Ronald Q. Cantelli and Leslie L. Cantelli

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AUTHENTICATED / LQ
U.S. GOVERNMENT
INFORMATION

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Ronald and Leslie Cantelli )
) Case No. 12-30748
Debtor(s) )
)
)
DECISION AND ORDER

This cause comes before the Court after an Evidentiary Hearing on the Motion of the United
States Trustee to Dismiss. (Doc. No. 48). As the basis for its Motion to Dismiss, the United States
Trustee cited to § 707(a) and § 707(b) of the Bankruptcy Code. At the commencement of the
Hearing, however, the United States Trustee withdrew its action to have this case dismissed under
§ 707(b). As such, the Hearing held on the Motion of the United States Trustee to Dismiss was
limited to the applicability of § 707(a) — providing for the dismissal of a debtor’s Chapter 7
bankruptcy case when “cause” is shown. The Debtors have objected to the dismissal of their case

under § 707(a). (Doc. No. 36).

At the conclusion of the Hearing held in this matter, the Court deferred ruling on the merits
of the Motion of the United States Trustee to Dismiss so as to afford the opportunity to fully consider
the evidence and arguments presented by the Parties. The Court has now had this opportunity and,
for the reasons set forth herein, finds that the Motion of the United States Trustee has merit.

Accordingly, unless the Debtors timely convert their bankruptcy case, this case will be dismissed.

BACKGROUND

The Debtors in this case are Ronald and Leslie Cantelli, husband and wife (hereinafter

referred to collectively as the “Debtors”). Mr. Cantelli is a professional cabinet maker, owning his

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own business. During the course of operating his cabinet making business, the Debtor has employed
a number of persons, presently having 12 employees in his charge. Since 2009, Mrs. Cantelli has

worked full-time for her husband’s cabinet making business in the capacity of an “office manager.”

On February 28, 2012, the Debtors filed a petition in this Court for relief under Chapter 7 of
the United States Bankruptcy Code. (Doc. No. 1). At the time they filed for bankruptcy relief, the

Debtors had two minor children, a son and a daughter.

In seeking bankruptcy relief, the Debtors disclosed two interests in real property: their
residence, which they valued at $865,000.00; and a second parcel of property, which they valued at
$15,000.00. Title to both these properties is held in the name of the “Leslie Cantelli Revocable

Living Trust.”

The Debtors’ residence is a four-bedroom, three-and-one-half-bath home with 5,176 square
feet of living space. The Debtors constructed the property in 2002, at a cost of approximately
$450,000.00. Because of Mr. Cantelli’s professional expertise and contacts, the Debtors were able
to construct their home at a below market rate. The Debtors financed the construction of their home

by initially taking a home-mortgage loan in 2002 in the amount of $250,000.00.

As a part of their bankruptcy filing, the Debtors disclosed an interest in a variety of personal
assets, including three automobiles: a 2002 Ford F-150, a 1998 Jaguar XK8, and a 1999 Land Rover
Discovery II. According to the information provided by the Debtors, the value of each individual
vehicle, none of which are encumbered by any lien or other interest, does not exceed $3,200.00. It
was also brought to the Court’s attention that Mrs. Cantelli has in her possession and regularly uses
a vehicle which is owned by her mother, but for which Mrs. Cantelli reimburses her mother the sum

of $288.77 per month to service the debt secured against the vehicle.

In all, the Debtors disclosed in their bankruptcy filing assets worth $1,201,790.67 against
liabilities totaling $1,569,675.44. After their residence, the Debtors’ most significant asset in terms

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In re Ronald and Leslie Cantelli
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of value was listed as “Funds due from business for loans to company,” with an assigned worth of

$300,000.00. No actual documentation evidencing this asset, however, was provided.

The Debtors’ liabilities were listed in these terms: (1) $1,137,019.77 in secured claims; (2)
$275,521.72 in unsecured, priority claims; and (3) $157,133.95 in unsecured, nonpriority claims. The
bulk of the Debtors’ secured obligations may be divided into two components: mortgages and tax
liens. The mortgage obligations total $783,974.00, consisting of a first mortgage in the amount of
$675,544.00 and a second mortgage in the amount of $108,430.00. Both of these mortgages

encumber the Debtors’ residence. Also encumbering their residence, a tax lien in the amount of

| $270,521.72, while against their second parcel of real property, there exists another tax lien for the

‘sum of $72,255.00.

