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A High-Income Debtor May File for Bankruptcy Under Chapter 7 of the Bankruptcy Code

By: Pamela Frederick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Notwithstanding a debtor’s high income and ability to pay creditors, in In re Snyder,[i] a bankruptcy court in New Mexico recently refused to dismiss the debtor’s chapter 7 bankruptcy case because the court found that the debtor did not act in bad faith when filing the case.[ii] The debtor, a 63-year-old doctor with an annual salary of $290,000, filed for bankruptcy under chapter 7 of the Bankruptcy Code in order to discharge a $170,000 debt.[iii] In response, the debtor’s sole creditor moved to dismiss the case, or alternatively, to convert the case to one under chapter 11, arguing that the debtor filed the case in bad faith.[iv] In support of its motion under section 707(a), the creditor argued that the debtor’s high income, ability to repay, failure to try to repay, failure to schedule his wife’s jewelry, use of his historical average expenses on his Schedule J, and the fact that the movant was the debtor’s only unsecured creditor were all indicia of the debtor’s bad faith.[v] The debtor responded that he did not file his chapter 7 case in bad faith, arguing that his age, lack of retirement savings, lack of a lavish lifestyle, and compliance with the Bankruptcy Code all indicated that he filed his petition in good faith.[vi] The court ultimately denied the creditor’s motion, concluding that despite the existence of unfavorable factors and the debtor’s high income, the debtor’s desire to save for retirement was “consistent with good faith.”[vii] Likewise, the court denied the creditor’s motion to convert because the evidence relied upon to support a conversion under section 706(b) was “identical” to the evidence in support of the motion to dismiss under section 707(a).[viii]

Abatements Enforceable as Forfeiture Provisions

By: Shantel M. Castro

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re The Great Atlantic & Pacific Tea Company, Inc.,[i] the District Court for the Southern District of New York upheld a bankruptcy-court order enforcing an abatement provision in a lease.[ii] The case involved a twenty-year lease between a commercial landlord and a grocery store.[iii] Under the terms of the lease, the grocery store was to construct its own building on the leased premises, and the landlord would pay the grocery store a $1.9 million construction allowance within ninety days of the grocery store opening to the public.[iv] A provision in the lease stated that if the landlord failed to pay the construction allowance, the grocery store’s obligation to pay fixed rent and other charges would abate until the allowance was paid with interest.[v] The lease further provided that the grocery store would have title to the building until such time. [vi] A subsequent section of the lease entitled “Landlord default” detailed the remedies available to the grocery store in the event of a default by the landlord.[vii] After the grocery store opened, but just prior to the deadline for payment of the construction allowance, the grocery store filed for bankruptcy under chapter 11 of the Bankruptcy Code.[viii] The landlord’s financing for the construction allowance was conditioned on the grocery store assuming the lease.[ix] The lease was not assumed prior to the payment deadline for the construction allowance, therefore the landlord could not close on its financing.[x] Consequently, the landlord did not pay the construction allowance on time.[xi] Therefore, the grocery store withheld rent payments and property taxes due under the lease until the construction allowance was paid nine months later.[xii] The landlord commenced an adversary proceeding to collect the rent and filed a cure claim after the grocery store assumed the lease.[xiii] The bankruptcy court dismissed the adversary proceeding and denied the cure claim.[xiv] On appeal, the district court affirmed.[xv]