The Journal of The DuPage County Bar Association

Back Issues > Vol. 28 (2015-16)

Motions to Dismiss Bankruptcy for Cause
By Michael W. Huseman

Nothing stops creditors’ counsel colder in their tracks than an official notice of bankruptcy filing. That unmistakable document from the U.S. Bankruptcy Court will bring litigation to a screeching halt whether pre-judgment or post-judgment. Fortunately, a bankruptcy filing is not always the end of the story. Creditors faced with a bankruptcy filing have several options, including adversary proceedings for objections to discharge and challenges to the dischargeability of certain debts. However, before acknowledging the validity of the bankruptcy by filing an adversary complaint, creditors’ counsel should examine whether a motion to dismiss the bankruptcy is the appropriate first step. If the totality of the circumstances indicates that the bankruptcy was filed in bad faith, the court may dismiss the bankruptcy for cause.

Chapter 7 Bankruptcies. Any party in interest, including a creditor, may move to dismiss a Chapter 7 bankruptcy for cause.1 Section 707(a) of the Bankruptcy Code lists three examples of “cause,” including unreasonable delay by the debtor that is prejudicial to creditors, but does not specifically mention bad faith.2 However, the three examples of “cause” set forth in §707(a) are illustrative rather than exhaustive.3 While the Seventh Circuit has not yet addressed the issue of dismissal “for cause” under§707(a), the majority of district and bankruptcy courts in this Circuit have concluded that bad faith – or lack of good faith – supports a “for cause” dismissal.4

Generally, the bad faith inquiry looks at the totality of the circumstances.5 The court must look at the totality of the circumstances surrounding both objective and subjective considerations in each case in order to determine whether the Bankruptcy Code is being used properly and fairly and, consequently, whether “cause” exists to dismiss the case.6 The court can focus on the debtor’s pre-petition and postpetition conduct.7 To make the requisite showing, the movant need not show, though it would be relevant, that the debtor had any sort of fraudulent or malicious intent or scheme in mind when filing; malfeasance is not a prerequisite to bad faith.8

Bankruptcy courts in this district generally have followed the “mainstream” totality of the circumstances test employed by other Circuits.9 Under the mainstream test, the debtor’s ability to pay his debts is the primary factor and other factors should be considered on a case by case basis.10 When determining whether a debtor has the ability to pay his debts, it is proper to consider all the debtor’s assets, including exempt assets.11 As explained by the Second Circuit, “a totality of the circumstances inquiry is equitable in nature and the existence of an asset, even if exempt from creditors, is relevant to the debtor’s ability to pay his or her debts.”12 In one particular case, a bankruptcy court in this district focused heavily on the fact that a debtor could have paid a $525,000 obligation from his $2.3 million dollars in exempt life insurance and pension funds, even noting “that no court can require him to do so and that he likely never will is beside the point.”13

Courts should also consider the debtor’s future income in determining whether the debtor has the ability to pay his debts.14 This factor is interesting because, in Chapter 7 bankruptcies, the debtor’s future income is usually only relevant in consumer cases. For instance, a court can dismiss a bankruptcy case under §707(b) for substantial abuse based upon the debtor’s future income and expenses,15 but that section only applies when a debtor’s debts are “primarily consumer debts.”16 While a debtor’s future income is not the determining factor under §707(a), like it can be for the substantial abuse analysis under §707(b), the future income can be considered by the court as part of the totality of the circumstances under§707(a), even for debtors with primarily commercial debts.

A comprehensive list of factors to be considered in addition to the debtor’s ability to pay his debts does not exist. As one court put it, “the facts required to mandate dismissal are as varied as the number of cases.”17 A New York bankruptcy court has enumerated a fourteen-item list of factors that will be considered when applying the totality of the circumstances test under §707(a), but that court stressed that all other factors which may bear on whether a debtor’s filing was in bad faith or good faith are also relevant.18 One significant factor is whether the debtor is willing to make lifestyle changes to pay his debts.19 Courts in this district have made bad faith determinations based upon a debtor’s unwillingness to cutback family vacations20 and debtors’ unwillingness to downsize their housing expenses.21 The court may also consider a debtor’s charitable or religious contributions to determine if he has made lifestyle changes to pay his debts.22

Another factor is whether the debtor has manipulated the bankruptcy process to frustrate one particular creditor.23 To make this determination, courts can look to see if the debtor has paid or reaffirmed his debts, either before or after filing, with the sole exception of one particular creditor.24 There is also a temporal element to this factor. Courts can consider whether the debtor filed bankruptcy shortly before a state court deadline to produce documents,25 or whether the case was filed in response to a judgment or pending litigation.26

Chapter 13 Bankruptcies. In Chapter 13 bankruptcies, the obligation of good faith is imposed upon the debtor at two different stages. First, the debtor must file his petition for Chapter 13 bankruptcy in good faith.27 Second, the debtor must file his Chapter 13 plan in good faith. 28 Cases discussing good faith in the Chapter 13 context distinguish between these two situations because a lack of good faith in filing the petition can lead to dismissal, while the consequence of a lack of good faith in proposing a plan may be less severe and lead only to the requirement of an amended plan.29

In determining whether a petition has been filed in good faith, the court once again performs a totality of the circumstances analysis involving both objective and subjective inquiries.30 Factors to be considered include “the nature and potential dischargeability of scheduled debts, the timing of the case filing; the circumstances of how particular debts were incurred; the debtor’s motive for filing; how the debtor’s actions affected creditors; the debtor’s treatment of creditors before and after filing; and whether the debtor has been forthcoming with the court and creditors.”31

