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NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. WW-15-1377-JuTaKu

)

SHAUN MICHEIL MARTIN and ) Bk. No. 13-42847-DBL

PATRICIA MAUREEN MCCARTHY, )

)

Debtors. ) 

______________________________)

FEARGHAL MCCARTHY, )

) 

Appellant, )

)

v. ) M E M O R A N D U M*

)

SHAUN MICHEIL MARTIN; PATRICIA)

MAUREEN MCCARTHY; MICHAEL G. )

MALAIER, Chapter 13 Trustee, )

)

 Appellees. )

______________________________)

Argued and Submitted on November 17, 2016

at Pasadena, California

Filed - December 6, 2016 

Appeal from the United States Bankruptcy Court for the

Western District of Washington

Honorable Brian D. Lynch, Chief Bankruptcy Judge, Presiding

________________________

Appearances: Appellant Fearghal McCarthy argued pro se. 

___________________________ 

Before: JURY, TAYLOR, and KURTZ, Bankruptcy Judges.

FILED

DEC 06 2016

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

* This disposition is not appropriate for publication.

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.

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Appellant Fearghal McCarthy (Mr. McCarthy) appeals from the

bankruptcy court’s order dismissing the chapter 131 case of

debtors, Shaun Micheil Martin (Mr. Martin) and Patricia McCarthy

(Ms. McCarthy) (collectively, Debtors),2 without prejudice. On

appeal, Mr. McCarthy assigns error to the bankruptcy court’s

decision to dismiss Debtors’ case without prejudice, contending

that the underlying facts supported dismissal with prejudice. 

For the reasons stated below, we discern no error and AFFIRM.

I. FACTS

A. Prepetition Events

In 2005, the McCarthys were involved in a contentious and

acrimonious divorce proceeding. In October 2006, while the

divorce was pending, Ms. McCarthy filed a chapter 7 bankruptcy

petition and obtained a discharge. The rancor evident in the

divorce persisted in the bankruptcy case. In January 2010, a

final divorce decree was entered. The state court appointed

Mr. McCarthy as custodian of the couple’s two sons and ordered

Ms. McCarthy to pay child support and provide health insurance

for the children. During the divorce proceedings, Mr. McCarthy

moved for contempt numerous times resulting in over $30,000 in

sanctions against Ms. McCarthy. 

In April 2013, Mr. McCarthy applied for a judgment based on

a promissory note for $225,000 that Ms. McCarthy had signed as

1 Unless otherwise indicated, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 

“Rule” references are to the Federal Rules of Bankruptcy

Procedure.

2 Neither Debtors nor the chapter 13 trustee have appeared

in this appeal.

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part of the dissolution proceeding. While Mr. McCarthy’s motion

for judgment was pending, Debtors purchased a new 2013 Dodge

Caravan minivan for $20,794 which they financed at 21% interest. 

Mr. McCarthy obtained entry of $224,000 judgment on April 24,

2013. He then threatened to garnish Ms. McCarthy’s wages. 

B. Bankruptcy Events

On April 28, 2013, Debtors filed their chapter 13 petition

to prevent any garnishments based on the judgment. Debtors’

Schedule F showed approximately $350,000 in unsecured debt,

including Mr. McCarthy’s $224,000 judgment.3 Ms. McCarthy was

also delinquent on her support payments. Debtors’ chapter 13

plan stated that they would make monthly payments of $2,000 for

thirty-six months and that they elected not to contribute their

tax refunds. Secured debt payments were $300 monthly, payable

on the Dodge minivan and a 2008 Kia Spectra (Kia). 

1. Debtors First Amended Plan

Debtors filed a first amended plan dated May 31, 2013. 

This plan raised the monthly payment to $2,104 with the

commitment period still at thirty-six months. Debtors also

proposed to use their tax refunds to fund the plan, with the

exception of the first $1,400 of each refund. The plan also

showed monthly domestic support payments to Mr. McCarthy of

$1,000 and raised the monthly payments on their secured car debt

3 Mr. McCarthy asserts that the debts listed in Schedule F

are overstated by $91,583, consisting of a mortgage debt that was

discharged in Ms. McCarthy’s chapter 7 case. He further contends

the scheduled debts are understated because the $30,000 in

sanctions Mr. McCarthy obtained in the divorce proceedings was

not listed.

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to $800. 

Mr. McCarthy objected to the confirmation of Debtors’

amended plan, contending that Debtors’ Form B22C failed to

accurately report their household size (three versus five) and

their average monthly income. He also alleged that Debtors’

plan was proposed in bad faith because they purchased the new

minivan prior to filing their bankruptcy case and accelerated

payments in the plan on that debt. Mr. McCarthy further argued

that Debtors’ living expenses included excessive or unwarranted

amounts and complained that the plan failed to commit Debtors’

federal and state income tax refunds in their entirety.4 

2. Confirmation of Debtors’ Second Amended Plan

About a week before the hearing on Mr. McCarthy’s objection

to Debtors’ first amended plan, Debtors filed their second

amended plan dated July 30, 2013, causing the evidentiary

hearing on confirmation to be rescheduled. Debtors also amended

their Schedules I and J. Amended Schedule I showed that

Mr. Martin was unemployed and listed his income as between

$1,800-$2,200 a month whereas the previous Schedule I showed

Mr. Martin’s income as $1,004 per month. The amended Form B22C

reduced Debtors’ household size to three, noted that Debtors

were above median income with negative disposable income, and

showed the applicable commitment period as five years. 

The second amended plan indicated monthly payments of

$2,104 for four months and $2500 thereafter for a term of sixty

4 Mr. McCarthy, an accountant by trade, continued to raise 

issues related to Debtors’ tax returns throughout this case.

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months. Debtors’ treatment of their tax refunds stayed the

same, but they lowered the payment on the minivan to the

contractual rate of $519. The plan showed that Debtors would

pay at least $95,081.23 to allowed nonpriority unsecured claims

for a return of 27% on allowed claims. 

