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In re Bushyhead

United States District Court, N.D. Oklahoma

April 28, 2017

IN RE BOW D. BUSHYHEAD and D. LYNN BUSHYHEAD, Debtors,
v.
BOW W. BUSHYEAD and D. LYNN BUSHYEAD, Appellees. SAMUEL K. CROCKER, UNITED STATES TRUSTEE, Appellant, Bankruptcy No. 13-12897-M

          OPINION AND ORDER

          JOHN E DOWDELL UNITED STATES DISTRICT JUDGE

         Before the Court is the Report and Recommendation (R&R) of United States Magistrate Judge Paul J. Cleary (Doc. 29), recommending that the Court affirm the decision of Chief United States Bankruptcy Judge Terrence L. Michael (Doc. 4-1 at 163-188) denying the United States Trustee's Motion to Dismiss the appellees' Chapter 7 filing “for cause” pursuant to 11 U.S.C. § 707(a). The Trustee filed a timely Objection (Doc. 30) to the R&R. Upon review of the R&R, the record on appeal, the bankruptcy court's Memorandum Opinion, the Objection to the R&R and the response thereto, and the parties' briefs, the Court finds and determines that the Objection should be overruled, and the bankruptcy court's determination should be affirmed.

         I. Standards of Review

         In reviewing the decisions of bankruptcy courts on appeal, district courts review findings of fact for clear error and conclusions of law de novo. Warren v. Ote, 512 F.3d 1241, 1248 (10th Cir. 2008); In re Scrivner, 535 F.3d 1258, 1262 (10th Cir. 2008). In such review, the Bankruptcy Code “must be construed liberally in favor of the debtor and strictly against the creditor.” Warren, 512 F.3d at 1248.

         A bankruptcy court's determination of what constitutes cause and its ultimate decision whether to dismiss for cause under 11 U.S.C. § 707(a) are reviewed for abuse of discretion. In re Arenas, 535 B.R. 845, 853 (B.A.P. 10th Cir. 2015); see also In re Krueger, 812 F.3d 365, 369 (5th Cir. 2016). Additionally, in reviewing the magistrate judge's R&R, this Court “must determine de novo any part of the magistrate judge's disposition that has been properly objected to” and “may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions.” Fed.R.Civ.P. 72(b)(3).

         II. Background

         Neither party objects to the “Findings of Facts” in Judge Michael's Memorandum Opinion. (See Doc. 4-1 at 164-170). The facts are summarized below.

         Bow Bushyhead and D. Lynn Bushyhead are husband and wife. In November 2007, the Bushyheads formed BB&D Concepts, LLC, an Oklahoma limited liability company, to operate a spa in Tulsa, Oklahoma. The Bushyheads invested $86, 000 of their own money into the business and borrowed $345, 000 from Comerica Bank for business purposes. The Bushyheads personally guaranteed the loan, and the United States Small Business Administration guaranteed eighty percent (80%) of the loan. The spa opened in November 2008 and lost, on average, between $4, 000 and $10, 000 per month. During the spa's operation, the business renegotiated the loan with Comerica several times, reducing the loan by nearly $100, 000.

         The spa closed on February 1, 2013, at which time the business was five months behind on its loan payments. Neither the business nor the Bushyheads made any further attempts to pay the loan. When the spa closed and the Bushyheads stopped paying the loan, Mr. Bushyhead made approximately $8, 800 per month and Mrs. Bushyhead drew a retirement income of $1, 350 per month. These figures do not include any bonuses that Mr. Bushyhead may have earned or any other sources of income outside his employment.

         Prior to March 2013, Mr. Bushyhead worked at Lone Star Trucking. In March 2013, he became the vice president of sales for Stone Trucking, earning an annual salary of $350, 000. He also received a “signing bonus” of $62, 100 and reimbursement for all expenses incurred as a member of The Oaks Country Club. Additionally, he was provided an additional six months' salary in settlement of litigation with his prior employer, Lone Star Trucking. Mrs. Bushyhead is retired, having formerly worked as a consumer price analyst for the United States Department of Labor, and she continues to receive retirement benefits. From February 22 to December 31, 2013, the Bushyheads' total income was $395, 537.94. The Bushyheads made no payments on the spa loan during that time.

         Around March 21, 2013, counsel for Comerica made efforts to settle the Bushyheads' debt; the Bushyheads made no attempt to settle. Mrs. Bushyhead testified that this was because she did not believe that Comerica would negotiate a settlement. Mr. Bushyhead testified that he did not use any of his income to pay towards the loan because the business “had been taking [money] from the family for years, ” and the Bushyheads “were tired of supporting a failing business that was never going anywhere.” He used their income instead, he testified, to pay towards their children's educational expenses.

