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Bankruptcy Court Dismisses Chapter 7 Case After Making Finding of Bad Faith

By Shahroozporia (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA bankruptcy judge in Los Angeles granted the trustee’s motion to dismiss a Chapter 7 case, ruling that the debtors filed their bankruptcy petition in bad faith. In re Olen, No. 2:13-bk-38721, mem. decision (Bankr. C.D. Cal., Aug. 22, 2014) (PDF file). The trustee moved to dismiss the case on multiple grounds, including the claim that granting relief to the debtors would be an abuse of Chapter 7’s provisions. The court held that the debtors had not provided enough financial information to allow it to rule on the question of abuse. It then held that this same lack of information, combined with evidence of substantial consumer expenditures shortly before and after filing the Chapter 7 petition, supported a finding of bad faith.

The debtors, a married couple, filed a voluntary petition for Chapter 7 bankruptcy in December 2013. An amended schedule of unsecured debts identified five debts totaling $1,575,000, including at least one substantial judgment against them in Los Angeles Superior Court. They identified total after-tax income of about $4,500 per month, based on employment with a corporation that they wholly own and control. Their claimed monthly living expenses resulted in a negative monthly net income of approximately $10,000.

In the months prior to filing for bankruptcy, according to the court, the debtors spent significant sums on airfare, including round trips to Florida and Nigeria to visit each debtor’s parents, trips to New York and Massachusetts for other family events, and a trip to Dubai that was allegedly a layover during the Nigeria trip. They also paid about $1,200 for a “boarding and training” program for their two dogs during the Nigeria trip, and they claim to have paid off the loan on their Land Rover in the same month they filed for Chapter 7.

The trustee moved to dismiss the Chapter 7 case for abuse and bad faith in March 2014. 11 U.S.C. § 707(b). The Bankruptcy Code provides a complex formula for determining whether a presumption of abuse applies in a Chapter 7 case. Id. at § 707(b)(2)(A)(i). The court held that it could not determine whether this presumption applies because of insufficient information about the debtors’ finances. The court did have enough information, however, to rule on the trustee’s motion to dismiss the case for bad faith. Id. at § 707(b)(3)(A).

The purpose of Chapter 7, the court noted, is to give “a ‘fresh start’ to debtors and maximiz[e] the return to creditors.” Olen, mem. dec. at 9, citing In re Mitchell, 357 B.R. 142, 154-55 (Bankr. C.D. Cal. 2006) (PDF file). The court held that the circumstances of the case met many of the Price and Leavitt factors used to determine bad faith, such as an “excessive or extravagant” proposed budget, or “eve-of-bankruptcy purchases.” Olen at 9-10, citing In re Price, 353 F.3d 1135, 1139-40 (9th Cir. 2004), In re Leavitt, 171 F.3d 1219, 1224 (9th Cir. 1999). The court cited the debtors’ “fail[ure] to adequately document and explain their relevant financial history and current condition,” with examples, to support its decision. Olen at 10.

Devin Sawdayi has represented individuals and families in the Los Angeles area in personal bankruptcy cases under Chapter 7 and Chapter 13 since 1997, helping them repair their finances with dignity and respect. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

California Bankruptcy Court Rules on Dischargeability of Debt Allegedly Incurred through “False Pretenses”, Los Angeles Bankruptcy Lawyer Blawg, July 27, 2014

Ninth Circuit Bankruptcy Appellate Panel Considers “Good Faith” Requirement for Discharge of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2014

California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse, Los Angeles Bankruptcy Lawyer Blawg, March 11, 2014

Photo credit: By Shahroozporia (Own work) [CC-BY-SA-3.0], via Wikimedia Commons.