Summary:
The Debtor filed Chapter 13 in 2009, subsequently converting to Chapter 7 on May 9, 2011. This conversion was one day prior to a hearing to determine the status of the claim of the Debtor’s ex-wife, Ms. Day.
Ms. Day argued that the conversion was only done in an attempt to avoid paying her claim through the Debtor’s Chapter 13 plan, which otherwise only required $21.50 to complete. Additionally, Ms. Day alleged that the Debtor self-reported environmental hazards on their property, in an effort to reduce the value. Accordingly, Ms. Day sought to have the Debtor’s Chapter 7 dismissed pursuant to 11 U.S.C. § 707(b)(3).
Looking at § 707(b)(3)(a), the Court first found that there was no evidence that the Debtor had filed the bankruptcy case in bad faith, both because he had primarily sought relief from credit card debts and also as her and Ms. Day had not separated at that time.
Whether the conversion was in bad faith could be a factor under the "totality of the circumstances" review in §707(b)(3)(b). That the Debtor converted to Chapter 7 to discharge Ms. Day’s claim was not, buy itself, indicative of bad faith. Furthermore, the Debtor’s self-reporting of environmental hazards on his property (from creosote soaked railroad ties buried 15 years earlier) was done to both make the property marketable, avoid future liabilities for non-disclosure and because failure to disclosure could have subjected him to criminal prosecution.
Accordingly, the Motion to Dismiss was denied.
Commentary:
Given that disclosure is the first rule of bankrupty (with disclosure and disclosure, rounding out the second and third rules also), it would have been rather odd for the Debtor's disclosure of environment hazards to be a grounds for dismissal.
Perhaps Ms. Day should have argued that his failure to disclose these problems when the case was initially filed was evidence that under § 707(b)(3)(a), the case was filed in bad faith.
Because it was not in issue in this case, the Court declined to address whether the Means Test of §707(b)(1) applies to converted cases.
Boyette- § 707(b)(3) following Conversion.PDF
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