Opinion
Case No. 6:22-bk-04276-TPG
2024-01-30
IN RE: JWB OVERLAND LLC, Debtor.
Stephen R. Caplan, Caplan & Associates PA, Orlando, FL, for Debtor.
Stephen R. Caplan, Caplan & Associates PA, Orlando, FL, for Debtor. ORDER GRANTING MOTION TO DISMISS PURSUANT TO 11 U.S.C. § 707(a) Tiffany P. Geyer, United States Bankruptcy Judge
Creditors Cal-Tenn Financial, LLC and Cal-Tenn Georgia, Inc. (collectively, "Cal-Tenn") filed a motion to dismiss the corporate Chapter 7 case of the Debtor, JWB Overland LLC, pursuant to 11 U.S.C. § 707(a) (the "Motion") for "cause" arguing that the Debtor filed the case in bad faith solely to derail litigation pending in another forum. (Doc. No. 14.) The Debtor objects to dismissal and argues the filing was motivated by a lack of funds to continue defending the litigation, and that Chapter 7 cases (unlike reorganization cases) contain no good faith requirement (the "Objection"). (Doc. No 36.) The Court conducted a trial on the issue and took the matter under advisement. (Doc. No. 58.) After considering the Motion, Objection, witness testimony, evidence, and the law, the Motion is granted. The case will be dismissed. 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. FINDINGS OF FACT
A. Prepetition Background
The pre-petition business relationship leading to the disputes between the parties need only be briefly summarized for the purpose of ruling on the Motion, as those disputes are not pending before this Court. Simply summarized, in 2014, Cal-Tenn entered into a Dealer Master Purchase Agreement ("Master Agreement") to service automobile financing loans for businesses owned and operated by John W. Burgett ("Burgett")— Dealer Services Financial Center, Inc., Dealer Services Financial Center, LLC, and (perhaps) Dealer Services Financial Center, a sole proprietorship (collectively, "Dealer Services") (Doc. No. 53-6 at 2)— through which Burgett purchased and sold automobiles. Burgett is also the sole owner and manager of the Debtor. (Doc. No. 53-4 at 5-7; Doc. No. 53-10 at 2.) Burgett created the Debtor to buy and sell cars and to purchase accounts receivable. (Doc. No. 53-2 at 6.) The Debtor was not a party to the Master Agreement with Cal-Tenn. (Doc. No. 52-1 at 447.)
Burgett disputes having any interest in a Dealer Services Financial Center sole proprietorship. (Doc. No. 53-6 ¶¶ 7, 8.) Whether he did or did not is immaterial to the issue before the Court, and the Court does not decide this issue.
Cal-Tenn alleges Burgett executed the Master Agreement for the Dealer Services entities without specifying whether he was doing so on behalf of the corporation, the limited liability corporation, or the sole proprietorship. (Doc. No. 52-1 at 11-12.)
Cal-Tenn alleges Dealer Services failed to perform under the Master Agreement. (Id. at 32-34, 59.) In 2016, Cal-Tenn filed suit in Tennessee against Burgett and his related entities, Dealer Services, and the Debtor, among multiple other defendants, claiming over $11 million in losses due to the defendants' alleged acts (the "Tennessee Litigation"). (Id. at 2, 152.) Cal-Tenn filed a Fourth Amended Complaint in the Tennessee Litigation on December 12, 2019, asserting claims for fraud, civil theft, theft by conversion, conspiracy, violations of Tennessee's consumer protection act, interference with a contractual relationship, and fraudulent misrepresentation in the inducement of a contract. (Doc. No. 52-1.) Among other things, Cal-Tenn seeks an award of punitive damages, treble damages, attorney's fees, and costs, and to hold all defendants jointly and severally liable. (Id. at 445.)
When the Debtor was operational, hundreds of thousands of dollars flowed through its several bank accounts. (Doc. Nos. 52-2, 52-3.) Yet, the Debtor apparently never filed any tax returns. (Doc. No. 13-1 at 9:13-21.) Burgett claims this is because the Debtor "made no money." (Id.) Conversely, Cal Tenn alleges the Debtor is "essentially a corporate shell without assets through which money was funneled by Mr. Burgett and the other defendants in the Tennessee [Litigation . . . .]" (Doc. No. 14 at 10.) During the pendency of the Tennessee Litigation, the Debtor was sanctioned at least twice for failing to comply with discovery requests, including failing to disclose bank accounts and produce bank statements. (Doc. No. 14-3 at 4-5; Doc. No. 14-4 at 2.)