Mr. McCarthy objected to Debtors’ second amended plan, 

alleging that the plan was not proposed in good faith due to

Debtors’ purchase of the minivan prior to their filing. 

Although some expenses had been adjusted in their amended

Schedule J, Mr. McCarthy continued to object to certain expenses

as excessive or unwarranted. He further asserted that Debtors

offered no reason or authority for their retention of the first

$1,400 of any tax refund. He also pointed out that, although

Debtors acknowledged a prepetition support payment default of

over $11,000, they failed to make a provision for payment of

that debt in the plan. Finally, Mr. McCarthy complained that

Debtors’ Schedule I and J were misleading. 

The chapter 13 trustee submitted a brief in support of

confirmation. 

On November 6, 2013, the bankruptcy court held an

evidentiary hearing on confirmation. Mr. Martin, Ms. McCarthy,

and Mr. McCarthy testified and numerous exhibits were offered

into evidence. The bankruptcy court took the matter under

advisement. 

On November 21, 2013, the bankruptcy court issued an order

setting forth its findings of fact and conclusions of law. The

court overruled Mr. McCarthy’s objections and confirmed Debtors’

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second amended plan.5 The court found that Debtors had filed

their petition in good faith after applying the factors set

forth in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224

(9th Cir. 1999). The court also found the plan was proposed in

good faith and committed substantially more than their projected

disposable income for the sixty month commitment period of the

plan. 

In addressing Mr. McCarthy’s bad faith argument based on

the purchase of the minivan, the court concluded that Debtors’

purchase did not indicate a lack of good faith when they

successfully modified the interest rate from over 20% down to 6%

and demonstrated that their family needed a reliable car. 

The bankruptcy court also found that the discrepancies in

the schedules and Form B22C were mistakes primarily due to the

sloppiness of Debtors’ attorney and Debtors. The court opined

that neither understood the basic strategy of chapter 13

practice applicable to Debtors’ situation. The court observed

that had Debtors’ attorney and Debtors properly analyzed the

case, Debtors would have rushed to claim they were above median

debtors for two reasons. 

First, once they corrected the household size to three it

was obvious that their monthly projected disposable income was

$1080 in the negative. According to the court, for purposes of

5 Mr. McCarthy also filed a motion to dismiss Debtors’ case

with prejudice and an order shortening time to have the motion

heard the same day as the evidentiary hearing on confirmation. 

The bankruptcy court denied the order shortening time without

prejudice to Mr. McCarthy’s refiling of the motion and scheduling

a hearing in due course.

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the disposable income test, Debtors would have no obligation to

pay any money to nonpriority unsecured creditors such as the

claim filed by Mr. McCarthy for the $224,000 judgment and the

vast majority of the over $30,000 in monetary sanctions arising

out of the dissolution. 

Second, the court noted that at the time Debtors filed

their case, there was no applicable commitment period for

debtors with negative income under the holding in Maney v.

Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. 2008). 

Accordingly, the bankruptcy court concluded: “Instead of running

away from status as above median debtors, they should have been

embracing it, as they could have been arguing for an even

shorter plan.” 

In the end, the bankruptcy court decided that the facts

showed Debtors were not manipulating the schedules or their

income to their advantage but, rather, that they and their

attorney did not handle the case competently from the outset. 

The court also found that given the size of the proposed

plan payment, the budget submitted in the most recent schedules,

and the substantial disbursement to unsecured creditors,

Debtors’ proposal to keep the first $1,400 of any tax refund was

reasonable and prudent.

3. Postconfirmation Modification: Third Amended Plan

Debtors filed a third amended plan dated April 3, 2014, and

requested modification of their confirmed plan based on

increased income and expenses. The third amended plan showed

plan payments in the amount of $23,224.68 through March 2014 and

$2900 per month commencing May 1, 2014. The third amended plan

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also indicated that Debtors would pay $109,000 to unsecured

creditors for a return of 30% of their allowed claims.

On April 29, 2014, Mr. McCarthy filed an objection to

Debtors’ third amended plan. There, he stated that he received

information that Mr. Martin had returned to regular, union

assignment work shortly following the November 6, 2013 hearing

on confirmation and that he had been regularly employed

thereafter. Mr. McCarthy informed the court that he told the

chapter 13 trustee about this development but that the trustee

did not seek payroll information from Mr. Martin. According to

Mr. McCarthy, Mr. Martin’s income was a moving target. 

Mr. McCarthy also argued that Debtors’ increased income and

reasonable expenses showed an after-tax income of $1,790 per

month; yet, Debtors proposed only a $400 per month increase in

the plan payment. Mr. McCarthy further asserted that there was

no justification or explanation as to why the difference of

$1,390 was not included in the plan. Finally, Mr. McCarthy

objected to numerous increased expenses relating to cell phones,

food, clothing and personal care. 

The court scheduled an evidentiary hearing for September 3,

2014. Mr. McCarthy moved for a continuance and to compel

discovery related to Debtors’ income and expenses. On

September 2, 2014, Debtors filed a notice withdrawing the motion

to modify their confirmed plan. Eight days later, the

bankruptcy court ordered a 2004 examination of Mr. Martin’s

employer, Western Partitions, and Ms. McCarthy’s employer,

DM2 Software. In response, Debtors filed fifth amended

Schedules I and J stating higher income for Mr. Martin. 

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4. Postconfirmation Modification: Fourth Amended Plan 

Debtors filed a fourth amended plan dated September 27,

2014, and again moved to modify their plan due to increased

income and expenses. This plan showed payments in the amount of

$40,209.28 through September 2014, $633 per month for six months

commencing October 2014, and $2300 per month thereafter. The

plan indicated that Debtors would pay $73,402 to nonpriority

unsecured claims for a return of 27.3% on their allowed claims. 