Duplicating the sum of the tax lien against their residence, the Debtors’ unsecured, priority
debt was set forth in the sum of $270,521.72. As the basis for this obligation, the Debtors stated that
it arose from unpaid federal withholding taxes for the years 2004 through 2008. Finally, the
information submitted by the Debtors shows that their $157,133.95 in unsecured, nonpriority debt

consists mostly of credit-card obligations.

As a whole, the Debtors set forth that their obligations are primarily in the nature of business
debts — a point which the United States Trustee, by withdrawing that portion of its Motion to Dismiss
under § 707(b), did not contest.' As it regards the business nature of their debts, the information
presented to the Court shows that, since at least 1990, Mr. Cantelli has operated his cabinet making
business. For his business operations, Mr. Cantelli has owned a controlling interest in the following

business entities, some of which, as noted below, are now longer in operation:

Chattabrooke Cabinets, Inc., formed June 1990.

Business ceased operating, filing for bankruptcy protection in 1992.

11 U.S.C. § 707(b) applies only to debtors “whose debts are primarily consumer debts . . . .”

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QMC Cabinet Makers, Inc., formed June 1995.

In January 4, 2007, articles of incorporation were cancelled for failure
to pay the necessary franchise tax.

Ohio Cabinet Makers, Inc., formed June 1995.
By 2004, business had ceased operations.
KEC Holdings, LLC, formed March 2005.

Currently in operation. Functions as holding company whereby it
owns equipment, which is then leased to Mr. Cantelli’s cabinet
making business. Between 2008 and 2011, KEC generated net rental
of $202,866.00. (Doc. No. 28, at pg. 12).

Northern Lights Cabinetry, LLC, formed 2006.

Currently in operation. Constitutes the business entity under which

Mr. Cantelli presently operates his cabinet making business.
Under one or more of these business entities, Mr. Cantelli’s cabinet making business has been in
continuous operation. Although the exact mechanics were never disclosed, it was indicated to the
Court that when one of the above business entities used in Mr. Cantelli’s cabinet making business
became defunct, its assets, but not its liabilities, would be transferred to a newly formed business for

little or no consideration.

In addition to the foregoing businesses, which were limited to Mr. Cantelli’s cabinet making

operation, the Debtors also, on a prepetition basis, maintained interests in these concerns:

C&C Investments, Partnership (Mr. Cantelli, 50% owner)

Owned six separate parcels of rental real estate, consisting of one
apartment building, one commercial building, one condominium, and
three houses.

In 2008, the real estate was sold to a third party, Feick, LLC, for the

sum of $180,000.00. The purchase agreement, however, provided that
C&C Investments would continue to rent the properties, with C&C

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Investments paying to Feick, LLC, a set amount based upon the
purchase price. As a part of this transaction, C&C Investments
maintained a three-year option to repurchase the properties for the
sum of $216,000.00. This agreement was renewed in 2011 under
substantially identical terms. For the years 2009 through 2011, C&C
Investments reported net losses for its rental activities.

In his bankruptcy petition, Mr. Cantelli listed this business as
“defunct.”

Hoty 250 Water, Ltd., (Mr. Cantelli, 1% owner)
In operation from 2000 to 2009.

Mr. Cantelli sold his interest in 2010, receiving a distribution of
$19,986.00

Hoty MD, Ltd., (Mr. Cantelli, 1% owner)
In operation from 2000 to 2008.

Mr. Cantelli sold his interest in 2011, receiving a distribution of

$11,120.00
At the time they sought bankruptcy relief, the Debtors did not disclose Mr. Cantelli’s sale of his
interests in the Hoty business entities. In addition, a recent loan of approximately $12,000.00 taken

by the Debtors against a life insurance policy was not initially disclosed.

As exhibited by the substantial tax claims disclosed by the Debtors, Mr. Cantelli, in operating
his cabinet making business, often became delinquent in his tax obligations. A large portion of the
delinquent tax obligation arose from Mr. Cantelli’s failure to pay to the Internal Revenue Service
(hereinafter the “IRS”) payroll taxes withheld from employees’ wages. Based upon the nonpayment
of taxes, various tax liens have been filed against the Debtors’ property and those business entities

controlled by Mr. Cantelli. (Doc. No. 49, UST. Ex. 19-1).

