FIRST CAPITAL BANK OF KENTUCKY v. BLOK et al
Filing
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APPEAL FROM THE UNITED STATES BANKRUPTCY COURT - The bankruptcy court's Order denying First Capital's Motion to Dismiss, dated 9/15/2011, is AFFIRMED. Signed by Judge Richard L. Young on 5/14/2012.(JLM)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
FIRST CAPITAL BANK OF KENTUCKY, )
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Appellant,
)
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vs.
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ROBERT JAMES BLOK, JR. and RAE
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JEANNA GODSEY,
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Appellees.
NA 11-090753-BHL-7A
BANKRUPTCY COURT CASE NO.
NA 4:11-cv-128-RLY-WGH
DISTRICT COURT CAUSE NO
APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
This is an appeal from a final order entered on September 15, 2011, by the
Honorable Basil H. Lorch, III, from the United States Bankruptcy Court for the Southern
District of Indiana, denying the Appellant’s Motion to Dismiss the Appellees’ Chapter 7
case. For the reasons explained below, the court AFFIRMS the decision of the
bankruptcy court.
I.
Background
Appellees, Robert James Blok, Jr. (“Dr. Blok”) and Rae Jeanna Godsey (“Dr.
Godsey”) (collectively “Debtors”), a married couple, are physicians from Charlestown,
Indiana. Following the demise of their respective medical practices in 2008 and the
continuing financial struggles with their limited liability company, Charlestown Medical
Properties, LLC (“Charlestown Medical”), Dr. Blok and Dr. Godsey filed their joint
Bankruptcy Petition under Chapter 7 on March 21, 2011. On June 11, 2011, Appellant,
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The First Capital Bank of Kentucky (“First Capital”), one of the Debtors’ creditors, filed
a Motion to Dismiss their Chapter 7 bankruptcy for cause pursuant to 11 U.S.C. § 707(a),
alleging that the Debtors have the ability to pay their debts and thus, filed for bankruptcy
in bad faith. After the issues were fully briefed, the court held an evidentiary hearing
wherein the Debtors testified and documentary evidence related to the bankruptcy filing
was admitted by stipulation of the parties. On September 15, 2011, the bankruptcy court
issued an Order denying First Capital’s Motion to Dismiss. This appeal followed.
II.
Jurisdiction
A bankruptcy court’s order denying a motion to dismiss a Chapter 7 bankruptcy
proceeding under 11 U.S.C. § 707 is considered final and appealable if it resolves all
contested issues on the merits and leaves only the distribution of estate assets to be
completed. See In re Ross-Tousey, 549 F.3d 1148, 1152-53 (7th Cir. 2008). The
bankruptcy court’s Order dated September 15, 2011, resolved all contested issues on the
merits, leaving only the ministerial act of distributing assets to be completed. Id. at 1153
(holding that the bankruptcy court’s “denial of the motion to dismiss was appropriate for
appeal to the district court” because the only remaining action to be taken was the
“ministerial act” of distributing assets). Accordingly, this court has subject matter
jurisdiction over the present appeal pursuant to 28 U.S.C. § 158(a).
III.
Statement of Facts
A.
Debtors’ Employment and Business Debt
Dr. Godsey formed Rae J. Godsey, D.O., P.S.C. (“Godsey, P.S.C.”), as the
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operating entity for her private medical practice in June 2003. Two years later, in August
2005, Dr. Blok organized Southern Indiana Orthopedic & Spine Surgery, P.S.C.
(“SIOSS”) as the operating entity for his own private medical practice. In 2005, the
Debtors also formed Charlestown Medical, which owned the property where the two
practices operated. Debtors are the only two shareholders/members of Godsey, P.S.C.,
SIOSS, and Charlestown Medical.
On January 15, 2008, Charlestown Medical executed a promissory note in favor of
First Capital in the face principal amount of $850,000. That same day, SIOSS executed a
promissory note in favor of First Capital in the principal amount of $60,000. Debtors
were each required to execute Commercial Guarantys in connection with these business
loans.
Both Dr. Blok’s and Dr. Godsey’s private medical practices suffered financially,
and by the Spring of 2008, SIOSS ceased operations. Part of the reason SIOSS failed is
because Dr. Blok’s Army Reserve unit was activated and deployed 21 days after the
practice opened its doors, resulting in Dr. Blok’s absence from his medical practice for
almost a year. Godsey, P.S.C. ceased operations soon thereafter. Dr. Blok testified that
when the businesses went under, First Capital held them personally responsible for the
debt. In addition, Dr. Blok’s and Dr. Godsey’s practices also had lines of credit with
Your Community Bank, a debt that was also converted into a personal debt at that time.
Despite receiving advice from their accountant to immediately file for bankruptcy, Dr.
Blok and Dr. Godsey resisted that option.
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Dr. Blok and Dr. Godsey secured employment at Clark Memorial Hospital in
2008. Dr. Godsey left Clark Memorial the following year to take a position with Humana
in Louisville, Kentucky. Their joint income was $728,935 in 2009 and $742,329 in 2010.