Debtors also moved for permission to incur debt for the

purchase of a second new car. They declared that the Kia was

not driveable and disclosed that they sold the car to a repair

shop for $2,000. The sale price, according to Debtors, was the

amount Ms. McCarthy was offered for the Kia as a trade-in. 

Mr. McCarthy again objected to Debtors’ fourth amended

plan. He complained that Debtors’ amended Schedule J increased

most of their expenses without showing any change in

circumstances to support the increases. Mr. McCarthy also

objected to Mr. Martin’s child support obligation which was

listed as an expense in an amended Schedule J for the first

time. Finally, Mr. McCarthy argued that Debtors did not need a

another new vehicle. 

The chapter 13 trustee supported Debtors’ requested

modification. The trustee noted that Debtors voluntarily

increased their monthly plan payment (from $2,307.00 to

$2,676.92) in May 2014, following their disclosure of increased

income. The trustee also supported Debtors’ request to purchase

a new car. Finally, the trustee informed the court that

Debtors’ request to temporarily allocate $1,667.00 per month for

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appellate attorney fees was necessitated by Mr. McCarthy’s

conduct because the underlying appeal was being prosecuted by

him and not by Debtors.

On November 4, 2014, the bankruptcy court held a hearing on

the matter. The bankruptcy court allowed a reduction in the

plan payments, granted Debtors’ request to employ an appellate

attorney for the pending state court appeal, and allowed

Mr. Martin to make his child support payment. The bankruptcy

court made no rulings with respect to other issues raised by

Mr. McCarthy relating to Debtors’ expenses. Those issues were

reserved for a later evidentiary hearing. 

 On November 20, 2014, the bankruptcy court entered an order

modifying Debtors’ chapter 13 plan. The court ordered that on

the effective date of the plan, October 1, 2014, their monthly

payment obligation was reduced to $1124 per month to reflect

Debtors’ ongoing legal fee expenses. The court further ordered

that Debtors could submit a request for a vehicle purchase

which, upon trustee approval, could result in further reduction

of Debtors’ plan payment obligation. Finally, the court ordered

that Mr. Martin’s ongoing child support obligation was approved

as an allowable expense.6

Debtors subsequently obtained a court order authorizing

them to purchase a new vehicle.

5. Mr. McCarthy’s Motion to Dismiss

On December 31, 2014, Mr. McCarthy filed an updated motion

6 According to Mr. Martin, the state court ordered him to

pay $1,328 a month in child support effective October 1, 2014.

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to dismiss Debtors’ case with prejudice, alleging bad faith. He

argued that (1) Debtors misrepresented facts in their petition

and supporting schedules; (2) Debtors commenced the case to

defeat state court litigation, i.e., enforcement of the $224,000

judgment; (3) Debtors exhibited bad faith in the continuing

manipulation of their income and living expenses schedules,

seeking to minimize their apparent, disposable income

commitment; (4) Debtors disposed of personal property, the Kia, 

without court authority and without a timely accounting of such

disposal to the court; (5) Debtors concealed Mr. Martin’s income

from the court and the trustee; (6) Debtors routinely inflated

and misstated their Schedule J living expenses; (7) Debtors

evaded discovery of their income and expenses; (8) Debtors

appeared to have filed a materially false Form 1040 income tax

return for 2013; and (8) Ms. McCarthy improperly used her

company credit card for personal expenses which increased her

debt. Based on these allegations, Mr. McCarthy argued that

Debtors’ conduct was “egregious”, warranting dismissal of their

case with prejudice under the factors set forth in Leavitt.

The chapter 13 trustee supported dismissal if the

allegations were proved at an evidentiary hearing. 

In opposition, Debtors maintained that most of the issues

raised by Mr. McCarthy were previously adjudicated. They

further explained that Mr. Martin was unemployed at the time of

confirmation and receiving unemployment benefits. They

explained that his income increased postconfirmation because

Mr. Martin was assigned to a project in Beaverton, Oregon. At

the beginning of December 2013 he was laid off for one week and

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then dispatched for work in Pullman, Washington and then to

Moscow, Idaho. Debtors maintained that they provided evidence

of Mr. Martin’s income to the trustee on February 24, 2014. 

Debtors also explained their “alleged” fraudulent tax

returns contained errors and had been corrected by a CPA. They

further argued that Ms. McCarthy’s use of her company’s credit

card was authorized as her employer allowed her to use the card

for non-business expenses during her travel and those amounts

were reimbursed to her employer. 

As explained below, Mr. McCarthy’s motion to dismiss was

scheduled for an evidentiary hearing at the same time as

Debtors’ request to further modify their confirmed plan and to

resolve outstanding issues related to their fourth amended plan.

6. Postconfirmation Modification: Fifth Amended Plan

Debtors filed a fifth amended plan dated March 23, 2015,

based on increased income and expenses. They also filed amended

Schedules I and J. In the fifth amended plan, they proposed

payments of $1124 for six months, then $1,044 for two months,

and then had payments resume at at $2711 per month. This plan

showed that Debtors would pay at least $85,665 to nonpriority

unsecured claims which was approximately 32.43% of their allowed

claims.

On April 28, 2015, Mr. McCarthy objected to the fifth

amended plan on several grounds including, among others, that

Debtors were not acting in good faith in either the filing of

their case or the proposal of their modified plan. He further

complained that Debtors had understated Mr. Martin’s income and

Ms. McCarthy’s earnings by omitting bonus payments made to her

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which averaged $500 per month from December 2013 through January

2015. Finally, he pointed out that Debtors’ 2013 and 2014 tax

returns showed that Debtors improperly took deductions. As a

result, Mr. McCarthy asserted that Debtors owed over $23,000 in

taxes for those years. Mr. McCarthy also alleged that Debtors

intentionally under-withheld taxes and spent the extra income

which, in turn, created a large postpetition obligation that

diverted disposable income from their creditors.