         In addition to paying money toward their children's educational expenses, the Bushyheads spent extravagantly throughout 2013. Some of their expenditures included: $15, 016.19 on furniture; $2, 634 on jewelry; $12, 784.37 on vacations; $24, 374.03, for country club membership, which was reimbursed by Mr. Bushyhead's employer; and $29, 791.19 on food and dining. Additionally, Mr. Bushyhead leased a 2013 Mercedes 550V Sedan, valued at $101, 430, paying $11, 041.84 upon the signing of the lease with 24 additional monthly payments of $1, 368.86. Lynn Bushyhead bought two horses for recreational purposes, at a total cost of $8, 750; and the Bushyheads pay around $500 per month to board the horses.

         In May 2013, Comerica Bank filed suit in Tulsa County District Court against the spa LLC, the Bushyheads, and a revocable trust held by the Bushyheads, to collect on the spa loan. The Tulsa County District Court held a summary judgment hearing on December 11, 2013 - the same day that the Bushyheads filed their Chapter 7 bankruptcy petition. At the December 11 hearing, the Tulsa County District Court stayed the action as to the Bushyheads (in light of notice of the filing of bankruptcy that day), dismissed the revocable trust without prejudice, and granted summary judgment to Comerica against the spa LLC. A journal entry of judgment against the LLC was filed the next day in the Tulsa County action, awarding Comerica judgment in the principal amount of $253, 792.55, plus accrued interest in the amount of $5, 153.51, late charges of $4, 148.89, with future interest to accrue in the amount of $38.24271 per day.

         The Bushyheads' original bankruptcy schedules listed $825, 169 in assets and $332, 152 in liabilities. They claimed $789, 196 in assets - over 95% of the total assets listed - to be exempt. The spa loan liability that was guaranteed by the Bushyheads represented 79.8% of their total liabilities. That loan constitutes business debt. The Bushyheads' consumer debt included approximately $14, 000 in credit card debt and $5, 500 in student loans for their children. The Bushyheads initially listed $21, 096 in monthly income and $16, 004 in monthly expenses, leaving $5, 092 in monthly net income. The Bushyheads' original schedules and statement of financial affairs contained several errors. The schedules were first amended in January, 2014 to include an additional $219, 603 in unsecured debt relating to the spa business; the single largest of these creditors was the Small Business Administration who guaranteed the Bushyheads' business loans. In February, 2014 the Bushyheads amended their statements to eliminate a credit card payment of $684 per month, after it was discovered that this expense was not actually being paid; the debtors also disclosed an interest in a revocable trust and the sale of their residence in 2012. In a further amendment, in March, 2014, the Statement of Financial Affairs was changed to disclose the litigation that resulted in payment of six months' salary to Mr. Bushyhead and to more fully disclose the Bushyheads' income in 2011, 2012, and 2013. In July 2014, the Bushyheads disclosed gifts made to their children in the year prior to their bankruptcy filing, their membership in The Oaks Country Club, and Stone's reimbursement of Mr. Bushyhead's country club expenses.

         The Bushyheads listed in their bankruptcy schedules a savings account with a balance of $15, 000. The Trustee learned during the first meeting of creditors that approximately $2000 had been removed from the account after the bankruptcy case filing. The Trustee demanded that the $2000 be returned and the entire $15, 000 be surrendered to him. The funds were surrendered.

         On May 9, 2014, the United States Trustee filed a motion to dismiss the bankruptcy case pursuant to 11 U.S.C. § 707(a), alleging that it had been filed in bad faith. (Doc. 4-1 at 96 et seq.). The Trustee argued that bad faith was evidenced by the following: (1) the Bushyheads could have used their excess monthly income of $5, 776.00 to pay 100% of the debt listed on their Schedules D and F in approximately 60 months such that they would be entitled to relief under Chapter 13, rendering relief under Chapter 7 unnecessary (id. at 98, 110); (2) the Bushyheads filed the bankruptcy petition in an attempt to prevent the Tulsa County summary judgment hearing (id.); (3) they failed to make any effort to settle or repay any portion of the business loan with the $180, 504 received from Stone as bonus and salary from March through August 2013 (id. at 99- 101); (4) the Bushyheads lived a lavish lifestyle (id. at 101-102); (5) they failed to voluntarily make full and complete disclosures in their bankruptcy schedules, doing so only after the Trustee demanded additional information that exposed errors in the original schedules and statement of affairs (id. at 102-104); (6) the Bushyheads were paying debts of family members and other creditors, while failing to pay on the Comerica spa loan (id. at 110-111); and (7) the Bushyheads' bankruptcy schedules inflated their expenses to disguise financial well-being (id. at 111). In response, the Bushyheads argued that “bad faith” was not an available basis for dismissal and their ability to repay debts was irrelevant under § 707(a). (See Id. at 127-133).

         The bankruptcy court denied the Trustee's motion to dismiss, entered judgment thereon, and thereafter entered an order discharging all of the Bushyheads' debts. The Trustee separately appealed the bankruptcy court's denial of its motion to dismiss and the order discharging ...


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