creditors memorandum against jack johnson

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF OHIO

EASTERN DIVISION AT COLUMBUS

In re:

John Joseph Louis Johnson, III aka John J.L. Johnson, III,

Debtor.

Case No. 14-57104-JEH

Chapter 11

Judge John E. Hoffman, Jr.

FINAL HEARINGMEMORANDUMIN SUPPORT OF OBJECTING CREDITORS’ OPPOSITION TO MOTION OFDEBTOR AND DEBTOR-IN-POSSESSION FOR AN ORDER CONVERTING

DEBTOR’S CHAPTER 11 CASE TO A CASE UNDER CHAPTER 7

Pro Player Funding, LLC (“Pro Player”), by its undersigned counsel, and on behalf of

RFF Family Partnership, LP (“RFF”), Capital Holdings Enterprises, LLC (“Capital

Enterprises”), Capital Financial Holdings, LLC (“Capital Financial”), Rod Blum (“Blum”), EOT

Advisors, LLC (“EOT”), and Cobalt Sports Capital, LLC (“Cobalt” and together with RFF,

Capital Enterprises, Capital Financial, Blum, EOT, and Pro Player, collectively, the “Objecting

Creditors”), in accordance with the Second Amended and Restated Scheduling Order [ECF 356],

submits this Final Hearing Memorandum in opposition to the Motion of Debtor and Debtor-in-

Possession to Convert Debtor’s Chapter 11 Case to a Case under Chapter 7 and Granting

Related Relief [ECF 167] (the “Conversion Motion”).

I. Introduction.

1. If the disposition of the Conversion Motion is to turn on the best interests of the

Debtor’s estate and its creditors, then the motion must be denied. The relief sought by the

Debtor would serve only the Debtor, and would unduly harm creditors. It would dramatically

diminish the assets of the estate by removing millions of dollars in future payments under the

Debtor’s player contract. The obvious and primary reason for the Debtor’s attempt to convert

Case 2:14-bk-57104 Doc 366 Filed 08/27/15 Entered 08/27/15 21:11:42 Desc Main Document Page 1 of 23

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this case to chapter 7 is to enable the Debtor to reap the remaining benefits under his player

contract, namely $15 million over three years, while leaving his creditors, who are owed in

excess of $15 million, with a few immaterial assets and unknown litigation claims. Thus,

granting the Conversion Motion is tantamount to this Court condoning abuse of the federal

bankruptcy system and lavishly rewarding a privileged, high-income individual debtor for

irresponsible serial borrowing and bad faith conduct (in and out of bankruptcy court). Moreover,

from a policy perspective, granting the Conversion Motion would create a roadmap for

irresponsible or unethical multi-millionaires with substantial future income to incur and then

discharge millions of dollars in debt while retaining such future income. It is fair to say that such

relief would be unprecedented and would turn the Bankruptcy Code on its head.

2. The Debtor does not have an absolute right to convert his case to one under

chapter 7. As this Court has noted recently, a chapter 11 case “may not be converted to a case

under another chapter of this title unless the debtor may be a debtor under such chapter[.]” See

Opinion and Order [ECF 327] (“Protective Order Opinion”) at 6 (citing 11 U.S.C. § 1112(f)).

After considering the totality of the circumstances here, there can be no doubt that the Debtor

cannot be a debtor under chapter 7 because his case under that chapter of the Bankruptcy Code

would be dismissed:

x under section 707(b)(1) and (2), because his debts are primarily consumer debtsand his failure to satisfy the “means” test would give rise to a finding of abuse;

x under section 707(a) for cause, including a lack of good faith;

x under section 707(b)(3)(i), due to his bad faith; and

x under section 707(b)(3)(ii) because the totality of the circumstances of theDebtor’s financial situation demonstrates abuse.


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3. Under section 707(b)(1), the Debtor will not be able to show that his debts are

primarily business debts. The Debtor’s bank records demonstrate that the large majority of the

loan proceeds underlying the Objecting Creditors’ claims and the substantial majority of all

claims were spent for personal, family, or household consumer goods and services. Further, the

Debtor’s prodigious monthly net salary of approximately $176,000 ensures that he would likely

fail the “means” test.

4. The other listed grounds set forth above justifying dismissal of the Debtor’s

hypothetical chapter 7 case focus on the Debtor’s lack of good faith. Under United States

Supreme Court precedent (i.e, Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 (2007)

(“Marrama”)), the Debtor’s conversion is subject to a requirement of good faith. Here, there is

abundant evidence of the Debtor’s bad faith (or lack of good faith), giving rise to independent

grounds for dismissal of his hypothetical chapter 7 proceeding. In addition, under section

707(b)(3)(ii) of the Bankruptcy Code, the Debtor’s substantial salary and ability to provide for

the payment of his debts are an independent basis for dismissing a hypothetical chapter 7 case

and denying the Conversion Motion.

