707(a).” /d. at 488. The court noted, however, that those cases cited to Chapters 11, 12, and 13,
where good faith is written into the Code, whereas Chapter 7 does not mention that concept. /d.
(citing In re Padilla, 222 F.3d at 1192) (Chapter 7 does not contemplate any ongoing relationship
between debtors and creditors). The court also rejected the notion that § 707(a) includes
“substantial abuse” as an example of “cause,” finding that such an interpretation would render
§ 707(b) superfluous. /d. at 489. In the court's view,

the boundary between the two subsections is this: section 707(a) authorizes a

dismissal for the debtor's failure to comply with bankruptcy procedures and is not

conditioned on that debtor's motive for filing, and section 707(b) authorizes a

dismissal for “substantial abuse” only as to an individual whose debts are primarily

consumer debts. Further limitations on an individual's right to choose a course of

liquidation must await future legislation.
Jd. at 489-90. The court denied the bankruptcy trustee's motion to dismiss the debtor's bankruptcy
petition under § 707(a) as a bad faith effort to defeat the collection efforts of one creditor while
maximizing his equity in exempt property: “this Court does not find statutory authority to examine
the Debtor's motives for filing chapter 7 and declines to read ‘bad faith’ as ‘cause’ under section
707(a).” Id. at 490.

B. Tests for Determining Bad Faith

Courts that have accepted bad faith as a basis for dismissal under § 707(a) nonetheless
disagree as to the proper test for determining such “bad faith.” Two bankruptcy courts in this
district have endorsed a “totality of the circumstances” test, described above. in re Collins, 250
B.R. at 654-55; in re American Telecom Corp., 304 B.R. at 869. Other courts have suggested that
bad faith requires a showing of egregious conduct, such as “using bankruptcy as a ‘scorched earth’
tactic against a diligent creditor, or using bankruptcy as a refuge from another court’s jurisdiction.”

In re Huckfeldt, 39 F.3d at 832 (quoting In re Khan, 172 B.R. at 625 n,23) (bad faith includes

“manifest dishonesty toward a legal tribunal” such as “systematic and deliberate misstatements or

13


premised solely on her ability to repay her consumer debt, which is an issue that can only be raised
by the court or by a bankruptcy trustee under § 707(b). (Debtor Response, at 9.)

On June 4, 2003, the bankruptcy court denied Novak’s motion, finding that it was based
exclusively on Novak’s belief that Wagnitz is able to repay her debt. In the court’s view, “[mJotions
to dismiss based upon the ability to repay debts must be brought pursuant to § 707(b) by a trustee.”
(Memorandum Opinion Denying Creditor's Motion for Extension of Time to File Complaint for Bad
Faith Filing (hereinafter “Opinion”), at 3-4.) See, e.g., Costello v. Bodenstein, No. 01 C 9696, 2002
WL 1821663, at *3 (N.D. Ill. Aug. 7, 2002) (ability to pay is the “primary” or “principal” factor in
determining “substantial abuse” under § 707(b)).

DISCUSSION
I. Standard of Review and Jurisdiction

This court has subject matter jurisdiction over Novak’s appeal from the bankruptcy court
pursuant to 28 U.S.C. § 158(a)(1), which vests the district court with jurisdiction over appeals from
“final judgments, orders and decrees” issued by the bankruptcy court. The district court functions
as an appellate court when reviewing bankruptcy court decisions. Bielecki v. Nettleton, 183 B.R.
143, 145 (N.D. Ill. 1995) (citing Fep. R. BANKR. P. 8013). In a bankruptcy appeal, the court
examines the “bankruptcy court's factual findings for clear error and its legai conclusions de novo.”
Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994). The parties in this case raise exclusively
questions of law, which the court will review de novo,

This case presents an issue of first impression in the Seventh Circuit; namely, whether bad
faith constitutes “cause” for dismissal under § 707(a) of the Bankruptcy Code and, if so, the proper
test for determining bad faith. The bankruptcy court did not directly decide this issue but

considered only “whether a creditor may bring an action under § 707(a) based on an alleged ability


