In re Chovev

559 B.R. 339

In re: Tolly Chovev aka Tolly A. Chovev, Debtor.

Case No. 8-12-76414-las

United States Bankruptcy Court, E.D. New York.

Signed October 12, 2016

Lance Roger Spodek, Lance Roger Spodek PC, New York, NY, for Debtor.

MEMORANDUM DECISION AND ORDER

Louis A. Scarcella, United States Bankruptcy Judge

I. Introduction

In this contested matter, the Court must decide whether “cause” exists to dismiss the debtor's bankruptcy case pursuant to 11 U.S.C. § 707(a)¹ . Josef Zloof (“Zloof”), an unsecured creditor holding the single largest claim against the debtor, maintains that this chapter 7 bankruptcy was commenced solely to thwart collection efforts on the malpractice judgment he obtained against the debtor. In his view, the debtor's prepetition conduct and the filing of this chapter 7 cases constitute bad faith which can serve as cause for dismissal under § 707(a). The debtor disagrees, insisting that bad faith does not in and of itself constitute cause for dismissal under § 707(a). Alternatively, the debtor argues that even if bad faith can serve as cause for dismissal under § 707(a), it is reserved for egregious or abhorrent conduct, conduct which he contends is not present in his bankruptcy case.

Having considered the submissions of the parties, the relevant law, and the record in this case, and for the reasons explained below, the Court holds in favor of the debtor and concludes that Zloof has failed to meet his burden of proof under § 707(a) to dismiss this chapter 7 case. The motion, therefore, will be denied. This Memorandum Decision and Order will constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052, as made applicable to this contested matter by Bankruptcy Rule 9014(c).²

II. Jurisdiction

The Court has jurisdiction over this contested matter under 28 U.S.C. § 1334 and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) because it concerns the administration of the debtor's estate. A bankruptcy judge may hear and finally decide any core proceeding. 28 U.S.C. § 157(b)(1). A motion to dismiss under § 707(a) “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011). Accordingly, the Court may enter a final decision and order adjudicating this matter.

III. Factual Background³

The debtor is a New York State licensed dentist. Prior to the filing of the debtor's chapter 7 case, Zloof brought a malpractice action against the debtor in the Supreme Court of the State of New York, County of Kings.⁴ On July 2, 2009, the Civil Court of the City of New York, County of Kings⁵ decided in favor of Zloof and awarded damages in the amount $267,707.00 (the “Malpractice Judgment”).⁶ Zloof sought to enforce the Malpractice Judgment and served information subpoenas upon the debtor and his nondebtor spouse, Susie Chovev. The debtor and his wife failed to respond to the information subpoenas, and consequently were arrested by the Nassau County Sheriff and ordered by the Supreme Court of the State of New York, County of Nassau to respond to the information subpoenas. On October 24, 2012, after service of additional information subpoenas on the debtor, his accountant, and his employer, the debtor filed this chapter 7 case thus staying all collection efforts on the Malpractice Judgment pursuant to § 362(a). The Malpractice Judgment accounts for roughly 74% of all unsecured claims filed and scheduled by the debtor in this case, and is by far the largest unsecured claim lodged against the debtor. This is a no asset chapter 7 case and no distribution, therefore, will be made to holders of allowed claims.⁷

According to the schedules and summaries filed by the debtor, he owns no real estate, has no secured debt, and has unsecured priority debt of $52,658.00 and unsecured non-priority debt of $318,753.00, which includes the Malpractice Judgment in the amount of $274,017.95. He rents a house in Cedarhurst, New York where he lives with his spouse and two daughters. The debtor owns minimal personal property valued at $13,385.00, consisting of his 2004 Toyota Corolla, New York State dental license, dental tools and a rental security deposit. Except for his New York State dental license, the debtor claimed all his personal property as exempt. The majority of his debts relate to his dental practice and, as noted above, Zloof holds the largest unsecured non-priority claim against the debtor.

The debtor lists his individual monthly income as $8,049.00 in Schedule I, and Mrs. Chovev's income as $1,200.00, for a combined household monthly income of $9,249.00. Although Mrs. Chovev was previously employed as an attorney, she changed careers sometime before the debtor filed his chapter 7 case and is employed as a school teacher. The debtor lists household monthly expenses of $10,250.00, resulting in a monthly deficit of $1,001.00.

The deadline for filing objections to the debtor's discharge or dischargeability of debt was January 22, 2013. Zloof did not commence a proceeding seeking to withhold the debtor's discharge or to determine the dischargeability of the Malpractice Judgment.