5. For the foregoing reasons, and as more fully discussed herein, and based on the

evidence and argument to be introduced at trial, the Conversion Motion must be denied.

II. Facts Supporting Denial of the Conversion Motion.

6. At the outset of this case, on October 7, 2014 (the “Petition Date”), the Debtor

made the affirmative election to file his voluntary petition (the “Petition”) under chapter 11 and

not under chapter 7. Since the Petition Date, the record evidence in this case establishes that the

Debtor has acted in bad faith.


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A. No Meaningful Effort to Propose a Plan or Negotiate with Creditors.

7. A few days before (and in some cases, the day before) the filing of the Conversion

Motion, the Debtor’s counsel telephoned counsel for each Objecting Creditor and made a de

minimis offer that was in no way a good faith offer. Many of the creditors were not even given

an opportunity to respond to the “offer” before the Conversion Motion was filed. Yet the Debtor

states in his Reply Memorandum of Fact and Law in Support of Motion of Debtor and Debtor-in-

Possession for an Order Converting Debtor’s Chapter 11 Case to a Case Under Chapter 7 and

Granting Related Relief and Omnibus Response to Objections re Same [ECF 197] (the

“Conversion Reply”) at ¶ 167: “Though Debtor preferred to reach a consensual plan with the

objecting claimants that might have paid a greater dividend to them in Chapter 11, the objecting

claimants were unwilling to negotiate to such a result. Each wants it all, but there never will be

close enough [SIC] all to go around.” The Debtor further states in the Conversion Reply that

“[n]ot one of the objecting claimants has stated that they would even entertain reducing their

claim or negotiate a discounted payment of their claim.” Conversion Reply at ¶ 79. It is a

euphemism to describe the Debtor’s statements as not accurate.

8. There was no attempt by the Debtor to negotiate with Objecting Creditors. The

nominal bad faith offer that was made just prior to the filing of the Conversion Motion appears in

retrospect to have been calculated to provide a basis in reality for the very disingenuous

argument that negotiating a plan with creditors was not possible. In fact, the Objecting Creditors

have been waiting patiently since the beginning of this case to begin plan negotiations. But no

negotiation ever took place. No objecting creditor ever believed that they would receive 100

cents on the dollar.1 The Objecting Creditors expected to negotiate a plan that took into

1 In accordance with section 1129(a)(15) of the Bankruptcy Code, absent settlement, Objecting Creditors areoptimistic that they will receive the Debtor’s projected disposable income over five years.


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consideration the Debtor’s resources and the merits of their claims. The real problem appears to

be that the Debtor never intended (and thus never attempted) to negotiate a chapter 11 plan. The

Debtor always meant to “swing for the fence” – to try and keep his millions of dollars in future

earnings to himself while shedding his prior debt in a chapter 7. Stated differently, the Debtor

has always intended to use the bankruptcy system in bad faith for his own personal gain and to

the substantial prejudice of his creditors.

B. Failure to Pursue or Preserve Estate Claims and Causes of Action.

9. The Debtor has made numerous statements in pleadings and elsewhere that he is

the innocent and naïve victim of “egregious, unethical and wrongful conduct” by his financial

advisors, including his parents.2 These assertions clearly should give rise to claims and causes of

action by the Debtor’s estate against the Debtor’s former advisors, including his parents.

Depending on where certain of the loan proceeds were ultimately transferred, there may also be

claims against other third parties. The Court can easily conclude from the record of this case that

the Debtor received a combination of loan funds and salary in excess of $20 million over the past

few years,3 and according to the Debtor’s Schedules, the Debtor has assets with a stated value of

$3.1 million.

10. Yet, the Debtor has not taken any meaningful action to pursue claims against his

parents or other advisors (or third parties). In fact, the only action that appears to have been

2 See, e.g., Motion to Extend Deadline to File Schedules or Provide Required Information [ECF 6](the “ExtensionMotion”); and Debtor’s motions to employ counsel and financial advisors [ECF 4 and 5].

3 The Debtor’s first set of Schedules of Assets and Liabilities [ECF 37] and the Statement of Financial Affairs (the“SOFA”) [ECF 38] were filed on November 7, 2014, and his Amended Schedules [ECF 44] were filed on November10, 2014, and [ECF 251] on May 21, 2015 (collectively, the “Schedules”). The Debtor failed to list on his Schedulestransfers that he made to insiders within one year prior to the Petition Date as required by Question 3(c) of theSOFA. Instead, the Debtor represented to the Court that they were “Under Investigation – various dates andamounts.” The SOFA was filed on November 7, 2014. More than six months later, Debtor filed an amended SOFAon May 20. 2015 [ECF 252]. However, this amended SOFA still lacks this critical information. The Court andcreditors are therefore left to wonder whether in fact the Debtor transferred, directly or indirectly, the missingmillions of dollars to his family, including his parents and brother.