The Ninth Circuit similarly declined to hold that bad faith per se is a basis for dismissal
under § 707(a). In In re Padilla, 222 F.3d 1184 (9th Cir. 2000), the debtor was accused of
engaging in credit card “bust-out” —i.e., “accumulation of a consumer debt in anticipation of filing
for bankruptcy.” /d. at 1187-88. On a motion of the United States trustee, the bankruptcy court
dismissed the debtor's bankruptcy petition as a bad faith filing under § 707(a). The Bankruptcy
Court of Appeals reversed, finding that “the bankruptcy court erred in concluding [the debtor's} filing
constituted bad faith requiring dismissal under § 707(a).” /d. at 1188. The United States trustee
appealed to the Ninth Circuit, which followed the Eighth Circuit's decision in In re Huckfeldt and
held that “bad faith as a general proposition does not provide ‘cause’ to dismiss a Chapter 7 petition
under § 707(a).” /d. at 1191. In reaching this conclusion, the court noted that the Bankruptcy Code
does explicitly mention “good faith” in Chapters 11 and 13, both of which address bankruptcies that
require debtors to maintain ongoing relationships with creditors. Chapter 7, on the other hand,
does not contemplate an ongoing relationship between debtors and creditors and makes no
mention of a good faith requirement. /d. at 1192-93. According to the court, “bad faith per se can
properly constitute ‘cause’ for dismissal of a Chapter 11 or Chapter 13 petition but not of a Chapter
7 petition.” /d. at 1193. The court found that the debtor’s credit card “bust-out” was not cause for
dismissal under § 707(a) because as a consumer debt, it is the type of misconduct contemplated
by § 707(b)’s “substantial abuse” provision. /d. at 1188, 1194.

Shortly after the Ninth Circuit rendered its decision in /n re Padilla, the Third Circuit reached
acontrary conclusion in /nre Tamecki, 229 F.3d 205 (3d Cir. 2000). The debtor in Tamecki sought
to discharge approximately $35,000 in credit card debt owed to the creditor. The bankruptcy
trustee moved to dismiss his Chapter 7 petition for “lack of good faith” under § 707(a). The trustee

argued that the debtor's divorce, which had been pending for some seven years, was “right around

constitute ‘cause’ for dismissal’).


Pub. L. No. 98-353, S 312, 98 Stat. 333, 355. in re Pedigo, 296 B.R. at 487. Section 707(b) states:

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

States trustee, but not at the request or suggestion of any party in interest, may

dismiss a case filed by an individual debtor under this chapter whose debts are

primarily consumer debts if it finds that the granting of relief would be a substantial

abuse of the provisions of this chapter. There shall be a presumption in favor of

granting the relief requested by the debtor.
11 U.S.C. § 707(b). Congress introduced the concept of “substantial abuse” in an effort to
“address perceived abuses of the existing law and curb the precipitous rise in personal
bankruptcies.” /n re Pedigo, 296 B.R. at 487. Congress did not, however, define the term
“substantial abuse” or explain whether or how it differs from “for cause” dismissals under § 707(a).
ule Case Law

A Bad Faith as “Cause” for Dismissal

Courts that have considered the meaning of “cause” under § 707(a) have reached
conflicting conclusions as to whether bad faith fits within the definition. Some courts have assumed
that bad faith is the equivalent of cause, while others have suggested that bad faith is a separate
jurisdictional requirement inherent in the provision. In addition, some courts rely on the “bad faith”
terminology, while others focus on an absence of good faith. To complicate matters further, courts
have not adequately clarified the relationship between a “for cause” dismissal under § 707(a) and
a dismissal for “substantial abuse” under § 707(b). The following discussion illustrates these
inconsistencies.

The Sixth Circuit was the first to weigh in on the issue of bad faith under § 707(a) in /n re
Zick, 931 F.2d 1124 (6th Cir. 1991). The debtor in Zick was a former employee of the creditor who
violated a covenant not to compete by starting his own company and soliciting the creditor's
customers. /d. at 1125. Following a court-ordered mediation, the creditor was awarded $600,000

for breach of contract. A few days later, the debtor petitioned for Chapter 7 bankruptcy relief

“seeking dischargeability principally on [the creditor's] debt.” /d. at 1125-26. The creditor objected


to repay debts.” (Opinion, at 1.) Novak argues that his motion was based on factors beyond
Wagnitz's ability to repay which can support a dismissal for cause under § 707(a).
. Section 707

The court begins by reviewing the text of the statute itself. Robinson v. Shell Oil Co,, 519
U.S. 337, 340 (1997). Section 707(a) states:

The court may dismiss a case under this chapter only after notice and a hearing and

only for cause, including ~

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees or charges required under Chapter 123 of title 28; and