The Court held a trial on the Motion on October 5, 2023. (Doc. No. 58.) Cal-Tenn's exhibits were admitted into evidence without objection, including the Fourth Amended Complaint in the Tennessee Litigation and the Debtor's bank statements. (Id. at 1.)
B. The Debtor files a Chapter 7 Case
After many years of involvement in the Tennessee Litigation, on November 30, 2022, the Debtor filed this Chapter 7 case. (Doc. No. 1.) The Debtor arrived in this Court as a long-defunct and non-operational entity, having ceased business approximately five years prior to filing its petition and dissolving as a limited liability company over two years ago in June 2020. (Doc. No. 53-2 at 6-7.) This is a "no asset" case (Doc. No. 44); an examination of the Debtor's schedules reflects no real property, no personal property, no cash, no accounts receivable, no investments, and no inventory (Doc. No. 1 at 7, 8-10). There is nothing for the Chapter 7 trustee to administer for the benefit of the Debtor's creditors, and even if there was, the Debtor scheduled only one creditor, Cal-Tenn, with an estimated $11 million contingent, unliquidated and disputed claim. (Id. at 12-13.)
Although the Debtor did not include any bank accounts on its schedules (Doc. No. 1 at 8-10), the Disclosure of Compensation from the Debtor's attorney reflects that the Debtor paid the Chapter 7 retainer (id. at 27).
Cal-Tenn seeks dismissal of the Debtor's case for "cause" pursuant to § 707(a) for multiple reasons, but chiefly arguing that the case was filed in bad faith solely to thwart Cal-Tenn's efforts in the Tennessee Litigation. (Doc. No. 14 at 8-19.) Indeed, Burgett consistently testified at the 341 meeting (Doc. No. 53-2 at 7) and at trial that the Debtor's Chapter 7 filing was motivated by the Tennessee Litigation, and that there is no money to defend the Debtor. At trial, Cal-Tenn's owner, Tracy McMurtry, testified that the Debtor's Chapter 7 filing and the automatic stay slowed the Tennessee Litigation down and impacted Cal-Tenn's litigation efforts and strategy resulting in unfair prejudice. McMurtry believes the Debtor, a key defendant, only filed for bankruptcy so the remaining defendants in the Tennessee Litigation, each of whom the Debtor scheduled as a co-debtor (Doc. No. 1 at 15-17) and some of whom —Burgett and Dealer Services— are related to the Debtor, can try to avoid liability by pointing to the Debtor whose chair in the Tennessee Litigation is "empty." Cal-Tenn also argues that Burgett was less than candid in his disclosures to the Chapter 7 trustee in this case, but that it was unable to timely raise this matter due to a protective order entered in the Tennessee Litigation pursuant to which certain records produced were designated as confidential. (Doc. No. 14 ¶¶ 3, 10 - 15.) Finally, Cal-Tenn points out that because this is a no asset liquidation case and the Debtor is ineligible for a discharge, the only possible motivation for filing the case is to prejudice Cal-Tenn in the Tennessee Litigation, meriting dismissal of the case as a bad faith filing pursuant to § 707(a). (Id. at 17-18.)
The Debtor lists its principal place of business as 561 Heather Oak Cove, Altamonte Springs, Florida 32714, and the address for two of the Dealer Services co-debtors as "561 Heather Oak Circle, Altamonte Springs, Florida 32714." (Doc. No. 1 at 1, 15, 16.) It appears that "circle" in the co-debtors' address is a scrivener's error.
In 1978, the law was changed to prohibit corporations and partnerships from receiving discharges, as to "avoid trafficking in corporate shells and in bankrupt partnerships." 11 U.S.C. § 727 (Historical Notes and Legislative Reports, 1978 Acts).
