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In Re Motaharnia

Citations: 215 B.R. 63; 1997 Bankr. LEXIS 1830; 1997 WL 731479Docket: Bankruptcy SV 96-24164-GM, SV 97-11662-GM, SV 97-10044-GM

Court: United States Bankruptcy Court, C.D. California; November 19, 1997; Us Bankruptcy; United States Bankruptcy Court

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The United States Trustee filed motions to dismiss the chapter 7 bankruptcy cases of three debtors—Mohammad R. Motaharnia, Supavarn Busayasakul, and Florante and Fely Ilagan—citing credit-card abuse under 11 U.S.C. § 707. All three debtors incurred substantial credit-card debt shortly before filing for bankruptcy. The court's focus is on whether dismissal under § 707(a) or § 707(b) is appropriate based on the alleged abuse.

Motaharnia filed for bankruptcy on December 2, 1996, with $155,937 in unsecured debt, primarily from credit cards. He disputes that the debt was incurred shortly before filing, claiming it dates back to 1988. His monthly income is $2,439, while his expenses exceed this by $1,463, primarily due to high mortgage and car payments. Despite earning $36,864 and $29,625 in the previous two years, his financial situation did not improve, raising concerns about his cash advances.

Busayasakul filed on February 7, 1997, with $142,174 in unsecured debt from 22 credit cards. She self-reports an income of $1,000 monthly from her video store and $500 from her son, with total monthly expenses of $1,680, resulting in a monthly deficit of $180. Her financial history shows limited earnings over the previous years, contributing to the Trustee's claims of credit-card abuse.

The Ilagans' details were not described in this excerpt, but their case is similarly analyzed for the potential dismissal based on credit-card misuse. The court will evaluate these cases collectively due to the common issue of alleged credit-card abuse.

Ms. Busayasakul opposes the motion to dismiss by asserting that she lost her video store in a 1994 earthquake, which led to significant debt to various vendors. She claims to have made genuine efforts to repay her creditors, including having her son contribute to her monthly income and making minimum payments since the earthquake. However, her opposition lacks a supporting declaration from her, and there is no explanation of how her 1994 business debt correlates with her current unsecured credit card obligations. Additionally, there is no clarity on her credit card payments over recent years, particularly given her budget deficits, nor is there an explanation for her acquisition of a Mercedes Benz.

In the case of Florante M. Ilagan and Fely V. Ilagan, they filed a voluntary Chapter 7 petition on January 2, 1997. As of January 1, 1996, their unsecured debt totaled $47,393, with 45% attributed to credit cards. By December 31, 1996, their unsecured debt rose to $176,552, largely due to approximately $94,955 incurred in credit card debt over the 11 months leading up to their bankruptcy, with no explanation for this increase. Florante is unemployed while Fely receives a monthly disability income of $1,332. Their family income fell from $27,833 in 1995 to $15,979 in 1996, resulting in a monthly deficit of $1,295 against expenses of $2,626.

The discussion section outlines the background of Section 707, highlighting that prior to 1984, it only included 707(a). The 1984 amendment added 707(b) to establish different dismissal standards, aimed at preventing non-needy debtors from abusing the bankruptcy process. The current motions are analyzed under both sections. Section 707(a) permits case dismissal for cause after a notice and hearing, including unreasonable delays prejudicial to creditors, nonpayment of fees, and failure to file required information timely.

Section 707(a)(1) and (3) outlines specific grounds for dismissal in bankruptcy cases, but this list is not exhaustive. Case law has identified additional grounds such as community safety, health concerns, and the need for judicial economy. "Cause" has been linked to the debtor's "bad faith" use of bankruptcy. In *In re Brown*, the court dismissed a case where the debtor attempted to conceal wealth through manipulative financial practices. Conversely, in *In re Zick*, the Sixth Circuit found cause due to the debtor's strategic filing after a mediation award, which limited creditor involvement. The Eighth Circuit in *In re Huckfeldt* rejected the "bad faith" standard as a determinant of cause, emphasizing that such a framework could misalign with the core objectives of Chapter 7, advocating for a strict interpretation of "cause." It noted that many "bad faith" decisions relate to a debtor's repayment ability, an aspect not intended by Congress to be considered under 707(a). Courts should apply a narrow definition of bad faith, reserving it for extreme cases where debtor motives starkly contradict the Bankruptcy Code's purposes. The United States Trustee argues that the debtors' alleged credit-card abuse indicates bad faith warranting dismissal. However, the distinction between fraudulent intent regarding credit card charges and bad faith in bankruptcy filings must be recognized, as they pertain to different aspects of debtor behavior and intent.

