Fourth Circuit Looks at Multiple Factors in Bad Faith Analysis

Posted by NCBRC - February 23, 2018

Filing bankruptcy for the primary purpose of discharging one debt is not, in itself, bad faith, and the bankruptcy court did not abuse its discretion when weighing several factors in denying the creditor’s motion to dismiss for cause under section 707(a). Janvey v. Romero (In re Romero), No. 17-1197 (4th Cir. Feb. 21, 2018).

Peter Romero was found liable to victims of a Ponzi scheme in which he was involved. Pursuant to that judgment, he owed $1.275 million to Ralph Janvey, the court-appointed Receiver in the Ponzi litigation. Mr. Janvey rejected without counteroffers Mr. Romero’s attempts to settle and Mr. Romero filed for chapter 7 bankruptcy. The bankruptcy court denied Mr. Janvey’s motion to dismiss and granted Mr. Romero’s discharge. In re Romero, 557 B.R. 875 (Bankr. D. Md. 2016). The district court affirmed.

Section 707(a) permits a bankruptcy court to dismiss a case “for cause.” While such cause is not defined in the Code, the Fourth Circuit in this case adopted the majority view that “cause” includes bad faith conduct by the debtor. The bankruptcy court in this case considered the eleven factors set forth in McDow v. Smith, 295 B.R. 69 (Bankr. E.D. Va. 2003), for determining whether a bankruptcy was filed in bad faith.

On appeal, the Fourth Circuit addressed Mr. Janvey’s argument that Mr. Romero filed for bankruptcy solely to discharge the Ponzi scheme judgment and that this constituted cause to dismiss. The court found as an initial matter that debtors are often motivated to file for bankruptcy as a result of pursuit by one creditor and, while not wholly irrelevant, that fact alone does not constitute bad faith. In fact, “equating a decision to file for bankruptcy in response to a sizeable debt with cause for dismissal would fault debtors for using the Code in precisely the way Congress intended. As one bankruptcy court has observed, ‘if filing bankruptcy to avoid the payment of a debt was cause for dismissal, no debtor would ever be able to file a bankruptcy case.’ In re Uche, 555 B.R. 57, 62 (Bankr. M.D. Fla. 2016).” In addition, the court noted that the bankruptcy court had found as a factual matter that Mr. Romero had multiple reasons for filing for bankruptcy including his wife’s expensive, ongoing, medical treatment, his outstanding legal bills, and his inability to find full-time employment.

Mr. Janvey next argued that Mr. Romero’s attempts to settle were themselves indicative of bad faith because the offers were unreasonably low. Noting the overall benefit of settlements to parties and to the public, the court found that Mr. Janvey’s argument did not tell the entire story. Rather, as found by the bankruptcy court, Mr. Romero had been candid and cooperative throughout the bankruptcy process and during the underlying Ponzi litigation, while Mr. Janvey had been unwilling to consider settlement and had instead aggressively pursued costly litigation. In fact, the bankruptcy court concluded that Mr. Janvey wanted to make an example of Mr. Romero in the hope of easing future litigation with other parties. The circuit court concluded that, just as Mr. Janvey had the right to reject Mr. Romero’s attempts at settlement, Mr. Romero had the right to seek bankruptcy relief.

Finally, the court was unpersuaded by Mr. Janvey’s argument that Mr. Romero had too much money in his exempt assets to justify bankruptcy relief. The court found that the purpose behind the Code’s exemption scheme is to permit a debtor to come out of bankruptcy able to function in society and embark on a fresh start. “A penniless start is not a fresh start.” Furthermore, the bankruptcy court found Mr. Romero’s lifestyle to be “comfortable, but not exorbitant.”

The court concluded that the bankruptcy court did not abuse its discretion in declining to dismiss Mr. Romero’s case for bad faith under section 707(a).

Romero 4th Cir opinion Feb 2018

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