The tax deficiencies, which gave rise to the tax liens, began in the year 1990, and occurred

frequently thereafter. Of note, beginning in the year 2000, the evidence before the Court shows that

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tax deficiencies existed with respect to Mr. Cantelli’s businesses for each year thereafter, until the
year 2009. Illustrative of the reoccurring tax deficiencies are the following tax liens as most recently

assessed against Mr. Cantelli and his business interests:

Party Name Date Amount
Ronald Cantelli 1/15/2010 $270,521.72
QMC Cabinet Makers, Inc. 2/18/2011 $374,440.77

Ronald Cantelli & 5/23/2011 $72,255.05
Northern Lights Cabinetry

Id.

In the years 2004 and 2007, the Debtors made significant payments toward their tax liabilities
~ particularly, those tax obligations arising from the nonpayment of withholding taxes. The means
to make these payments were partially obtained through the Debtors taking advances on their credit
cards. More significantly, however, the Debtors refinanced their home on two separate occasions,
using the bulk of the available proceeds received therefrom to pay their tax obligations. First, in
2004, the Debtors conveyed a first and second mortgage on their home, receiving in return financing
worth $740,000.00. Second, in 2007, the Debtors again conveyed a first and second mortgage on
their home, receiving in exchange financing in the sum of $854,905.00. (U.S.T. Ex. 20-1).

Despite the sizeable payments they made toward their tax obligations, the Debtors, when they
filed for bankruptcy relief, were still seriously delinquent with respect to their tax obligations. In this
regard, the IRS filed a proof of claim in the Debtors’ case in the amount of $355,168.43, representing
unpaid taxes for the reporting periods running from September 30, 2003, through September 30,
2009. (Claim No. 3-1). Moreover, as to this liability, there still exists a question as to whether the

2

It is assumed that, with respect to this second refinancing, the prior mortgage obligations
encumbering the Debtors’ residence were retired.

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proof of claim filed by the IRS constitutes a final determination of the Debtors’ outstanding federal
tax liabilities, with the Debtors having just filed, or preparing to soon file, their federal tax returns

for the years 2008 through 2011.

As a part of their bankruptcy disclosures, the Debtors reported a net monthly income of
$6,072.41, representing $2,127.29 in net monthly income for Mr. Cantelli and $3,945.12 in net
monthly income for Mrs. Cantelli. This overall level of household income for the Debtors has
remained relatively consistent over the years; however, it was reported that recently Mr. Cantelli’s
level of income has decreased, while Mrs. Cantelli’s level of income has increased — a situation Mr.
Cantelli acknowledged was brought about out of a concern that the IRS would seek to attach his

wages.

Against their income, the Debtors reported current monthly expenditures of $10,828.54,
leaving the Debtors with a shortfall in their monthly budget of $4,756.13. The Debtors’ largest
claimed expense, by far, is for their home which, exclusive of taxes and insurance, requires an
expenditure of $7,248.87 per month to services the two mortgages.’ In the past, income attributable
to Mr. Cantelli’s cabinet making business has been utilized by the Debtors to help pay for their
mortgage obligations. When they filed for bankruptcy relief, the Debtors disclosed that they intended
to reaffirm on the mortgage obligations encumbering their residence. The Debtors, however, while

having yet to vacate their residence, have since retracted this stated intention.

In addition to their housing expenditure, the Debtors budget $405.00 per month for
phone/cable/internet usage. The Debtors’ budget also reflects a monthly expenditure of $800.00 for
recreation and entertainment. Consistent with this expense, financial information provided to the
Court shows that the Debtors have expended significant amounts of money for dance lessons and
baseball related activities for their children. (U.S.T. Ex. No. 10). The Debtors have also recently

taken a number of trips to places such as Arizona, Las Vegas, Florida, and Puerto Rico.

3

The Debtors are currently in arrears on their mortgage obligations by a number of months.

