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September 30, 2007

No 707(a) Dismissal even with $400,000 in Annual Income

In re Perlin, ----F.3rd ---, (3rd Cir. August, 2007)

Issue:   1)  Can a bankruptcy court consider the debtors’ significant income when deciding whether or not to dismiss a chapter 7 under Section 707(a)?  2)  Is the debtors’ income here of about $400,000 per year sufficient to find bad faith and dismiss the case?               

Holding:   1) Yes, 2) No. 

Direct appeal from Bankruptcy Court      

Judge Cowen

The debtors filed chapter 7.   “Dr. Steven J. Perlin is a licensed radiologist.  In recent years, working only part-time, he has earned an annual income of approximately $370,000.  At all relevant times, Dr. Perlin’s wife, Cristine A. Perlin, owned and operated Centre Medical Imaging, LLC (“CMI”), the medical imaging company where Dr. Perlin practiced.  Together, the Perlins expended a considerable amount of money on certain luxury items, such as two Lexus automobiles and private school tuition totaling $5,000 per month.  In addition, they have saved more than $430,000 for their retirement.”   The debtors leased a piece of medical equipment with $1.2 million in total lease payments.  It was a big mistake.   The lessor filed suit to collect and the debtors filed chapter 7.  The lessor then filed a motion to dismiss the chapter 7 under Section 707(a) “alleging (1) the Perlins had submitted allegedly misleading schedules to the court; (2) they had timed the filing of their bankruptcy petition around Hitachi’s exercise of its legal rights against them; (3) they had artificially inflated their expenses in order to insulate their substantial income; (4) they enjoyed a substantial annual income and a lavish lifestyle, which included two luxury automobiles, private school tuition, and substantial retirement savings; and (5) they failed to make a good faith effort to repay Hitachi as an alternative to seeking discharge.”  The bankruptcy court heard evidence and found good faith saying there was no “manipulation.”  “With regard to the Perlins’s substantial income and expenses, the Bankruptcy Court opined that based upon the legislative history to section 707(a) and our comments in Tamecki, a debtor’s ability to repay is not, in and of itself, sufficient to support a bad faith finding.”  The bankruptcy judge also ruled that income was no longer a factor in a 707(a) analysis because of the “theory of negative implication,” i.e., since 707(b) has an income/means test and there is none in 707(a), Congress did not intend income/means to be a factor in 707(a).

The 3rd Circuit affirmed saying that the judge was wrong about the existence of the income/means test in 707(a) but, in any event, the judge was right in finding no bad faith.  For negative implication to apply, the code sections must be “part of a package or commonly associated group or series.”  Congress has always treated 707(a) and (b) differently.  707(b) is directed at consumer debtors, 707(a) is not.  The two sections do not go “hand-in-hand.” 

But is income part of the bad faith test?  The House and Senate Reports in enacting 707(a) stated, “The section does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal,” i.e., there is no mandatory chapter 13.  But that does not prohibit the court from looking at income.  “[D]ismissal should be ‘confined carefully’ and utilized only in ‘egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.’”  Here, “[t]here is no evidence that the Perlins schemed to conceal or misrepresent income, inflated their expenses to hide income, filed misleading statements or schedules in an effort to defraud their creditors, unduly interfered with the judicial process, or engaged in any other misconduct.  On the contrary, the Bankruptcy Court found that the Perlins were ‘straightforward in their schedules’ and ‘forthcoming with the Court and their creditors.’”  It appears that the court was also impressed that the debtor’s tried to work it out with the lessor before filing. 

September 30, 2007 in Other Circuit Briefs | Permalink

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