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taken is a meeting between the Debtor’s parents and counsel to the Debtor where the parents

were asked questions – not under oath – about their actions in regard to the Debtor’s finances.

No documents have been subpoenaed from the parents related to such actions. In fact, the

Debtor’s parents recently testified that all of their physical records were “lost” when they left

California, and all of their electronic records (emails, etc.) have been “lost” because their

Comcast email account has been terminated. Despite all of these obvious red flags, the Debtor

concludes in his Reply that the parents are insolvent and not collectible, thereby facially

attempting to justify his failure to pursue substantial claims against them. 4

11. The Debtor’s failures in this regard are, at best, bad faith conduct and a breach of

his fiduciary duty to the estate and creditors.

C. The Debtor’s Schedules Evidence His Bad Faith.

12. Further, the Schedules themselves evidence bad faith. The Debtor lists a total of

74 creditors in his Schedules that collectively hold stated claims in an aggregate amount of

$12,492,253. Of those 74 creditors, the Debtor designated the claims of 63 of them, holding total

claims equal to $12,258,473, as either disputed, contingent and/or unliquidated. A debtor’s

designation of “virtually all of the scheduled secured and unsecured claims as contingent or

unliquidated . . . certainly raises, at a minimum, an inference that the debtor is abusing the

judicial process.” In re De La Hoz, 451 B.R. 192 (Bankr. M.D. Fla. 2011) (holding that debtor’s

designation of all secured claims and 20 of 22 unsecured claims as contingent, unliquidated and

disputed constituted bad faith). Designating the substantial majority of the claims on his

Schedules as disputed, contingent and/or unliquidated is clear evidence of bad faith on the part of

4 In addition, the Debtor has failed to take any steps to investigate claims and causes of action against the severalloan brokers that he and his parents claim defrauded them and/or took advantage of them in connection with thevarious loans that were taken out from the Objecting Creditors. No depositions have been noticed or taken. Nodocuments have been requested. And no informal discussion have been had with regard to these various parties.


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the Debtor, and a bad faith attempt to eliminate claims of any creditor lacking proper

representation, notice or diligence.

D. The Petition Evidences Bad Faith by Designating “Primarily BusinessDebts.”

13. The Debtor indicated on his Petition that his debts are “primarily business debts”

despite having no good faith basis for doing so. The Debtor’s bank records demonstrate that the

large majority of the loan proceeds underlying the Objecting Creditors claims and the substantial

majority of all claims were spent for personal, family, or household consumer goods and

services.

14. Moreover, all of the Debtor’s income has been derived from his professional

hockey player’s contract. See SOFA at 31. The Debtor did not have any business income.5

There is no basis for the Debtor to have stated that the majority of the Debtor’s debt could be

considered business related.6 Like several elements of the Debtor’s bankruptcy case, the

statement on the petition appears to be part of a premeditated effort to avoid the “means” test

under section 707(b) of the Bankruptcy Code (discussed more fully below).

E. The Debtor’s Post-Petition Spending Evidences Bad Faith.

15. In the first ten months of the Debtor’s chapter 11 case, he received total net

income in excess of $2.2 million dollars. See Monthly Operating Report for July 2015 [ECF 360]

(the “July 2015 MOR”). Despite being in bankruptcy, the Debtor continues to live a luxury

5 The Debtor only lists one business interest on Schedule B, namely Barwis Methods Training Centers of SoutheastMichigan, LLC, with a purported value of zero ($0.00) dollars.5 This same business interest is the only item listedunder Question 18 on his SOFA in regards to the “nature, location and name of business.” In addition, on ScheduleB, question 13, which requires disclosure of “stock and interest in incorporated and unincorporated businesses,” theDebtor represented “none.”

6 As set forth above, the Debtor has not been able to explain, and has made no apparent meaningful effort toinvestigate and locate, the disposition of millions of dollars in loans that he obtained in addition to his severalmillion dollars in player salary. Since he apparently cannot, or does not wish to, explain the use and disposition ofsuch funds, it is hard to understand how he can claim that the debts are “primarily business debts.”


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lifestyle and has yet to curb his high-level spending. Debtor continues to incur monthly rent

obligations on his Dublin, Ohio residence which as of July exceed $27,000. He is spending $521

a month on a vehicle, which he fills with over $1,000 of gas per month (more than $10,000 since

filing). His telecommunications bills approach $700 per month (over $5,000 since filing). His

dry cleaning bill in July 2015 alone exceeded $1000. He continues to pay approximately $1,500

a month (over $15,000 since filing) for his brother’s private school tuition and living

expenses. He also continues to make regular unaccounted for ATM cash withdrawals from his

checking account – in 2015 alone (as of July), he had 39 withdrawals totaling $16,5000. In 2015

alone, he has spent at least $22,000.00 at retailers and restaurants via check card

purchases. Most shocking is that the Debtor spent close to $50,000 on wedding expenses during

the pendency of this case. In total, through July 2015, Debtor has spent $732,511.92 since the

Petition Date. Id.