In response, the Debtor argues that there is no good faith requirement in Chapter 7 cases. (Doc. No. 36 ¶¶ 18, 19, 22.) In addition, the Debtor argues that dismissals of Chapter 7 cases are limited to "egregious circumstances," Industrial Services, Inc. v. Zick (In re Zick), 931 F.2d 1124, 1129 (6th Cir. 1991), and that no such circumstances exist here. (Doc. No. 36 ¶ 21.) On the first point, the Court disagrees with the Debtor. Good faith must be a requirement for all debtors seeking relief under any chapter of Title 11. In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991) (" '[A]lthough the jurisdictional requirement of good faith is not explicitly stated in the statute, it is inherent in the purposes of bankruptcy relief.' " (quoting In re Jones, 114 B.R. 917, 926 (Bankr. N.D. Ohio 1990))). "The good-faith requirement also comports with the bankruptcy court's role as a court of equity, where those seeking relief must approach the court with clean hands and an honorable purpose." In re Jones, 114 B.R. at 926 (finding a good faith requirement in Chapter 7 cases); In re Boca Village Ass'n, Inc., 422 B.R. 318, 323 (Bankr. S.D. Fla. 2009) ("[T]he majority position is that a debtor's lack of good faith in commencing a Chapter 7 case can constitute cause for dismissal under § 707(a)."); In re Ripley & Hill, P.A., 176 B.R. 596, 598 (Bankr. M.D. Fla. 1994) ("Filing a petition in bad faith constitutes sufficient reason to dismiss a case.").
On the second point, the Court agrees that the facts relevant to the bankruptcy filing here fall short of being egregious insofar as they are not what this Court considers to be glaringly bad, outrageous, or shocking. Although there are serious issues raised against the Debtor in the Tennessee Litigation involving transfers among and between insiders or entities related to the Debtor and these issues were touched upon at trial here, such transfers were remote in time to the petition date and of no apparent interest to the Chapter 7 trustee. Further, no avoidance actions were commenced to recover any transfers. As such, the Court declines to spend time on this issue. Nevertheless, the Court concludes the facts are more than sufficient to demonstrate that the Debtor filed the case for an improper reason inconsistent with the purpose and spirit of the Bankruptcy Code, meriting dismissal.
The Debtor makes the final note that bankruptcy cases are routinely filed when no funds are available to defend against pending litigation, and this is certainly true. But there generally must be something more, and here the Debtor is just a non-functioning husk, having dissolved many years ago, yielding the inescapable inference that the filing is merely gamesmanship.
II. CONCLUSIONS OF LAW
Courts have discretion to dismiss a Chapter 7 case for cause, including bad faith, after notice and a hearing. 11 U.S.C. § 707(a); United States v. McDaniel (In re McDaniel), 363 B.R. 239, 243 (M.D. Fla. 2007). But see In re Bushyhead, 525 B.R. 136, 142-52 (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). The movant seeking a bad faith dismissal bears the burden of proof. In re McDaniel, 363 B.R. at 244.
Section 707(a) supplies three non-exclusive illustrations of cause:
[t]he court may dismiss a case under this chapter only after notice and a hearing and only for cause, includingAlthough § 707(a)(1) permits dismissal for a debtor's unreasonable delay that is prejudicial to its creditors (Doc. No. 14) and here Cal-Tenn argues prejudicial delay, the delay contemplated by § 707(a)(1) typically concerns a debtor's delay within the context of the bankruptcy case. In re Jackson, 258 B.R. 272, 276, 277 (Bankr. M.D. Fla. 2000) ("Only bankruptcy behavior will be considered in evaluating whether Debtor sufficiently abused or plans to abuse the bankruptcy system."); Matter of Lang, 5 B.R. 371, 374 (Bankr. S.D.N.Y. 1980). In this case, none of § 707(a)'s enumerated examples of cause apply.
(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). To determine whether a case is filed in bad faith, courts must carefully examine the debtor's conduct and identify specific facts which demonstrate 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). 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, 167 (Bankr. S.D. Fla. 2009).
Some courts analyze 15 factors outlined in In re Baird, 456 B.R. 112, 116-17 (Bankr. M.D. Fla. 2010), when determining whether the 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. Baird is of limited value here, however, as most of its fifteen factors are inapplicable.