7. The Evidentiary Hearing

An evidentiary hearing on Mr. McCarthy’s motion to dismiss

and Debtors’ motion to modify their plan commenced on May 6,

2015, and continued on September 1-2, 2015. At the May hearing,

Ms. McCarthy testified concerning various issues including her

use of her employer’s company credit card for personal expenses

and discrepancies on her tax returns.7

Mr. Ford, the owner of the repair shop that purchased the

Kia, also testified. He testified that the car was not safe to

drive, that he quoted a price of $1,500 minimum to make the car

safe, and that he purchased the car for $2,000 and sold it for

$4,700 once it was in salable condition. To make it salable,

Mr. Ford replaced the brakes and put two new tires on the car. 

Mr. Burkard, a fifty percent owner of DM2 Software, Inc.,

testified that there was no prohibition to Ms. McCarthy using

the company credit card for personal expenses at the time she

incurred those expenses. Since then, the company changed its

7 The transcripts contain only excerpts of the witness’s

testimony.

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policy and now prohibits employees from charging non-business

expenses on the credit card. He also testified as to the amount

of Ms. McCarthy’s bonuses and indicated that they were likely to

continue. 

Finally, Mr. Erickson, the CPA who prepared Debtors’ tax

returns, testified as to how he identified errors on Debtors’

2013 tax return and prepared their 2014 tax return. 

Mr. Erickson testified that Debtors appeared to owe several

thousand dollars over the amount they had withheld for 2014

taxes. He also testified that he had made errors himself on the

returns which were based on Debtors’ representations.

On September 1, 2015, Mr. Martin testified about his

employment in 2013. He did not recall whether he worked for

Western Partitions, his employer, for the bulk of that year. 

On September 2, 2015, Mr. Martin testified that he no

longer had the $2,000 from the sale of the Kia. He was also

questioned about $3,250 that Debtors spent on rental cars from

Hertz after they sold the Kia for $2,000. Although Mr. Martin

said he could not recall the brands of the cars that were

rented, he later recalled that at one point it was a Dodge

minivan and at another point a GMC pick-up truck. He also could

not recall how long the cars had been rented for. Mr. Martin

further testified that Debtors had not saved any money for a

down payment on a new car. 

Mr. Martin conceded that it was error to claim one of the

McCarthy’s sons as an exemption on their tax return and further

testified that it was error to claim a $5,000 deduction for a

contribution to an IRA account since he had no such account in

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2013. 

Mr. Martin further testified that Debtors continued to send

their daughter to a private school for $600 a month because the

school offered a higher quality education than the public

school. 

Finally, Mr. Martin testified that he was delinquent in his

support payments but was not certain as to how many months.

Mr. McCarthy also testified that Mr. Martin was four months

delinquent in his support payments. He further opined that

Debtors budgeted $2,000 more than necessary for the payment of

attorney’s fees to Ms. McCarthy’s state court lawyer. 

Closing arguments were held on September 14, 2015. 

Debtors’ counsel argued that dismissal was not necessary and

that there were other remedies available to the court besides

dismissal with prejudice. Counsel noted that a six month bar to

re-filing would force Debtors to forego over $60,000 and

29 months of progress towards discharge. Counsel also noted

that Mr. McCarthy would be able to execute on his judgment over

the course of the next six months and observed that he would

collect a greater portion of the payments in a subsequent

chapter 13 because Debtors’ child support obligation to him

would run its course over the next few years. Finally, counsel

argued that the court should not dismiss Debtors’ case but

requested that any dismissal be without prejudice. 

Counsel for the chapter 13 trustee represented that the

trustee supported dismissal of the case based on his view that

Debtors had not really approached the bankruptcy with an eye

towards reorganization of their personal finances. The trustee

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also thought that Debtors were not truthful as to their income

despite repeated opportunities to disclose to the trustee

exactly what they expected in the future. According to the

trustee, evidence of any additional income had to be obtained

through repeated discovery requests. Finally, the trustee

opined that the case was a two-party dispute with no end in

sight. He qualified his support of dismissal, however, by

observing that Debtors may have presented a sufficient argument

against dismissal with prejudice or suggested that a lesser

sanction would be appropriate. 

The court took the matter under advisement.

8. The Bankruptcy Court’s Order

On October 21, 2015, the bankruptcy court issued its

findings of fact and conclusions of law in an order dismissing

Debtors’ case without prejudice and denying Debtors’ motion to

modify their plan.

1. Findings of Fact 

Income: The court found that Debtors had understated or

failed to effectively disclose their income. Based on the

evidence, the court noted that Ms. McCarthy did not report her

bonus income of $8,943 to the chapter 13 trustee or in Debtors’

amended schedules and that Debtors had understated Mr. Martin’s

income by over $20,000 for the postconfirmation period of

November 2013 to September 2014. 

Sale of the Kia: Although there was some question whether

Ms. McCarthy sold the Kia prior to obtaining court approval, the

court did not find that important. The court noted that Debtors

received approval from the trustee in January 2015 for the

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purchase of a new vehicle and that since March 2015, their

schedules showed a $350 a month deduction for a new car payment. 

However, Debtors testified at the evidentiary hearing that they

took the $2,000 from the sale, deposited it into their bank

account and spent it in the ordinary course. Mr. Martin

testified that they have been unable to buy another vehicle

since they no longer had funds for a down payment.

Tax Returns: The bankruptcy court found that the evidence

showed that Debtors owed over $23,000 in taxes for the 2013 and

2014 tax years because they had claimed numerous improper

deductions. Although Ms. McCarthy had testified that she found

the tax software confusing when she prepared Debtors’ original

tax returns, the court did not find her testimony credible when

her job was associated with computer software in the petroleum

industry. The court opined that had Debtors filed the 2013

return with the properly claimed deductions, they would likely

have been able to modify their plan to reflect the need to pay

the resulting tax liability, with little adverse consequence. 

The court observed that Debtors’ “irresponsible claims of

deductions . . . simply played into the hands of Mr. McCarthy. 