F. The Conversion Motion Evidences Bad Faith.

16. The Conversion Motion is further evidence of the Debtor’s bad faith in this

chapter 11 case. It is devoid of factual support or meaningful explanation as to why the Debtor

is seeking conversion of this chapter 11 case to a case under chapter 7. Conversion would only

serve to benefit the Debtor himself at the expense of his creditors. There is in indeed no greater

calamity that could befall the estate and the creditors than conversion. It would result in a

massive dissipation of assets – namely the millions of dollars in future payments under the

Debtor’s player contract. That fact highlights the irreconcilable conflict that the Debtor and his

counsel7 have in this chapter 11 case, which in and of itself is sufficient basis to deny conversion.

Specifically, the Debtor’s clear desire to retain for himself the millions of dollars left on his

7 The vast majority of courts have held that counsel for chapter 11 debtors represent the bankruptcy estate. See, e.g.,Everett v. Perez, 30 F.3d 1209 (9th Cir. 1994).


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professional hockey contract at the expense of his creditors puts his personal interests in direct

conflict with his obligations as a fiduciary to creditors.

17. The Debtor argues in the Conversion Motion that most if not all of the claims

against him are not valid (or are specious), yet he has not filed a single objection to a proof of

claim filed in this chapter 11 case other than objecting to three clams in non-dischargeability

adversary proceedings that were filed by RFF, Capital Financial and EOT, which objections

were clearly done to deflect the claims asserted against the Debtor in such cases. At the same

time, the Debtor argues that chapter 11 offers no relief because he could not possibly pay all

creditors in full. The Debtor’s argument in the Conversion Motion that the Objecting Creditors

would not accept less than 100 percent of their claims in any plan is not and was never true. As

discussed above, it is a false allegation calculated in bad faith to provide a purported basis for

seeking conversion.

G. Additional Relevant Facts.

18. On the Petition Date, Debtor owned 3 BMWs, a Ferrari and at least 2 residences.

See Schedules A and B. Debtor’s monthly gross income is $416,000, his net income is

$176,000, and his monthly expenses are, on average and excluding legal fees, in excess of

$37,000. See, e.g., July 2015 MOR. By comparison, in 2014 the median monthly income for a

single wage earner in Dublin, Ohio (Debtor’s place of residence) was approximately $4,450.

III. Legal Argument and Citation to Authorities.

A. The Debtor Does Not Have an Absolute Right to Convert.

19. Numerous courts have held that a debtor does not have an absolute right to

convert a chapter 11 case to chapter 7 under section 1112(a). See, e.g., Monroe Bank & Trust v.

Pinnock, 349 B.R. 493 (E D. Mich. 2006); In re Adler, 329 B.R. 406 (Bankr. S.D.N.Y. 2005); In


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re Ponzini, 277 B.R. 399, 404 (Bankr. E D. Ark. 2002); see also Marrama, 549 U.S. at 375

(holding that, with respect to § 706, that a court may use its broad authority under § 105(a) to

deny a debtor’s request to convert). Any right to conversion is also subject to the requirement of

good faith. Id. Further, as this Court has noted, a chapter 11 case “may not be converted to a case

under another chapter of this title unless the debtor may be a debtor under such chapter[.] 11

U.S.C. § 1112(f)).” Protective Order Opinion, at 6.

20. In the Conversion Reply, the Debtor seeks to distinguish multiple cases that

confirm the very point that a debtor in chapter 11 does not have an absolute right to convert. For

example, Debtor cites Results Sys. Corp. v. MQVP, Inc., 395 B.R. 1 (E.D. Mich. 2008) for the

proposition that “[e]ven certain courts questioning a debtor’s absolute right to convert

nevertheless approved conversion under circumstances far more prejudicial to creditors than

could ever be demonstrated here.” Conversion Reply at ¶ 104. Ultimately, Results Systems

stands for the proposition that a “debtor’s right to convert is not absolute” but may be granted

absent a finding of bad faith or extreme circumstances. Id. at 8. Conversion was allowed in that

case principally because there was a lack of evidence that the debtor had acted in bad faith. To

the contrary, in this case, there is overwhelming evidence of bad faith.8

8 Likewise, Adler supports denying conversion. In Adler, the court expressly held that “the statutory language clearlystates that a debtor ‘may’ convert his case, but does not state that the Court ‘shall’ honor his request.” 329 B.R. at409. The Debtor here attempts to suggest that Adler stands for the proposition that a court has discretion to deny amotion to convert only in the face of a pending motion to dismiss. Conversion Reply at ¶ 105. This is incorrect.Rather, in Adler, the court recognized its discretion to deny conversion independent of the pending motion todismiss. Adler, 329 B.R. at 409. It then held that the debtor lacked good faith in seeking to convert his case tochapter 7 because “the sole motive of the Debtor’s conversion is to avoid the possibility of dismissal withprejudice.” Id. at 410. Similarly, in Monroe Bank, the court held, consistent with Adler, that a debtor does not havean absolute right to conversion. 349 B.R. at 497 (“the statutory language [of § 1112(a)] clearly states that a debtor‘may’ convert his case, but does not state that the Court ‘shall’ honor his request.”) (alterations original). The Debtorsimply misconstruesMonroe Bank.