The fraudulent-intent standard from credit-card non-dischargeability cases under § 523(a)(2) is deemed inappropriate for assessing "cause" under § 707(a). The Debtors have demonstrated consistent motivations aligned with bankruptcy policies, seeking a discharge of dischargeable debts under Chapter 7. They have properly filed all necessary schedules and disclosed assets and liabilities, providing appropriate financial records, without ulterior motives to harm specific creditors. Consequently, the facts of their cases do not warrant dismissal under § 707(a).

Regarding § 707(b), the court can dismiss a case involving primarily consumer debts if it finds that granting relief would constitute substantial abuse. A presumption favors granting relief to the debtor. Motions for dismissal under § 707(b) must be filed within 60 days of the creditors' meeting unless extended by the court. In the cases of Busayasakul and Ilagan, motions were timely, but Motaharnia’s motion was late, filed beyond the 60-day period, and was denied.

To qualify under § 707(b), debts must be primarily consumer debts, defined as those incurred for personal, family, or household purposes. More than 50% of the debt must be consumer-related. Ilagan concedes that her debt meets this requirement, while Busayasakul contests it, claiming a significant portion relates to her business, but lacks specific evidence. The court will allow Busayasakul to present admissible evidence to support her claim.

The second requirement for dismissal under § 707(b) is that relief would result in substantial abuse, primarily assessed by the debtor's ability to repay debts. In the Ninth Circuit, the inability to repay within three years, without undue hardship, justifies further examination of other factors indicating bad faith.

An inability to pay does not exempt a debtor from dismissal under section 707(b) if bad faith is established. The Kelly rule in the Ninth Circuit permits dismissal based solely on a debtor's ability to pay; however, it lacks guidance for cases where the debtor has little financial capacity to fund a Chapter 11 or Chapter 13 plan. To address this, other circuits' tests are useful. The Fourth Circuit's "totality of the circumstances test" considers multiple factors beyond solvency, such as the reasons for filing bankruptcy (e.g., illness or unemployment), excessive cash advances or purchases, the reasonableness of the debtor's budget, accuracy of financial disclosures, and the good faith of the filing. It emphasizes a holistic view of abuse under the Bankruptcy Code.

Conversely, the Sixth Circuit's "hybrid approach" assesses a debtor's future earning potential to repay debts while also examining mitigating factors that may counter a presumption of substantial abuse. This approach evaluates whether the debtor's dealings with creditors are honest and whether their financial situation genuinely warrants debt discharge. Key factors include eligibility for Chapter 13, available state remedies, potential for private negotiations, and ability to reduce expenses without sacrificing necessities. The court may dismiss a case if it finds the debtor is not in need or is acting unscrupulously, requiring adherence to a basic standard of fair play and honesty in dealings.

The United States Trustee contends that the debtors' credit-card abuse constitutes substantial abuse, despite their inability to repay debts. Key factors in this argument include whether the debtors made purchases beyond their repayment capacity and the good faith of their bankruptcy petitions. The case of In re Uddin, 196 B.R. 19 (Bankr.S.D.N.Y.1996) is cited as a precedent where substantial abuse was identified despite the debtor's inability to repay, noting that the debtor accumulated over $170,000 in unsecured debt, primarily from excessive purchases and gambling. Misrepresentations about income to obtain credit were also highlighted, leading the court to conclude that this behavior amounted to a blatant abuse of consumer credit. The court stated that if consumer credit abuse is established, dismissal is warranted when financial distress relates to luxury purchases and gambling debts, emphasizing that Chapter 7 relief should not benefit those living beyond their means. 

