Opinion
Case No. 6:22-bk-1396-TPG
2023-09-22
IN RE Edwin R. ENGLISH, III, Debtor.
Richard W. Hennings, Richard W. Hennings PA, Eustis, FL, for Debtor. Arvind Mahendru, Winter Springs, FL, Trustee, pro se.
Richard W. Hennings, Richard W. Hennings PA, Eustis, FL, for Debtor. Arvind Mahendru, Winter Springs, FL, Trustee, pro se. ORDER DENYING MOTION TO DISMISS CASE FOR BAD FAITH PURSUANT TO 11 U.S.C. § 707(a) Tiffany P. Geyer, United States Bankruptcy Judge
THIS CASE came on for hearing on June 8, 2023, on the motion of Creditor, Truist Bank ("Truist"), seeking dismissal of the Debtor's case pursuant to 11 U.S.C. § 707(a) (the "Motion") (Doc. No. 38) and upon the Debtor's objection thereto (Doc. No 45). Truist holds a deficiency judgment against the Debtor stemming from the Debtor's personal guaranty of a business debt approximately 17 years ago. (Doc. No. 56 ¶¶ 1, 6.) Truist asserts that the Debtor filed this case in bad faith to avoid paying the judgment, arguing, among other things, that the judgment is the Debtor's only debt and he has the means to pay it. (Doc. No. 38.) In response, the Debtor admits Truist's recent collection activity was the impetus for filing the Chapter 7 case but argues that, although he is presently employed, he is now 71, close to retirement, and it was only recently that Truist began collection actions despite the judgment being entered over nine years ago in 2014. (Doc. No. 40-1 at 9; Doc. No. 45.) After considering the pleadings, the parties' joint stipulations of fact (Doc. No. 56), arguments of counsel, the law, and being otherwise fully advised in the premises, the Motion is denied. As explained below, the Court finds that the Debtor did not file this Chapter 7 case in bad faith. This order constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052.
Unless otherwise specified, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule" references are to the Federal Rules of Bankruptcy Procedure.
I. PRE-PETITION BACKGROUND AND STIPULATED FACTS
There are very few factual disputes. Most facts below are taken, some verbatim, from the parties' factual stipulation filed with the Court on April 10, 2023. (Doc. No. 56.)
Events Preceding Truist's Deficiency Judgment Against the Debtor
On June 16, 2006, English Communications Inc. ("English Communications") signed and delivered to Colonial Bank a $235,000 mortgage and promissory note secured by real property in Lake County, Florida (the "Property"). (Id. ¶ 1.) The Debtor guaranteed the note. (Id.) About three years later, the Federal Deposit Insurance Corporation (the "FDIC") was appointed as Receiver over Colonial Bank's assets and assigned Branch Banking and Trust Company ("BB&T") all mortgages, notes, and security instruments Colonial Bank held as of August 14, 2009. (Id. ¶ 2.)
The parties provided no details on English Communications, but the Court presumes it is a defunct business venture of the Debtor.
Following a default, on December 20, 2010, BB&T filed a Complaint against English Communications, the Debtor, and others to foreclose the mortgage and to enforce the promissory note and guaranty. (Id. ¶ 3.) On June 28, 2011, BB&T obtained a $222,302.71 foreclosure judgment against English Communications and the Debtor, plus interest. (Id. ¶ 4.) On August 11, 2011, BB&T bid $100.00 at the foreclosure sale and obtained title to the Property on August 23, 2011, as the high bidder. (Id. ¶ 5.)
Entry of Truist's Deficiency Judgment Against the Debtor
About three years after the foreclosure sale, on August 6, 2014, the Circuit Court of the Fifth Judicial Circuit in and for Lake County, Florida (the "Circuit Court") entered a Final Deficiency Judgment (the "Deficiency Judgment") against English Communications and the Debtor in the amount of $122,783.03, after the Circuit Court determined that the Property had a fair market value of $115,000. (Id. ¶ 6.)
"The real estate market crashed during the period of February 19, 2008, through July 1, 2011." Meyer v. Greene, 710 F.3d 1189, 1192 (11th Cir. 2013). During this period, deficiency judgments increased, and borrowers "were then exposed to the risk that lenders would sue them personally for the large deficiency." Alan M. Weinberger, Tools of Ignorance: An Appraisal of Deficiency Judgments, 72 Wash. & Lee L. Rev. 829, 836-37 (2015); Dov Solomon, From the Great Depression to the Great Recession: On the Failure of Regulation in the Mortgage Market, 42 J. Legis. 162, 184 (2016).