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B. Conversion Should Be Denied Because the Debtor’s Chapter 7 Case IsSubject to Dismissal Under Section 707(a) and (b).

21. The existence of grounds that would require dismissal of a case is tantamount to a

finding that the person or entity does not qualify to be a debtor under that chapter. See Marrama,

549 U.S. at 373-74. As a result, if the Debtor’s (hypothetical) chapter 7 case would be subject to

dismissal, then the Debtor does not qualify to be a debtor under chapter 7, thereby barring

conversion. Sections 707(a) and (b) of the Bankruptcy Code provide grounds for dismissal of a

case under chapter 7 and, on the facts present in this case, bar conversion of the Debtor’s case

from chapter 11 to chapter 7.

1. Under Section 707(b)(1) and (2), Debtor Cannot Convert His Case toChapter 7.

22. Under section 707(b)(1) and (2) of the Bankruptcy Code, a debtor under chapter 7

of the Bankruptcy Code whose debt is primarily consumer debt (i.e., greater than 50%) may have

his case dismissed if relief under chapter 7 is determined to be an abuse of that chapter. Such

abuse is presumed if the debtor cannot satisfy the required “means” test under section 707(b)(2).

a. The Debtor’s Debt is Primarily Consumer Debt.

23. Consumer debt is “debt incurred by an individual primarily for a personal, family,

or household purpose.” 11 U.S.C. § 101(8). In order to determine whether a debt is a consumer

debt for purposes of section 707(b)(1), the Court will look to whether it was incurred primarily

for a “consumer purpose.” See In re Hlavin, 394 B.R. 441, 446 (Bankr. S.D. Ohio 2008) (holding

that loans incurred for a consumer purpose are consumer debts); see also Johnson v. Vetter (In re

Johnson), 2014 Bankr. LEXIS 2726 (B.A.P. 9th Cir. June 6, 2014) (same).

24. Importantly, the Court is not bound by the Debtor’s classification of the debt in

his Petition or Schedules, but instead will look to the intent of the debtor at the time the debt was

incurred. See In re Swartzentruber, 2009 Bankr. LEXIS 2596 (Bankr. N.D. Ohio Sept. 4, 2009)


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(holding that the debtor’s “intent in incurring the debt, or entering into the transaction, is the key

to determining the nature of the debt as a consumer or non-consumer debt”); In re Davis, 378

B.R. 539 (Bankr. N.D. Ohio 2007) (same); see also United States Trustee v. Mohr, 436 B.R. 504

(S.D. Ohio 2010) (holding court “must use the amount” but not the characterization of debts

listed on the Debtors’ schedules).9 Courts may focus on how the proceeds of loans were used to

make that determination. See, e.g., In re Naut, 2008 Bankr. LEXIS 175 (Bankr. E.D. Pa. Jan. 22,

2008) (concluding that because proceeds of loans were used to purchase and improve non-

business-related property, debts were consumer debts); Cox v. Fokkena (In re Cox), 315 B.R.

850 (B.A.P. 8th Cir. 2004) (relying on objective evidence of debtor’s use of loan proceeds to

determine debts were primarily for family or household purposes).

25. The Debtor’s bank records demonstrate that the large majority of the loan

proceeds underlying the Objecting Creditors’ claims and the substantial majority of all claims

were obtained for and spent for personal, family and household goods and services. The Debtor

points to confession of judgment provisions or a lack of “consumer provisions” in loans as

evidence that debt was business debt. Confession of judgment provisions are frequently included

in consumer loans (notwithstanding that they may not always be enforceable) and Objecting

Creditors are not aware of any credible authority requiring that “consumer provisions” (whatever

they may be) be present in a note or loan agreement in order to qualify the related debt as

consumer debt. Instead, the purpose or intent is amply demonstrated here by the actual use,

which was to purchase primarily personal, family, or household consumer goods and services.

9 The court in Mohr relied on In re Pearson, 773, F.2d 751, 756 (6th Cir. 1985), a chapter 13 case that discussesfactors to be considered by the court in making threshold eligibility determinations in chapter 13 cases. The court inPearson held that “a court should rely primarily upon the debtor's schedules checking only to see if the scheduleswere filed in good faith.” 773 F.2d at 756. Neither the court in Pearson or Mohr discussed whether it need rely onschedules filed in bad faith, as is the case here.