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In the past, the Debtors have also engaged in a sizeable amount of gambling activities, with
the Debtors showing from 2008 to 2010 gambling winnings of $44,648.00 against losses of
$39,795.00. Although not disclosed in their bankruptcy schedules, the Debtors further budget
approximately $200.00 a month for a housekeeper. The Debtors’ monthly budget also shows a
$600.00 allotment for food, an amount which appears to be understated given that the Debtors

related to the Court that they frequently dine out.
DISCUSSION

Before this Court is the Motion of the United States Trustee to Dismiss pursuant to 11 U.S.C.
§ 707(a). Matters concerning the dismissal of a case, which affects both the ability of a debtor to
receive a discharge and directly affects the creditor-debtor relationship, are core proceedings
pursuant to 28 U.S.C. §§ 157(b)(2)(J)/(O). As a core proceeding, this Court has been conferred with
the jurisdictional authority to enter a final order in this matter. 28 U.S.C. § 157(b)(1).

Section 707(a) of the Bankruptcy Code provides that the “court may dismiss a case under this
chapter only after notice and a hearing and only for cause...” (emphasis added). Section 707(a) then
goes on to provide a list of three grounds that may constitute “cause” for dismissal. 11 U.S.C.
§ 707(a)(1)/(2)/(3). The three grounds for dismissal as specified in § 707(a) are: (1) unreasonable
delay by the debtor that is prejudicial to creditors; (2) a debtor’s failure to pay certain statutory fees;

and (3) a debtor’s failure to file certain required information.

The three grounds listed in § 707(a), however, are not exclusive, with it being recognized that
a court may dismiss a debtor’s chapter 7 case for “cause” generally. Smith v. Geltzer (In re Smith),
507 F.3d 64, 72 (2™ Cir. 2007). The Motion of the United States Trustee (hereinafter the “UST”) to
Dismiss is based upon this precept. According to the UST, “‘cause” generally exists to dismiss this
case because the Debtors, in seeking relief under Chapter 7 of the Bankruptcy Code, acted in “bad

faith.” (Doc. No. 28, at pg. 21).

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In the case of Industrial Ins. Servs., Inc. v. Zick (In re Zick), the Sixth Circuit Court of
Appeals recognized that a “lack of good faith,” although not an enumerated ground, could serve as
a valid basis to dismiss a case for “cause” under § 707(a). 931 F.2d 1124, 1126-27 (6" Cir.1991).
In making this assessment, the Court in Jn re Zick held that the “facts required to mandate dismissal
based upon a lack of good faith are as varied as the number of cases.” Id. at 1127, citing In re
Bingham, 68 B.R. 933, 935 (Bankr. M.D.Pa.1987). However, according to the Court in Jn re Zick,

certain considerations will lend themselves to a good faith analysis under § 707(a).

First, the Court in Jn re Zick found the considerations relied upon by the bankruptcy court
in the case were sufficient to support the bankruptcy court’s finding of bad faith. These
considerations were: (1) the debtor’s manipulations which reduced the creditors in the case to one;
(2) the debtor’s failure to make significant lifestyle adjustments or efforts to repay; (3) the fact that
the petition was filed clearly in response to [a creditor] obtaining a mediation award; and (4) the

unfairness of the debtor’s use of Chapter 7 under the facts in this case. 931 F.2d at 1128.

Second, the Court in Jn re Zick also set forth that dismissal for a lack of good faith would be
warranted in the situation before it, where the debtor “concealed or misrepresented assets and/or
sources of income,” and where the debtor filed for Chapter 7 relief based upon the “intention to
avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence.” Jd. at
1129. Finally, in In re Zick, the Court attributed to the debtor a “bad faith motivation” in seeking

| Chapter 7 relief where the debtor made arrangements with certain creditors — e.g., family members
— to repay their debts, while seeking to discharge a debt incurred by a “malicious breach of a

noncompetition agreement” in which a judgment had just been rendered. Jd.

The above considerations taken into account by the Court in Jn re Zick lend themselves to
the dismissal of this case. First, in assessing the evidence before it, the Court is not persuaded that
the Debtors were entirely forthwith in their financial disclosures. This lack of openness is
exemplified by a number of omissions and deficiencies contained in the Debtors’ financial

disclosures.