Effective December 7, 2019, BB&T and SunTrust Bank, Inc. ("SunTrust") merged and are now known as Truist Bank. (Id. ¶ 7.) At some point following entry of the Deficiency Judgment, Truist obtained $8,889.37 via a garnishment writ served on a deposit account maintained by the Debtor at SunTrust. (Id. ¶ 8.) On March 10, 2022, Truist served the Debtor with a subpoena duces tecum in aid of execution, with documents due on April 8, 2022, and the Debtor's deposition to follow on April 26, 2022. (Id. ¶¶ 9, 10.)
The Debtor and His Bankruptcy Case
The Debtor did not provide documents by the subpoena's due date and instead filed this Chapter 7 case on April 19, 2022. (Id. ¶ 11.) His deposition was stayed by operation of § 362(a) (id. ¶ 13), so he sat for a Rule 2004 examination set by Truist instead (id. ¶ 34). Arvind Mahendru was appointed as Chapter 7 trustee (the "Trus tee") (id. ¶ 14) and conducted a Section 341 meeting of creditors which was continued to multiple dates including June 7, 2022, June 21, 2022, and July 5, 2022 (meeting concluded) (id. ¶ 24). Truist did not attend any of the meetings of creditors. (Id. ¶ 24.)
Rule 2004 examinations have been compared to "fishing expeditions," due to their broad scope. In re Gaddy, 851 F. App'x 996, 1004 n.6 (11th Cir. 2021) (quoting In re Duratech Indus., Inc., 241 B.R. 283, 289 (E.D.N.Y. 1999). In the Eleventh Circuit, "Unpublished opinions are not considered binding precedent, but they may be cited as persuasive authority." 11th Cir. R. 36-2.
The Trustee was thorough in his investigation of the Debtor. During the investigation, the parties agreed to extend the time to object to the Debtor's discharge for a period of 60 days. (Doc. Nos. 14, 15.) The Trustee determined he had claims against the Debtor resulting from the Debtor paying his wife's car payments with non-exempt funds in the year prior to the bankruptcy filing. (Doc. No. 56 ¶ 27.) The claims were resolved in a compromise motion (Doc. No. 20) approved by the Court on October 4, 2022 (Doc. No. 26), requiring the Debtor to make a lump sum payment of $11,700 to the Trustee, which he did (Doc. No. 56 ¶ 29).
Truist sought a further extension of time to object to the Debtor's discharge (Doc. No. 19), which the Court denied, concluding the request was untimely (Doc. No. 34). In connection with the Section 341 meetings and resolving the issues concerning the Debtor's payments on his wife's vehicle and all other questions the Trustee had, the Trustee requested documentation from the Debtor and represented at the hearing on the Motion that he was satisfied with the Debtor's production and overall cooperation in the case.
The Debtor is employed as the executive director of the Mount Dora Community Trust. (Doc. No. 56 ¶ 18.) He turned 71 in July 2023 and is now drawing social security. (Id. ¶ 17.) He plans to retire in the not-too-distant future but did not state exactly when. (Doc. No. 46 ¶ 13.) He has been married for over a decade.
Truist is the Debtor's only creditor and timely filed an unsecured proof of claim for $175,125. (Doc. No. 1 at 18-19; Claim 1-1.) Although the Debtor included a $1,000 debt owing to Chase Cardmember Service on his bankruptcy schedules, that obligation was paid pre-petition. (Doc. No. 1 at 28; Doc. No. 40-1 at 10; Doc. No. 40-2 at 1.) The Debtor's Schedule I reflects his individual gross income as $7,500 per month and his net monthly income as $6,276.24. (Doc. No. 1 at 22-23.) The Debtor's wife is not employed but receives income from rental property and a trust established by her father, who passed away. (Id. at 23; Doc. No. 40-1 at 3, 6.) The couple's total monthly net income is $12,276.24. (Doc. No. 1 at 23.)
