Determining whether you qualify under Chapter 7 or Chapter 13 of the Bankruptcy Code is critical when seeking bankruptcy protection.  The Bankruptcy Code limits a consumer debtor’s ability to discharge his or her debts as opposed to a debtor that incurs mostly business related debts.

Enter Paul Cherrett.  Mr. Cherrett has been working in the hospitality industry for over twenty-five years.  Cherrett and his family lived in Jackson Hole, Wyoming, where Cherrett worked at the Four Seasons.  Aspen Skiing Company offered Cherrett a position.  But Aspen, Colorado is expensive; and Cherrett’s family did not want to relocate.  So, in order to entice Cherrett to work there, Aspen offered Cherrett a $500,000 housing loan as part of the compensation package.  Cherrett accepted the offer, and moved to Aspen, Colorado, while his wife and high school aged daughter remained in Jackson Hole.

By 2009, Cherrett’s daughter went to college, his wife came to live with him in Aspen, and the Cherretts sold their home in Jackson Hole.  Two years later, Cherrett resigned from his position at Aspen Skiing Company.  And by 2013, Cherrett and his wife filed a voluntary Chapter 7 petition for Bankruptcy.

Aspen Skiing Company sought to dismiss the petition for abuse under Section 707(b)(1) of the Bankruptcy Code, which allows a court to dismiss a case filed under Chapter 7 by an individual debtor, whose debts are “primarily consumer debs.”  If dismissed, Mr. Cherrett would be forced to convert his case to Chapter 13 requiring him contribute all of his monthly disposable income to his creditors over a three to five year period.

And so, for the next four years, this case moved from the Bankruptcy Court, to the Bankruptcy Appellate Panel, who affirmed the Bankruptcy Court, and ultimately to the Ninth Circuit who affirmed both lower court’s decisions.

The gravamen was the purpose behind the housing loan offered to Mr. Cherrett by Aspen Skiing Company.  If the loan was for a “business purpose,” then it was not a “consumer debt” under Section 707(b)(1), and accordingly, the case would not be dismissed.  Ultimately, the trial court held that in fact the purpose of offering Mr. Cherrett a housing loan was a business one, intended to entice him to move to Aspen, Colorado to work for the Aspen Skiing Company.

In affirming this decision, the Ninth Circuit’s holding was noteworthy.  Rather than review the matter de novo, the Ninth Circuit opined that a determination of the purpose for the housing loan is a mixed question of law and fact; and that therefore, the correct standard of review when inquiring into the purpose of the housing loan is one of clear error.  The Ninth Circuit distinguished this question from one of its previous decisions – In re Kelly – in which the issue was whether a real property mortgage could ever qualify as consumer debt.  That, the Ninth Circuit opined, is a question of law, not fact; and therefore, the correct standard of review as to that broad question was de novo.

The takeaway from this decision is that often the lines between questions of fact and law can be obscure.  But in this case – In re Cherrett, Case No. 14-60079 (9th Cir. Oct. 16, 2017) – the Ninth Circuit provides us insight into how the court brightens those lines.

This decision would appear consistent with the application by courts in the third circuit of the “business purpose” rule to the question of whether a mortgage debt is a consumer debt under Section 707(b)(1).  See, e.g., In re Funk 146 B.R. 118, 122 fn. 6 (D.N.J. 1992) (citing in re Johnson, 115 B.R. 159 (S.D. Ill 1990); Guaranty Sav. & Loan Assn. v. Lowe, 109 B.R. 698 (W.D. Va. 1990)).