Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Jan. 25 — The Fifth Circuit Jan. 19 described a debtor's appeal of the dismissal “for cause” of his bankruptcy case as “an exercise in chutzpah” because the debtor “flagrantly” and “repeatedly” abused the bankruptcy and court processes to retain assets and defeat his business partners.
Affirming the bankruptcy court's judgment, Judge Edith H. Jones of the U.S. Court of Appeals for the Fifth Circuit concluded that the debtor's bad faith conduct can be “cause” for dismissal under Bankruptcy Code Section 707(a).
Under Section 707(a), a court may dismiss a case only after notice and hearing and only “for cause.” The statute lists three grounds “for cause” including unreasonable delay by the debtor, nonpayment of fees or charges, and failure of the debtor to file schedules and creditor lists, but this list is illustrative, not exclusive, the court said.
The appeals court followed the Seventh and Eleventh Circuits in taking a flexible and “totality of the circumstances” approach in determining what constitutes “cause” for dismissal purposes in a Chapter 7 bankruptcy case in which a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
Debtor Jeffrey Krueger filed his Chapter 7 bankruptcy “because of a criminal contempt proceeding pending against him, because his state court litigation had taken a turn for the worse, and to provide him the cover to retake control of Cru [Energy, Inc.],” and these noneconomic motives aren't worthy of bankruptcy protection, the court said. Once the debtor's Chapter 7 commenced, he engaged in conduct designed to manipulate the proceedings for his own purposes, including false filings, false testimony, and witness intimidation, the court said. His behavior is exactly the sort of conduct contemplated by most courts as giving cause for dismissal under Section 707(a), the court said.
Good faith is “inherent in the purpose of bankruptcy relief” and a “necessary prerequisite to obtaining a fresh start,” the court said.
The debtor and Michael Torres were involved in a state district court lawsuit over the ownership and control of renewable energy company Cru Energy, Inc., of which they were both shareholders. Krueger and Torres accused each other of fiduciary breaches, fraud, conversion, and tortious interference.
The state district court entered a temporary restraining order against Krueger prohibiting him from making non-ordinary-course business withdrawals from Cru Energy's bank account. Later, the court issued a temporary injunction against Krueger from making any withdrawals or transfers from any Cru Energy bank account, calling a shareholder meeting, or contacting any investor, business partner, or potential business partner.
Subsequently, the debtor formed another similar company called Krueger Renewable Utilities (Kru), which had the same business plan as Cru, and many of the same shareholders and investors.
The debtor also transferred $160,000 from a Cru Energy account to his personal bank account, and another $3,000 after the temporary restraining order was entered.
The day before the show cause hearing on his violation of the temporary restraining order, the debtor filed Chapter 7 bankruptcy.
Torres obtained relief from the automatic stay to pursue a contempt motion against Krueger. The state court held Krueger in criminal contempt for making the cash withdrawals in violation of the temporary restraining order, and Krueger spent three days in jail.
Subsequently, Krueger called for a meeting of Cru Energy shareholders, except for Torres, and although ownership had passed to the bankruptcy trustee, he voted his shares and proxy shares to remove Torres from the board, reelect himself and three other members to the board that he supported. At the next board meeting, Krueger was elected chairman, president, and chief executive officer, and he fired the attorneys who represented Cru Energy in the suit against himself. He also voted to sue Torres and dismissed all of Cru Energy's claims against him.
Torres moved the bankruptcy court to dismiss the bankruptcy case with prejudice for cause. The court granted the motion and imposed a two-year refiling bar on Krueger.
On appeal, Krueger argued that he was denied procedural due process because the bankruptcy court considered issues beyond the scope of the motion to dismiss.
The Fifth Circuit rejected this argument, concluding that his right to due process was “more than vindicated” by the court's processes. “Due process requires notice ‘reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections,'” the court said.
Krueger also contended that his bad behavior wasn't “cause” for dismissal under Section 707(a).
The Fifth Circuit found that it had broad authority to determine what is cause for dismissal under Section 707(a). This interpretation falls in line with Seventh and Eleventh Circuit decisions, the court said.
The court also found good faith important in a bankruptcy filing. Chapters 11 and 13 both require explicit consideration of good faith to win confirmation of debt repayment plans, the court said, but it doesn't follow that “bad faith is irrelevant under chapter 7.”
The debtor's attempt to recast his conduct as a “few isolated, questionable acts was unconvincing,” the court said. Krueger's actions “formed a concerted scheme to use the bankruptcy process as both a shield from legitimate state court actions and a sword to retain control of Cru,” the court said.
The bankruptcy court correctly considered all of the facts and circumstances surrounding the debtor's filing for bankruptcy, and concluded that the case should be dismissed “for cause.”
Senior Judge Patrick E. Higginbotham, and Judge Jerry E. Smith joined the opinion.
Bruce W. Akerly, Cantey Hanger, L.L.P., Dallas, represented appellant Jeffrey Tre Krueger; Edwin Paul Keiffer, Esq., Coats Rose, P.C., Dallas, represented appellee Michael Torres.
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