Silvia Elizabeth Mitchell

OCR transcription for search; preserved printed pages are authoritative

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION

In re Case No. LA 06-11892 ER

Chapter 7
SILVIA ELIZABETH MITCHELL MEMORANDUM OF DECISION GRANTING
THE UNITED STATES TRUSTEE‘’S
MOTION TO DISMISS CHAPTER 7

CASE WITH PREJUDICE PURSUANT TO
11 U.S.C. § 707 ¢b) (3) (A)

Date: October 19, 2006
Time: 2:30 P.M.
Place: Courtroom 1568
255 E. Temple Street
Los Angeles, CA 30012

Debtor.

Me ee ee ee ee ee ee ee ee ee ee ee ee

The United States Trustee (“UST”) filed a Motion to Dismiss
Chapter 7 Case with Prejudice Pursuant to 11 U.S.C. § 707(b) (3) (A) and
Contingent Motion to Extend Bar Date for Filing Complaint under 11
U.S.C. § 727 Objecting to Debtor’s Discharge (“Motion”). In the
Motion, the UST argues that the Chapter 7 case filed by Debtor Silvia
Elizabeth Mitchell (“Debtor”) should be dismissed because: “Debtor
filed her bankruptcy petition in bad faith, having willfully and

intentionally engaged in abusive and fraudulent credit usage leading up

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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to her bankruptcy filing.” The Debtor opposed the Motion and raised
several evidentiary objections. A hearing was held on October 19,
2006. The UST and the Debtor both entered appearances on the record.
At the conclusion of the hearing, the Court took the UST’s Motion and
the Debtor’s evidentiary objections under submission.

I. Jurisdiction

This Court has jurisdiction over this case pursuant to 28 U.S.C. 8
1334 (a) (2006) (“[T]he district courts shall have original and exclusive
jurisdiction of all cases under title 11.”), 28 U.S.C. § 157(a) (Each
district court may provide that any or all cases under title 11 and any
or all proceedings arising under title 11 or arising in or related to a
case under title 11 shall be referred to the bankruptcy judges for the
district.”), General Order No. 266 of the United States District Court
for the Central District of California (referring “all cases under
Title 11 and all proceedings under Title 11 or arising in or related to
a case under Title 11” to the district's bankruptcy judges), and 28
U.S.C. § 157(b) (“Bankruptcy judges may hear and determine... all
core proceedings . .. .”). The UST’s Motion to dismiss is a core
proceeding because it was brought under 11 U.S.C. § 707 (b), which
governs abuse of the provisions of Chapter 7 of the Bankruptcy Code.

see City of Moreno Valley v. Century-TCI Cal., L.P., No. EDCV 02-1387-

VAP (SGLx), 2003 U.S. Dist. LEXIS 4490, at *6 (C.D. Cal. March 21,
2003) (“Core proceedings are those that: (1) involve a cause of action
created or determined by a statutory provision of title 11 [the
Bankruptcy Code]; or (2) are not based on any right expressly created
by title 11, but nevertheless, would have no existence outside of the

bankruptcy.” )

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II. Statement of Facts and Procedural History

The Debtor filed a voluntary Chapter 7 petition on May 8, 2006.
The original meeting of creditors under 11 U.S.C. § 341(a} was held on
June 13, 2006 and a continued 341(a) meeting was held on July 27, 2006.
The Debtor attended both meetings.

On August 11, 2006, the UST filed the Motion currently before the
Court arguing that the Debtor’s case should be dismissed under §
707 (b) (3) (A) as having been commenced in bad faith.? Specifically, the
UST contends that “given her long-standing lack of income, the Debtor’s
credit transactions in the months leading up to her bankruptcy filing,
both before and after consulting bankruptcy counsel, were abusive and
made in anticipation of filing the instant bankruptcy case.” The UST
has submitted the following evidence in support of its allegations: (1)
the Debtor has $62,521.00 in non-priority unsecured debt, which she has
identified as being as primarily consumer in nature (as opposed to debt
incurred for business purposes); {2) the Debtor stated under oath
during her initial 341{a) meeting that she has been unemployed since
2004 and that she is not currently experiencing any medical condition
that would prevent her from working; (3) the Debtor was unemployed
throughout the year 2003; (4) in the past four years, the Debtor has
earned a grand total of $11,000, all of it during calendar year 2004;
(S) the Debtor admits that she has earned no income at all during 2003,
2005, and 2006; (6) the Debtor’s Statement of Financial Affairs and
bankruptcy schedules list no other sources of income; (7) according to

the credit card statements submitted to the UST by the Debtor, she

* Unless otherwise indicated, all statutory citations refer to
the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

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spent at least $15,386.32 during the year 2005 on products and services
labeled by the UST as “non-essential” and organized into various
categories including “dining out”, “women’s fashions and accessories”’,
“electronics and personal property”?, and “beauty treatments and
related products”*; (8) the Debtor contacted a bankruptcy attorney on
December 1, 2005 when she tendered $100.00 to the Price Law Group,
reportedly to retain that law firm to act as bankruptcy counsel for her
roommate, Angel Dawn McGaugh; (9) the Debtor made an additional payment
of $1,449,00 to the Price Law Group on February 28, 2006; (10) from
January 2006 to April 2006 (the four months before she filed her
bankruptcy petition), the Debtor spent $13,531.52 on “dining out”, “pet

pampering,”* “women’s fashions and accessories"*®, “electronics and

? Even though she listed only $400 worth of clothing assets on
Schedule B (which was filed with her petition), the Debtor's credit
card statements reveal purchases of at least $7,698.56 during 2005
at a variety of clothiers including Barneys New York,
Anthropologie, Lucky Brand Dungarees, Victoria’s Secret, and
Frederick's of Hollywood.