(3) failure of the debtor in a voluntary case to file, within fifteen days or such

additional time as the court may allow after the filing of the petition commencing

such case, the information required by paragraph (1) of section 521, but only on a

motion by the United States trustee.
11 U.S.C. § 707(a). The enumerated grounds for a “for cause” dismissal are not exhaustive, but
merely illustrative. /n re Padilla, 222 F.3d 1184, 1191 (9th Cir. 2000) (citing 11 U.S.C. § 102(3))
(defining “including,” for purposes of Title 11, to be “not limiting”). The only guidance Congress
provided as to the meaning of “cause" in this section is an admonition that the “ability of the debtor
to repay his debts in whole or in part [does not] constitute[] adequate cause for dismissal.” H.R.
Rep. 95-595, at 380 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6336. See also in re Pedigo,
296 B.R. 485, 487 (Bankr. S.D. Ind. 2003). Except where the debtor's failure to file § 521(1)
information is at issue, it is clear that any interested party may move for dismissal for cause under
§ 707(a). See, e.g., Inre Weeks, __ B.R. __, 2004 WL 413253, at *2 (Bankr. E.D. Mich. 2004)
(‘§ 707(a) actions may be brought by any party").

Another provision, 11 U.S.C. § 707(b), authorizes the court to dismiss a bankruptcy petition
only on its own motion or that of the United States trustee where the debtor is guilty of “substantial

abuse” of the bankruptcy process. Section 707(b) did not exist when the Bankruptcy Code was first

enacted but was added in the Bankruptcy Amendments and Federal Judgeship Act of 1984,


for Chapter 7 bankruptcy, listing assets of $1,250 and liabilities of $546,857. /d. at 830. He then
accepted a fellowship paying $45,000 per year, substantially less than he could have earned as
a practicing surgeon. The debtor's ex-wife and her parents (the creditors), apparently of the view
that bad faith is equivalent to cause for dismissal under § 707(a), moved to dismiss the bankruptcy
petition on that basis. The creditors alleged that the debtor commenced the proceedings to avoid
paying his obligations under the divorce decree and shift responsibility for those debts onto the
creditors. /d, The bankruptcy court dismissed the case and was affirmed by the district court. /d.

The Eighth Circuit was persuaded by a more “narrow, cautious approach to bad faith” set
forth in /n re Khan, 172 B.R. 613 (Bankr. D. Minn. 1994). Khan had urged that bad faith sufficient
to support dismissal for cause under § 707(a) should be ‘limited to extreme misconduct falling
outside the purview of more specific Code provisions, such as using bankruptcy as a ‘scorched
earth’ tactic against a diligent creditor, or using bankruptcy as a refuge from another court’s
jurisdiction.” 39 F.3d at 832. With that principle in mind, the Eighth Circuit in Huckfeldt rejected
the use of the phrase “bad faith” and found that “the § 707(a) analysis is better conducted under
the statutory standard, ‘for cause.” /d. The court explained,

some conduct constituting cause to dismiss a Chapter 7 petition may readily be

characterized as bad faith. But framing the issue in terms of bad faith may tend to

misdirect the inquiry away from the fundamental principles and purposes of Chapter

7... lf the bankruptcy court elects instead to act under the inherent judicial power

to punish a bad faith litigant, that action should not be taken under § 707(a).
Id. The Huckfeldt court found adequate cause to dismiss the debtor's petition, without resort to
the “bad faith” terminology, because he manipulated his earnings to frustrate the divorce decree

and to push his ex-wife into bankruptcy. The debtor was not, in the court's view, an “‘honest but

unfortunate debtor’ entitled to the equitable relief of a Chapter 7 liquidation.” /d. at 832-33.?

2 Compare In re Horan, 304 B.R. 42, 46 (Bankr. D. Conn. 2004) (‘[i]f this court were
writing on a cleaner slate, the court similarly would reject the ‘bad faith’ label. However, . . . the
court will accept the ‘bad faith’ label as a term of art for a certain class (or classes) of
circumstances (prepetition in whole or in part) which, when analyzed under Section 707(a),

8


* Miftute Order Fem (06/97),

Vy United States District Court, Northern District of Illinois

\, of Assigned Judge itting Judge it er

\Acaraianet ies | Retgfea R Pallmeyer | iting Jef te

CASE NUMBER © 03 C 5106 DATE 3/29/2004
CASE Novak v. Wagnitz
TITLE

{In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

of the motion being presented.)