At the evidentiary hearing, Dr. Blok testified that his current base salary as an orthopedic
surgeon with Clark Physician Group is $550,000 per year, and Dr. Godsey testified that
her current base salary at Humana as a Medical Director is $170,000 per year, bringing
their total combined base income to $720,000 a year.
Despite Dr. Blok’s substantial income, his future income is not expected to remain
at current levels. Dr. Blok testified that in 2007, he was diagnosed with a heart condition
known as myocardial bridging, which causes him severe chest pain, particularly in
stressful situations. Consequently, the condition has negatively affected his future
earning capacity. For example, Dr. Blok no longer performs invasive surgical
procedures, such as total joint and knee replacements, and restricts his practice to
minimally invasive procedures. The condition also caused him to receive a medical
discharge from the military (formal discharge pending), ruling out the opportunity to earn
extra income as a military physician.
B.
Assets
In March 2008, in advance of the Debtor’s Chapter 7 filing, Anderson Appraisal
Associates, LLC, appraised their personal property as having a fair market value of
$67,125. Debtors also own four vehicles, all of which were purchased in either 1999 or
2002. Their primary automobiles, a 2002 Ford Excursion and a 1999 Ford Expedition,
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each have over 200,000 miles on them. In addition, they have a mortgage expense of
almost $4,000 a month. Their 28-acre property houses a barn and a cabin, both of which
are over 200 years old and in need of repairs.
C.
Debts and Other Expenses
Although Charlestown Medical continues to operate, its only lessee is a local
YMCA. The rent they collect from the YMCA ($4,310 a month) does not cover the
mortgage payment to First Capital. Dr. Godsey testified that she and Dr. Blok hired a
realtor, but were unable to sell or rent out the entire office space. They sought
refinancing of the office space, but were declined by banks due to their debt-to-income
ratio.
In addition, Dr. Blok and Dr. Godsey provide support to two children who are
attending college. Further, their minor child was diagnosed with learning disabilities in
2009, resulting in severe delays in reading, writing and math. They searched for an
appropriate school to address his delays, and settled on the Summit Academy in
Middletown, Kentucky, located a considerable distance from their home and for which
they pay out-of-state tuition. According to their Amended Schedule J, their monthly
expenses exceed their monthly income by approximately $810.83.
D.
Payments to Trustee
Since the filing of their Chapter 7 case, the Debtors paid $72,156.18 to the Trustee.
This amount consisted of a Kentucky tax refund, a net federal tax refund, funds from their
checking and saving accounts, and the sale of certain personal property.
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E.
First Capital’s Claim Against the Debtors
First Capital originally filed a claim in the amount of $869,811.04. The claim is
secured by Charlestown Medical, LLC, an entity also in bankruptcy. See In re
Charlestown Medical Properties, LLC, Case. No. 11-90965-BHL-7 (Bankr. S.D. Ind.).
The real property has been appraised at $650,000 and has been abandoned by the Trustee.
Subsequent to this appeal, First Capital amended its claim to an unsecured claim for
$230,071.98.
The Debtors paid First Capital approximately $229,921.58 on the subject loans
after their medical practices failed, from April 2008 into 2010.
IV.
Standard of Review
The district court reviews the bankruptcy court’s findings of fact for clear error
and its conclusions of law de novo. Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584,
588 (7th Cir. 2009). The decision whether to grant a motion to dismiss in a Chapter 7
case lies within the discretion of the bankruptcy court, and will be reversed only for an
abuse of that discretion. Id. “[A] court abuses its discretion when its decision is premised
on an incorrect legal principle or a clearly erroneous factual finding, or when the record
contains to evidence on which the court rationally could have relied.” Id. (quoting
Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir. 2004)).
V.
Discussion
The sole issue on appeal is whether the bankruptcy court erred in denying First
Capital’s Motion to Dismiss this action for cause under 11 U.S.C. § 707(a). Pursuant to
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11 U.S.C. § 707(a), the court may dismiss a case under Chapter 7 for “cause,” including:
(1) unreasonable delay by the debtor that is prejudicial to creditors; (2) nonpayment of
any fees or charges required under chapter 123 of title 28; and (3) failure of the debtor in
a voluntary case to file the information required by paragraph (1) of section 521. The
Seventh Circuit has not addressed the meaning of “cause” in the Chapter 7 context;
however, in 2005, this court held that the enumerated examples listed above were not
exhaustive, and that the provision for “cause” includes filing a petition in bad faith. See
United States Trustee v. Pedigo, 329 B.R. 47, 50 (S.D. Ind. 2005); accord In re Tamecki,
229 F.3d 205, 207 (3d Cir. 2000) (citing In re Zick, 931 F.2d 1124 (6th Cir. 1991)); In re
Piazza, 451 B.R. 608, 614 (S.D. Fla. 2011); In re Rahim, 449 B.R. 527, 531 (E.D. Mich.
2011). In this regard, the Sixth Circuit observed:
Dismissal based on lack of good faith . . . should be confined carefully and
is generally utilized only in those egregious cases that entail concealed or
misrepresented assets and/or sources of income, lavish lifestyles, and
intention to avoid a large single debt based upon conduct akin to fraud,
misconduct or gross negligence.