They certainly should have expected that Mr. McCarthy would have

scrutinized their return.” 

Company Credit Card: The court found Ms. McCarthy’s use of

her company credit card to pay for her father’s airline ticket

on two occasions so that he could accompany her in her travel

was de minimis and not prohibited by the company at the time the

expenses were incurred.

Expenses. The court also noted that the costs associated

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with Debtors’ daughter’s private schooling was $600 per month

which was above the National standard of $156. The court

observed that Debtors had claimed the expense only since March

2014 and that they maintained that their daughter needed to

attend the private school as a public school would hold her back

educationally.

Next, the court addressed Mr. Martin’s child support

obligation, noting that prior to confirmation, Debtors never

listed any child support owed by him. The court also noted that

no documentation regarding Mr. Martin’s support obligation was

put into evidence, but he testified that the obligation was

imposed in October 2014 and that Debtors made the payment from

their bank account but are frequently delinquent on the payment. 

Spending Habits. Last, the court noted that there had been

extensive examination and testimony about Debtors’ expenses and

spending habits. There was evidence showing vacations, five

phone lines, and that Debtors ate out a substantial amount of

the time with almost daily purchase of fast food. The court

found that the bank statements put into evidence by Mr. McCarthy

showed Debtors were constantly overdrawn on their accounts. In

light of this evidence, the bankruptcy court found that there

was no indication that Debtors attempted to rein in their

spending and reorganize in good faith. 

In the end, the bankruptcy court found that Debtors were

not forthcoming about disclosing either their income or their

actual expenses. The court concluded that it was clear they

could not obtain financial stability even with the increased

income and improper claims of tax deductions. However, the

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court also found that Mr. McCarthy was equally to blame “for

this debacle.” The court noted that he closed his accounting

practice and unsuccessfully argued in state court and on appeal

that Ms. McCarthy was obligated to pay higher child support for

him to stay at home with their sons, who are both teenagers. 

See McCarthy v. McCarthy, 2015 WL 5139089 (Wash. Ct. App.

Sept. 1, 2015). The court further observed that Mr. McCarthy

spent much of his time scrutinizing Debtors’ income and spending

habits and preparing exhaustive spreadsheets showing the

Debtors’ income and expenses.

The bankruptcy court reiterated that Debtors ended up

confirming a plan which proposed payments to unsecured

creditors, primarily Mr. McCarthy, which exceeded what they

would have had to pay if they had properly calculated their

projected disposable income as above median debtors from the

outset. The court observed that Debtors had been making

substantial payments to the chapter 13 trustee under their plan

which resulted in substantial distributions to Mr. McCarthy over

and above the ongoing child support obligation.

2. Legal Conclusions

In its legal conclusions, the bankruptcy court first noted

that although it had found in the November 2013 confirmation

hearing that Debtors had proposed their plan in good faith, the

court could review that finding postconfirmation if new

information had come to light. See In re Luxford, 368 B.R. 63,

70-71 (Bankr. D. Mont. 2007) (considering trustee’s post

confirmation motion to dismiss for lack of good faith after

discovering that debtors had confirmed a plan based on fraud,

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where debtors had purposely omitted assets and transactions from

their schedules and statements such that the Chapter 13 plan did

not actually meet the best interests of creditors test of

§ 1325(a)(4)). 

Accordingly, the court considered again the four factors of

the Leavitt test to determine whether, under the totality of the

circumstances, Debtors were acting in good faith. These factors

are: (1) whether the debtor misrepresented facts in his

petition or plan, unfairly manipulated the Code, or otherwise

filed his petition or plan in an inequitable manner; (2) the

debtor's history of filings and dismissals; (3) whether the

debtor intended to defeat state court litigation; and

(4) whether egregious behavior is present. In re Luxford,

368 B.R. at 70. In considering these factors, the court noted

dismissal turned on the first and the fourth factors because it

had previously found the second and third factors were not met

in its findings on confirmation of Debtors’ second amended plan. 

The bankruptcy court found that nothing presented at the May and

September 2015 hearings changed those findings.

First Leavitt Factor: As to misrepresentation of facts,

unfair manipulation of the Bankruptcy Code and/or the filing of

a plan in an inequitable manner, the court found that the most

glaring example was the understatement of both Mr. Martin’s and

Ms. McCarthy’s income to the tune of almost $30,000. Ms.

McCarthy’s bonuses were not disclosed, and Mr. Martin was listed

as unemployed when he was in fact employed. The court observed

that early in 2013 Mr. Martin’s income may have been sporadic

due to the economy, but his situation had improved. The court

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noted that even when his employment was disclosed, the earnings

were understated.

According to the bankruptcy court, Debtors similarly

misrepresented many of their expenses. The court observed that

Debtors’ bank account statements which showed how Debtors spent

their money, little resembled their Schedule J. The court found

that, rather than using funds on hand to make a down payment and

buy a new vehicle as the Court approved, they used the $2,000

from the sale of the Kia for day to day expenses and then wasted

another $3,250 renting brand new cars from Hertz. “Their $350

per month budget item for the purchase of a new car remains,

nine months after the purchase was approved, a fiction.” The

court also noted that Debtors never demonstrated that Mr. Martin

had an actual monthly support obligation of $1328 nor did they

identify with any accuracy how or when that obligation was paid. 

Finally, the court observed that Debtors had not budgeted for

the hundreds of dollars a month they incurred in overdraft fees

from their bank as a result of the irresponsible spending

habits.8 In the end, the bankruptcy court concluded that

Debtors’ schedules did not accurately reflect their actual

spending. Thus, this factor weighed in favor of dismissal.

Fourth Leavitt Factor: Next, the court considered whether

egregious behavior was present. The court acknowledged that

Debtors had not properly disclosed their income and expenses,

had been irresponsible in some of their spending habits, and had

8 In closing argument, Mr. McCarthy’s attorney argued that

for the period of January 1 through April 31, 2015, Debtors’

average monthly overdraft was $419 a month.

