Michigan Bankruptcy Blog

District Court Affirms In Re Rahim: Chapter 7 Business Debtors' Case May Be Dismissed Under § 707(a)

In re Rahim, E.D. Mich., May 23, 2011 (Case No. 10-15123, Hon. Sean F. Cox).

Previously on this blog, we discussed In re Rahim, a case in which Judge Rhodes dismissed the Chapter 7 case of debtors with primarily non-consumer debts "for cause" under 11 U.S.C. § 707(a) because the case was not filed in good faith. The debtors, both practicing physicians, brought home an annual income of more than $500,000 and had multiple homes and luxury vehicles.

The debtors appealed to the United States District Court for the Eastern District of Michigan, which affirmed the dismissal of the case.  In a 13-page opinion, the District Court (Judge Cox) found that the totality of the circumstances supported dismissal and that the Bankruptcy Court's factual findings were not clearly erroneous. 

The District Court clarified that the dismissal was not based solely on the debtors' ability to pay their debts; rather, the dismissal was based on the "egregious" conduct of the debtors, which included living a lifestyle that resulted in monthly expenses of $42,425.  Additionally, the District Court noted that the debtors were not entirely honest about their income and failed to disclose certain items of imputed income.  This "bad faith" and "egregious conduct" was sufficient to warrant dismissal, even in the absence of fraud or negligence.  The District Court also rejected the debtors' argument that the Bankruptcy Court had improperly applied the standards for dismissal found in § 707(b).    

Although In re Rahim involves unusual facts, attorneys who represent business debtors in Chapter 7 cases should take note that their clients are not necessarily immune from a motion to dismiss under § 707(a) simply because their case involves primarily non-consumer debts.

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Categories: Chapter 7, Eastern District of Michigan