IV. Procedural History

Zloof moves to dismiss the debtor's chapter 7 case under §§ 707(a) and (b) (“Motion”) [Dkt. No. 12]. Within that Motion, Zloof argues that cause exists to dismiss the debtor's bankruptcy case because it was filed solely to stay collection efforts and avoid repayment of the Malpractice Judgement. This, Zloof contends, constitutes bad faith warranting dismissal under § 707(a). With respect to § 707(b), Zloof argues that the debtor inflated his expenses so as to pass the “means test,” codified in § 707(b)(2). Zloof insists that had the debtor accurately listed his expenses, he would have failed the means test. The debtor's bankruptcy filing, Zloof maintains, is therefore an abuse of chapter 7 for purposes of § 707(b)(1), and, as such, constitutes grounds for dismissal. Zloof filed a supplemental affirmation in further support of the Motion. [Dkt. No. 18].

The debtor opposed the Motion [Dkt. No. 20]. In his opposition, the debtor contends that his chapter 7 case was not filed in bad faith, and that the “means test” is not dispositive because it only applies to an individual with primarily consumer debts,⁸ not business debts. Here, the debtor maintains that the majority of his debts are business debts. Zloof filed a reply [Dkt. No. 22] reiterating many of the same arguments contained in the Motion. He did, however, withdraw his § 707(b) argument, and now contends that the debtor's inflated expenses should instead be considered as additional evidence of bad faith under § 707(a).

The Court held an evidentiary hearing and heard arguments on the Motion. The debtor served as his own witness at the evidentiary hearing and the parties introduced documentary evidence. The debtor was subject to cross-examination by Zloof who appeared pro se .⁹ At the conclusion of the evidentiary hearing, the Court took the matter under advisement.

V. Discussion

Under § 707(a), a chapter 7 case may be dismissed for “cause.” Although the Bankruptcy Code does not define the term “cause,” § 707(a) lists three nonexclusive illustrations of cause:¹⁰ (1) unreasonable delay by the debtor that is prejudicial to creditors, (2) nonpayment of required fees or charges, and (3) only on motion of the United States Trustee, failure of the debtor to file a list of creditors, schedules, and a statement of financial affairs as required under § 521(a). 11 U.S.C. § 707(a)(1)–(3). The burden to prove cause rests with Zloof, as the moving party. In re Aiello , 428 B.R. 296, 299 (Bankr. E.D.N.Y. 2010).¹¹

The determination of what constitutes “cause” to dismiss an individual debtor's chapter 7 case is left to the discretion of the court. See In re Smith , 507 F.3d at 73 (“The determination of whether cause exists is committed to the sound discretion of the bankruptcy court”) (quoting In re Hull , 339 B.R. 304, 308 (Bankr. E.D.N.Y. 2006) ); Clear Blue Water, LLC v. Oyster Bay Mgmt. Co., LLC , 476 B.R. 60, 67 (E.D.N.Y. 2012) (“A bankruptcy court has discretion to determine what additional circumstances, not enumerated in the statute, may constitute cause”); In re Krueger , 812 F.3d 365, 370 (5th Cir. 2016) (“Courts have broad authority to determine what is cause for dismissal under section 707(a) ”); 6 Collier on Bankruptcy § 707.03 (Alan N. Resnick & Henry J. Sommer eds. 16th ed. 2015) (“The court has substantial discretion in ruling on a motion to dismiss under section 707(a), and in exercising that discretion must consider any extenuating circumstances, as well as the interests of the various parties”).

Zloof asserts two grounds for dismissal of this chapter 7 case, neither of which is among the illustrations of “cause” listed in § 707(a). First, he maintains that the debtor filed his chapter 7 case solely to stop collection efforts on the Malpractice Judgment, and, second, that the debtor inflated his expenses on Schedule J to his chapter 7 petition. Both of these grounds, Zloof insists, constitute bad faith, and bad faith can serve as cause for dismissal of a chapter 7 case. With equal certitude, the debtor contends that he is eligible for relief under chapter 7 as he did not file his bankruptcy petition in bad faith, and, in any event, bad faith may not serve as cause to dismiss an individual non-consumer debtor's chapter 7 case under § 707(a). The latter argument is based on the language of § 707(a). Section 707(a), unlike its counterpart, § 707(b), which pertains solely to bankruptcy filers with primarily consumer debts, does not mention “bad faith” as grounds to dismiss a chapter 7 case.¹²

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