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filed initial tax returns which plainly and simply misstated

their deductions. However, weighing against these facts was

that Debtors were not living a luxurious lifestyle, and the

court also noted they had been making substantial plan payments

- likely more than they would have had to pay if they had

properly filled out the Form B22C from the outset. The court

further observed that Debtors were subjected to constant and

unremitting scrutiny from Mr. McCarthy in their case and his

continued efforts in the state court to contest matters arising

from the dissolution of the McCarthys’ marriage. These efforts,

although unsuccessful, required Ms. McCarthy to incur additional

attorney’s fees. On balance, the court concluded that Debtors’

behavior was not egregious.

Based upon the totality of the circumstances, the

misstatement of income and expenses and, as mentioned by the

chapter 13 trustee, a failure to demonstrate the kind of

responsible spending that is required in a Chapter 13 case, the

court found “cause” to dismiss Debtors’ case under § 1307(c). 

The court concluded however that Debtors’ conduct did not rise

to the level warranting dismissal with prejudice.

Mr. McCarthy filed a timely notice of appeal from this

order.

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding

under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction

under 28 U.S.C. § 158. 

III. ISSUE

Whether the bankruptcy court abused its discretion by not

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dismissing Debtors’ chapter 13 bankruptcy case with prejudice.

IV. STANDARDS OF REVIEW

We review the bankruptcy court’s case dismissal for an

abuse of discretion. In re Leavitt, 171 F.3d at 1222-23. 

To determine whether the bankruptcy court has abused its

discretion, we conduct a two-step inquiry: (1) we review de novo

whether the bankruptcy court “identified the correct legal rule

to apply to the relief requested” and (2) if it did, whether the

bankruptcy court’s application of the legal standard was

illogical, implausible or “without support in inferences that

may be drawn from the facts in the record.” United States v.

Hinkson, 585 F.3d 1247, 1261–62 & n. 21 (9th Cir. 2009)

(en banc). “If the bankruptcy court did not identify the

correct legal rule, or its application of the correct legal

standard to the facts was illogical, implausible, or without

support in inferences that may be drawn from the facts in the

record, then the bankruptcy court has abused its discretion.” 

USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880,

887–88 (9th Cir. 2010) (citing Hinkson, 585 F.3d at 1261–62). 

When a bankruptcy court makes factual findings of bad faith

to support dismissal of a chapter 13 case, we review those

findings for clear error. In re Leavitt, 171 F.3d at 1222-23. 

Whether or not a debtor’s conduct rose to the level of

egregiousness is a question of fact. A court’s factual

determination is clearly erroneous if it is illogical,

implausible, or without support in the record. Hinkson,

585 F.3d at 1261-62 & n.21. Under this standard, “[w]here there

are two permissible views of the evidence, the fact finder’s

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choice between them cannot be clearly erroneous.” Anderson v.

City of Bessemer City, N.C., 470 U.S. 564, 574 (1985).

V. DISCUSSION

A. Legal Standards: Dismissal and Dismissal With Prejudice

Section 1307(c) sets forth nonexclusive grounds which may

constitute cause for dismissal of a chapter 13 case. Although

not specifically listed, bad faith is a “cause” for dismissal

under § 1307(c). Eisen v. Curry (In re Eisen), 14 F.3d 469, 470

(9th Cir. 1994). In this Circuit, bankruptcy courts make good

faith determinations on a case-by-case basis, after considering

the totality of the circumstances. In re Leavitt, 171 F.3d at

1124. In addition, a “‘court must make its good-faith

determination in the light of all militating factors.’” Ho v.

Dowell (In re Ho), 274 B.R. 867, 876 (9th Cir. BAP 2002) (citing

Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir. 1982)). 

Section 349(a) expressly grants the bankruptcy court

authority to dismiss a case with prejudice. In re Leavitt,

171 F.3d at 1123. A dismissal with prejudice is a severe and

drastic sanction that is limited to extreme situations: 

“Generally, only if a debtor engages in egregious behavior that

demonstrates bad faith and prejudices creditors—for example,

concealing information from the court, violating injunctions, or

filing unauthorized petitions—will a bankruptcy court forever

bar the debtor from seeking to discharge then existing debts.” 

In re Chabot, 411 B.R. 685, 705 (Bankr. D. Mont. 2009) (citing

Colonial Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933, 937

(4th Cir. 1997)); see also Ellsworth v. Lifescape Med. Assocs.,

P.C. (In re Ellsworth), 455 B.R. 904, 922 (9th Cir. BAP 2011)

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(acknowledging that dismissal with prejudice is a drastic remedy

reserved for “extreme situations.”). Dismissal with prejudice

imposes a bar on further bankruptcy proceedings between the

parties and is a complete adjudication of the issues. 

In re Leavitt, 171 F.3d at 1123. “Functionally, then, a

dismissal with prejudice is equivalent to a judgment under §

523(a) that each debt that would have been discharged under the

debtor’s plan is thereafter nondischargeable.” In re Ellsworth,

455 B.R. at 922. 

In deciding whether to dismiss a case with prejudice,

Leavitt directs the bankruptcy court to consider the same four

factors for dismissal based on “cause” and make a finding of bad

faith based on egregious conduct. 171 F.3d at 1224. “The court

is not obligated to count the four Leavitt factors as though

they present some sort of a box-score but rather is to consider

them all and weigh them in judging the ‘totality of the

circumstances.’” In re Lehr, 479 B.R. 90, 98 (Bankr. N.D. Cal.

2012).