* The Debtor spent at least $3,469.60 in 2005 on “electronics
and personal property” at various retailers including Best Buy,
Crate & Barrel, Far Corners Antiques, and Bed Bath & Beyond.

* Between January 2005 and December 2005, the Debtor spent
$2,985.32 on “Beauty Treatments and Related Products” at various
businesses including Chroma Makeup Studio, Colosseum Fitness
Center, Studio Nail & Skin Care, Beverly Hills Health & Fitness,
Brooks Massage Therapy, L Salon, and Turn Back Time, a “Cosmetic
Medical Center” located in Santa Monica, California.

> According to her January 2006 to April 2006 credit card
statements, the Debtor spent at least $1,223.42 at establishments
such as Doggie Styles, Melrose Pet Grooming, the Bark, LA Dogworks,
Lucky Pup Designs, Barking Lot, Petlove, Collar & Leash, Petville,
and Holistic Hound. The UST labels these expenditures “pet
pampering.”

* In the first four months of 2006, the Debtor spent at least
$5,250.56 on “women’s fashions and accessories.” This is in

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personal property”, and “beauty treatments and related products”’; (11)
the Debtor’s January 2006 to April 2006 spending amounts to a
substantial increase from $1,282.19 average monthly spending on “non-
essentials” during 2005 to $3007.00 per month in 2006; (12) the Debtor
allowed at least $355.51 in charges on one credit card during March and
April 2006 by Ms. Mcgaugh; (13) between January 4, 2006 and April 17,
2006, the Debtor took one credit card from a zero balance to a balance
owing of $7,708.00; (14) with a different credit card, the Debtor went
from a zero balance to owing $1,435.76 in just six days in April 2006;
(15) over a 16-day period near the end of 2005, the Debtor incurred
over $11,000 in purchases against one credit card account; and (16) in
the seven months between July 2005 and February 2006, the Debtor opened
at least five new credit card accounts and charged $39,473.00 against
these accounts, which amounts to 63.2% of her total reported non-
priority unsecured debt.

In addition, the UST notes that the Debtor received at least
$21,092.59 in deposits to her bank account between March 2005 and April
2006 but failed to fully account for this income in her schedules and
Statement of Financial Affairs as required by 11 U.S.C. § 521 (a) {1).

At least $16,654 of these funds was deposited in the six months leading
up to her bankruptcy filing. Moreover, the UST claims that, “while the
Debtor has been completely without earned income throughout 2005 and
2006 and has affirmed in writing that she has never taken any cash

advances on any of her credit cards or transferred balances from card

addition to the $7,698.56 she spent in 2005.

’ The Debtor spent $1,709.03 on “beauty treatments and related
products” between January 2006 and April 2006 at many of the same
outfits she frequented during 2005.

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to card (a practice known as ‘kiting’) in the 12 months before filing
the present bankruptcy case,” three substantial electronic payments
totaling $14,025.00 were made to reduce several of her credit card
balances. Finally, the UST states that the Debtor created a false
sense of financial solvency by lying to at least one creditor, American
Express, in July 2005 and claiming that she was then employed by
Straight Edge Productions and earning $80,000 per year. The UST argues
that these deceptive acts by the Debtor should viewed as additional
evidence of bad faith and of her abuse of the provisions of Chapter 7.

Alternatively, if the Court were inclined to deny the Motion, the
UST requests that the bar date for filing a § 727 complaint to deny the
Debtor’s discharge be extended by at least 90 days from the date of the
hearing on the Motion. The UST requests this additional time so that
it may complete its “pending investigation, including formal discovery
and a Rule 2004 examination, to obtain additional testimony, and/or
other evidence produced by the Debtor or other parties in interest.”

In her Opposition to U.S. Trustee’s Motion to Dismiss Chapter 7
Case and Extend Bar Date (“Opposition”), the Debtor argues that the
facts alleged by the UST “simply do not add up to bad faith or abuse”
and that her inability to pay her debts is the result of “bad luck, net
bad faith.” The Debtor claims that she has an “earning capacity” “well
in excess of $6,250 per month,” which is evidence that “but for her
unexpected inability to find work in her profession she would easily
have been able to pay her consumer debts.” The Debtor states that she
is an FAA-certified pilot and that she has had two “informal
interviews” since the Spring of 2005. One of these “informal
interviews” was with a pilot at America West Airlines (which has since

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merged with US Airways). According to the Debtor, a job there “would
have paid well in excess of $100,000 after a probationary period and a
few years with the airline.” The other “informal interview” was with
the flight department at Hewlett Packard where, according to the
Debtor, her salary would quickly “increase to over $100,000 per year."
Neither of the Debtor’s “informal interviews” resulted in an offer of
employment. Regardless, based upon her training and experience, the
Debtor believes that one day she will work as commercial airline pilot
and earn between $160,000 and $230,000 per year. In light of this
“earning capacity,” the Debtor argues that she has the “ability to earn
more than sufficient income to service her accumulated debt.” The
Debtor also contends that there is no evidence showing that her
“proposed family budget is excessive or extravagant” but “to the
contrary, her monthly expenses are less than $1000.78

In addition, the Debtor denies having any “discussions with any
attorney at the Price Law Group regarding the bankruptcy process.” The
Debtor states that, at the time she paid the Price Law Group to
represent Ms. Mcgaugh, she and Ms. Mcgaugh discussed “keeping [the
Debtor's] credit clean” so that they “may attempt to purchase a home
together once [the Debtor] was employed as a pilot.”

Finally, the Debtor claims that her bankruptcy schedules correctly
reflect her “assets, liabilities, and financial condition” and that her

“statement of income and expenses is accurate.” She states that,

* Although the Debtor did not specify what her “proposed
family budget” entails, it appears that she may have been referring
to the expenses listed in Schedule J, which she filed with her
bankruptcy petition. On Schedule J (Current Expenditures of
Individual Debtor), the Debtor claims that her monthly expenses
total $990.00.