The Debtor's Schedule J includes, inter alia, the following monthly expenses: (i) $2,000 in "Food and housekeeping supplies," (ii) $1,100 in "Clothing, laundry, and dry cleaning," (iii) $1,500 in "Entertainment, clubs, recreation, newspapers, magazines, and books," and (iv) $300 in "wife's other personal expenses." (Doc. No. 1 at 25.) The Debtor included scant personal assets on Schedule A/B—he owns no real estate and values his personal property at $1,928.00. (Id. at 10-14.) The Debtor and his wife have two vehicles, both titled in his wife's name (Doc. No. 40-1 at 7), and he pays the monthly payments on both vehicles (Doc. No. 1 at 25, ¶ 17c; Doc. No. 40-1 at 7). He has no 401k or pension plan, no stocks, bonds, trusts or annuities. (Doc. No. 1 at 12.) The Debtor resides in a home owned by his wife's trust (Doc No. 40-1 at 3), and his schedules reflect that he pays the bulk (or all) of the home's expenses, such as real estate taxes, insurance, association dues and repairs. (Doc. No. 1 at 24, ¶ 4a-d.) The Debtor's Statement of Financial Affairs ("SOFA") reflects his gross income for 2021 was $84,576.91 and his gross income for 2020 was $68,308. (Id. at 28.)
The Parties' Disputes
Truist contends the Debtor filed this Chapter 7 case in bad faith for the sole purpose of evading collection actions on its judgment, meriting the dismissal of the case for "cause" pursuant to § 707(a). (Doc. No. 38.) Truist argues that the Debtor has engaged in no apparent belt-tightening or expenditure reductions to pay the Deficiency Judgment and argues that the Debtor lives a "lavish lifestyle" (Id. at 1-2); he pays for his wife's medical insurance, two vehicles titled in his wife's name, and has sufficient funds to pay off his credit cards each month and pays expenses associated with the Mount Dora Yacht Club. (Id. at 35, 38.) Moreover, Truist argues, the Debtor did not disclose the purchase of an expensive ring for his wife (Doc. No. 38 at 27, 30) or his monthly payments on his wife's vehicles as a gift in his SOFA (Doc. No. 1 at 27-33).
For his part, the Debtor is frustrated at Truist's lengthy delay in waiting to take collection action against him at a stage in his life when he is close to retirement and thus nearer to lacking any income stream beyond social security. (Doc. No. 40-1 at 9; Doc. No. 45 ¶¶ 11, 12.) The Debtor notes that he never borrowed funds from Truist, and that Truist only obtained the Deficiency Judgment through an FDIC assignment and subsequent bank merger after the real estate market collapsed, causing the Deficiency Judgment to be higher than it would have been if property values had not declined. (Doc. No. 45 ¶¶ 1-3, 7-9.) He filed a Chapter 7 case instead of a Chapter 11 case because has no ongoing business to reorganize and did not want to incur the higher expenses of a Chapter 11 case due to having a single business debt. (Id. ¶ 13.) In addition, because his income will soon consist of only social security, he did not consider a Chapter 13 case to be a viable or attractive option. (Id.) In sum, the Debtor maintains that he considered all his options under the Bankruptcy Code and determined Chapter 7 to be the most beneficial to him. (Id.)
See supra note 3.
The parties attempted to resolve their differences at mediation (Doc. No. 58), but mediation ended in impasse (Doc. No. 60).
II. LAW AND ANALYSIS
Under § 707(a), the court has discretion to dismiss a Chapter 7 case for cause after notice and a hearing. United States v. McDaniel (In re McDaniel), 363 B.R. 239, 243 (M.D. Fla. 2007). Section 707(a) supplies three non-exclusive illustrations of cause, none of which apply here. Courts have concluded bad faith can demonstrate cause for dismissing a Chapter 7 case, and that the movant seeking a bad faith dismissal bears the burden of proof. In re McDaniel, 363 B.R. at 244; but see In re Bushyhead, 525 B.R. 136, 142 (Bankr. N.D. Okla. 2015) (rejecting bad faith as a consideration when dismissal is sought pursuant to § 707(a) and noting that courts are split on the issue).
Under § 707(a),
[t]he court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under chapter 123 of title 28; and
(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.
Bad faith is a fact-intensive determination that " 'is subject to judicial discretion under the circumstances of each case' " and "does not lend itself to a strict formula." Piazza v. Nueterra Healthcare Physical Therapy, LLC (In re Piazza), 719 F.3d 1253, 1271 (11th Cir. 2013) (quoting Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir.1984)). In Piazza, the Eleventh Circuit determined that "a totality-of-the-circumstances approach is the correct legal standard for determining bad faith under § 707(a)" and focused on " 'atypical' conduct . . . that falls short of the 'honest and forthright invocation of the Bankruptcy Code's protections . . . .' " Id. (internal citation omitted). Courts must "examine whether a debtor's intentional acts or omissions to act 'constitute a misuse or abuse of the provisions, purpose, or spirit of the Bankruptcy Code.' " In re Merkel, 595 B.R. 608, 611-12 (Bankr. S.D. Fla. 2018) (quoting Piazza, 719 F.3d at 1272). "A bankruptcy court, as a trier of fact, must carefully examine the conduct of the debtor and identify facts and bases which support a finding of bad faith under § 707(a)." Id. at 612. Because the analysis is generally subjective and entrusted to the court's discretion, "the court should step cautiously when asked to exercise the power to deny a debtor access to its jurisdiction." In re Kane & Kane, 406 B.R. 163, 170 (Bankr. S.D. Fla. 2009) (citing In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991) (dismissal of Chapter 7 cases for lack of good faith limited to egregious circumstances)).
