Tracey N. Wise, Bankruptcy Judge.
This matter is before the Court on Creditor Monmouth EFM, LLC's Motion to Dismiss this case for lack of good faith under 11 U.S.C. § 1307(c).
The Court has jurisdiction over this matter. 28 U.S.C. § 1334(b). Venue is proper in this District. 28 U.S.C. §§ 1408 and 1409. This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). The Court is authorized to issue a final order adjudicating this matter.
Debtor Daniel L. Pfetzer filed a chapter 13 petition on June 7, 2017, which states that, as of the filing, Debtor and Creditor were parties to state court litigation. On June 8, 2017, Debtor filed a chapter 13 plan, and then an amended chapter 13 plan on July 7, 2017. Creditor never filed an objection to confirmation of Debtor's plan or amended plan. Timely objections to confirmation were due, under versions of Bankruptcy Rule 3015(f) and Local Rule 3015-3(a) then in effect, by July 26, 2017, seven days after the meeting of creditors under § 341(a) held on July 19, 2017. Creditor filed a proof of claim on August 18, 2017, listing an unsecured debt valued at $697,502.12.
On September 9, 2015, Creditor filed an adversary complaint against Debtor in which it asked the Court to deny Debtor's discharge under § 727(a). After Creditor filed an amended complaint, Debtor moved to dismiss the adversary proceeding, arguing that § 727 does not apply to cases filed under chapter 13. Rather than oppose that motion, Creditor filed, with Debtor, an Agreed Stipulation of Dismissal without prejudice on November 20, 2017.
The next day, Creditor filed the Motion requesting a dismissal for cause under § 1307(c), asserting Debtor's alleged bad faith in filing his petition. Creditor argues:
[Motion at 2.]
Debtor opposes the Motion on two fronts. Debtor disputes Creditor's position on the facts. And, more importantly for purposes of this opinion, Debtor contends that Creditor is barred from seeking the relief it requests. Debtor argues that, because Creditor did not file a timely objection to confirmation under § 1325(a)(7) based on Debtor's alleged lack of good faith in filing his petition, Creditor cannot now raise the same objection under the guise of a motion to dismiss under § 1307(c). Debtor frames the pertinent facts as follows:
[ECF No. 51 (the "Response") (citations to documents in the record omitted).]
Debtor's amended plan has not yet been confirmed. Accordingly, the Court has not yet found, by confirming his plan, that Debtor satisfied all requirements under § 1325(a), including that Debtor filed his petition in good faith under § 1325(a)(7).
This Motion calls for an analysis of the interplay of two sections of the Bankruptcy Code, one of which only came into existence via the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The narrow issue presented appears to be one of first impression. Neither party directed the Court to a case in which, prior to confirmation, a debtor argued that a creditor could not seek a dismissal under § 1307(c) owing to an alleged lack of good faith in filing a petition because the creditor failed to object to confirmation under § 1325(a)(7). The Court's own research also did not find any case law speaking directly to the question presented, let alone any binding authority.
To begin, a review of the two Code provisions at issue will clarify the inquiry. First, although not expressly listed in § 1307(c) as "cause," it is a long-standing tenet that a bankruptcy court may dismiss a chapter 13 case for cause under that section if it finds that the debtor filed a petition in bad faith. See, e.g., Alt v. U.S. (In re Alt), 305 F.3d 413, 418-19
Creditor posits that this case should be dismissed for bad faith under § 1307(c) because:
[Motion at 14.] However, Creditor did not argue that Debtor lacked good faith in filing his petition in a timely objection to the confirmation of Debtor's chapter 13 plan.
Post-BAPCPA, to confirm a chapter 13 plan, a debtor must establish, inter alia, that "the action of the debtor in filing the petition was in good faith." 11 U.S.C. § 1325(a)(7); see also In re Caldwell, 895 F.2d 1123, 1126 (6th Cir. 1990) (explaining that the debtor has the burden to establish that a plan should be confirmed based on the criteria in § 1325(a)). Debtor argues that the 2005 addition of § 1325(a)(7) now requires a creditor to object to plan confirmation if that creditor contends that the debtor filed a petition in bad faith. To support this position, Debtor notes that "[t]he bad faith in the filing of the petition traditionally referred to pre-BAPCPA case law under [§] 1307(c) is exactly the same bad faith which has now been codified in [§] 1325(a)(7)." [ECF No. 56 ("Supplemental Brief") at 4 (citing In re Hieter, 414 B.R. 665, 670 (Bankr. D. Idaho 2009) ("[E]ven prior to BAPCPA, a chapter 13 case could be dismissed when it was demonstrated to the court that the case was filed in bad faith or as an attempt to unfairly manipulate the Code.... Because BAPCPA effectively codified the good faith filing requirement previously employed in the case law, that case law is applicable to any analysis of § 1325(a)(7).") (citations omitted)).]