B. Analysis

Here, in considering dismissal of Debtors’ case in

conjunction with confirmation of Debtors’ modified plan, the

bankruptcy court correctly examined the totality of the

circumstances and considered the four factors enunciated in

Leavitt to determine Debtors’ good faith. See In re Luxford,

368 B.R. at 70-71; see also § 1329(b)(1) (incorporating good

faith standard under § 1325(a)(3) for modification of a

confirmed plan). On appeal, Mr. McCarthy has not challenged the

legal standards that the bankruptcy court applied: instead, he

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argues that the court’s factual findings on the Leavitt factors

were erroneous or an abuse of discretion. He also contends that

reversal is warranted because neither Debtors nor the court

provided any analysis for an alternative sanction which would

have afforded him a sufficient remedy. These errors, according

to Mr. McCarthy, demonstrate that the court abused its

discretion in dismissing this case without prejudice. 

We are not persuaded. “The bankruptcy court is not

required to find that each [Leavitt] factor is satisfied or even

to weigh each factor equally.” Khan v. Curry (In re Khan),

523 B.R. 175, 185 (9th Cir. BAP 2014). Rather, “[t]he factors

are simply tools that the bankruptcy court employs in

considering the totality of the circumstances.” Id. By

applying the Leavitt factors in a totality of circumstances

analysis, the bankruptcy court, as the trier of fact, determines

whether there is “cause” for dismissal for bad faith and whether

such dismissal should be with prejudice based on the debtor’s

egregious conduct. Here, the bankruptcy court applied the

correct legal standards and only its factual findings are at

issue. The court explicitly found that under the four factor

test for determining bad faith set forth in Leavitt, only one of

the four factors was present; i.e., factor one. 

The First Leavitt Factor: this factor questions whether

Debtors misrepresented facts in the petition or plan, unfairly

manipulated the Code, or otherwise filed their petition or plan

in an inequitable manner. The bankruptcy court found numerous

misrepresentations regarding Debtors’ income and expenses and

found that this factor weighed in favor of dismissal. Nowhere

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does Mr. McCarthy argue with any specificity why the court’s

findings related to this factor were erroneous. Based on our

review of the record, we conclude that the bankruptcy court’s

findings under this factor were plausible and supported by

inferences drawn from the facts in the record and thus not

erroneous.

The Second Leavitt Factor: This factor looks at the

history of filings and dismissals of prior bankruptcy cases. “A

debtor’s history of filings and dismissals is relevant” to the

bad faith analysis. Nash v. Kester (In re Nash), 765 F.2d 1410,

1415 (9th Cir. 1985). Here, the bankruptcy court afforded

Ms. McCarthy’s prior bankruptcy filing little weight in its bad

faith analysis because Ms. McCarthy had filed her chapter 7 case

and received her discharge while the dissolution case was

pending. The bankruptcy court found her filing was

understandable given that Mr. McCarthy had received over $30,000

in sanctions against Ms. McCarthy during the dissolution

proceedings and the on-going animosity between the parties.

Mr. McCarthy does not challenge these findings on appeal. 

Rather, he contends that the court erred by not considering

Debtors’ numerous filings in the case itself; i.e., they filed

three Form B22c’s all of which were false, seven sets of

Schedule I and J’s all of which falsely stated income and

expenses, and six plans, only one of which was confirmed due to

the court’s reliance on Debtors’ false testimony and Form B22c. 

In other words, all Debtors’ filings and amendments were false. 

These facts, however, do not make the bankruptcy court’s

findings on the second Leavitt factor clearly erroneous.

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When evaluating the second Leavitt factor, a bankruptcy 

court is concerned with prior bankruptcy case filings and

dismissals and not with filings within the case itself. 

Actually, Mr. McCarthy’s arguments about Debtors’ “merry-goround” of amended filings in the case is intertwined with the

court’s analysis under the first Leavitt factor; i.e., Debtors’

misrepresentation of facts related to their income and expenses. 

Moreover, Mr. McCarthy ignores the bankruptcy court’s factual

findings regarding Debtors’ initial schedules and Form B22c. 

The court initially found that the “mistakes” were largely due

to the “sloppiness of Debtors’ attorney, abetted by Debtors,

neither of whom understood the basic strategy of chapter 13

practice applicable to their situation.” In short, the

bankruptcy court’s findings on this factor were logical and

supported by inferences drawn from the facts in the record and,

thus, were not clearly erroneous. 

The Third Leavitt Factor: This factor examines whether

Debtors intended to defeat state court litigation. The

bankruptcy court found that Debtors had not filed their petition

to defeat state court litigation. Mr. McCarthy contends this

was error. He points out that the facts in this case are

similar to the facts in Leavitt. There, the debtor filed a

chapter 13 petition approximately two weeks after a judgment on

a jury verdict was entered against him and then he proposed zero

payment to unsecured creditors in his first plan and 3% in his

second plan. According to Mr. McCarthy, Debtors filed their

petition just four days after Mr. McCarthy obtained his judgment

and Debtors’ original plan proposed paying unsecured creditors

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2% and their amended plan proposed paying unsecured creditors

3%. He also asserts that this case is essentially a single

creditor case since he represents 89% of all non-priority

unsecured claims. 

Again, these arguments do not make the bankruptcy court’s

findings under this factor clearly erroneous. Mr. McCarthy

ignores the bankruptcy court’s findings of fact under this

factor and does not tell us why those findings are clearly

erroneous. As the bankruptcy court noted, the portion of the

McCarthy dissolution proceedings related to the $224,000

judgment was concluded when Debtors filed their case. Since

Mr. McCarthy had threatened garnishment, the bankruptcy court

found it was not surprising that Debtors filed for bankruptcy

protection. The court also found that Mr. McCarthy’s debt was

not the only debt sought to be addressed by Debtors’ case. 

Although he was the largest unsecured creditor, Debtors had

issues with the large secured claim arising from their

prepetition purchase of the minivan. Taken together, these

facts do not show that Debtors’ only purpose in filing was to

defeat the state court litigation. See In re Eisen, 14 F.3d at

470 (bad faith exists where the debtor’s only purpose is to

defeat state court litigation). 