MOTION:
= ENTRY:
qd) im Filed motion of [ use listing in “Motion” box above.]
(2) oO Brief in support of motion due
(3) QO Answer brief to motion due___. Reply to answer brief due____.
(4) QO Ruling/Hearing on____—s set for att
(5) o Status hearing[held/continued to} [set for/re-set for] on setfor at
(6) o Pretrial conference[held/continued to] [set for/re-set for]on__—ssetfor___—s_sat__
(7) Qa Trial{set for/re-set for]on___—_at
(8) Oo [Bench/Jury trial] [Hearing] held/continuedto at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

QFRCP4(m) CO Local Rule 41.1 OO FRCP4i(ay(1) © FRCP41(a)(2).

further consideration of Novak’s motion in light of that issue.

dl) oa [For further detail see order attached to the original minute order.]

(10) Ml [Otherdocket entry] Enter Memorandum Opinion and Order. The decision of the bankruptcy court
is affirmed in part and vacated in part. The bankruptcy court rightly concluded that a debtor’s ability to
pay does not alone suffice for dismissal under § 707(a). The court did not address, however, whether
other factors may support a finding of “cause” to dismiss under that section. The case is remanded for

No notices required, advised in open court.
s

No notices required.
umber of notices

Document
Number

|v | Notices mailed by judge's staff. MAR 30 2004

Notified counsel by telephone. dae docketed

Docketing to mail notices.

v | Mail AO 450 form.

Ging depuly iodas

Copy to judge/magistrate judge.

3/29/2004

ate mailed nol
courtroom gate mailed notice

ETV deputy's
initials

TV

ailing deputy initials



testimony before the bankruptcy court that he sought Chapter 7 relief so that he would not have
to change this lifestyle. /d.

The creditor sought to dismiss the bankruptcy petition as a bad faith filing under § 707(a).
After a trial on the merits, the bankruptcy court granted that motion. /d. at 652. The debtor
appealed the decision but, for reasons unexplained, voluntarily dismissed the appeal. /d. at 653
n.1. The court nonetheless addressed the bad faith ruling as background for its decision on the
creditor’s motion for sanctions: “[w]hile this section contains a discussion of the law, it is not to be
read as the holding of this opinion. It is merely a recitation of the facts of the hearing.” /d.

The court stated that “[b]ad faith can constitute cause for dismissal under § 707(a)” and
adopted a “totality of the circumstances” test for determining bad faith. /d. at 653. Applying that
test, the court considered (1) “whether the debtor has the present ability to pay his debts if he
chooses”; (2) “whether the debtor has manipulated the bankruptcy process to frustrate one
particular creditor’; (3) “the absence of any attempt to pay creditors”; and (4) “whether the debtor
is willing to make lifestyle changes to pay his debts." /d. at 654-55. The court found that all of
these factors supported a finding of bad faith because he had several million dollars of exempt
assets he could use to pay the debt if he so chose; he was admittedly trying to avoid paying a
single creditor; he only filed for bankruptcy to get the one creditor “off his back”; and he refused to
make changes to his arguably lavish lifestyle to pay his debts. /d. in the court’s view, it “would be
an affront to equity and good conscience to allow the debtor to manipulate the system as he seeks
to do here.” /d, at 655. See also in re Merritt, 211 F.3d 1269 (Table), 2000 WL 420681 (6th Cir.
2000) (affirming bad faith dismissa! under § 707(a) where the debtor concealed assets, enjoyed
a lavish lifestyle, had an annual income of over $96,000, made minimal effort to pay the creditor's
judgment against him, and essentially pursued bankruptcy to avoid that single large debt).

tn deciding that the creditor was entitled to sanctions for the debtor's frivolous arguments
against the bad faith dismissal, the court noted that the totality of the circumstances test has been

11


the comer’ and that he could soon obtain his unencumbered $50,000 share of the house on which
he had claimed an exemption, an amount more than adequate to pay his debt. /d. at 206. The
bankruptcy court dismissed the petition and the district court affirmed. Following in re Zick, the
Third Circuit also affirmed. The court held that “Section 707(a) allows a bankruptcy court to dismiss
a petition for cause if the petitioner fails to demonstrate his good faith in filing.” /d. at 207. The
court also found that “fojnce a party calls into question a petitioner's good faith, the burden shifts
to the petitioner to prove his good faith.” /d. The creditor produced evidence that the debtor
accrued over $35,000 in debt at a time when he was earning “less than one-tenth this amount,” and
that his imminent divorce would free up his $50,000 share of a jointly-owned house. /d. The court
found no error in the bankruptcy court's decision to discount the debtor's self-serving response —
i.e., that he accrued the debt for subsistence purposes; that he intended to repay the debt; and that
he loved his wife and would take her back “in a heartbeat” — and affirmed the dismissal under
§ 707(a) for failure to establish good faith. /d, at 207-08.