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Of initial concern for the Court is Mr. Cantelli’s business interest in C&C Investments. This
business enterprise, in which Mr. Cantelli is a 50% owner, centers on the lease of real property.
Although his interest in this business was disclosed in his bankruptcy schedules, Mr. Cantelli set
forth that the business enterprise was “defunct.” This status of the business, however, was
contradicted by Mr. Cantelli’s own testimony at the Hearing held in this matter, at which time Mr.

Cantelli acknowledged that he was still receiving rental income on behalf of the business.

Moreover, there exist other deficiencies with respect to the Debtors’ disclosures concerning
C&C Investments. One, any profit or loss from the business was not accounted for in the Debtors’
bankruptcy filing. Instead, the Debtors simply set forth that for the two most recent years, 2011 and
2012, their rental income was “0.00.” Similarly, the Debtors ascribed a value of “0.00” to their
interest in the business, a statement which does not align itself with the evidence presented to the

Court.

As disclosed to the Court, C&C Investments presently maintains an option to repurchase the
six properties it sold to Feick, LLC. According to the statements made by Mr. Cantelli, this option
has value, with Mr. Cantelli testifying that the properties sold by C&C Investments could now be
worth approximately a halfa million dollars, a value which is more than double the amount needed
by C&C Investments to exercise its option to repurchase the properties. Under these circumstances,

ascribing a value of “0.00” to C&C Investments can only be viewed as misleading.

The Debtors’ lack of full disclosure is also exhibited in other areas. The first concerns Mr.
Cantelli’s 1% interests in Hoty 250 Water, Ltd., and Hoty MD, Ltd. Although Mr. Cantelli did
disclose the existence of his past interests in both of these business entities, Mr. Cantelli’s divestiture
of these interests, through a relatively recent sale in which he received approximately $30,000.00,

was not disclosed.*

4

As a part of their financial disclosures, debtors are required to file a “Statement of Financial
Affiars.” 11 U.S.C. § 521(a)(1)(B) (ii). Question 10 of this statement, entitled “Other Transfers”

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In filing for bankruptcy relief, the Debtor likewise omitted a recent loan of approximately
$12,000.00 taken by the Debtors against a life insurance policy. Regardless of the Debtors’
contention that they did not own the life insurance policy, the receipt of these funds should have been
disclosed. Other deficiencies with the initial disclosures made by the Debtors include: (1) listing the
value of KEC (Mr. Cantelli’s equipment holding company) as $0.00, when the company generated
net rental income between 2008 and 2011 of more than $200,000.00; and (2) totally omitting any

reference of their business relationship with Feicke, LLC.

Itis also problematic that, in their original household budget filed with the Court, the Debtors
claimed a monthly shortfall of $4,756.13, a statement which is neither presently nor historically
accurate. Presently the statement is inaccurate, with the Debtors acknowledging that, because of their
intention to surrender their home, they are no longer making the $7,248.87 monthly payment toward
their mortgage obligations. Historically, the claimed shortfall is inaccurate, with the Debtors also
revealing that, in the past, they caused funds from Mr. Cantelli’s business operation to be diverted
from the business to pay for their personal mortgage obligations. These circumstances should have

been initially disclosed.

Regarding the above deficiencies, the Debtors contended that nothing nefarious was intended.
And looked at individually, each of the above omissions, while of import, would not necessarily be

a strong indication of a lack of good faith. In this matter, however, it is the scope of the above

asks this question:

List all other property, other than property transferred in the ordinary course of the
business or financial affairs of the debtor, transferred either absolutely or as security
within two years immediately preceding the commencement of this case.

As applied to this question, the exact date of the 2010 sale of Hoty 250 Water, Ltd. is not clear.
Thus, the sale may have occurred outside the two-year time frame set forth in Question 10, with
the Debtors filing for bankruptcy in February of 2012. In any event, the sale of Hoty MD, Ltd.,
occurring in 2011, falls within the two year window provided in Question 10.

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matters not disclosed by the Debtors which strongly lends itself to the conclusion that the Debtors

have not been entirely forthcoming with the true nature of their financial affairs.

