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By Diane Davis
Oct. 18— A creditor who obtained a malpractice judgment against a dentist can’t show that the dentist filed Chapter 7 bankruptcy in bad faith to prevent collection efforts ( In re Chovev , 2016 BL 340061, Bankr. E.D.N.Y., No. 8-12-76414-las, 10/12/16 ).
Judge Louis A. Scarcella of the U.S. Bankruptcy Court for the Eastern District of New York concluded Oct. 12 that creditor Josef Zloof failed to meet his burden of proof under Bankruptcy Code Section 707(a) to dismiss the case.
Under Section 707(a), a Chapter 7 case may be dismissed for “cause,” but the Bankruptcy Code doesn’t define the term “cause.” What constitutes “cause” to dismiss is therefore left to the discretion of the court, the court said.
Bankruptcy courts disagree on whether “bad faith” may serve as “cause” for dismissal under Section 707(a), the court said. Courts that allow bad faith to serve as cause for dismissal have a “stringent standard” that is used in egregious cases where assets are misrepresented or concealed or there are excessive expenditures and a lavish lifestyle, the court said.
While the court was “sympathetic” to the creditor’s plight that he wouldn’t receive any distribution in this “no-asset” case, the court said it was “bound to apply the law as it exists.” The debtor’s misconduct wasn’t stringent enough to meet the standard for finding bad faith under Section 707(a), the court said.
Debtor Tolly Chovev, a dentist, filed for Chapter 7 bankruptcy protection after Zloof obtained a $267,700 medical malpractice judgment against him in a New York state court. In a Chapter 7 case, a debtor’s nonexempt assets are liquidated by a trustee and the proceeds are distributed to creditors.
The debtor listed monthly income of $8,049, and $1,200 additional income from his non-debtor spouse. He also listed household monthly expenses of $10,250, leaving a $1,001 monthly deficit.
The debtor owned no real estate and only had unsecured priority debt of $52,658, and unsecured non-priority debt of $318,753, including the malpractice judgment.
Zloof asked the bankruptcy court to dismiss the case under Section 707(a), arguing that it was filed solely to stay collection efforts and avoid repayment of the malpractice judgment. According to Zloof, this is evidence of “bad faith” warranting dismissal. Zloof also said the debtor inflated his expenses, which is bad faith.
The debtor contended that his Chapter 7 case wasn’t filed in bad faith, and that the majority of his debts are business debts.
Filing Chapter 7 to ward off collection efforts isn’t in and of itself sufficient to establish cause under Section 707(a), the court concluded.
The court also rejected Zloof’s argument that the debtor used bankruptcy as a refuge from having to pay the malpractice judgment and that he had sufficient resources to repay the judgment. The ability to pay one’s debts can’t “serve as the principal basis to dismiss a chapter 7 case for cause under §707(a),” the court said, based on the legislative history to the section.
Lance Roger Spodek, Lance Roger Spodek PC, New York, N.Y., represented debtor Tolly Chovev; Chapter 7 trustee Allan B. Mendelsohn, Allan B. Mendelsohn, LLP, Huntington, N.Y.
To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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