In the Chapter 13 bankruptcy case of Quinn, Jonathan P. and Christina E.; In re, 20 the bankruptcy court denied a creditor’s motion to dismiss the debtors’ case noting that the debtor did not act in bad faith despite the debtors’ “offensive” behavior to that particular creditor.
The details of the bankruptcy case:
The debtors (aka IPR) borrowed money from Michael Ciappa (creditor) to demolish an existing house and build a new one. The agreement was that once the debtors built the house it would be sold and the profits would be split equally with the creditor. But when a buyer was found, the sale fell through, the debtors did not agree with the amount Ciappa (creditor) claimed he had incurred.
The debtors then mortgaged the property, but did not use the loan proceeds to pay Ciappa’s costs. Instead, they used the money to speculate on properties at sheriff’s sales. Ciappa sued the debtors in state court, where he obtained a mechanic’s lien against the property and personal judgments against the debtors for $103,917 in construction costs, $20,541 for profits lost when the sale fell through, and $45,407 in attorney’s fees. The debtors filed for Chapter 13 days before the property was scheduled for sheriff’s sale. Ciappa filed a proof of claim and objected to the debtors’ plan, which provided for the surrender of the property. Ciappa asserted that the debtors’ filing and plan were not made in good faith. Ciappa also asked for stay relief on the basis that the debtors had trashed the property in the process of abandoning it. The court said bad faith is based on the debtors’ actions toward all creditors and to their overarching motives in filing for bankruptcy. “When the universe of affected parties is considered and the Quinns’ need for the protection of bankruptcy is recognized, it is clear that despite the Quinns’ offensive interactions with Ciappa, the Quinns have met their burden of proof to demonstrate that they did not file for bankruptcy in bad faith, and that, overall, they have not acted with bad faith as to their bankruptcy proceeding,” the court said.
This is an important ruling for debtors filing for bankruptcy. According to this bankruptcy judge, a bankruptcy filing is considered bad faith if it is towards all or the majority of creditors in the bankruptcy filing. This ruling does not however refer to bankruptcy fraud. While the debtors in this case engaged in offensive behavior by trashing the creditor’s property in the process of leaving, that action alone did not warrant the judge to declare that their bankruptcy filing was done in bad faith.