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b. The Debtor Fails the Means Test.

26. In the present case, the Debtor’s average gross monthly income exceeds

$450,000.00. See Statement of Current Monthly Income [ECF 66]. Such monthly income is over

nine times the applicable median yearly income in Ohio, which, based on the Debtor’s filing

date, was $43,688.00. The Debtor cannot meet the means test and a presumption of abuse under

section 707(b)(2)(a)(i) exists. As a result, the Debtor would not be able to remain in a chapter 7.

27. Courts have concluded that the “means” test must be applied in those cases that

originated in one chapter and then convert to chapter 7. See e.g., In re Perfetto, 361 B.R. 27

(Bankr. D.R.I. 2007). The obvious reason for this requirement is to ensure that a debtor cannot

circumvent the filing requirements of a chapter 7 case merely by starting in a separate chapter

and then converting. In re Kellett, 379 B.R. 332, 338 (Bankr. D. Or. 2007).

2. Under Section 707(a) and Marrama, the Debtor’s Bad Faith, AmongOther Factors, Prohibits Conversion to Chapter 7.

28. While section 707(a) includes a non-exhaustive list of “cause” that justifies

dismissal, courts have routinely held that “cause” exists to dismiss a chapter 7 case under section

707(a) when a debtor’s request for chapter 7 bankruptcy relief was made in bad faith. See e.g.,

Perlin v. Hitachi Capital Am. Corp. (In re Perlin), 497 F.3d 364, 369 (3d Cir. 2007); Daniels v.

Barron (In re Barron), 325 F.3d 690, 695 (5th Cir. 2003); Dionne v. Simmons (In re Simmons),

200 F.3d 738 (11th Cir. 2000).

29. A section 707(a) bad faith inquiry is always an ad hoc and intensely fact specific

one. “The facts required to mandate dismissal based upon a lack of good faith are as varied as

the number of cases.” In re Zick, 931 F.2d 1124, 1127 (6th Cir. 1991) (quoting In re Bingham,

68 B.R. 933, 935 (Bankr. M.D. Pa. 1987)). What the Sixth Circuit’s “smell test” for bad faith

boils down to are indications of a “dishonest” and “non-needy” debtor who makes “no attempt to


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deal with creditors on an equitable basis” and seeks chapter 7 relief as a “head start” rather than a

“fresh start.” Id. at 1128 (quoting In re Krohn, 886 F.2d 123 (6th Cir. 1989)).

30. Individual factors indicative of section 707(a) bad faith include, among others,

whether the debtor is enjoying a luxurious lifestyle. See, e.g., Zick, 931 F.2d at 1127-28 (citing

In re Brown, 88 B.R. 280, 283 (Bankr. D. Haw. 1988)). High income debtors (like the Debtor

here) are likely candidates for dismissal under section 707(a). See In re Stump, 280 B.R. 208,

215-16 (Bankr. S.D. Ohio 2002) (listing debtor and her spouse’s combined six figure incomes

and large monthly expenditures for mortgages, car payments, country club memberships, ten

recent family vacations, and private schools as factors supporting dismissal); see also In re

Weixel, 494 B.R. 895, 903 (B.A.P. 6th Cir. 2013) (“The Weixels, despite being in financial

difficulty since 2007, made no attempt to change their upscale lifestyle“); In re Rahim, 442 B.R.

578, 580-82 (Bankr. E.D. Mich. 2010) (“However, the record reflects that the debtors have made

no effort whatsoever to reduce their expenses”). Furthermore, high income debtors (like the

Debtor here) who refuse to meaningfully negotiate with their creditors prior to filing for chapter

7 should have their cases dismissed for cause. See In re Merritt, 211 F.3d 1269, * 2 (6th Cir.

2000) (quoting and affirming bankruptcy court’s conclusion that to offer “somebody $7,500 on a

$45,000 debt when you got this kind of money and assets, it’s ludicrous.”).

31. The Debtor in this case has relied on Perlin to suggest that his future income

should not be considered. To the contrary, Perlin specifically held that “in adjudicating a motion

to dismiss asserting bad faith under 11 U.S.C. § 707(a), it is within the sound discretion of the

bankruptcy court to consider a debtor's monthly income and expenses together with any other

factors relevant to a debtor's good faith in filing for bankruptcy.” 497 F.3d at 367. Nevertheless,

the Perlin court, relying on Zick, recognized that “although a debtor's ability to repay is not,


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itself, sufficient cause for dismissal, ‘[w]hen a debtor capable of at least partial repayment has

made every effort to avoid payment of an obligation, lack of good faith sufficient to justify

dismissal may be found.’” Id. (citing Zick, 931 F.2d at 1127 n.3).