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between November 2005 and April 2006, a friend deposited $16,500 into
her bank accounts to help cover living expenses. The Debtor states
that her friend has not asked her to pay back this money, but rather
she “has requested that [the Debtor] give back by donating [her] time
to a charity of [her] choice.” The Debtor also argues that “[t]he
UST’s assertion that [she] made ‘three substantial electronic payments’
[towards her credit card debt] is incorrect.” The Debtor states,
however, that she “did attempt to lower [her] interest rate by
accepting lower interest offers from credit card companies” “with the
full expectation of paying [her] creditors back as soon as [she]
commenced working as a commercial pilot.”

The Debtor also filed her Evidentiary Objections to Declarations
of Wendy C. Sadovnick raising several objections to the Declaration of
Bankruptcy Analyst, which was signed by Wendy Sadovnick and submitted
as part of the Motion (“Sadovnick Declaration”), and the Supplemental
Declaration of Bankruptcy Analyst Wendy Carole Sadovnick in Further
Support of United States Trustee’s Notice of Motion and Motion to
Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707 (b) (3) (A)
(“Supplemental Sadovnick Declaration”) .* Specifically, the Debtor
argues that a certain statement in the Sadovnick Declaration, which
indicates that the Debtor had charged nearly $11,351.25 over a 16-day
period on mostly “non-essential items”, was speculative and lacked
foundation as “there is no factual basis set forth for the contention
that declarant has knowledge of the Debtor’s mind-set and intentions”

or “that the charges referenced were for non-essential items and

° According to her declarations, Ms. Sadovnick has been

employed as a Bankruptcy Analyst by the Office of the United States
Trustee for the Central District of California since 1985.

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discretionary items.” The Debtor raises these very same objections to
various portions of the Sadovnick Declaration that claim that the
Debtor used her credit cards during 2005 and 2006 to incur $28,917.84
in mostly “extravagant” expenses. In addition, the Debtor objects to
the paragraph in the Supplemental Sadovnick Declaration that states
that the Debtor lied to American Express about being employed by
Straight Edge Productions (and earning $80,000 per year) as being
inadmissible hearsay, as being speculative, and as lacking foundation.
Finally, the Debtor argues that other statements in the Supplemental
Sadovnick Declaration, which indicate that certain of the Debtor’s
credit card expenditures were “discretionary in nature” and included
the purchase of “non-essential items,” lack foundation and are
speculative in that “there is no factual basis set forth for the
contention that the declarant has knowledge of the Debtor’s mind-set
and intentions” or “that the charges referenced were for non-essential
items and discretionary items.”

The UST filed a Reply to Debtor's Evidentiary Objections to
Declarations of Wendy C. Sadovnick (“Reply to Evidentiary Objections”)
arguing that each of the Debtor’s objections should be overruled. Ag
to the objections claiming lack of foundation and speculation, the UST
argues that the relevant statements are the opinions of a lay witness,
which are adequately supported by the various Exhibits attached to the
Motion. The UST also asserts that the Court should overrule the
Debtor’s hearsay objections because the relevant statements by Ms.
Sadovnick “only reiterate” the Debtor’s own comments as recorded in the
American Express records attached to the Supplemental Sadovnick

Declaration as Exhibit “B’”,

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The UST also filed a Reply to Debtor’s Opposition to U.S.
Trustee’s Motion to Dismiss Chapter 7 Case and Extend Bar Date (“Reply
to Opposition”) emphasizing that its Motion to dismiss is based on §
707 (b) (3) (A) (“bad faith”) not § 707(b) (3) (B) (the “totality of the
circumstances .. . of the debtor’s financial situation”). The UST
also disputes the validity of the Debtor’s arguments concerning her
“earning potential”. It notes that during her last job (in 2004) she
earned only $11,000 per year. The UST further explains that the Debtor
stated under oath during her first § 341{a) meeting that, in the
immediate future, she would likely take a similar low-paying job. In
addition, the UST argues that the Debtor, at a time when she was
unemployed and had no certain prospects of future employment, used her
credit cards to support an “extravagant” lifestyle in complete
disregard for her limited financial resources. According to the UST,
the Debtor’s “hopes of one day finding suitable employment do not
mitigate the bad faith of the types of expenses she incurred in her
straightened circumstances.” Finally, the UST argues that the Following
actions by the Debtor provide circumstantial evidence of bad faith and
of the Debtor's intent to defraud creditors: (1) using credit cards to
“maintain a lifestyle she had never earned enough to support” for
nearly a year and half after leaving her last job; (2) lying about her
employment status and annual income in order to obtain credit; (3)
failing to disclose a $16,500 “gift” in her schedules and Statement of
Financial Affairs; and (4) dramatically increasing her credit card
spending in the months leading up to her chapter 7 filing and after
having contacted a bankruptcy attorney.

During the hearing on the Motion, the UST requested that, in

addition to granting its Motion, the Court enter an order barring the

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Debtor from refiling another Chapter 7 petition for 180 days. The
Debtor opposed the imposition of such a bar, asserting that this case
presents none of the indicia that would lead to a bar on refiling under
§ 109 of the Bankruptcy Code. In addition, the Debtor argued that
while the facts in this case might seem to approach bad faith, they do
not quite reach it because: (1) the Debtor took no cash advances
against her credit cards; (2) she has not been gambling; (3) there have
been no § 523 complaints; (4) there were no fraud complaints prior to
the bankruptcy filing; and (5) there were no prior bankruptcy cases.
Finally, the Debtor raised two other objections to the introduction of
the Sadovnick declarations. First, she claimed that they constitute
improper advocacy before a Court by a non-attorney. Second, she argued
that Ms. Sadovnick is disqualified from serving as a witness in this
case because she is employed by the UST.