Some courts analyze 15 factors outlined in In re Baird, 456 B.R. 112, 116-17 (Bankr. M.D. Fla. 2010), when determining whether a totality-of-the-circumstances demonstrates that a debtor has acted in bad faith meriting dismissal. In In re Piazza, the Eleventh Circuit affirmed a bankruptcy court's ruling which relied on a Baird factor analysis, although the Eleventh Circuit expressly declined to adopt these factors. In re Piazza, 719 F.3d at 1272. Part of the trouble in relying on the Baird factors is because at least four factors involve evaluating the debtor's ability to pay, which is neither permissible nor relevant in evaluating dismissals for cause under § 707(a). See In re Bushyhead, 525 B.R. at 148-52 (discussing the Baird factors and why reliance upon them is particularly problematic in the § 707(a) context).
Truist urges essentially three reasons it believes this Court should conclude the Debtor filed this Chapter 7 case in bad faith. First, the Debtor has openly admitted he filed Chapter 7 to avoid paying a single debt—the Deficiency Judgment. (Doc. No. 56 ¶ 35.) Truist contends that the lack of any other indebtedness tends to demonstrate that the Debtor did not need to file bankruptcy. (Doc. No. 38 at 6-7.) Second, and related to Truist's first point, Truist argues that the Debtor has sufficient resources to pay the Deficiency Judgment but instead lives a lavish lifestyle and pays expenses of his wife, a statutory insider. (Id. at 8-9.) Finally, at the hearing on the Motion, Truist argued that the Debtor failed to disclose the purchase of an expensive ring for his wife within the year prior to filing this case.
The Court rejects Truist's first argument as providing cause for dismissal in this case. The Debtor's admission that he filed Chapter 7 to avoid paying the Deficiency Judgment does not reflect bad faith. The Debtor's resort to Chapter 7 is strategic, but not unfair in the circumstances. He has no prior bankruptcy filings. He is 71, drawing on social security, and close to retirement. (Doc. No. 40-1 at 9.) He owns no real estate, has no 401k, pension, stocks, bonds, trusts or annuities. (Doc. No. 1 at 10-14.) The total value of his personal property is just $1,928.00. (Doc. No. 1 at 14.) Though it is true he has not yet retired, he does not intend to work much longer, limiting his ability to make payments in a Chapter 13. (Doc. No. 40-1 at 9.) These facts do not merit dismissal of the Debtor's Chapter 7 case for bad faith.
As observed by the Honorable Erik P. Kimball, it is one thing to deny a debtor access to bankruptcy to "pursue a potentially protracted reorganization case" while prosecuting an appeal against a judgment creditor without paying a supersedeas bond. In re Kane & Kane, 406 B.R. at 170. But "[i]t is quite another matter to deny . . . access to . . . Chapter 7" where a debtor is required to tender non-exempt assets to a Chapter 7 trustee to administer for the benefit of the creditors. Id. "A Chapter 7 petition is, to a great extent, throwing oneself on the mercy of the Bankruptcy Court" and surrendering to a forum where non-exempt assets are "collected and distributed . . . in a fair and equitable manner." Id. Moreover, filing for bankruptcy relief "to counter the collection efforts of one creditor, without further indicia of bad faith, is not sufficient to warrant dismissal under § 707(a)." In re Merkel, 595 B.R. at 614 (collecting cases).