If a case is dismissed under 11 U.S.C. § 707(b) for pre-petition actions, and the debtor lacks the ability to make future payments, it is akin to a dismissal with prejudice, preventing re-filing or discharge due to the existence of substantial pre-petition credit-card debt. The Bankruptcy Code outlines specific grounds for denying discharge under sections 727, 523, and 349, emphasizing the need for honest dealings and fair creditor treatment. Dismissal must reflect egregious conduct undermining the bankruptcy system's integrity. There is no indication from § 707 or its legislative history that such a dismissal serves as a permanent bar on refiling for Chapter 7.

A debtor whose case is dismissed under 707(a) may have the chance to correct issues and refile later. If dismissed under 707(b) for having the ability to repay debts, the debtor can refile under chapters 11 or 13. The court can deny discharge if the debtor's actions are deemed egregious, as per section 349. Only the court or the United States Trustee can initiate a dismissal motion under 707(b), which should only occur upon evidence that the debtor's actions harm the bankruptcy system. 

In cases of credit card abuse, dismissal under 707(b) is warranted if the debtor has excess income to pay debts. However, if the debtor cannot meet significant financial obligations, the court must assess factors indicating the debtor's honesty and good faith, and consider lesser remedies. Key factors include the proportion of unsecured debt from credit cards, the volume of credit cards used, economic incentives for creditors to act under section 523(a)(2), the purpose of credit card debt, and the debtor's efforts to repay. If these factors are proven, dismissal may occur regardless of the debtor's ability to pay.

Section 707(b) creates a presumption favoring discharge for chapter 7 debtors, emphasizing the policy of granting bankruptcy relief. This presumption requires courts to favor the debtor unless substantial abuse is clearly evident. If a debtor can repay debts, the presumption is rebutted, justifying dismissal. Conversely, if the debtor cannot repay but exhibits other dishonest behaviors, the presumption can be overcome only if substantial abuse is demonstrated.

The 707(b) motion regarding Motaharnia is denied due to untimeliness. The motion concerning Busayasakul is postponed for further examination of the debt's origins, whether they are consumer debts, and the debtor's prepetition repayment efforts. The Ilagans failed to respond to this motion, potentially because they filed a motion to withdraw their petition, which the Court did not rule on due to procedural non-compliance. The United States Trustee appears to have met their burden concerning the Ilagans, whose Withdrawal of Voluntary Petition is treated as a motion to dismiss, resulting in the dismissal of their case and rendering the Trustee's motion moot. The Court refers to all three debtors collectively as "Debtors," with individual cases identified by name. The excerpt also references the legislative context of 707(b), highlighting that it was enacted to prevent abuse of Chapter 7 by debtors capable of repaying their debts. It notes that the bankruptcy court has the discretion to dismiss cases deemed substantially abusive. Additional legal precedents and analyses regarding dismissal criteria and the evaluation of debtors' abilities to repay are cited to support the Court's rationale.

The court in Green emphasized that establishing a future income threshold for Chapter 7 eligibility through a per se rule would undermine the presumption favoring debtors seeking relief. A debtor who opts for Chapter 7 aims to discharge debts by liquidating non-exempt assets and retains the choice to file under Chapter 13 if they prefer to repay creditors over time. The court highlighted that a per se rule dismissing Chapter 7 petitions based on a debtor's ability to repay would only be valid if the debtor is also eligible for Chapter 13. In Bryant's case, dismissal under Section 707(a) was warranted due to the debtor's failure to disclose assets and liabilities, selective discharge of creditors, and a luxurious lifestyle despite having minimal assets. The court noted substantial abuse, citing the debtor's discretionary spending habits, such as dining out and cable expenses. Additionally, the text referenced the principle of holistic statutory interpretation, as seen in Massachusetts v. Morash, and considerations regarding the amounts owed to creditors and their likelihood of recovery over time.