As noted, the Seventh Circuit has not yet considered what constitutes “cause” for dismissal
under § 707(a), or whether bad faith satisfies the cause requirement. Two cases from this district,
however, have indicated that bad faith does support a “for cause” dismissal. Novak relies heavily
upon /n re Collins, 250 B.R. 645 (Bankr. N.D. Ill. 2000), in which the debtor filed for bankruptcy two
weeks before judgment was entered against him in the amount of $525,000. /d. at 651-52. At the
time, he held approximately $2.3 million in exempt assets and a home valued at $490,000. He
earned net income in excess of $200,000 the year he filed for bankruptcy, plus an additional $5,000
to $6,000 per month in Social Security payments and pensions which was exempt from creditors.
Id, at 652. The debtor had total monthly expenses of $11,525.65; he took his extended family
(including five children and 20 grandchildren) on vacation every year, paying the entire bill (which
totaled $13,000 the year of the bankruptcy); and he took an additional $5,000 trip to Mexico and
a trip to Snowmass, Colorado. /d. at 653. The debtor admitted in his bankruptcy filings and in his

10


that the petition was brought in bad faith and argued that § 707(a) “allows the bankruptcy court to
consider ‘good faith’ as a basis for dismissal of a Chapter 7 petition.” /d. at 1126. The bankruptcy
court and district court both agreed. /d. at 1126.

The Sixth Circuit affirmed that “lack of good faith is a valid basis of decision in a ‘for cause’
dismissal by a bankruptcy court.” /d. at 1127. The court stated, however, that lack of good faith
should be confined carefully and is generally utilized only in those egregious cases
that entail concealed or misrepresented assets and/or sources of income, and
excessive and continued expenditures, lavish lifestyle, and intention to avoid a large

single debt based on conduct akin to fraud, misconduct, or gross negligence.
Id. at 1129. See also In re Weeks, 2004 WL 4132853, at *2 (‘for cause’ objections under § 707(a)
in the Sixth Circuit are limited to the most egregious instances of bad faith”); In re Carbaugh, 299
B.R. 395, 399 (Bankr. N.D. Tex. 2003) (bad faith may be cause for dismissal under § 707(a), but
“the facts have to be extraordinary to justify the dismissal of a Chapter 7 liquidation case for bad
faith"). The court found such factors present in the debtor's case based on his “malicious breach
of anoncompetition agreement” and apparent attempt to avoid his obligations solely to the creditor
by, for example, listing his mother and his wife as creditors. /d. In the court's view,

[tlhe Bankruptcy Code is intended to serve those persons who, despite their best

efforts, find themselves hopelessly adrift in a sea of debt. Bankruptcy protection

was not intended to assist those who, despite their own misconduct, are attempting

to preserve a comfortable standard of living at the expense of their creditors. Good

faith and candor are necessary prerequisites to obtaining a fresh start. The

bankruptcy laws are grounded on the fresh start concept. There is no right,

however, to a head start.
!d. The court characterized good faith as a jurisdictional prerequisite to a Chapter 7 bankruptcy
because it is “inherent in the purposes of bankruptcy relief.” /d. (quoting /n re Jones, 114 B.R. 917,
926 (Bankr. N.D. Ohio 1990)).

A few years later, the Eighth Circuit rejected the notion that bad faith supports dismissal
under § 707(a). In /n re Huckfeldt, 39 F.3d 829 (8th Cir. 1994), the debtor, a surgical resident, was

ordered to pay some $241,000 in debts in a divorce decree. Approximately one week later, he filed


because Jackowiec lives there and she wants their 13-year-old son to be near to him. Wagnitz
indicated that the most pressing reason for her bankruptcy was that Novak had obtained a
judgment against her and was starting to garnish her wages which, she claimed, was “detrimental
to the survival of the debtor and her children.” (/d. at 2-3.)

After the § 341 meeting, interim trustee Voiland reported the matter to the office of the U.S.
Trustee as a no-asset bankruptcy. (fd. at 2.) Novak, however, began requesting information from
Wagnitz, Craig Wagnitz, and Jackowiec, apparently in an effort to establish that Wagnitz filed the
Chapter 7 petition in bad faith. (/d. at 3.) Wagnitz produced a check tendered to her attorneys for
payment of bankruptcy fees that was returned for insufficient funds. In addition, Jackowiec
produced a letter confirming that he had been fired from Peat Marwick and that his child support
payments would be reduced from $1,671 per month to $110 per month. Jackowiec also testified
at a deposition that his son lives in Geneva to be close to him, and that Wagnitz has to pay ongoing
expenses for a tutor because the son has a reading disability. (/d. at 3-4.)

