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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION AT COLUMBUS
In re:

Case No. 14-57104-JEH

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

Chapter 11

Debtor.

Judge John E. Hoffman, Jr.

FINAL HEARING MEMORANDUM

IN SUPPORT OF OBJECTING CREDITORS OPPOSITION TO MOTION OF
DEBTOR AND DEBTOR-IN-POSSESSION FOR AN ORDER CONVERTING
DEBTORS 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-inPossession to Convert Debtors 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

Debtors 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
Debtors player contract. The obvious and primary reason for the Debtors attempt to convert

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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:
under section 707(b)(1) and (2), because his debts are primarily consumer debts
and his failure to satisfy the means test would give rise to a finding of abuse;
under section 707(a) for cause, including a lack of good faith;
under section 707(b)(3)(i), due to his bad faith; and
under section 707(b)(3)(ii) because the totality of the circumstances of the
Debtors financial situation demonstrates abuse.

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3.

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

primarily business debts. The Debtors 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
Debtors 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 Debtors

hypothetical chapter 7 case focus on the Debtors 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 Debtors conversion is subject to a requirement of good faith. Here, there is
abundant evidence of the Debtors 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 Debtors 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 Debtors 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-inPossession for an Order Converting Debtors 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 Debtors 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

In accordance with section 1129(a)(15) of the Bankruptcy Code, absent settlement, Objecting Creditors are
optimistic that they will receive the Debtors projected disposable income over five years.

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consideration the Debtors 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 nave 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 Debtors estate against the Debtors 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 Debtors 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 Extension
Motion); and Debtors motions to employ counsel and financial advisors [ECF 4 and 5].
3

The Debtors 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 November
10, 2014, and [ECF 251] on May 21, 2015 (collectively, the Schedules). The Debtor failed to list on his Schedules
transfers that he made to insiders within one year prior to the Petition Date as required by Question 3(c) of the
SOFA. Instead, the Debtor represented to the Court that they were Under Investigation various dates and
amounts. The SOFA was filed on November 7, 2014. More than six months later, Debtor filed an amended SOFA
on May 20. 2015 [ECF 252]. However, this amended SOFA still lacks this critical information. The Court and
creditors are therefore left to wonder whether in fact the Debtor transferred, directly or indirectly, the missing
millions of dollars to his family, including his parents and brother.

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taken is a meeting between the Debtors parents and counsel to the Debtor where the parents
were asked questions not under oath about their actions in regard to the Debtors finances.
No documents have been subpoenaed from the parents related to such actions. In fact, the
Debtors 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 Debtors failures in this regard are, at best, bad faith conduct and a breach of

his fiduciary duty to the estate and creditors.

C.

The Debtors 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 debtors
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 debtors
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 several
loan brokers that he and his parents claim defrauded them and/or took advantage of them in connection with the
various loans that were taken out from the Objecting Creditors. No depositions have been noticed or taken. No
documents 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 Business

Debts.

13.

The Debtor indicated on his Petition that his debts are primarily business debts

despite having no good faith basis for doing so. The Debtors 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 Debtors income has been derived from his professional

hockey players 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 Debtors debt could be
considered business related.6

Like several elements of the Debtors 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 Debtors Post-Petition Spending Evidences Bad Faith.

15.

In the first ten months of the Debtors 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 Southeast
Michigan, LLC, with a purported value of zero ($0.00) dollars.5 This same business interest is the only item listed
under Question 18 on his SOFA in regards to the nature, location and name of business. In addition, on Schedule
B, question 13, which requires disclosure of stock and interest in incorporated and unincorporated businesses, the
Debtor represented none.
6

As set forth above, the Debtor has not been able to explain, and has made no apparent meaningful effort to
investigate and locate, the disposition of millions of dollars in loans that he obtained in addition to his several
million dollars in player salary. Since he apparently cannot, or does not wish to, explain the use and disposition of
such 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 brothers 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 Debtors 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
Debtors 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 Debtors 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 Debtors 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.

Debtors 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 (Debtors 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 debtors 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 debtors 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 debtors 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

Likewise, Adler supports denying conversion. In Adler, the court expressly held that the statutory language clearly
states that a debtor may convert his case, but does not state that the Court shall honor his request. 329 B.R. at
409. The Debtor here attempts to suggest that Adler stands for the proposition that a court has discretion to deny a
motion 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 to
dismiss. Adler, 329 B.R. at 409. It then held that the debtor lacked good faith in seeking to convert his case to
chapter 7 because the sole motive of the Debtors conversion is to avoid the possibility of dismissal with
prejudice. Id. at 410. Similarly, in Monroe Bank, the court held, consistent with Adler, that a debtor does not have
an 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 Debtor
simply misconstrues Monroe Bank.

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B.

Conversion Should Be Denied Because the Debtors Chapter 7 Case Is

Subject 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 Debtors (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 Debtors case
from chapter 11 to chapter 7.
1.
22.

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

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.
23.

The Debtors Debt is Primarily Consumer Debt.

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 Debtors 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 debtors 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 nonbusiness-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 debtors use of loan proceeds to
determine debts were primarily for family or household purposes).
25.

The Debtors 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.

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

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The Debtor Fails the Means Test.

In the present case, the Debtors 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 Debtors 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.
28.

Under Section 707(a) and Marrama, the Debtors Bad Faith, Among
Other Factors, Prohibits Conversion to Chapter 7.

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 debtors 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 Circuits 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 spouses 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 courts conclusion that to offer somebody $7,500 on a
$45,000 debt when you got this kind of money and assets, its 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 Debtors

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.
33.

Under Section 707(b)(3), the Debtors Bad Faith and the Totality of
the Circumstances Prohibit Conversion to Chapter 7.

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

circumstances, the Debtors 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 relief
would be an abuse of the provisions of this chapter in a case in
which the presumption in paragraph (2)(A)(i) does not arise or is
rebutted, the court shall consider
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the
debtor seeks to reject a personal services contract and the
financial need for such rejection as sought by the debtor) of
the debtors financial situation demonstrates abuse.

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11 U.S.C. 707(b)(3).
a.
34.

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

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 debtors 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 or
catastrophic event, the debtors ability to repay his debts out of
future earnings with relative ease, whether the debtor enjoys a
stable source of future income, whether the debtor is eligible for
debt adjustment under chapter 13, the availability of state
remedies, the availability of relief through private negotiations, and
whether the debtor can significantly reduce his expenses without
depriving himself of adequate necessities.
[The Southern District of Ohio], as well as other courts, have also
considered whether the debtors have shown a consistent pattern of
living 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

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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.
36.

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

A debtors 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 Debtors
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 debtors 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 these
family oriented decisions. However, it is elemental that a reduced income for an extended period of time requires a
change in lifestyle. Schubert, 384 B.R. at 781. Moreover, it is logical to interpret the bad faith requirement of
section 707(b)(3)(A) as not being the same as the egregious conduct which often appears necessary for dismissal
under section 707(a).

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debtor does not need bankruptcy relief); see also In re Summer, 255 B.R. 555 (Bankr. S.D. Ohio
2000). In fact, A debtors 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
debtors 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
debtors 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

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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 debtors 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 ones debts.). Importantly, the debtors 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 Debtors 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 Debtors
creditors. Under the totality of the circumstances, the abuse standard and the bad faith standard,
the Debtors hypothetical chapter 7 would be dismissed. Therefore, the Conversion Motion must
be denied.

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