Finally, the facts in Leavitt are distinguishable. Unlike

Mr. Leavitt, Debtors confirmed a plan which paid 27% to

unsecured creditors. In sum, the bankruptcy court’s findings on

this factor were logical and supported by inferences drawn from

facts in the record and thus were not clearly erroneous. 

The Fourth Leavitt Factor: This factor looks at whether

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egregious behavior is present. This factor is relevant to

Mr. McCarthy’s request to dismiss this case with prejudice

because under Leavitt the bankruptcy court must make a finding

of bad faith based on egregious conduct. The bankruptcy court

properly noted that egregious behavior demonstrates bad faith

and prejudices creditors, such as concealing information from

the court, violating injunctions, filing unauthorized petitions,

hiding or undervaluing assets, making post-petition payments to

pre-petition creditors, violating non-bankruptcy laws or

otherwise demonstrating fraudulent conduct, without excuse. See

In re Chabot, 411 B.R. at 704-705 (citing Leavitt, 171 F. 3d at

1223-24) and In re Cortez, 349 B.R. 608, 613-614 (Bankr. N.D.

Cal. 2006). 

The bankruptcy court acknowledged that Debtors had not

properly disclosed their income and expenses, had been

irresponsible in some of their spending habits, and had filed

initial tax returns which plainly and simply misstated their

deductions. However, in its totality of circumstances analysis,

the bankruptcy court also considered all mitigation factors. 

See In re Ho, 274 B.R. at 876. Those factors included: Debtors

were not living a luxurious lifestyle; Debtors had been making

substantial plan payments - likely more than they would have had

to pay if they had properly filled out Form B22C from the

outset; and Debtors were subjected to constant and unremitting

scrutiny from Mr. McCarthy in their case and his ongoing efforts

in the state court to continue fights arising from the

dissolution of the McCarthys’ marriage. On this last point, the

court observed that, although Mr. McCarthy was unsuccessful in

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state court, his actions required Ms. McCarthy to incur

additional attorney’s fees. Accordingly, on balance, the court

concluded that Debtors’ behavior was not egregious.

With respect to this factor, Mr. McCarthy argues on appeal

that Debtors’ conduct throughout this case cumulatively amounts

to nothing less than egregiousness. He further maintains that

the bankruptcy court’s findings concerning his conduct should be

stricken because the allocation of blame was without any factual

basis. We disagree with both contentions. 

Mr. McCarthy’s arguments fail to appreciate the reality

that “bad faith” is a term which is used to describe a broad

range of improper conduct, only some of which is sufficient to

support the extreme sanction of dismissal with prejudice. In

Leavitt, the Ninth Circuit held that dismissal with prejudice

must be coupled with a finding of bad faith based on egregious

conduct. 171 F.3d at 1224. In other words, dismissal with

prejudice under § 349(a) is not meant to be a remedy for every

instance of debtor misconduct. 

On the evidence before it, the bankruptcy court was not

persuaded that Debtors’ case was associated with sufficient bad

faith to justify dismissal with prejudice. The bankruptcy court

applied the correct legal standards and, as noted above, its

factual findings were plausible and supported by inferences

drawn from the facts in the record. We cannot reverse the

bankruptcy court’s findings of fact simply because we might have

decided the case differently. “Where there are two permissible

views of the evidence, the fact finder’s choice between them

cannot be clearly erroneous.” Anderson, 470 U.S. at 574.

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Moreover, as already noted, the bankruptcy court was directed to

consider all militating factors and therefore could properly

consider Mr. McCarthy’s conduct throughout this case. 

Finally, Mr. McCarthy argues that the bankruptcy court

abused its discretion by failing to consider alternative

remedies to dismissal with prejudice as instructed by Ellsworth. 

Mr. McCarthy is mistaken. First, in its findings and

conclusions, the bankruptcy court expressly recognized that

dismissal under § 1307(c) is a two-step process: first the

court must determine whether there is cause for dismissal; then

there should be some consideration of whether a sanction less

than dismissal with prejudice is sufficient. In re Ellsworth,

455 B.R. at 922. “For example, the Court could simply dismiss a

case, or dismiss it with a 180 day (or some other length of

time) bar to re-filing.” Id. Therefore, the court approached

the question of dismissal with prejudice by recognizing the

two-step process and was well aware that lesser sanctions could

be imposed. 

Second, the debtors in Ellsworth did not advocate for, or

present any evidence in support of, any alternative besides

dismissal with prejudice. In contrast, Debtors here argued that

dismissal was not necessary, but they also pointed out that

there were other remedies available to the court besides

dismissal with prejudice. In closing argument, counsel for

Debtors argued that a six month bar to re-filing would force

them to forego over $60,000 and twenty-nine months of progress

towards discharge. Counsel also noted that Mr. McCarthy would

be able to execute on his judgment over the course of the next

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six months but that he would collect a greater portion of the

payments in a subsequent chapter 13 because Debtors’ child

support obligation to him would run its course over the next few

years. Finally, counsel argued that the court should not

dismiss Debtors’ case but, if it did dismiss, that it should

dismiss without prejudice. Therefore, alternatives to dismissal

with prejudice were placed squarely before the bankruptcy court.

Although Mr. McCarthy requested dismissal with prejudice,

the court did not find sufficient bad faith to justify this

extreme result. Therefore, it was unnecessary for the court to

further explore, much less analyze, whether alternative remedies

were appropriate. Mr. McCarthy mistakenly complains that the

dismissal left him with no remedies at all when he has the full

array of state law rights at his disposal. Moreover, from the

bankruptcy court’s comments, it is evident that Debtors paid

more to Mr. McCarthy than the amount required by the bankruptcy

code under their short-lived confirmed plan. 

In sum, Mr. McCarthy offers no arguments on appeal that

demonstrate that the bankruptcy court’s dismissal of this case

without prejudice was an abuse of discretion.

VI. CONCLUSION

For the reasons stated above, we AFFIRM.

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