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In re Hardigan

United States District Court, S.D. Georgia, Savannah Division

September 19, 2014

IN THE MATTER OF: KENNETH R. HARDIGAN, Debtor.
v.
KENNETH R. HARDIGAN, Appellee. GUY G. GEBHARDT, ACTING UNITED STATES TRUSTEE, Appellant, Bankruptcy Case No. 12-40484-LWD

ORDER

J. RANDAL HALL, District Judge.

Acting United States Trustee Guy Gebhardt ("Appellant") appeals from the Bankruptcy Court's March 29, 2013 Order denying SunTrust Bank's and the United States Trustee's motions to convert Kenneth R. Hardigan's ("Appellee") Chapter 7 filing to a Chapter 11 or, in the alternative, to dismiss. Because the Bankruptcy Court did not err in refusing to convert the Chapter 7 case to one under Chapter 11 and did not err in applying the totality of the circumstances test when assessing abuse, this Court AFFIRMS the Bankruptcy Court's Order.

I. BACKGROUND

Appellee is a cardiologist residing in Savannah, Georgia. (Doc. no. 5-1 at 1, 19.) He filed his Chapter 7 petition for bankruptcy on March 7, 2012. (Doc. no. 5-14 at 1.) It is undisputed that his debts are primarily consumer in nature. (Doc. no. 5-14 at 3.) Appellant moved on May 23, 2012 to convert the case to a Chapter 11 or, in the alternative, to dismiss on the ground that Appellee's bankruptcy petition constituted an abuse of the Chapter 7 process. (Doc. no. 5-5.) In ruling on the motion, the Bankruptcy Court determined that no presumption of abuse based on the "means test" of 11 U.S.C. § 707(b)(2) existed. In re Hardigan , 490 B.R. 437, 440 (Bankr. S.D. Ga. 2013). Appellant alleged that given Appellee's ability to pay, his Chapter 7 petition constituted abuse based on the "totality of the circumstances" test set forth in 11 U.S.C. § 707(b)(3)(B). (Doc. no. 5-5 at 4-5.) The Bankruptcy Court held that based on a number of factors, Appellee's petition did not constitute abuse. In re Hardigan , 490 B.R. at 459. Additionally, the Bankruptcy Court declined to convert Appellee's petition to a Chapter 11 under 11 U.S.C. § 706(b). Id. at 446-47.

II. JURISDICTION AND STANDARD OF REVIEW

This Court has appellate jurisdiction pursuant to 28 U.S.C. § 158(a)(1) and Bankruptcy Rules 8001 et seq. On appeal, the Court reviews the Bankruptcy Court's factual findings for clear error, and its legal conclusions de novo. In re Globe Mfg. Corp. , 567 F.3d 1291, 1296 (11th Cir. 2009).

In determining whether Chapter 7 relief constitutes abuse under 11 U.S.C. § 707(b)(3), "bankruptcy courts have considerable discretion" and, when challenged, "[the district court] review[s] only for abuse of discretion." In re Kulakowski , 735 F.3d 1296, 1298-99 (11th Cir. 2013). A bankruptcy court abuses its discretion when it "applies the wrong principle of law or makes clearly erroneous findings of fact." In re Piazza , 719 F.3d 1253, 1271 (11th Cir. 2013).

III. DISCUSSION

This appeal presents two issues: (1) whether the Bankruptcy Court erred in denying Appellant's motion to dismiss under 11 U.S.C. § 707(b)(3)(B); and (2) whether the Bankruptcy Court erred in denying Appellant's motion to convert to a Chapter 11 under 11 U.S.C. § 706(b).

A. Dismissal Under 11 U.S.C. § 707(b)(3)(B)

On appeal, Appellant challenges the Bankruptcy Court's application of the "totality of the circumstances" test. The Court reviews this determination for an abuse of discretion. See In re Kulakowski , 735 F.3d 1296, 1299 (11th Cir. 2013).

The Bankruptcy Code provides for dismissal of a Chapter 7 case where "the granting of relief would be an abuse of the provisions of [the Code]." 11 U.S.C. § 707(b)(1). A presumption of abuse arises where the debtor fails the "means test, " which is calculated by a statutory formula. 11 U.S.C. § 707(b)(2). Even where this presumption of abuse does not arise, however, the court may still find abuse by considering (1) whether the debtor filed the petition in bad faith; or (2) "the totality of the circumstances...of the debtor's financial situation...." 11 U.S.C. § 707(b)(3)(A-B).

In the present case, the Bankruptcy Court found that Appellee's petition would not constitute abuse under the totality of the circumstances test. In re Hardigan , 490 B.R. 437, 459 (Bankr. S.D. Ga. 2013). In making its determination, the Bankruptcy Court relied on the following factors: (1) ability to repay a meaningful portion of debts; (2) whether the bankruptcy was caused by an unforeseen or sudden calamity; (3) eligibility for Chapter 11 or Chapter 13 relief; (4) the debtor's efforts to repay debts and negotiate with creditors; (5) the debtor's ability to provide a "meaningful" distribution in a Chapter 13 case; (6) ability to reduce the debtor's expenses without depriving the debtor of necessities; (7) the time period over which the debts were incurred; and (8) the stability of the debtor's income. In re Hardigan , 490 B.R. 437, 447 (Bankr. S.D. Ga. 2013) (citing In re Truax , 446 B.R. 638, 642 (S.D. Ga. 2010)).

The Bankruptcy Court found that, although Appellee's ability to pay pointed toward abuse, other factors dictated a contrary result. Specifically, the Bankruptcy Court held Appellee's fresh start would be impaired by a Chapter 11 proceeding; the real estate market collapse constituted an unforeseeable calamity; Appellee's debts were incurred over years and not through a pre-bankruptcy "spending spree"; Appellee dealt fairly ...


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