On February 10, 2003, Novak filed a Motion for Extension of Time to File Complaint for Bad
Faith Filing, arguing that “[clonsidering Debtor’s income, debts, and lifestyle ascertained from
Schedule J, creditor is now conducting discovery in order to ascertain whether he will file an action
to dismiss the debtor's petition as a bad faith filing” pursuant to § 707(a). (Novak Motion { 5.)
According to Novak, there is evidence that Wagnitz has the ability to repay her debt; that she filed
Chapter 7 bankruptcy solely to frustrate one particular creditor (Novak); that she has not made any
attempt to pay Novak; and that she is unwilling to make any lifestyle changes. In his reply brief,
Novak cited /n re Collins, 250 B.R. 645 (Bankr. N.D. Ili. 2000), where the court adopted a “totality
of the circumstances” for determining bad faith, apparently deeming “bad faith” as sufficient to
establish cause for dismissal under § 707(a). (Reply Brief to Debtor's Motion to Determine

Standing (hereinafter “Novak Reply”), at 2-3.) Wagnitz opposed the motion, arguing that it was


omissions . . . ; knowingly false testimony . . . ; and intentional acts to hinder the trustee in the
administration of the estate’).

Still other courts have adopted the so-called “smell test,” or some version of it, weighing
such factors as:

(1) the debtor reduced his creditors to a single creditor in the months prior to filing

his petition; (2) the debtor failed to make lifestyle adjustments or continued living an

expansive or lavish lifestyle; (3) the debtor filed the case in response to a judgment

pending litigation, or collection action; there is an intent to avoid a large single debt;

(4) the debtor made no effort to repay his debts; (5) the unfairness of the use of

Chapter 7; (6) the debtor has sufficient resources to pay his debts; (7) the debtor

is paying debts to insiders; (8) the schedules inflate expenses to disguise financial

well-being; (9) the debtor transferred assets; (10) the debtor is over-utilizing the

protection of the Code to the unconscionable detriment of creditors; (11) the debtor

employed a deliberate and persistent pattern of evading a single major creditor; (1 2)

the debtor failed to make candid and full disclosure; (13) the debts are modest in

relation to the assets and income; and (14) there are multiple bankruptcy filings or

other procedural “gymnastics.”

In re Spagnolia, 199 B.R. 362, 365 (Bankr. W.D. Ky. 1995). See also In re Zick, 931 F.2d at 1128
(bankruptcy court did not err in finding bad faith based on factors (1), (2), (3), and (5)); In re
Marsico, (Bankr. D.N.H. Jan. 5, 2004) (adopting a modified four-factor test including
misrepresentation of facts and manipulation of the Bankruptcy Code; history of filings and
dismissals; intention to defeat state court litigation; and the presence of egregious behavior). The
court notes that many of the “smell test” factors appear to overlap or repeat each other. In any
event, the presence of only one of these factors generally will not support a bad faith finding. /a.
See also In re Zick, 931 F.2d at 1129 (‘[djismissal based on a lack of good faith must be
undertaken on an ad hoc basis").

Under any version of this test, one factor in particular is of key relevance: the debtor's ability
to pay. Though it is not alone sufficient for dismissal under § 707(a), most courts have held that
ability to pay is a relevant inquiry in determining bad faith. See, e.g., In re Merritt, 2000 WL
420681, at *3 (“post-petition ability to repay debts . . . is a relevant inquiry”); in re Spagnolia, 199
B.R. at 366 (listing post-petition ability to pay as a factor); /n re Collins, 250 B.R. at 654-55 (stating

14


Motion 7] 5.) More importantly, Novak clarified in his reply brief that he intended to pursue evidence
of Wagnitz’s efforts to frustrate a single creditor (Novak), her failure to attempt to repay him, and
her unwillingness to make lifestyle changes, in addition to her ability to repay the debt. (Novak
Reply, at 2-3.) The bankruptcy court did not address any of these potential arguments in denying
Novak's Motion for Extension of Time to File Complaint for Bad Faith Filing.

The court takes no position as to whether bad faith is cause for dismissal under § 707(a);
whether the totality of the circumstances test sets forth the proper standard for determining bad
faith; nor whether Novak will be able to establish any of the relevant factors. Those are
determinations for the bankruptcy court in the first instance. The bankruptcy court’s order denying
Novak's motion is vacated to the extent the court failed to consider whether factors beyond ability
to pay may be considered in determining “cause” for dismissal under § 707(a) and, if so, whether
Novak should be granted an opportunity to conduct further discovery and present evidence on
those factors.