For the reasons given infra, the Court finds that the each of the
Debtor’s evidentiary objections is without merit and that she filed her
Chapter 7 petition in bad faith. Furthermore, the Court concludes that
filing one Chapter 7 petition in bad faith is sufficient “cause” under
1i U.S.C. § 349 to impose a 180-day bar against refiling another
Chapter 7 petition. Accordingly, the Court overrules the evidentiary
objections, grants the Motion, dismisses the Debtor’s case, and orders
that she be barred from filing another Chapter 7 petition for 180 days.

IIIT. Discussion

In relevant part, § 707(b) of the Bankruptcy Code states:

After notice and a hearing, the court, on its own motion or on

a motion by the United States Trustee . .. or any party in

interest, may dismiss a case filed by an individual debtor

under [Chapter 7] whose debts are primarily consumer debts, or,

with the debtor’s consent, convert such a case to a case under

chapter 11 or 13 of this title, if it finds that the granting
of relief would be an abuse of the provisions of [Chapter 7 of

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the Bankruptcy Code] . . . In considering . . . whether the
granting of relief would be an abuse of the provisions of
[Chapter 7] in a case in which the presumption [of abuse laid
out in § 707{b) (2) (A) {I)] does not arise or is rebutted, ?® the
court shall consider - (A) whether the debtor filed the
petition in bad faith; or (B) the totality of the circumstances
(including whether the debtor seeks to reject a personal
services contract and the financial need for such rejection as
sought by the debtor) of the debtor's financial situation
demonstrates abuse.”

11 U.S.C. § 707(b) (1), (3). Section 707(b) was amended as part of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”). Among other things, the “substantial abuse” threshold for
§ 707(b) dismissals was replaced with a simple “abuse” standard. See
1i U.S.C. § 707(b) (1). In addition, BAPCPA added two tests to
determine whether an “abuse” of Chapter 7 exists: (1) the filing of a
petition in “bad faith” (11 U.S.C. § 707(b) (3) (A)); and whether “the
totality of the circumstances . .. of the debtor’s financial situation
demonstrates abuse” (11 U.S.C. § 707(b) (3) (B}).

Section 707(b) applies to the Debtor’s case because, as she has
acknowledged in her petition, she is an individual debtor under Chapter
7 whose debts are primarily consumer in nature. Furthermore, only §
707 (b) (3) (A) (dismissal based upon a debtor’s bad faith filing of a
Chapter 7 petition) is at issue in this case due to UST’s explicit

limitation of its request for relief to that Code section. Before

“ Pursuant to § 707(b) (2), a presumption of abuse of Chapter
7 arises in certain cases. see 11 U.S.C. § 707 (b) (2) (A) (i) (I) -
(II). However, when a debtor’s income is below the applicable
median family income, neither the court nor any party in interest
may bring a motion claiming presumptive abuse. 11 U.S.C. 8
707(b) (7) (i). In this case, the Debtor asserts (and there is no
evidence to contradict) that she currently has no income, which is
certainly below the relevant median family income. Therefore,
pursuant to § 707(b) (7), no party may argue that the Debtor’s case
should be dismissed as being presumptively abusive under §
707(b) (2).

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addressing the merits of the UST’s Motion, however, the Court must
first resolve the Debtor’s various evidentiary objections.
A. The Debtor’s Evidentiary Objectiona

As explained supra, the Debtor challenges the admissibility of
various statements made in the Sadovnick Declarations. Fach of these
objections, however, is without merit.

The Debtor's hearsay objection to statements concerning her
falsification of an American Express credit application is hereby
overruled for two reasons. First, a party’s own statements, when

offered against them as evidence, are not hearsay. See, Fed. R. Evid.

801(d) (2) {A) (“A statement is not hearsay if . . . the statement is
offered against a party andis .. . the party’s own statement, in
either an individual or a representative capacity.”); United States v.
Arteaga, 117 F.3d 388, 395 (9th Cir. 1997) (“[A] party’s own statement,
if offered against that party, is not hearsay . .. ."). Second, the

American Express records containing the Debtor’s false statements are
admissible under the business records exception to the hearsay rule
given that they are accompanied by a certification that: (1) they were
“made at or near the time of the events reflected” in the documents;
(2) they were “kept in good faith and [were] created in the normal
course of business”; and (3) “it is the regular course of business of
American Express Travel Related Services Company, Inc. to make these
records.” See, Fed Rules Evid R 803(6) (“A memorandum, report, record,
or data compilation, in any form, of acts, events, conditions,
opinions, or diagnoses, made at or near the time by, or from
information transmitted by, a person with knowledge, if kept in the
course of a regularly conducted business activity, and if it was the

regular practice of that business activity to make the memorandum,

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report, record or data compilation [are not excluded by the hearsay
rule] .“).

Likewise, the Court hereby overrules the Debtor's objections that
various statements in the Sadovnick declarations are speculative and
lack foundation in that “there is no factual basis set forth for the
contention that [Ms. Sadovnick] has knowledge of the Debtor’s mind-set
and intentions” or “that the charges referenced were for non-essential
items and discretionary items.” Contrary to the Debtor’s assertions,
the Sadovnick declarations do not express opinions concerning the
Debtor's state of mind and intentions. Rather, the declarations
describe facts that the UST, in its Motion, uses to argue the Debtor
filed her Chapter 7 petition in bad faith. Furthermore, while Ms.
Sadovnick does describe some of the Debtor’s purchases as
“discretionary” and “non-essential”, there is a sufficient foundation
for these statements in the exhibits to the Motion and the Supplemental
Sadovnick Declaration. For example, the Debtor's various credit card
statements, which were submitted as to the Court as exhibits, show that

the Debtor made substantial purchases at retailers such as “Doggie

Styles”, “Wilshire Beauty Supply”, “Barking Lot” pet groomers, *L
Salon”, “Comcast Cable”, “Purple Circle Salon”, “Studio Nail and Skin’,
“Cowgirl Hall of Fame”, “Chroma Makeup Studio”, “Turn Back Time” a
cosmetic medical center, “Par Corners Antiques”, and “Tiffany and Co.”