In re Zick, 931 F.2d at 1129; see also In re Tamecki, 229 F.3d at 207 (citing Zick for the
same proposition). Factors the court may consider include whether: (1) the filing seems
intended to dispose of only one or two creditors; (2) the debtor filed in response to a
judgment, to pending litigation, or to collection action; (3) the debtor made no effort to
repay debts; (4) the debtor manipulated information on the schedules to obtain a
particular result; (5) the debtor failed to make lifestyle adjustments to repay creditors; and
(6) the debtor had sufficient resources to pay some or all of the debts. In re Pedigo, 296
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B.R. 485, 488 n.2 (Bankr. S.D. Ind. 2003) (collecting cases), rev’d on other grounds, 329
B.R. 47 (S.D. Ind. 2005).
The Debtors’ Statement of Financial Affairs reflects that they paid off the majority
of their creditors (over 30) in the 90 days prior to filing bankruptcy, leaving
approximately eight creditors on the schedules, including First Capital. At the evidentiary
hearing, First Capital made reference to the fact that the Debtors paid only $222 in
payments to First Capital on the business loans in that same 90-day period. First Capital
neglects to inform the court, however, that prior to filing for bankruptcy, the Debtors paid
First Capital well over $200,000 from the time their practices failed, April 2008, into
calendar year 2010. The fact that the Debtors paid off some creditors, with balances far
less than owed to First Capital, is not evidence of an intention to avoid a large single debt.
To the contrary, this evidence reflects only that they paid off as many creditors as they
could prior to filing bankruptcy.
It is important to note that the Debtors’ largest source of debt is business debt that
they personally guaranteed. Although the Debtors’ accountant recommended that they
file bankruptcy in 2008, the Debtors resisted that option, thinking that their income was
sufficient to cover both their personal and business-related debt. They also sought out a
lessee for Charlestown Medical, the YMCA, to help pay the mortgage on that property.
The rent they were able to negotiate with the YMCA is less than their mortgage payment.
The Debtors have attempted, through a realtor, to lease out the balance of the
Charlestown Medical business space and/or sell the property, but have been unable to do
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so. The evidence reflects that the Debtors have made an honest and good faith attempt to
pay their debts.
First Capital attempts to liken the Debtors as the type of people who refuse to
make lifestyle adjustments to pay their creditors. The evidence does not support this
view. While they own a large property, their house is approximately 50 years old, and the
barn and cabin on the property are over 200 years old and in need of constant repair. An
appraisal from March 2008 indicates a fair market value of $67,125 for all of their
personal property, including their four cars. Their two primary vehicles, as noted
previously, have over 200,000 miles on them. This is not the type of egregious case in
which the Debtors are “attempting to preserve their comfortable standard of living at the
expense of their creditors.” See In re Rahim, 449 B.R. at 534; see also id. at 532 (citing
In re Zick, 931 F.2d at 1129). Instead, this is a case in which unforeseen circumstances –
Dr. Blok’s military deployment soon after his practice opened, Dr. Blok’s heart condition
which has changed the way he practices medicine and negatively affects his future
earning capacity, the loss of Dr. Blok’s and Dr. Godsey’s private practices, and the cost
of tuition for their minor son’s special education at the Summit Academy – coupled with
a weak economy, created an untenable situation for the Debtors. In fact, at the hearing,
Dr. Blok testified that both his house and the commercial property (Charlestown Medical)
is appraised for less than what he and Dr. Godsey owe First Capital.
The court is left with only one salient fact – the Debtors have, in the words of First
Capital, a “massive income.” First Capital complains that the bankruptcy court unduly
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minimized that fact. As the bankruptcy court correctly observed, the Debtors’ income,
standing alone, is not sufficient to find cause to dismiss this case for bad faith.
“Otherwise, dismissal would essentially be based upon a debtor’s mere ability to pay,
which is expressly prohibited by the legislative history.” In re Perlin, 497 F.3d 364, 374
(3d Cir. 2007); see also Order at 4 (collecting cases).
What this case boils down to is a couple with an extremely large income and an
even larger debt. The debt is not a result of the Debtors living beyond their means; the
debt is principally the result of business-related loans. The bankruptcy schedules filed by
the Debtors, (the accuracy of which is not challenged), and the testimony of the Debtors,
support this view. Accordingly, the bankruptcy court correctly found that this is not the
type of egregious case that warrants dismissal pursuant to 11 U.S.C. § 707. Were it so,
the United States Trustee’s Office surely would have filed such a motion, or moved to
convert this case into a Chapter 13 case.
VI.
Conclusion
For the foregoing reasons, the bankruptcy court’s Order denying First Capital’s
Motion to Dismiss, dated September 15, 2011, is AFFIRMED.
SO ORDERED this 14th day of May 2012.
__________________________________
RICHARD L. YOUNG, CHIEF JUDGE
RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
United States District Court
Southern District of Indiana
Southern District of Indiana
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Electronic Copies to:
Phillip Alan Martin
FULTZ MADDOX HOVIOUS & DICKENS, PLC
pmartin@fmhd.com
Michael Wayne McClain II
BALLINGER MCCLAIN, PLLC
mike@kentuckytrial.com
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