In considering whether a plan is filed in good faith, the court asks of the debtor: “Is he really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?”32 The court considers whether the plan accurately reflects the debtor’s financial condition and affords substantial protection to unsecured creditors.33 Factors to be considered when evaluating whether a plan has been filed in good faith include whether the plan states the secured and unsecured debts of the debtor accurately; whether the plan states the expenses of the debtor accurately; whether the percentage of repayment of unsecured debts is correct; whether inaccuracies in the plan amount to an attempt to mislead the bankruptcy court; and whether the proposed payments indicate a fundamental fairness in dealing with creditors.34 The Seventh Circuit has stressed that the above list is not exhaustive.35

Procedure and Timelines. A motion to dismiss a bankruptcy for cause is a “contested matter” under the Federal Rules of Bankruptcy Procedure.36 The Rules do not contain a deadline for filing a motion to dismiss under §707(a).37 But the Rules do say that a discharge may not be entered while a motion to dismiss under §707 is pending.38 So, it appears that a motion to dismiss for cause may be filed at any time before discharge. Creditors need to be aware of all other relevant timelines, however, when developing a strategy to contest a bankruptcy proceeding. For example, if the motion to dismiss is unsuccessful, the creditor may want to file an adversary complaint objecting to the debtor’s discharge. A complaint objecting to discharge needs to be filed no later than 60 days after the first date set for the meeting of creditors.39 That deadline can be extended, but the motion for extension of time must be filed before the deadline has expired.40 Also, a creditor may want to conduct discovery prior to hearing on the motion to dismiss. Traditional avenues of discovery are available in contest matters, including interrogatories, production requests, requests to admit, and depositions.41 Before spending too much time briefing a motion to dismiss, or conducting discovery, the creditor will want to docket the date by which he must file any available adversary proceedings.

Conclusion. A wide variety of circumstances can lead to a bankruptcy court determining that a debtor has filed a petition in bad faith. Creditors’ counsel should familiarize themselves with the cases and bankruptcy rules in this area to see if a motion to dismiss for cause can be utilized as a preliminary matter before jumping into a more costly and time consuming
adversary proceeding.

1.11 U.S.C. 707(a).
2.Id.
3.In re Tallman, 417 B.R. 568, 575 (Bankr. N.D. Ind. 2009).
4.In re Jakovljevic-Ostojic, 517 B.R. 119, 126 (Bankr. N.D. Ill. 2014).
5.In re Collins, 250 B.R. 645, 653-654 (Bankr. N.D. Ill. 2000).
6. In re American Telecom Corp., 304 B.R. 867, 870 (Bankr. N.D. Ill. 2004).
7. In re Sekendur, 334 B.R. 609, 619 (Bankr. N.D. Ill. 2005).
8. In re American Telecom Corp., 304 B.R. 867, 870 (Bankr. N.D. Ill. 2004).
9. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
10. Id.
11. In re Kornfield, 164 F.3d 778, 784 (2nd Cir. 1999).
12. Id.
13. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
14. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000); In re Perlin, 497 F.3d 364, 372 (3rd Cir. 2007).
15. In re Roppo, 442 B.R. 888, 892 (Bankr. N.D. Ill. 2010); 11 U.S.C. 707(b)(3)(B).
16. In re Terzo, 502 B.R. 553, 556 (Bankr. N.D. Ill. 2013).
17. In re Sekendur, 334 B.R. 609, 619 (Bankr. N.D. Ill. 2005).
18. In re O’Brien, 328 B.R. 669, 675 (Bankr. W.D. N.Y. 2005).
19. In re Kornfield, 164 F.3d 778, 784 (2nd Cir. 1999); In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989).
20. In re Collins, 250 B.R. 645, 655 (Bankr. N.D. Ill. 2000).
21. In re Roppo, 442 B.R. 888, 895 (Bankr. N.D. Ill. 2010); In re Bacardi, 2010 Banrk. LEXIS 3 (Bankr. N.D. Ill. 2010).
22. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000); In re Griffieth, 209 B.R. 823, 828 (Bankr. N.D. N.Y. 1996).
23. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
24. In re Davidoff, 185 B.R. 631, 634 (Bankr. S.D. Fla. 1995).
25. Piazza v. Nueterra Healthcare Physical Therapy, LLC, 469 B.R. 388, 393 (S.D. Fla. 2012).
26. In re O’Brien, 328 B.R. 669, 675 (Bankr. W.D. N.Y. 2005).
27. 11 U.S.C. 1307(c); In re Love, 957 F.2d 1350, 1354-55 (7th Cir. 1992).
28. 11 U.S.C. 1325(a)(3); In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990).
29. In re Youngblood, 2013 Bankr. LEXIS 4260 (Bankr. N.D. Ill. 2013).
30. In re Youngblood, 2013 Bankr. LEXIS 4260 (Bankr. N.D. Ill. 2013).
31. Id.
32. In re Smith, 286 F.3d 461, 466 (7th Cir. 2002).
33. Id.
34. In re Rimgale, 669 F.2d 426, 432 (7th Cir. 1982).
35. Id.
36. Fed. R. Bankr. P. 1017(f)(1).
37. In re Tanenbaum, 210 B.R. 182, 187 (Bankr. D. Colo. 1997).
38. Fed. R. Bankr. P. 4004(c)(1)(D).
39. Fed. R. Bankr. P. 4004(a).
40. Fed. R. Bankr. P. 4004(b)(1).
41. Fed. R. Bankr. P. 9014(c).

Michael W. Huseman is a partner at Dreyer, Foote, Streit, Furgason & Slocum, P.A. in Aurora. He practices primarily in the areas of commercial litigation, sophisticated asset recovery, and bankruptcy litigation. Mr. Huseman received his Juris Doctor from Northern Illinois University College of Law and his Bachelor of Arts from St. Joseph’s College in Rensselaer, Indiana. Mr. Huseman also edits the Northern Law Blog.

 
 
DCBA Brief