The Court is convinced that, in identifying the businesses where the
Debtor incurred her credit card debt, Ms. Sadovnick has laida
sufficient foundation for her opinion that many of the Debtor’s
purchases were for “discretionary” or “non-essential” items. In fact,

it is difficult to image that the Debtor could make any other type of

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purchase at Tiffany & Co. or the various beauty salons, make up
studios, and dog groomers she visited.

Furthermore, the Court hereby overrules the Debtor's objections
concerning improper advocacy by Ms. Sadovnick. As explained supra, the
Sadovnick declarations do explicitly argue that the Debtor filed her
petition in bad faith. Rather, they set forth facts concerning the
Debtor’s use of her credit cards and express an adequately-supported
opinion that some of the Debtor’s purchases were “discretionary” and
“non-essential”. Reciting the history of the Debtor's credit card
expenditures and opining that some of them were not necessary for
survival is a far cry from asserting a legal argument that the Debtor
filed her bankruptcy petition in bad faith.

Finally, the Court hereby overrules the Debtor’s objection
claiming that Ms. Sadovnick is disqualified from submitting a
declaration in support of the Motion because she is employed by the
UST. The Debtor argues that the Court should not consider the
Sadovnick Declarations because, as an employee at the UST’s office, she
is disqualified from serving as a witness in any case in which the UST
is involved. To support this argument, the Debtor likened Ms.
Sadovnick’s role to that of a secretary or paralegal of an attorney
representing a party in a legal dispute. Because such a secretary or
paralegal would be not be allowed to serve as a witness, the Debtor
claims, Ms. Sadovnick should not be allowed to submit a declaration in
support of the UST’s Motion. The Court, however, does not find this
analogy persuasive. As the Court understands the role of Bankruptcy
Analysts at the UST’s office, they do not act as Support staff to an
attorney in the same way that a secretary or paralegal does. Rather,

they are more akin to an investigator hired by a party to look into the

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facts of a case. Because such investigators are clearly allowed to

serve as witnesses (see, e.g.,United States v. Riley, 1991 U.S. Dist.

LEXIS 1882, at *2-3 (S.D.N.¥. 1991)), the Court finds that Bankruptcy
Analysts at the UST’s office should also be allowed to act as
witnesses.
B. The UST’s Request for Dismissal under § 707 (b) (3) (A)

Having determined that it is supported by competent evidence, the
Court now turns to the merits of the Motion. The UST argues that the
Debtor’s case should be dismissed because she filed her Chapter 7
petition in bad faith. The Debtor vigorously refutes this contention.
However, for the reasons given infra, the Court finds that there is
sufficient evidence of bad faith to warrant dismissal of the Debtor's
case under § 707 (b) (3) (A).

i) Dismissal under § 707 after BAPCPA

Before the enactment of BAPCPA, the Bankruptcy Appellate Panel for
the Ninth Circuit (“BAP”) had determined that a case should not be
dismissed under § 707 if relief from a debtor’s bad acts was available

under any other provision of the Bankruptcy Code. See Padilla v.

Frazer {In re Padilla), 214 B.R. 496, 500 (B.A.P. 9th Cir. 1997), aff'd

sub nom. Neary v. Padilla (In re Padilla), 222 F.3d 1184 (9th Cir.

2000). In Padilla, the bankruptcy court found that a debtor filed his
bankruptcy petition in bad faith and dismissed his case because, inter
alia: (1) over the course of a relatively short period of time, he
incurred credit card debt nearly equal to his annual income; (2) he
made transfers to insiders; and (3) he sold personal property to raise
cash for gambling. Id. at 499. The BAP, however, reversed the
dismissal, stating that relief for the particular types of bad conduct

attributed to the debtor was available under 11 U.S.c. §§ 522, 523 and

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727 and concluding that § 707(a) “should not be used as a substitute
for these provisions.” Id.

However, in light of the recent addition of § 707({b) (3) (A) to the
Bankruptcy Code, the Court is now free to dismiss a case under § 707
even if the Bankruptcy Code provides another remedy for a debtor’s “bad
faith" acts. See 11 U.S.C. § 707(b) (3) (A). This is because §

707 (b) (3) (A) specifically lists the filing a petition in “bad faith” as
an example of “abuse” of the bankruptcy system warranting dismissal of
a Chapter 7 case. See id.
ii) Dismissal for “Abuse” Including the Filing of a
Petition in “Bad Faith”

Under § 707(b) (3) courts must ascertain whether the granting of
relief to a debtor would constitute an “abuse” of the provisions of
Chapter 7. 11 U.S.C. § 707(b) (3). In making this determination,
courts “shall consider . . . whether the debtor filed the petition in
bad faith [or] the totality of the circumstances .. . of the debtor’s
Financial situation demonstrates abuse.” 11 U.S.C. 88 707(b) (3) (A) -
{B). The structure of these provisions indicates that the courts must
ultimately determine whether there is “abuse” of Chapter 7. Such abuse
might include, but is not necessarily limited to, the filing of a
petition in “bad faith”.