The Debtors’ position is further belied by this deficiency: the Debtors did not later, on their
own accord, seek to rectify the misinformation contained in their initial disclosures. Instead, the
Debtor’s only sought to explain the inaccuracy of their original disclosures when prodded by the
UST. Put differently, the Debtors placed the impetus on other parties to inquire about the true nature

of their financial affairs.

Considered on whole, therefore, the Debtors’ approach is inapposite to a debtor’s duty to
provide a full and complete disclosure of their financial affairs. Stephenson v. Malloy, 700 F.3d 265,
267 fn. 2 (6" Cir. 2012), citing 11 U.S.C. § 521(a)(1). Their approach, moreover, goes contrary to
the continuing duty of disclose placed upon debtors. /n re McClellan, 428 B.R. 737, 745, fn. 1
(Bankr. N.D.Ohio 2009), citing Lewis v. Weyerhaeuser Co., 141 Fed. Appx. 420, 424 (6" Cir.2005)
(“the duty of disclosure is a continuing one, . . .”). See also FED.R.BANKR.P. 1009 (affording a
liberal approach to amendments). To this end, this Court has previously remarked: “when in doubt,
disclose.” United States Trustee. v. Halishak (In re Halishak), 337 B.R. 620, 630 (Bankr.N.D.Ohio
2005).

The Debtors’ failure to be entirely forthright in their bankruptcy filing is not the only
consideration which works against their favor. Similar to the situation in Jn re Zick, the Debtors’ use
of the bankruptcy process may be said to be aimed at one creditor: the IRS. Furthermore, the
Debtors’ treatment of their tax obligations can hardly be considered equitable. In fact, the Debtors’
treatment of the claims held by the IRS is not only inequitable, but is consistent with the
consideration raised in Jn re Zick regarding an “intention to avoid a large single debt based on
conduct akin to fraud, misconduct, or gross negligence.” These conclusions are supported by the

prepetition treatment afforded by the Debtors to their tax obligations.

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For his cabinet making business, Mr. Cantelli has, since the early 1990's, operated a number
of business entities. Some of these business entities have been dissolved or are otherwise no longer
in operation. All the business entities operated by Mr. Cantelli for his cabinet making business
incurred liabilities for unpaid federal taxes, with a large portion of the tax liabilities arising from the
nonpayment of withholding taxes. When forming a new business entity, the assets, but not the

liabilities, of an operating business entity would be transferred to the new business entity.

These facts strongly suggest that, as asserted by the UST at the Hearing, the Debtors have
used a successive string of business entities to avoid their legal responsibility to pay their taxes. This
conclusion is only reinforced by the fact that Mr. Cantelli has continuously operated and exercised
exclusive control over his cabinet making business. As a result, with Mr. Cantelli’s business
operation remaining in constant operation over the years, the Court can discern little need on the part
of Mr. Cantelli to create a number of successive business entities outside of the need to avoid his
ongoing tax deficiencies. At the Hearing, the Debtors were unable to offer a viable explanation

contradicting this conclusion.

This conclusion, that the Debtors’ intentionally created a successive string of business entities
for the express purpose of avoiding the tax obligations incurred by Mr. Cantelli’s cabinet making
business, is further supported by the Debtors’ recent action to manipulate their income. Specifically,
Mr. Cantelli acknowledged that, out of a concern that his wages would be attached by the IRS, he
caused his level of income from the cabinet making business to be decreased, while

contemporaneously causing his wife’s level of income from the business to be increased.

As applied to § 707(a), these measures, as taken by the Debtors to address their tax liabilities,
are contrary to any notion of good faith. See In re Griffieth, 209 B.R. 823, 830 (Bankr.
N.D.N.Y.1996) (failure to pay tax debt over 10 years weighed toward finding of a “bad faith” filing).
This is not to say that the Debtors were completely dilatory in the manner in which they handled their
tax obligations to the IRS. Particularly, it did not go unnoticed to the Court that the Debtors, in the

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years leading up to their bankruptcy filing, did make a couple of substantial payments to the IRS,

thereby reducing their tax liabilities.

