Summary:
Ralph Janvey, as the receiver in a Ponzi scheme litigation against Stanford Financial Group (“SFG”), sought and, following trial, obtained a judgment against Peter Romero for $1.275 million related to fees and profits Romero had earned from SFG. Romero then filed Chapter 7 and Janvey sought dismissal for cause pursuant to 11 U.S.C. § 707(a). The bankruptcy court denied the motion, which was affirmed on appeal by the district court.
Following the majority position, the 4th Circuit began by holding that § 707(a) does allow dismissal of cases filed in bad faith, as that was “the sounder one, because it is the most helpful in preventing serious abuses of the bankruptcy process.” That notwithstanding, “the remedy of dismissal be reserved for cases of real misconduct.” It also declined to adopt a specific test for bad faith, neither the six, eleven or fourteen factor tests of In re Griffieth, 209 B.R. 823, 827 (Bankr. N.D.N.Y. 1996), In re McDow, 295 B.R. at 79 n.22 or In re Spagnolia, 199 B.R. 362, 365 (Bankr. W.D. Ky. 1995), as a “court need not mechanically tick off each factor and tally up its tick-marks at the end.” Instead such tests were guide for the discretion of the bankruptcy judge.
To show such “real misconduct”, Janvey raised three arguments- Firstly, he argued that the $1.275 million judgment constituted 90% of Romero’s debt and was the precipitating cause of the bankruptcy. The Court of Appeal rejected this noting that “[a]s a legal matter, the fact that a bankruptcy petition was filed in response to a single debt need not alone constitute bad-faith cause for dismissal.” Secondly, Janvey argued that Romero’s two offers to settle the lawsuit were made with the threat of bankruptcy looming to force acceptance of less. The Court of Appeals also rejected this as “groundless” as the law encourages settlement, with the limitations related to bankruptcy being to prevent preferential settlements to some creditors at the expense of others. Lastly, Janvey argued that Romero was keeping too much property. Romero had, without objection by the Chapter 7 Trustee or Janvey, exempted his home and two rental properties, owned as tenants by the entireties with his severely disabled wife, worth a total of more than $5 million. But the Court of Appeals recognized that a “debtor’s ability to repay debts does not alone amount to cause for dismissal” particularly when that would require use of exempt assets. To hold otherwise “would also undercut the entire exemption scheme that Congress designed.”
Commentary:
I have been critical of opinions where bankruptcy courts have used 11 U.S.C. § 707(a) to dismiss non-consumer cases where the debtor has the ability to pay creditors, as it would seem that involuntary conversion, pursuant to § 706(b), of those cases to Chapter 11 (where they would pay something) would be more statutorily accurate. See, for example, In re Edwards, This case tests that, as conversion would seem pointless, as Romero has no ability to pay. Absent dismissal for cause under § 707(a), the bankruptcy court would have had no ability to review and remedy a case such as this had bad faith been found, since 11 U.S.C. § 727 does not seem applicable as Romero’s conduct in the bankruptcy itself was “candid, forthcoming, timely and cooperative”. Nor is it clear that Janvey could show all the criteria necessary for nondischargeability under 11 U.S.C. § 523(a)(2) or (4).
In a case where the Court of Appeals admitted the life history of the debtor, who had “a storied career in the Foreign Service” was a tangential “McGuffin” (citing to the Oxford English Dictionary definition of such), it does appear that both the bankruptcy and higher courts were taken with Mr. Romero’s suave, diplomatic air as both recounted a bit of this background and even referred to Romero as “the Ambassador.”
The opinion also attempts to be almost literary, at one point stating the bankruptcy “may happen over time, or it may happen very suddenly.” It should have more directly quoted Ernest Hemingway in the Sun Also Rises:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
For a copy of the opinion, please see:
Janvey v. Romero- 11 U.S.C. § 707(a) Bad Faith
Category
Blog comments