Prior to the enactment of BAPCPA, the Ninth Circuit formulated a
test for identifying “substantial abuse” under the former version of §

707(b). See Price v. United States Trustee (In re Price), 353 F.3d

1135, 1139-1140 (9th Cir. 2004). The Price test called for an
examination of all relevant facts and circumstances in a case,
including the following benchmarks: (1) whether the debtor has a

likelihood of sufficient future income to fund a Chapter 11, 12, or 13

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plan which would pay a substantial portion of the unsecured claims; (2)
whether the debtor’s petition was filed as a consequence of illness,
disability, unemployment, or some other calamity; (3) whether the
schedules suggest the debtor obtained cash advancements and consumer
goods on credit exceeding his or her ability to repay them; (4) whether
the debtor’s proposed family budget is excessive or extravagant; (5)
whether the debtor’s statement of income and expenses is
misrepresentative of the debtor’s financial condition; and (6) whether
the debtor has engaged in eve-of-bankruptcy purchases. Id. Given that
BAPCPA has lowered the threshold for dismissal under § 707(b) from
“substantial abuse” to “abuse”, it appears that the Price test (which
was formulated for the more rigorous “substantial abuse” standard) is
still relevant in making determinations of “abuse” under the current
version of § 707(b) (3).

In addition, § 707(b) (3) (A} requires a finding as to whether a
Chapter 7 petition was filed in “bad faith”. That term, however, is
not defined in the Bankruptcy Code. In fact, the meaning of “bad
faith” under § 707(b) (3) (A) appears to be a matter of first impression
among the various courts in the Ninth Circuit.

In this Court’s view, the standards for bad faith dismissal used
in Chapter 11 and Chapter 13 cases should, to the extent possible, also

apply in Chapter 7 cases via § 707(b) (3) (A).“ This is true for several

1 Before the enactment of BAPCPA, in Neary v. Padilla (In re
Padilla), the Ninth Circuit concluded that “bad faith as a general
proposition does not provide ‘cause’ to dismiss a Chapter 7
petition under § 707(a)” because Chapter 7 did not specifically
include a requirement of “good faith” as do Chapters 11 and 13.
See 222 F.3d at 1191-93. However, in light of the addition of §
707{b) (3) to the Bankruptcy Code, a debtor's bad faith now clearly
constitutes grounds for dismissal of a Chapter 7 case.

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reasons. First, the harm of filing a voluntary petition in bad faith
is essentially the same no matter what chapter of the Bankruptcy Code a
debtor chooses to file under - creditors will be unjustly deprived of
their rights and the integrity of the bankruptcy system and of the
courts will be weakened. Second, creating a variety of bad faith
standards for the filing of bankruptcy petitions would be unnecessarily
confusing and would only encourage potential bad-faith filers to choose
the chapter of the Code that appears to have the most favorable bad
faith test. Finally, as things currently stand, the bad faith tests in
Chapter 11 and Chapter 13 are, at their core, basically the same. Each
requires courts to evaluate all of the relevant facts and circumstances
in a case to determine whether a debtor’s intention in filing a
bankruptcy petition is consistent with the purposes of the Bankruptcy

Code. Compare In re Powers, 135 B.R. 980, 991-92 (Bankr. C.D. Cal.

1991) (stating that a determination of bad faith in Chapter 13 cases
“depends upon the facts and circumstances presented” and requires
“examination into any abuses of the provisions, purpose, or Spirit of
bankruptcy law and into whether the debtor honestly needs the liberal
protection of the Bankruptcy Code”) with In re Marshall, 298 B.R. 670,
681 (Bankr. C.D. Cal. 2003) (quoting In re Arnold, 806 F.2d 937, 939
(9th Cir. 1986)) (explaining that a finding of bad faith in Chapter 11
cases “‘depends upon an amalgam of factors and not upon a specific
fact’” and that “‘[g]ood faith is lacking only when the debtor’s
actions are a clear abuse of the bankruptcy process’"). This Court
sees no reason why “bad faith” in Chapter 7 should diverge from this
standard.

Courts applying the Chapter 11 and Chapter 13 bad faith tests

generally consider a variety of non-exclusive factors, including: (1)

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the debtor’s history of filings and dismissals (Leavitt v. Soto (In re

Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999)); (2) whether a debtor
misrepresented facts in their petition, unfairly manipulated the
Bankruptcy Code, or otherwise filed the petition in an inequitable

manner (Id.; Marshall, 298 B.R. at 681); (3} whether the debtor is

actually in need of bankruptcy protection (Marshall, 298 B.R. at 681);
(4) whether the debtor intended to invoke the automatic stay for
improper purposes, such as for the sole objective of defeating state
court litigation (Id.; Leavitt, 171 F.3d at 1224); and (5) whether
egregious behavior is present (Leavitt, 171 F.3d at 1224}. However,
neither malice nor fraudulent intent by the debtor is required for a
finding of bad faith in Chapter 11 or Chapter 13 cases. See id.
Furthermore, no single criterion should be considered dispositive, but
rather the entirety of the situation must be evaluated. See Powers, 135
B.R. at 991-921; Marshall, 298 B.R. at 681.

In sum, by borrowing from the Ninth Circuit’s “substantial abuse”
test and from the bad faith criteria applicable to Chapter 11 and
Chapter 13 cases, this Court finds that the following legal standards
apply when determining whether to dismiss a case under § 707 (b) (3) (A).
First, the Court must evaluate whether, in light of all the relevant
facts and circumstances, it appears that the debtor’s intention in
filing a bankruptcy petition is inconsistent with the Chapter 7 goals
of providing a “fresh start” to debtors and maximizing the return to

creditors.*? See Powers, 135 B.R. at 991-921; Marshall, 298 B.R. at

*? While many of the cases describing the test for bad faith
under Chapters 11 and 13 refer to the “totality of the
circumstances” (See, e.q., Marshall, 298 B.R. at 681), this Court
believes it is best to avoid such language when discussing §
707 (b) (3) (A) in order to avoid confusion with § 707(b) (3) (B), which

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681; See also In re De La Rosa, 91 B.R. 920, 922 (Bankr. §.D. Cal.

