In re Tate

IN RE: MICHAEL CHANCE TATE DEBTOR

CASE NO. 20-10163

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF LOUISIANA

October 20, 2020

CHAPTER 7

MEMORANDUM OPINION

Christopher Dwyer moved to dismiss debtor Michael Chance Tate's ("Tate" or "Debtor") chapter 7 bankruptcy under 11 U.S.C. § 707(b), or alternatively, to convert it to a chapter 13 case.¹ Dwyer's reply brief² later alleged in further alternative that Tate's case should be dismissed as an abusive filing under 11 U.S.C. § 707(a). Tate opposes all relief Dwyer seeks.³

This memorandum opinion explains why Dwyer's motion is denied.⁴

I. Findings of Fact

Dwyer and Debtor first met in grade school. Years later Dwyer, acting as his own general contractor, decided to build a home and approached Tate, whom he knew performed HVAC work, to submit a bid for the undertaking. Dwyer then orally contracted with Tate's business, Chance's HVAC, LLC ("Chance's"), to design and install a heating and air conditioningsystem.⁵ Dwyer paid cash for the work⁶ that Chance's invoiced on its letterhead.⁷ Throughout the time Chance's and Dwyer did business, Chance's did not hold a valid Louisiana contractor's license.⁸ Chance's also apparently lacked some insurance coverage that Dwyer believed it should have, though no evidence supported a finding that their agreement required Chance to maintain insurance.⁹

Tate did not complete the project before leaving to take employment out of state. Before leaving Louisiana, however, Tate introduced Dwyer to another HVAC installer, Evans, suggesting that Evan would finish his work, which Tate testified was ninety percent complete. But Evans later declined to finish the undertaking and introduced Dwyer to Sagely's Home Maintenance ("Sagely's"). Dwyer engaged Sagely's to finish the job even though the company, like Chance's, was unlicensed.

Christopher and Alicia Dwyer eventually sued Chance's for failing to complete the contracted work, taking money for equipment without paying the equipment vendor, installing a water heater different from the model Dwyer had ordered, and for defective workmanship.¹⁰ The state court petition names only Chance's as a defendant.

Tate filed chapter 7 on February 3, 2020.¹¹ Dwyer has moved to dismiss the bankruptcy,¹² alleging that Tate:

1) Committed "contractor fraud" by misrepresenting to Dwyer that Chance's held a contractor's license and insurance;

2) Had no intention of performing the agreed work, instead converting what Dwyer paid for the work to his own use rather than paying the equipment vendor;

3) Substituted lesser quality equipment than Dwyer had agreed on; and

4) Mischaracterized his debt to Dwyer as business debt because Debtor was no longer operating a business when he filed chapter 7.

Tate denies Dwyer's allegations.¹³

II. Law and Analysis

A. Section 707(b)

Section 707(b)(1) empowers a court to dismiss a case filed by an individual chapter 7 debtor whose debts are primarily consumer debts on a finding that granting relief to the debtor would be an abuse. "As such, § 707(b) only permits the dismissal of a case filed by an individual debtor whose debts are primarily consumer."¹⁴

Tate's original chapter 7 petition failed to indicate whether his debts were primarily consumer or business,¹⁵ as Official Form 10 requires. That omission was not insignificant. Section 707(b) provides for dismissal of a chapter 7 case filed by an individual debtor with primarily consumer debts if granting relief would be an abuse of chapter 7.¹⁶ If the debtor does not have primarily consumer debts, and instead has primarily business debts, section 707(b) is inapplicable.

Tate responded to Dwyer's original motion to dismiss by filing an amended petition claiming that his debts are not primarily consumer but instead are primarily business.¹⁷ That amendment mooted the original motion. Dwyer then pivoted¹⁸ to argue that even if the Debtor's obligations were not primarily consumer debts, the bankruptcy filing was itself abusive under Bankruptcy Code section 707(a) and so should be ended.