Yet, the weight of this mitigating factor is diminished when it is considered that the payments
made to the IRS for Mr. Cantelli’s cabinet making business were specifically directed to and limited
to those tax liabilities arising from the failure to pay trust fund taxes — in particular, payroll taxes for
employees of Mr. Cantelli’s cabinet making business. (Def. Ex. No. 1). Such taxes are
nondischargeable in bankruptcy. 11 U.S.C. §§ 507(a)(8)(C), 523(a)(1)(A). Mr. Cantelli is also
personally liable for this type of tax liability. 26 U.S.C. §§ 6671 and 6672. As a result, the picture
the Debtors attempted to present to the Court — that in paying their delinquent tax obligations, they
were acting responsibly and unselfishly — is not entirely accurate, with it being to Mr. Cantelli’s legal

advantage to pay such taxes ahead of other types of taxes which may be subject to discharge.

Moreover, the Debtors’ lack of good faith in their handling their tax liabilities is even more
disconcerting given a couple of additional aggravating considerations. First, the Debtors, in 2002,
constructed what can only be termed a luxury home. However, prior to, during, and for many
consecutive years after the construction of their luxury home, the tax obligations of Mr. Cantelli’s
cabinet making operation to the IRS were in arrears. The Debtors also, admittedly, used income
generated from the cabinet making business to pay for the mortgages encumbering their home. It is,
thus, no great leap to conclude that the Debtors partially financed their luxury home through the
nonpayment of their tax obligations. The particular character of the taxes involved casts this course

of action in a particularly bad light.

As stated, the evidence presented to the Court shows that most of the Debtors’ unpaid tax
liabilities resulted from the nonpayment of withholding taxes incurred in Mr. Cantelli’s cabinet
making business. Withholding taxes are those taxes withheld by an employer from an employee’s

pay to account for an employee’s income tax liability. Such funds, thus, do not actually belong to

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the employer, with the law placing on a person, such as a Mr. Cantelli, the duty to account for such

funds.°

It, thus, follows that, for all practicable purposes, the Debtors were using funds which did not
belong to them to fund their luxury home. Such a course of conduct is inapposite to any notion of
good faith. The Debtors’ luxury home further segues into another, and the final consideration lending

itself to a finding of bad faith in this case.

In In re Zick, the Sixth Circuit Court of Appeals set forth that, as applied to the dismissal of
a case under § 707(a), a factor tending to show bad faith concerned “a debtor’s failure to make
significant lifestyle adjustments.” In this matter, when they filed for bankruptcy relief, the Debtors,
although having since recanted, set forth that they had intended to retain their home by reaffirming
on the property’s mortgage obligations. This property, as earlier pointed out, is a luxury home,
having 5,176 square feet of living space. To service the mortgage obligations on their residence, the
Debtors were required to expend the sum of $7,248.87 per month, an amount which is exclusive of

taxes and insurance, not to mention other necessities such as utilities and basic upkeep.

Such an intended use of the bankruptcy process is clearly unfair to the Debtors’ creditors, and
shows that the Debtors were not serious in their effort to make a significant adjustment to their
lifestyle. This conclusion if further reinforced by other aspects of the Debtors’ spending habits. First,
from 2008 to 2010, the Debtors expended an appreciable amount of money on gambling, and other

entertainment related activities. As a part of these expenditures, the Debtors have also taken a

5

“The Internal Revenue Code requires employers to withhold from their employees’ paychecks
money representing the employees’ personal income and Social Security taxes. 26 U.S.C. §§
3102(a), 3402(a). Because employers must hold these funds in “trust for the United States,” §
7501(a), the taxes are commonly called “trust fund” taxes. Should an employer fail to pay such
taxes, § 6672 authorizes the Government to collect an equivalent sum directly from the
employer’s officers or employees who are responsible for collecting the tax and are thus
commonly referred to as “responsible” individuals.” United States v. Energy Resources
Company, Inc., 495 U.S. 545, 545, 110 S.Ct. 2139, 2139-40, 109 L.Ed.2d 580 (1990).

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Case No. 12-30748

number of trips. It was also brought to the Court’s attention that, in the time period leading up to
their bankruptcy filing, the Debtors employed the services of a housekeeper. As well, the Debtors

frequently dine out.