1988); In re Diego, 6 B.R. 468, 469 (Bankr. N.D. Cal. 1980). In making
this determination, the Court will consider the Following factors: (1)
whether the debtor has a likelihood of sufficient future income to fund
a Chapter 11, 12, or 13 plan which would pay a substantial portion of
the unsecured claims; (2) whether the debtor’s petition was filed as a
consequence of illness, disability, unemployment, or some other
calamity; (3) whether the schedules suggest the debtor obtained cash
advancements and consumer goods on credit exceeding his or her ability
to repay them; (4) whether the debtor's proposed family budget is
excessive or extravagant; (5) whether the debtor’s statement of income
and expenses is misrepresentative of the debtor's financial condition;
(6) whether the debtor has engaged in eve-of-bankruptcy purchases; (7)
whether the debtor has a history of bankruptcy petition filings and
case dismissals; (8) whether the debtor intended to invoke the
automatic stay for improper purposes, such as for the sole ecbjective of
defeating state court litigation; and (9) whether egregious behavior is

present. See Price, 353 F.3d at 1139-1140; Leavitt, 171 F.3d at 1224;

Marshall, 298 B.R. at 681. As in Chapter 11 and Chapter 13 cases, this
Court finds that no single criterion should be considered dispositive,

but rather all of the facts in a case must be evaluated. See Powers,

135 B.R. at 991-921; Marshall, 298 B.R. at 681. Finally, the Court
also concludes that neither malice nor fraudulent intent by the debtor

is required for a finding of bad faith under § 707(b) (3). See Leavitt,

171 F.3d at 1224.

calls for an analysis of the “totality of the circumstances .
of the debtor’s financial situation. See 11U.8.c. § 707 (b) (3) (A) -
(B).

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Applying these standards to this case, the Court finds that
granting relief to the Debtor would amount to an abuse of the
provisions of Chapter 7 because the Debtor has filed her bankruptcy
petition in bad faith. The Debtor stated under oath during her 341 (a)
meeting that she has been unemployed since 2004. During the time she
was employed, she received a total of $11,000 in annual income.
Regardless, as the UST has demonstrated, the Debtor spent a total of
$15,386.32 on “dining out,” “women’s fashions and accessories, “
“electronics and personal property,” and “beauty treatments and related
products” during the year 2005. Moreover, in the first four months of
2006 (leading up to her bankruptcy filing in May 2006), the Debtor
spent $13,531.52 on these same types of items. This amounts to an
increase from $1,282.19 average monthly spending on non-essential
consumer goods during 2005 to $3007.00 per month in the four months
prior to the Debtor's bankruptcy filing in May 2006. This increase in
spending occurred after the Debtor had contacted a bankruptcy attorney.
Furthermore, the amounts of debt incurred throughout 2005 ($15,386.32)
and during the first four months of 2006 ($13,531.52) far exceed the
Debtor’s last reported annual income. All of these facts indicate that
the Debtor has obtained “consumer goods on credit exceeding . . . [her]
ability to repay them” and that she engaged in several weeks worth of

“eve-of-bankruptcy purchases.” See Price, 353 F.3d at 1139-1140.

Morever, the Debtor has never claimed that there are mitigating
circumstances surrounding her credit card spending or the filing of her
Chapter 7 petition, such as illness, disability, or some other
calamity. See id. While the Debtor does claim that her inability to
service her debt is the result of her “unexpected inability to find

work in her profession”, the Court is not convinced that this indicates

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a lack of bad faith because the Court is simply not persuaded that the
Debtor's current unemployment is “unexpected”. According to the
evidence presented, the Debtor is not currently experiencing any
medical condition that would prevent her from working. Furthermore,
according to the Debtor’s own statements, she has only attended two
“informal” job interviews since leaving her last job in 2004. In light
of these scant efforts, it is not surprising that the Debtor has not
found employment.

In addition, the UST notes that during the six months before
filing for bankruptcy the Debtor received $16,664.59 in deposits to her
bank account and $14,025.00 in electronic payments to several credit
card accounts. However, the Debtor never listed this income in her
schedules or Statement of Financial Affairs. These facts indicate that
“the debtor’s statement of income and expenses is misrepresentative of
the debtor's financial condition.” See id.

Furthermore, the UST has presented evidence indicating that the
Debtor created a false sense of financial solvency by lying to at least
one potential creditor (claiming that she was employed by Straight Edge
Productions and earning $80,000 per year) in order to obtain additional
credit. The Debtor has never challenged these allegations. This
fraudulent activity is “egregious behavior” that further indicates bad

faith is present. See Leavitt, i71 F.3d at 1224,

The Debtor claims that her history of credit card spending is not
disproportionate to her income because, based on two “informal
interviews” with potential employers (which never resulted in offers of
employment), she has an “earning capacity” “well in excess of $6,250
per month.” This argument, however, is not convincing because the

Debtor’s “earning potential” is irrelevant. The appropriate question

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is whether the Debtor purchased consumer goods on credit in excess of

her ability to pay for them. See Price, 353 F.3d at 1139-1140. This

is clearly the case here. The Debtor has had no income since 2004.
She has had only two “informal” job interviews since then. And, she
has used credit cards to purchase consumer goods and services in an
amount that is at least five times greater than her highest reported
annual income. Regardless, even if this Court accepts the Debtor’s
contentions concerning her “earning potential” of $160,000 to $230,000
per year, that would only strengthen the evidence indicating that
granting her relief would be an abuse of the provisions of Chapter 7.
See Price, 353 F.3d at 1139-1140 (stating that it would be an abuse of
Chapter 7 to grant relief to a debtor who is likely to have “sufficient
Future income to fund a Chapter 11, 12, or 13 plan which would pay a
substantial portion of the unsecured claims”).

