Interesting Case on Bad Faith and a Meth Lab

An interesting case was recently reported in the Consumer Bankruptcy News. In First Tennessee Bank, N.A. v. Hansen, 2012 WL 1156409 (Bankr. E.D. Tenn. 4/6/12), the bank alleged that the debtors’ case was filed in bad faith because they knew about a meth lab in their basement and should not be allowed to get the damages caused by the lab to be discharged. The debtors had rented out their basement to their grandson’s father. The father had a drug problem, which he claimed was over. The debtors required that he take drug tests and after 10 months of the tests coming back negative, they allowed him to rent their basement. In 2010 the debtors’ business declined and they thought about selling their house, but after obtaining an appraisal in August of 2010 they realized there was no equity in the house and proposed a plan that called for the surrender of the house back to the lender. They then moved out of the house, but allowed their grandson and his father to remain in the house.

In October of 2010, the debtor husband went back to the house and went to the basement storage area to get packing tape and discovered two bottles and a tube and confronted the father. The father admitted he was making speed and apologized for violating the debtors’ trust and destroyed all the lab equipment. However, it turned out that after destroying all the lab equipment he then bought new equipment and resumed his illegal activities. The police were called to the house by child protective services to make sure the grandson had enough food in the house. When opening the cabinets the police discovered jars containing a white liquid and found the meth lab. The father was arrested and the house was condemned. The bank subsequently paid more than $45,000 to repair the damage done to the house and also spent more than $35,000 in legal fees. The bank asked the court to dismiss the case as having been filed in bad faith. The bank alleged that the debtors knew of the meth lab and were using the Chapter 13 filing to get rid of a worthless house and the debt associated with it. However, the court found that the debtors were not aware of the meth lab and only decided to surrender the house after an appraisal came back which indicated they had no equity in the house. Accordingly, the court denied the bank’s motion.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.