32. Here, the facts strongly militate in favor of denying the Conversion Motion. The

record facts establish that the Debtor has conducted himself with bad faith in filing his Petition,

his Schedules and the Conversion Motion. Among other things, the Debtor has breached his

fiduciary duty; failed to investigate and pursue substantial causes of action against his parents

and other advisors (and other third parties); not attempted to formulate a plan of reorganization;

not negotiated with his creditors in good faith; and continues to live a lavish lifestyle. Moreover,

equitable considerations strongly favor denial of the Conversion Motion. The Debtor’s

Conversion Motion is a transparent and long premeditated scheme to misuse the bankruptcy

system to discharge his debt (that he is capable of paying in significant part) so that he can solely

enjoy millions of dollars in future earnings. The Conversion Motion must be dismissed.

3. Under Section 707(b)(3), the Debtor’s Bad Faith and the Totality ofthe Circumstances Prohibit Conversion to Chapter 7.

33. In the unlikely event that the Debtor passes the means test or demonstrates special

circumstances, the Debtor’s hypothetical chapter 7 would still be dismissed for “bad faith” or a

“totality of circumstances” indicating abuse:

In considering under paragraph (1) whether the granting of reliefwould be an abuse of the provisions of this chapter in a case inwhich the presumption in paragraph (2)(A)(i) does not arise or isrebutted, the court shall consider—

(A) whether the debtor filed the petition in bad faith; or

(B) the totality of the circumstances (including whether thedebtor seeks to reject a personal services contract and thefinancial need for such rejection as sought by the debtor) ofthe debtor’s financial situation demonstrates abuse.


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11 U.S.C. § 707(b)(3).

a. Bad Faith Under Section 707(b)(3)(A).

34. While the text of §707(b)(3) lists “bad faith” and “totality of the circumstances”

as separate factors, they are usually applied together with bad faith as one of many

“circumstances” demonstrating abuse. In this way, dismissal under section 707(b)(3) is often

nearly indistinguishable from dismissal for “cause” under section 707(a). In each case, factors

include:

[T]he debtor’s good faith and candor in filing his schedules,whether the debtor made any purchases on the eve of bankruptcy,whether the debtor was forced into bankruptcy by an unforeseen orcatastrophic event, the debtors’ ability to repay his debts out offuture earnings with relative ease, whether the debtor enjoys astable source of future income, whether the debtor is eligible fordebt adjustment under chapter 13, the availability of stateremedies, the availability of relief through private negotiations, andwhether the debtor can significantly reduce his expenses withoutdepriving himself of adequate necessities.

[The Southern District of Ohio], as well as other courts, have alsoconsidered whether the debtors have shown a consistent pattern ofliving on credit or beyond their means.

In re Schubert, 384 B.R. 777, 780 (Bankr. S.D. Ohio 2008) (citing In re dePellegrini, 365 B.R.

830 (Bankr. S.D. Ohio 2007)).

35. It should be noted that many courts do not appear to require “egregious” bad faith

under section 707(b)(3)(A). Section 707(b)(3)(A) cases thus require less culpability than

section 707(a) cases. When applying section 707(b)(3), courts have dismissed chapter 7 cases

filed by debtors who have made merely bad financial decisions rather than dishonest ones. See

In re Groscost, 2011 Bankr. LEXIS 3701 at **5-7 (Bankr. N.D. Ohio Sept. 27, 2011).10 This

10 For example, a Debtor who quits his job and lives on credit cards based upon his sincere, but entirely delusional,belief that he will win the lottery, can have his chapter 7 petition dismissed under section 707(b)(3). See Groscost,2011 Bankr. LEXIS 3701 at **5-7. Another recent case dismissed the chapter 7 petition of debtors who took lower


17

appears to be a logical conclusion for two reasons: first, section 707(b)(3)(A) gives a debtor the

option of converting to chapter 11; and second, in 2005 BAPCPA changed the standard of

section 707(b) from “substantial abuse” to just “abuse.” See In re dePellegrini, 365 B.R. at 832.

b. Totality of Circumstance Under Section 707(b)(3)(B).

36. A debtor’s chapter 7 case may be dismissed for abuse pursuant to section

707(b)(3) where there is evidence of bad faith or based on the totality of the circumstances. 11

U.S.C. § 707(b)(3); Schubert, 384 B.R. at 780. Importantly, “[g]iven the use of the conjunction

‘or,’ a showing of bad faith is not necessary . . . to prevail under § 707(b)(3).” Id.

37. “[A] finding of abuse under the totality of the circumstances test provided by

§ 707(b)(3)(B) can be predicated upon either lack of honesty, want of need, or both.” Weixel,

494 B.R. at 901 (internal quotations omitted) (citing Beckerman, 381 B.R. 841, 844-45 (Bankr.

E.D. Mich. 2008)); Schubert, 384 B.R. at 780). Overall, the point of section 707(b)(3)(B) is to

determine whether, outside of chapter 7, the Debtor could provide his creditors with substantial

relief while maintaining a reasonably comfortable lifestyle. In re Phillips, 417 B.R. 30, 39

(Bankr. S.D. Ohio 2009). By this standard, it is highly appropriate to dismiss this Debtor’s

chapter 7 petition under section 707(b)(3)(B).