Here, the Debtor is (or at least was, prior to dissolution) a corporate entity. As far back as 1994, this Court concluded that a corporate Chapter 7 case could be dismissed under § 707(a) for bad faith. In re Ripley & Hill, 176 B.R. at 598. In Ripley, the Chapter 7 debtor had no employees or assets separate from its professional association shareholders, and only two debts. Id. at 597. The bankruptcy case was essentially a two-party dispute, and the debtor was simply a shell corporation through which money was funneled. Id. at 598. The largest claimholder moved to dismiss the case under § 707(a) for bad faith. Id. at 597.
Like the instant case, in Ripley, the Chapter 7 "fresh start" was inapplicable because the debtor, as a corporation, was ineligible to receive a discharge. Id. at 598. In addition, the other key purpose of Chapter 7—the fair and orderly distribution of a debtor's assets—was also inapplicable because, like this case, the debtor had no assets. Id. After examining the equities of the debtor's Chapter 7 filing and weighing the possible benefits and harms to the parties, the Court in Ripley determined that dismissal for cause was appropriate under § 707(a). Id. at 599. Like the case at bench, there was no benefit in pursuing the bankruptcy case because, at the conclusion of the case, the parties would be in the same position they were before the case was filed—"a partially-adjudicated two party dispute." Id. Importantly, the Court concluded there would be harm in continuing the bankruptcy case resulting from a delayed liquidation of the creditor's claim and "wasted judicial resources from another court entering [the] dispute . . . ." Id. Thus, the totality of the circumstances and benefits versus harms favored dismissal; continuing the case was "not consistent with the policies and legislative intent contained in the code." Id.
A case from the Southern District of Florida, In re Boca Village Association, Inc., 422 B.R. at 321-24, is consistent with Ripley and likewise supports the proposition that a corporate debtor's bad faith can provide cause for dismissal under § 707(a), noting the grounds are narrow, with the ultimate question being whether the debtor is pursuing a goal other than obtaining relief provided through the methods available in the Bankruptcy Code. In re Boca Vill. Ass'n, 422 B.R. at 323. If a " 'debtor has taken advantage of the court's jurisdiction in a manner abhorrent to the purposes of Chapter 7,' a court can dismiss a Chapter 7 case for bad faith constituting cause under § 707(a)." Id. at 324 (quoting In re Kane & Kane, 406 B.R. 163, 168 (Bankr. S.D. Fla. 2009)). Here, the Court concludes the Debtor has taken advantage of the Court's jurisdiction to pursue an improper goal.
As in Ripley, neither of the legitimate Chapter 7 goals can be achieved in this case. The Debtor is (was) a corporation and will not receive a discharge. 11 U.S.C. § 727(a)(1). There will be no orderly and efficient distribution of assets because the Debtor has none. As such, there is no benefit "consistent with the policies and legislative intent contained in the code." In re Ripley & Hill, 176 B.R. at 599. Instead, there is only harm resulting from a further delay of the Tennessee Litigation, and expenditure of this Court's resources on a no asset, no discharge case involving a two-party dispute with a defunct debtor. Cal-Tenn met its burden of proving the Debtor's bad faith in filing this Chapter 7 case. Sufficient evidence of "atypical conduct" was presented to demonstrate that the Debtor's motives in filing this case were other than an "honest and forthright invocation of the Bankruptcy Code's protections." In re Piazza, 719 F.3d at 1271 (quoting In re Albany Partners, 749 F.2d at 674). Most notably, the Debtor is dissolved and cannot receive a discharge and the Debtor's lack of assets shows it had no intent to achieve an orderly liquidation for the benefit of creditors. Though Burgett testified there was no money to defend the Debtor in the Tennessee Litigation, Burgett and the Debtor's related co-debtor entities are continuing to defend, so the Court struggles to find credibility in Burgett's testimony on that point. This bankruptcy case serves no purpose beyond disruption of the Tennessee Litigation. After examining the totality of the circumstances and comparing the benefits and harms, the Court concludes the Debtor filed this case in bad faith warranting dismissal under § 707(a).
Accordingly, it is
ORDERED:
1. The Motion (Doc. No. 14) is GRANTED;
2. This case is DISMISSED; and
3. The Clerk is directed to close this case.
ORDERED.