CONCLUSION

For the reasons stated above, the decision of the bankruptcy court is affirmed in part and
vacated in part. The bankruptcy court rightly concluded that a debtor’s ability to pay does not alone
suffice for dismissal under § 707(a). The court did not address, however, whether other factors
may support a finding of “cause” to dismiss under that section. The case is remanded for further
consideration of Novak’s motion in light of that issue.

ENTER:

Dated: March 29, 2004 Qrsca Th fe hhay—~

REBECCA R. PALL MEY
United States DistrletJudge

16


nonetheless provide a brief factual background to place the legal dispute in context. The facts are
drawn from the parties’ submissions before the bankruptcy court and are assumed true solely for
purposes of this appeal.

Wagnitz filed for bankruptcy under Chapter 7 of the Bankruptcy Code on December 10,
2002. At that time, she identified Novak as a creditor in the amount of $18,805.20.’ (Debtor's
Response to Creditor's Motion for Extension of Time to File Complaint for Bad Faith Filing
(hereinafter “Debtor Response’), at 1.) Wagnitz is employed as a Senior Special Agent with the
Ilinois Department of Revenuellllinois Gaming Board and earns $64,000 per year. She reportedly
takes home $4,454 per month in net income and has total monthly expenses of $5,990. (Schedule
| and J, Exs. to Novak’s Motion for Extension of Time to File Complaint for Bad Faith Filing
(hereinafter “Novak Motion”).) Wagnitz is currently married but separated and has two children —
a 7-month-old by her estranged husband, Craig Wagnitz, and a 13-year-old by a former husband,
George Jackowiec, (Debtor Response, at 2.)

On January 6, 2003, Wagnitz and Novak attended a § 341 meeting of creditors before
interim bankruptcy trustee Joseph Voiland. 11 U.S.C. § 341 (“[w]ithin a reasonable time after the
order for relief in a case under this title, the United States trustee shall convene and preside at a
meeting of creditors”). At the meeting, Wagnitz indicated that her estranged husband Craig had
been unemployed for more than a year and that she had not received any support from him during
that time. Wagnitz acknowledged receiving $1,671 per month in child support from her ex-
husband, George Jackowiec, but she informed Novak and his counsel that shortly after she filed
for bankruptcy, she learned that Jackowiec had lost his job as a financial consultant with Peat
Marwick and would be unable to maintain the payments. (Debtor Response, at 2.) Wagnitz stated

that she rents a residence in Geneva, Illinois, rather than in a community with a lower cost of living,

1 The record does not indicate the basis for Wagnitz’s $18,805.20 debt to Novak.

2


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

In re:

KELLY L. WAGNITZ,

)
)
)
)
Debtor. )
)
JOHN NOVAK, )
) No. 03 C 5106
Appeliant, )
) Judge Rebecca R. Pallmeyer
ve )
)
KELLY L. WAGNITZ, )
)
Appellee. )

rE
8 2004
Appellant John Novak appeals a June 4, 2003 order of the bankruptcy court denying his

MEMORANDUM OPINION AND ORDER {AQ §

motion for extension of time to file an adversary proceeding against Debtor Kelly Wagnitz
(‘Wagnitz” or “Debtor’), seeking dismissal of her Chapter 7 bankruptcy petition under 11 U.S.C.
§ 707(a). Novak sought to conduct further discovery to determine whether Wagnitz had filed the
petition in bad faith which, he claimed, constitutes “cause” for dismissal under the statute. Without
directly addressing whether bad faith is in fact “cause” for dismissal, the bankruptcy court found
that Novak's assertion of bad faith was based solely on his belief that Wagnitz has the ability to
repay her debts, and that such ability cannot alone support dismissal under § 707(a). Novak
appealed to this court, arguing that Wagnitz’s ability to repay her debt is just one factor in the
totality of circumstances suggesting bad faith. For the reasons set forth here, the decision of the
bankruptcy court is affirmed in part and vacated in part.
BACKGROUND
The parties agree that there are no factual issues relevant to this appeal and that the court

need only decide legal questions regarding the proper scope of 11 U.S.C. § 707(a). The court will