The Debtor also states that there is no evidence that her
“proposed family budget is excessive or extravagant” but “to the
contrary, her monthly expenses are less than $1000.” However, this
contention is disingenuous. The Debtor has not, on average, spent less
than $1200 per month in the nearly 18 months before she filed for
bankruptcy. In fact, during early 2006 she spent, on a monthly basis,
nearly three times her “proposed budget”.

There is also additional evidence of bad faith. In December 2005,
before the Debtor began increasing her monthly credit card spending to
approximately $3000 per month, she tendered $100.00 to the Price Law
Group (a bankruptcy law firm). She made an additional payment of
$1,449.00 to the Price Law Group on February 28, 2006. The Debtor
claims that she paid these sums to retain that law firm to act as

bankruptcy counsel for her roommate, Ms. Mcgaugh, and that she never

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discussed bankruptcy relief with any attorney at the firm. However,
the Court finds little credible evidence to support this assertion.
The Debtor has not provided the Court with a copy of a retainer
agreement showing that the Price Law Group represented Ms. Mcgaugh and
not the Debtor. Nor has she presented a declaration made on behalf of
the Price Law Group to confirm that she never spoke to any attorney
there concerning the availability of bankruptcy relief. The only
meaningful evidence before the Court is the Debtor's own declaration.
However, given her lack of candor in her bankruptcy schedules and

Statement of Financial Affairs and her history of making

misrepresentations to creditors, the Court has doubts concerning the

Debtor's credibility. Regardless, even if the Debtor’s claims are true
they, (at a minimum) indicate that the Debtor was cognizant of the
possibility of bankruptcy relief when she began to dramatically
increase her credit card spending and incurred at least $13,531.52 in
credit card debt for non-essential consumer goods in only four months.
According to the Debtor’s bankruptcy schedules and Statement of
Financial Affairs (which she continues to claim are accurate), the
Debtor incurred all of these expenses without any source of income.

In short, the Court finds that granting relief to the Debtor in
this case would be an abuse of the provisions of Chapter 7 of the
Bankruptcy Code because the Debtor has filed her petition in bad faith.
The Debtor is seeking more than a “fresh start”. She is seeking in
impermissible “head start” at the expense of her creditors. See In re
Vangen, 334 B.R. 241, 245 (Bankr. W.D. Wis. 2005) (citing Grogan v.

Garner, 498 U.S. 279, 286 (1991)).

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c. The UST’s Request for a 180-Day Bar

The UST also requests that the Court enter an order barring the
Debtor from refiling another Chapter 7 petition for 180 days. The
Debtor opposes the imposition of such a bar, arguing that it igs not
warranted under § 109 of the Bankruptcy Code. The Court, however,
finds that a bar against refiling another Chapter 7 petition is
appropriate under 11 U.S.C. § 349.

In relevant part, § 349 provides that: “Unless the court, for
cause, orders otherwise, the dismissal of a case under this title [the
Bankruptcy Code] does not .. . prejudice the debtor with regard to the
filing of a subsequent petition under this title, except as provided in
section 109(g) of this title.” 11 U.S.c. 8 349(a) (emphasis added). As

its plain language suggests, § 349 gives a court authority to “sanction

a debtor for cause by imposing a bar against re-filing.” In re
Grischkan, 320 B.R. 654, 661 (Bankr. D. Ohio 2005). This Court finds

that filing one Chapter 7 petition in bad faith is sufficient “cause”
under 11 U.S.C. § 349 to impose a 180-day bar against refiling another
Chapter 7 petition. Otherwise, the Debtor would be free to file
another Chapter 7 petition within days of the dismissal of this case
for bad faith. Such a result is not consistent with the goal of
limiting abuse of the bankruptcy system that underlies § 707 (b) (3) (A),

IV. Conclusion

The Court finds that the each of the Debtor’s evidentiary
objections is without merit and that granting her relief would be an
abuse of the provisions of Chapter 7 because she filed her petition in
bad faith. Furthermore, the Court concludes that filing one Chapter 7
petition in bad faith is sufficient “cause” under 11 U.S.C. § 349 to

impose a 180-day bar against refiling another Chapter 7 petition.

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Accordingly, the Court overrules the evidentiary objections,
grantsMotion, dismisses the Debtor’s case, and orders that she be

barred from filing another Chapter 7 petition for 180 days.

DATED: December 4, 2006

\-ERNEST M. ROBLES
United States Bankruptcy Judge

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CERTIFICATE OF SERVICE

I, 4 ele 2 , hereby certify that ;
bh Y ¥ DEe
I sent by U.S. mail a true copy of the MEMORANDUM OF AAT. |

THE UNITED STATES TRUSTEE’S MOTION TO DISMISS CHAPTER 7 CASE WITH

PREJUDICE PURSUANT TO 11 U.S.C.

addresses listed below:

Debtor

Silvia Elizabeth Mitchell
624 N. Plymouth Apt 6

Los Angeles, CA 90004

Debtor’s Attorney
Hale Andrew Antico
27538 Sierra Hwy Stel100
Santa Clarita, CA 91351

Debtor’s Attorney

Jeffrey S Shinbrot

8383 Wilshire Blvd Ste 1010
Beverly Hills, CA 90211

§ 707(b) (3) (A) to the parties at the

Chapter 7 Trustee
Jeffrey I Golden
Weiland, Golden,
Ekva

P.O. Box 2470
Costa Mesa, CA 92628-2470

Smiley, Wang

United States Trustee
725 S. Figueroa St.,
Los Angeles, CA 90017

Suite 2600

Aydt, Gonzater

Clerk