, it argues Hodge filed his petition in response to Grand Valley's proposed collection action. Fourth, it argues Hodge continues to pay money to his ex-wife and adult emancipated son. The Court will now consider each of these arguments in turn. 1) Single Creditor
Grand Valley argues Hodge's petition was filed in bad faith because it is the only creditor whose debt will be discharged under the petition. Under the Spagnolia factors, a petition may be in bad faith if "[t]he debtor reduced his creditors to a single creditor in the months prior to filing the petition" or if "[t]he debtor employed a deliberate and persistent pattern of evading a single major creditor." 199 B.R. at 365. However, "a debtor's stated intention to repay all creditors except one has been held to be insufficient cause to dismiss under § 707(a) as has the fact that a debtor . . . filed bankruptcy to avoid only a single debt." In re Maide, 103 B.R. 696, 697 (Bankr. W.D. Perm. 1989). Grand Valley presents no evidence indicating Hodge reduced his creditors to a single creditor immediately before he filed his petition, nor has Hodge employed a deliberate and persistent patten of evading his debt to Grand Valley. Therefore, the fact that Grand Valley is the only creditor whose debt will be discharged by Hodge's petition does not constitute bad faith.
2) Reasonable Efforts
Grand Valley also argues Hodge's petition was filed in bad faith because Hodge made no reasonable effort to pay his debt to Grand Valley. However, contrary to Grand Valley's assertions, Hodge did make reasonable attempts to discharge his debt. He participated in negotiations with Grand Valley in an attempt to settle the debt and made a written settlement offer, offering either a lump sum of $15,000 or a total of $20,000 in installments to be paid over four years. The Court finds these attempts to settle his debt indicate Hodge did not file his petition in bad faith.
3) Proposed Collection Action
Grand Valley further argues Hodge's petition was filed in bad faith because Hodge filed his petition three weeks after its planned collection efforts. A debtor may be acting in bad faith when his petition is filed in response to a judgment pending litigation or collection action. Spagnolia, 199 B.R. at 365. However, in most cases in which a petition was found to be in bad faith for this reason, the debt was incurred by a defendant who had been found liable for some wrongdoing. See, e.g., In re Cassell, No. 99-70200, 1999 U.S. Dist. LEXIS 13349 at *2 (E.D. Mich. Aug. 13, 1999) (medical malpractice); Spagnolia, 199 B.R. at 363 (personal injury); Indus. Ins. Servs., Inc. v. Zick, No. 89-CV-72179, 1990 U.S. Dist. LEXIS 19754, at *2 (E.D. Mich. Feb. 21, 1990) (hereinafter Zick I) (tortious interference and breach of contract). In this case, Hodge's debt arose from a lawsuit he filed against Grand Valley. Although he ultimately lost and was ordered to pay mediation sanctions, Hodge was not found to have filed a frivolous lawsuit or engaged in any other wrongdoing. The Court finds that a debtor whose debt arises from a lawsuit he filed in good faith has not filed his bankruptcy petition in bad faith.
The mediation sanctions resulted from Hodge's rejection of a mediation award in his favor. Under Mich. Ct. Rule 2.403(O)(1), a party who rejects a mediation award and subsequently receives a less favorable verdict must pay sanctions.
4) Lifestyle
Grand Valley's final argument is that Hodge's petition should be dismissed because he continues to voluntarily pay $350 per month to his ex-wife and adult emancipated son while refusing to pay Grand Valley. A bankruptcy petition may have been filed in bad faith when the debtor fails to make lifestyle adjustments or continues living a lavish lifestyle. Spagnolia, 199 B.R. at 365. In some cases, courts have dismissed a petition because the debtor continues to voluntarily pay the debts of others, particularly family members; however, in most of those cases, the debtors' actions have been far more egregious than the ones present here. For example, in Emge, the debtor not only paid for her adult daughter's graduate school but also refused to make any adjustments to her lifestyle, even after admonishment from the court. 226 B.R. at 400. In Maide, the debtor not only paid all his estranged wife's expenses, including the mortgage on her home, but also removed assets from his estate and failed to account for assets and liabilities. 103 B.R. at 698. The Court finds Hodge's payments of $350 per month to his ex-wife and son do not rise to the level of extravagance found to constitute bad faith in previous cases.
5) Conclusion
In accordance with this Opinion, a judgment shall enter affirming the Bankruptcy Court's Order of December 14, 2003, which denied Appellant's Motion to Dismiss.
JUDGMENT
In accordance with the Opinion filed this day,IT IS HEREBY ORDERED that the Bankruptcy Court's Order of December 13, 2003 is AFFIRMED.