widely adopted in many circuits for dismissal under both § 707(a) and § 707(b). /d. at 665. The
court acknowledged, however, that “[mJost. . . of the published opinions discussing the totality of
the circumstances test involve motions to dismiss under § 707(b).” /d. at 654 (citing /n re Kornfield,
164 F.3d 778, 783 (2d Cir. 1999) (referring to the totality of the circumstances test as “mainstream”
in § 707(b) substantial abuse case); /n re Stewart, 175 F.3d 796, 810 (10th Cir, 1999) (finding in
§ 707(b) case that “good faith” is a factor under the totality of the circumstances test)). The court
also expressed concern about the debtor's reliance on “obscure, [and largely discredited] minority
holdings of two bankruptcy courts that have determined no good faith filing requirement exists
under § 707(a).” /d. at 666 (citing in re Landes, 195 B.R. 855, 860-61 (Bankr. E.D. Pa. 1996) and
In re Etcheverry, 221 B.R. 524, 525 (Bankr. D. Colo. 1998)). According to the court:

Had Collins discussed any of the law unfavorable to his position; had he mentioned

and refuted any of the unfavorable material in the cases such as Khan and

Huckfeldt, to which he did cite; had he made any attempt to distinguish § 707(a)

from § 707(b), it might have been possible to conclude that he was making a good

faith argument for change in or extension of the law. However, he did none of these

things...
Id. at 666-67.

More recently in /n re American Telecom Corp., 304 B.R. 867 (Bankr. N.D. Ill. 2004), the
court found that under Chapters 7, 11, and 13 of the Bankruptcy Code, “the concept of ‘cause’ has
been interpreted to include a lack of good faith in filing the bankruptcy petition.” /d. at 869. The
court stated that it “must look at the totality of the circumstances . . . to determine whether the
Bankruptcy Code is being used properly and fairly and, consequently, whether ‘cause’ exists to
dismiss the case.” /d. (quoting /n re Leavitt, 209 B.R. 935, 940-41 (B.A.P. 9th Cir. 1997)). The
court did not, however, set forth the factors to consider in making that determination.

An Indiana bankruptcy court adopted a much more restrictive interpretation of § 707(a) in

In re Pedigo, 296 B.R. 485 (Bankr. S.D. Ind. 2003). The court first acknowledged that “the majority

of courts . . . have, in fact, found that bad faith does constitute cause for dismissal under section

12


that present ability to pay is the “most important factor of the totality of the circumstances test”);
McDow v. Smith, 295 B.R. 69, 79 n.22 (E.D. Va. 2003) (listing ability to repay and lavish lifestyle
as a single factor); In re Cappuccetti, 172 B.R. 37, 40 (Bankr. E.D. Ark. 1994) (finding bad faith in
part based on debtor’s ability to pay). But see In re Studdard, 159 B.R. 852, 856 (Bankr. E.D. Ark.
1993) (ability to repay debts by lowering children’s college payments and taking away their cars
alone justified bad faith dismissal under § 707(a)). At least one court, however, has taken the
contrary position that “a debtor’s ability to pay in the future is not a factor a court should consider
in a motion to dismiss pursuant to § 707(a). It is only a consideration of ‘substantial abuse’
pursuant to § 707(b).” in re Keobapha, 279 B.R. 49, 53 (Bankr. D. Conn. 2002). See also /n re
Pedigo, 296 B.R. at 489-90 n.3 (“{a]lthough a debtor's ability to pay his or her debts is a factor to
consider in determining whether to dismiss or convert under § 707(b), that factor does not
constitute substantial abuse per se”).
IV. Analysis

In this court’s view, the bankruptcy court properly concluded that ability to repay is not alone
sufficient to justify dismissal under § 707(a). Ability to pay is the primary consideration under
§ 707(b)’s substantial abuse test, Coste/lo, 2002 WL 1821663, at *3 (noting that five of six courts
of appeals that addressed the “substantial abuse” standard agree that “the ‘primary’ or ‘principal’
factor is the debtor's ability to repay his debts"), but it is clear that Congress did not contemplate
dismissal of cases under § 707(a) solely on that basis. See H.R. Rep. 95-595, at 380 (1978),
reprinted in 1978 U.S.C.C.A.N. 5963, 6336 (“ability of the debtor to repay his debts in whole or in
part [does not} constitute[} adequate cause for dismissal"). In this court's view, however, the
bankruptcy court erred in assuming that Novak’s argument was limited to that single factor. His
initial motion made only a somewhat ambiguous reference to Wagnitz's ‘income, debts, and

lifestyle,” but he did cite /n re Collins, which sets forth the totality of the circumstances test. (Novak

15