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Fifth Circuit Affirms District Court Ruling Against Bad-Faith Debtor

By Jonathan R. Tung, Esq. on January 25, 2016 | Last updated on March 21, 2019

The Court of Appeals for the Fifth Circuit took sides against a bad-faith debtor when it reviewed the facts of the case and described the plaintiff's actions as "an exercise in chutzpah."

In this Chapter 7 dismissal case, the plaintiff used every trick in the book to "flagrantly and repeatedly abuse" the bankruptcy court proceedings.

The Beginnings of Cru. Energies

Plaintiff Krueger and Defendant Torres were shareholders in a newly formed Cru Energy, Inc. They both sued each other for breaches of fiduciary duties including fraud, conversion, and tortious interference. A TRO and other injunctions were issued against Krueger and he was enjoined from participating in Cru's business operations.

Cru's Crew Forms Kru

Perhaps smelling troubling in the wind, Krueger formed another company called "Kru" (Krueger Renewable Energies) which lifted the same business plan as Cru, and included many of the same shareholders and investors. Krueger new the injunction was coming and was essentially attempting to still run the company without Torres' involvement.

Despite various injunctive orders against him, Krueger transferred funds to his own personal account from the company's account. Krueger spent time in jail and contemplated how to further carry out his schemes. But just before he went to jail, he filed for Chapter 7 Bankruptcy.

Quietly, Krueger called a meeting of Cru's shareholders -- a meeting Torres did not attend. There, Krueger made sure that he manipulated Torres off of the company, secured himself to the Board, and fired the attorneys of the company. This was supposed to be impossible because the bankruptcy attorney actually owned Krueger's shares in Cru. No matter ...

Torres was initially in trouble because his suits against Krueger because he asserted no personal claims against him. Only with dogged effort was he able to secure a motion to dismiss the bankrupcy that Krueger had fought so hard to procure.

"Chutzpah"

Krueger made it to the Circuit's hit-list in record time. Upon review of the facts, it found that Krueger's attempt to characterize his behavior as not being "cause" for dismissal rather presumptuous. Under 11 U.S.C. sec 707, a debtor's case may be dismissed "for cause." The Circuit applications of various previous interpretations guiding the proper understanding of "cause" applied here. Short story? Krueger met them all.

To make things simple, under the broadest review of the facts, the totality of the circumstances clearly show that Krueger was up to bad-faith right out of the gate. The bankruptcy court found that Krueger engaged in at least six different instances that constituted dishonest behavior and "bare knuckle litigation practices" including: misleading the court, misleading parties to the manner, lying under oath, trying to avoid the automatic stay, and use of a false address

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