Bankruptcy Code section 101(8) defines consumer debt as a "debt incurred by an individual primarily for a personal, family, or household purpose." "The term 'primarily' indicates that all of the debts need not be consumer debts but that consumer debts must be a substantial component of the indebtedness."¹⁹ "'[P]rimarily' suggests an overall ratio of consumer to nonconsumer debts of over fifty percent."²⁰

One seeking dismissal under section 707(b) bears the burden of proving that the debtor's debts are primarily consumer rather than business,²¹ applying a fairly straightforward test: "[W]hether a debt should be classified as a business debt ... [depends on] whether it was incurred with an eye toward profit."²²

In evaluating whether a profit motive exists, the purpose for incurring the debt is determined at the time the debt was incurred, and any subsequent recharacterization of the debt is inconsequential. A court should determine the true purpose for incurring the debt in light of the entire transaction.²³

The Debtor's schedules list $142,842.45 in debt, with $126,132.52 labeled as "Business Debt":

$32,008.68 to Acme;

$2,274 to Affirm Inc.;

$12,754 to Amex;

$943.89 to Capital One;

$57,330 to Chris Dwyer;²⁴

$186.13 to Citi Cards;

$796 to Credit One Bank, NA;

$10,835.98 to Discover;

$825.86 to Genesis Bc/Celtic Bank;

$376.24 to Graceland Rental;

$5,283.71 to JPMBC Card Services; and

$2,518.03 to PayPal Credit/Syncb.

Dwyer hired Debtor's business Chance's for HVAC work, a business undertaking "with an eye toward profit."²⁵ Tate's debt to Acme for equipment to conduct his HVAC trade undoubtedly was business and not consumer debt.²⁶ Thus, at least $95,104.68 of $142,842.45—well more than half—of Debtor's liabilities are not consumer debts.

Dwyer maintains that these debts cannot be considered Tate's business debts because Chance's was not a licensed business. But he cites no statutory authority or jurisprudence to support his contention.

Because Debtor's debts are not primarily consumer debts, dismissal under section 707(b) is not warranted.

B. Section 707(a)²⁷

Section 707(a) empowers the court to dismiss a chapter 7 case "for cause," including:

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees or charges required under chapter 123 of title 28; and(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on motion by the United States Trustee.²⁸

But that sparse list does not define the universe of reasons a court may dismiss a chapter 7. Congress used including in the statute to expand the list of reasons a bankruptcy court might decide to end a case.²⁹ Thus, courts including the Fifth Circuit have held that section 707(a)'s enumerated causes for dismissal "are illustrative, not exhaustive."³⁰ The Fifth Circuit holds:

"Cause" is a broad concept, designed to "afford flexibility to the bankruptcy courts." This flexibility derives from bankruptcy's equitable roots. True to equity's flexibility, we have instructed courts to "weigh the benefits and prejudices" of dismissal—to the debtor, creditors, and the bankruptcy system—when deciding a § 707(a) motion.³¹

"[C]ause is any reason cognizable to the equity power and conscience of the court as constituting an abuse of the bankruptcy process."³² "In judging whether there is cause to dismiss a case, a court may consider the debtor's entire course of conduct—before, during, and after thefiling of the chapter 7 petition."³³ The Fifth Circuit held in In re Krueger³⁴ that bad faith can be cause for dismissal.³⁵

Requirement of good faith prevents abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefitting them in any way to achieve reprehensible purposes.³⁶

Dwyer points to In re Peterson³⁷ for a list of factors to be applied when considering requests for involuntary dismissal. But Fifth Circuit law controls the outcome here, and its jurisprudence suggests that only more egregious actions will support a bankruptcy court's use of section 707(a) to end a debtor's case.³⁸ For example, in In re Krueger,³⁹ the debtor 1) admitted that he filed bankruptcy to avoid a criminal contempt proceeding and to gain a new venue; 2) used a false address on his bankruptcy petition to avoid service; 3) failed to list in his scheduleof assets his interest in a newly formed company at the very time he was seeking to raise capital for the new company; 4) convened and voted in a shareholder meeting, even though his shares in the company were property of the bankruptcy estate controlled by the trustee; 5) threatened a witness at the bankruptcy court's hearing on the motion to dismiss under section 707(a).

The Fifth Circuit held that the debtor's actions "formed a concerted scheme to use the bankruptcy process as both a shield from legitimate state court actions and a sword to retake control" of his company.⁴⁰ It found a record "replete with evidence that [the debtor] filed bankruptcy for illegitimate purposes, misled the court and other parties, and engaged in bare-knuckle litigation practices, including lying under oath and threatening witnesses."⁴¹

The evidence here paints a picture far different from that in Krueger.

First, Dwyer contends that Tate intentionally defrauded him by misrepresenting that Chance's was licensed and insured. Tate, on other hand, maintains that Dwyer never asked if Chance's was licensed and denies ever telling him that it was licensed. No evidence established that Dwyer suffered any loss because Chance's lacked insurance or a license: indeed, Dwyer hired Sagely's, another unlicensed contractor, to finish the work about which it complains.

The arrangement between Tate and Chance's came about initially because Tate and Dwyer were childhood...