The Debtors contend that they have since ceased and/or decreased such expenditures, thereby
showing an intent to make adjustments in their lifestyle. Yet, even assuming this to be true, the Court
is not persuaded that a postpetition change in spending habits is automatically indicative of good
faith for purposes of § 707(a). This is particularly true under the circumstances presented in this
matter where, in the years immediately preceding their bankruptcy, the Debtors’ frivolity in their
spending continued unstrained, despite the Debtors admittedly knowing the precariousness of their
financial situation. Such a consideration was recognized by the Sixth Circuit Court of Appeals as
a basis for dismissal under § 707(b), where in addressing whether a debtor was honest — a concept
closely akin to good faith as applied to § 707(a) — it was held that a court should consider whether
the debtor “was forced into Chapter 7 by unforeseen or catastrophic events.” Jn re Krohn 886 F.2d
123, 126 (6" Cir.1989), It also did not go unnoticed to the Court that, at the time they were engaging
in unnecessary spending, the Debtors were not filing their personal tax returns and could, as a result,

have additional tax liabilities.

In assessing whether a case should be dismissed for a lack of good faith under § 707(a), the
Sixth Circuit in Jn re Zick found “particular merit in what is described as the “smell test”... .”
Under this test, the cumulative weight of the Debtors’ actions leads this Court to conclude that, in
seeking to receive a Chapter 7 discharge, as opposed to a discharge under a plan of reorganization,
the Debtors did not file this case in good faith. As such, dismissal for “cause” under § 707(a) is

appropriate. Before concluding, a couple of final points are in order.

First, although much of the evidence and conduct surrounding the Motion to the UST to
dismiss was directed at Mr. Cantelli and his business interests, the Court is persuaded that a
dismissal of Mrs. Cantelli case is equally appropriate under § 707(a). In the Debtors’ financial

dealings, Mrs. Cantelli was not an innocent spouse, having been involved in and having benefitted

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In re Ronald and Leslie Cantelli
Case No. 12-30748

directly from Mr. Cantelli’s cabinet making business. Mrs. Cantelli was also responsible for a

significant portion of the unnecessary spending as discussed above.

Second, on more than one occasion at the Hearing held on the Motion of the UST to Dismiss,
the Debtors testified that some of their actions, which the UST cited as a basis for dismissal, were
undertaken on the advice of professionals, such as accountants and attorneys. As an example, Mr.
Cantelli testified that, when paying his tax deficiency, he was advised to first pay the trust fund taxes.
The implicit message of such testimony was that actions taken on the advice of professionals should

not be considered as bearing negatively on a good faith analysis under § 707(a).

The Debtors’ attempt, however, to ascribe responsibility to third-party professionals is not
persuasive. In this regard, merely because a course of action is legal, does not mean that the action
equates with good faith. Consequently, actions taken by a debtor at the advice of a professional will
not necessarily insulate such actions from consideration in a good faith analysis. This is particularly
true here, where the evidence presented in this matter showed that the Debtors, having been involved

in the cabinet making business for more than two decades, are well versed in business practices.
In reaching the conclusions set forth in this Decision, the Court has considered all of the

evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically

referred to herein.

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In re Ronald and Leslie Cantelli
Case No. 12-30748

Accordingly, it is

ORDERED that the Motion of the United States Trustee to Dismiss pursuant to 11 U.S.C.
§ 707(a), be, and is hereby, GRANTED.

IT IS FURTHER ORDERED that this case is hereby DISMISSED.

IT IS FURTHER ORDERED that this Court’s order of Dismissal is hereby stayed for a
period of fourteen (14) days so as to afford the Debtors the opportunity to convert this case.

Dated: January 4, 2013

ao”
Richard L. Speer
United States
Bankruptcy Judge

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CERTIFICATE OF SERVICE

Copies were mailed this 6th day of January 4, 2013 to:

Leslie L. Cantelli
1837 Cedar Point Road
Sandusky, OH 44870

Ronald Q. Cantelli
1837 Cedar Point Road
Sandusky, OH 44870

Thomas C Pavlik

950 Skylight Ofe Twr
1660 W 2nd Street
Cleveland, OH 44113

John N Graham
5151 Monroe St, #245
Toledo, OH 43623

Derrick Rippy
201 Superior Ave, #441
Cleveland, OH 44114

/s/Diana Hernandez,
Deputy Clerk, U.S. Bankruptcy Court

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