38. In addition to bad faith, the Sixth Circuit, unlike many other circuits, allows

dismissal for “cause” based solely on a debtor’s ability to repay at least a part of his debts.

Rahim, 442 B.R. at 583 (finding that Sixth Circuit decisions hold that “§ 707(a) does authorize

dismissal of a chapter 7 case filed by a debtor whose debts are primarily business debts when the

paying jobs in order to have more time with their children. “We are not criticizing the Debtors for making thesefamily oriented decisions. However, it is elemental that a reduced income for an extended period of time requires achange in lifestyle.” Schubert, 384 B.R. at 781. Moreover, it is logical to interpret the “bad faith” requirement ofsection 707(b)(3)(A) as not being the same as the “egregious” conduct which often appears necessary for dismissalunder section 707(a).


18

debtor does not need bankruptcy relief”); see also In re Summer, 255 B.R. 555 (Bankr. S.D. Ohio

2000). In fact, A debtor’s ability to repay its “unsecured debts has developed to become a prime,

and often dispositive consideration when determining whether, under the ‘totality of the

circumstances’ standard of § 707(b)(3)(B), a case should be dismissed for abuse.” Brenneman,

397 B.R. at 870-871.

39. Dismissal for abuse “is intended to uphold creditors’ interests in obtaining

repayment where such repayment would not be a burden.” Id. (citing Krohn, 886 F.2d at 126)).

A substantial level of income therefore weighs in favor of abuse. Weixel, 494 B.R. at 895

(quoting In re Peterlin, 457 B.R. 630, 634 (Bankr. N.D. Ohio 2011)); Brenneman, 397 B.R. at

871 (holding that high level of income of $125,000 annually made the court skeptical of the

debtor’s need for chapter 7 bankruptcy relief).

40. In Brenneman, the court dismissed the debtors’ chapter 7 case pursuant to section

707(b)(3). The court concluded that the totality of circumstances indicated abuse where the

debtor’s had significant financial resources in the form of annual income of $125,000 but failed

to make reasonable adjustments to their monthly budget. 397 B.R. at 875; Peterlin, 457 B.R. at

634 (finding abuse where debtor and husband had combined monthly gross income over $10,000

and sought to continue to incur private school tuition in excess of $500 per month); see also In re

Wadsworth, 383 B.R. 330, 333 (Bankr. N.D. Ohio 2007) (“Under any measure, a debtor, having

a stable annual salary of almost $100,000.00, will be hard pressed to establish that they do not

have the ability to pay some of their unsecured debt . . . [t]his is especially true since the

implementation of BAPCPA, which makes the standard for dismissal less stringent. . . .”).

41. In considering whether a debtor has the ability to repay his debts out of future

earnings, courts commonly look to whether debtors are able to repay a “meaningful” percentage


19

of unsecured debts. In re Goble, 401 B.R. 261, 276 (Bankr. S.D. Ohio 2009). A meaningful

percentage may be as little as 10% of a debtor’s unsecured debt. See, e.g., In re Mestemaker, 359

B.R. 849 (N.D. Ohio 2007) (10 to 15%); In re Hess, 2007 Bankr. LEXIS 3553 (N.D. Ohio Oct.

15, 2007) (14%); Schubert, 384 B.R. at 780-81 (14%); see also Brenneman, 397 B.R. at 870-871

(“there exists a large degree of incongruity between a high level of income and an inability to

repay, at least a percentage, of one’s debts.”). Importantly, the debtor’s ability to pay is to be

made at the time of the hearing – not the petition (or conversion) date. Schubert, 384 B.R. at 780

(citing In re Pennington, 348 B.R. 647, 650-51 (Bankr. D. Del. 2006)).

42. Here, the Debtor’s bad faith is demonstrated by his conduct with respect to the

filing of his Petition, Schedules and the Conversion Motion, among other things, as more fully

discussed above. In addition, the Debtor has the ability to repay a substantial portion of his

unsecured debt. He has a stable source of future income. In fact, two thirds of his $15 million

salary for the next three years is guaranteed. The Debtor could easily reduce his expenses while

maintaining a reasonable lifestyle. Thousands of dollars could be saved just from reducing his

rent, dry cleaning, and telecommunications costs to reasonable levels. The Debtor and his family

have consistently lived on credit and well beyond their means at the expense of the Debtor’s

creditors. Under the totality of the circumstances, the abuse standard and the bad faith standard,

the Debtor’s hypothetical chapter 7 would be dismissed. Therefore, the Conversion Motion must

be denied.

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