District Court Affirmed Bad Faith Dismissal of Chapter 7 Petition Where Debtors had $800,000 in Assets and only $40,000 in Debt

District Court Affirmed Bad Faith Dismissal of Chapter 7 Petition Where Debtors had $800,000 in Assets and only $40,000 in Debt

On or about April 14, 2014, Appellee FM East Developers, LLC (“FM East”) negotiated a contract with Appellants/Debtors  for a cash sale of Appellants’ residential real property. When the sale did not close, on July 31, 2014, FM East filed an action for specific performance against Appellants seeking to compel the sale i(the “State Court Action”). In its complaint, FM East alleged that Appellants agreed to sell FM East the residential property for $750,000, that all parties executed the agreement, and all conditions precedent were satisfied, but that Appellant refused to close.

Four days later, on August 22, 2014, Appellants  filed a voluntary petition for Chapter 7 relief in the United States Bankruptcy Court. ( In their initial petition, they listed assets of $858,963.99 and liabilities of $30,477.06. Under their assets, Appellants listed $793,286.00 in real property, and $65,677.99 in personal property.

FM East subsequently appeared in Appellants’ bankruptcy case and moved to dismiss their petition for cause under 11 U.S.C. § 707(a) and (b) , arguing that Appellants filed their petition in bad faith — specifically, to thwart the State Court Action and renege on their agreement to sell the real property. The bankruptcy court held a hearing on FM East’s motion on January 6, 2015. During the hearing, FM East argued that “the petition simply does not show an insolvent debtor,” pointing to several facts evidenced in the petition: that Appellants’ assets were nearly thirty times that of their liabilities; that Appellants were not in default and current on their credit cards with a then-outstanding balance of $4,600; that Appellants had paid $4,000 to pay down both credit cards within thirty days of filing for bankruptcy; and that Appellants stipulated that the difference between Appellants’ income and expenses was $139. FM East contended that “[t]he only goal that this debtor had was not one to seek the refuge of the Bankruptcy Code as an honest and unfortunate debtor, but one to forestall and obviate what is a state court action for specific performance on a contract where they’re legally obligated to sell their property.” (Id. at 8).

On May 5, 2015, the bankruptcy court held an evidentiary hearing on FM East’s motions to dismiss and enforce settlement.  After taking evidence, the bankruptcy court found that Appellants filed their Chapter 7 case “in bad faith” under 11 U.S.C. § 707 . The court concluded that Appellant wife’s testimony was not credible, and deemed the proceedings “a colossal waste of everyone’s time.”  The court also pointed to the fact that Appellants held “$800,000 in assets” but only “40,000 in debt . . . raising a strong smell of bad faith” and asked, “How do you come to bankruptcy when you’re that solvent?” The court further observed that Appellants “can pay the debt 10, 20 times with the amount of assets” they held. Accordingly, the court dismissed the case with prejudice for two years to allow FM East to pursue its State Court Action, with leave to the parties to shorten or lengthen the prejudice period depending on the circumstances of the state court case.

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