Second, Truist's argument that the Debtor has sufficient resources to pay the Deficiency Judgment but instead lives a lavish lifestyle bears little to no relevance here, where the Debtor's obligations arise from a business venture and are not primarily consumer obligations. As detailed in the parties' factual stipulation, the Deficiency Judgment arises from the Debtor's personal guaranty of a business loan approximately 17 years ago (Doc. No. 56 ¶¶ 1-6); debts of this nature are considered business debts and not consumer debts. In re Grillot, 578 B.R. 651, 657-58 (Bankr. D. Kan. 2017) ("An individual's guaranty of a business or commercial debt is generally a non-consumer debt.") Debtors whose debts are primarily business debts and not consumer debts, such as the Debtor is here, are entitled to file Chapter 7 cases and, critically, are not subject to the § 707(b) "means test." Townson v. Ruff (In re Ruff), 639 B.R. 772, 785 (Bankr. N.D. Ga. 2022) (when debts are not "primarily consumer debts," the "means test" provisions of § 707(b) do not apply); In re Uche, 555 B.R. 57, 61 (Bankr. M.D. Fla. 2016) (" '[D]ismissal based upon a debtor's ability to pay is expressly prohibited by the legislative history of Section 707(a).' ") (quoting In re Baird, 456 B.R. at 117); In re Bushyhead, 525 B.R. at 152 (guarantors of failed business entitled to discharge guaranteed business debt notwithstanding ability to pay as such is not cause for dismissal under § 707(a)).
Certainly, the Debtor appears to have a comfortable life and benefits from living in a home owned by his wife's family trust (Doc No. 40-1 at 3) with no mortgage obligation, though he evidently pays most, or all, related property expenses (Doc. No. 1 at 24). And while his Schedule J reflects a monthly deficit of $564.69, he generally has sufficient income to pay his revolving monthly bills and generously allocates funds each month for food, housekeeping, clothes, dry cleaning, and recreation and entertainment. (Id. at 25.) He also pays for the couple's vehicles and medical expenses. (Id.) But once the Debtor stops working, his ability to cover these expenses will be severely limited because he has nothing beyond social security payments to contribute. (Id. at 10-14.) Filing a Chapter 7 case in the circumstances in which the Debtor finds himself is not a misuse or abuse of the provisions of the Bankruptcy Code, and to the extent the Debtor may have some ability to pay the Deficiency Judgment if he curbed his expenses does not supply cause for dismissal under § 707(a).
Finally, Truist argues that the Debtor failed to disclose an expensive gift to his wife, a ring costing $30,000, in the months before filing his Chapter 7 case. (Doc. No. 1 at 27-33.) Question 13 of Part 5 on the SOFA (Official Form 107) requires a debtor to disclose any gifts they have given in the two years prior to bankruptcy with a total value of more than $600 per person. (Id. at 30.) Here, Truist correctly notes that the Debtor made no disclosures. Both Truist and the Trustee explored this omission with the Debtor.
According to the Debtor, the omission was unintentional as he did not consider the purchase a gift, per se. (Doc. No. 40-2 at 4.) Documents produced in discovery, coupled with the Debtor's testimony at his 341 meetings and in his 2004 examination reveal that the bulk of the funds for the purchase of the ring, $20,000, were contributed by his wife from her trust fund. (Id. at 9, Doc. No. 40-4 at 11; Doc. No. 40-7 at 16.) The remaining $10,000 was contributed by the Debtor using a credit card. (Doc. No. 40-1 at 9.) Thus, in the Debtor's mind, his wife purchased the ring, and he just contributed to her purchase. (Id.; Doc. No. 40-2 at 1.) As such, he did not consider the ring to be a gift in the traditional sense, meriting disclosure on the SOFA. (Doc. No. 40-2 at 1.) At the hearing, the Trustee stated that he was satisfied with the Debtor's explanation and did not believe the Debtor's omission constituted intentional concealment. But Truist is not satisfied, and the Court agrees that the letter and spirit of the relevant SOFA question required the Debtor to disclose his contribution towards this purchase. Nevertheless, the Court cannot find on this record that the Debtor intentionally concealed information about his contribution towards the ring with an intent to abuse the provisions, purpose or spirit of the Bankruptcy Code.
Truist also correctly notes that the Debtor did not disclose his payments on his wife's vehicles in response to SOFA Part 3 Question 8 (Doc. 1 at 29), which requires a debtor to list any payments or transfers of property on account of a debt that benefits an insider. However, the Debtor did expressly disclose such payments on Schedule J. (Doc. No. 1 at 25, ¶ 17c.) As such, the Court finds that the Debtor's disclosures, though imperfect, are adequate.
III. CONCLUSION
The Court cannot conclude that the totality-of-the-circumstances demonstrates that the Debtor filed this Chapter 7 case in bad faith. The Debtor filed his Chapter 7 case to seek a discharge of a business-related personal guaranty which is a proper use of Chapter 7. Accordingly, it is ORDERED that the Motion to Dismiss (Doc. No. 38) is DENIED.
ORDERED.