Debtor contends that "[a] failure to timely object to confirmation concedes all arguments which could have been raised under [§] 1325(a), and therefore provides a complete defense under section 1307(c)." [Supplemental Brief at 1.] To bolster this argument, Debtor cites Shaw v. Aurgroup Financial Credit Union, 552 F.3d 447, 457 (6th Cir. 2009) (holding that a creditor's failure to timely object to plan confirmation may be construed as acceptance of the plan) and In re Flynn, 402 B.R. 437, 443-44 (1st Cir. BAP 2009) ("Unlike chapter 11, chapter 13 has no balloting mechanism by which secured creditors may evidence acceptance of a plan. It is, therefore, only the negative — a filed objection — that evidences the lack of acceptance. For this reason, when a creditor is properly noticed of the provisions in a chapter 13 plan and takes no timely action, i.e., files no objection, the judicial doctrine of `implied' acceptance fills the drafting gap in the Code."). According to Debtor,
[Supplemental Brief at 2-3.] Therefore, according to Debtor, a creditor's failure to object on any basis itemized under § 1325(a) implies that creditor's acceptance of the plan and concedes that the debtor has satisfied the listed elements, including that the petition was filed in good faith.
Creditor counters that neither the Code nor any case law cited by Debtor expressly supports the argument that the addition of § 1325(a)(7) now requires a creditor to object to confirmation to be able to seek dismissal of a chapter 13 case under § 1307(c) based upon bad faith in filing a petition. To that end, Creditor contends that this Court's general and equitable powers "`must and can only be exercised within the confines of the Bankruptcy Code,'" and the Court may not read a requirement into the Code that does not
Creditor also points out that there is no specific deadline set forth in the Bankruptcy Code, the Bankruptcy Rules, or this Court's Local Rules by which a creditor must file a motion under § 1307(c). Moreover, Creditor notes that the Court has not confirmed a chapter 13 plan in Debtor's case. Therefore, there is no plan with terms that are binding on Debtor or his creditors, nor has the Court found that Debtor has satisfied all elements listed under § 1325(a). To the latter point, Creditor argues that cases addressing motions to dismiss based on a lack of good faith in filing the petition "rely on whether a plan had already been confirmed, as opposed to the amount of time that had elapsed, in deciding whether to grant the motion to dismiss." [Reply at 4 (citing In re Newman, 259 B.R. 914 (Bankr. M.D. Fla. 2001); Nicholes v. Johnny Appleseed (In re Nicholes), 184 B.R. 82 (9th Cir. BAP 1995); In re Elstien, 238 B.R. 747, 754 (Bankr. N.D. Ill. 1999)).] Creditor also cites In re Setelin, 218 B.R. 818 (Bankr. E.D. Va. 1998), in which the bankruptcy court rejected an argument that a motion to dismiss under § 1307(c) was untimely under the local rules because the motion to dismiss was filed prior to plan confirmation.
Finally, Creditor argues that a 2008 case stands for the proposition that § 1307(c) and § 1325(a) serve different purposes:
[Reply at 6.] The Salvo decision does not address the issue presented herein, and Creditor selectively quotes from that case in its Reply.
In Salvo, the bankruptcy court denied a motion to dismiss for lack of good faith in filing the petition and permitted the debtor
Salvo, 2008 WL 938585, at *3, 2008 Bankr. LEXIS 1142, at *8. The bankruptcy court's reasoning (which includes, but is not limited to the passage quoted in Creditor's Reply) is as follows:
Id. 2008 WL 938585, at *4, 2008 Bankr. LEXIS 1142, at *9-10. Salvo does not support Creditor's position as suggested; it clearly addresses § 1325(a)(3), not § 1325(a)(7).
Having considered the parties' arguments, the Court returns to the Bankruptcy Code and pertinent Court Rules to resolve the Motion. Since 2005, the Code has required that whether the debtor filed a chapter 13 petition in good faith is an issue that must be addressed in connection with plan confirmation. 11 U.S.C. § 1325(a)(7). If a creditor believes that a bankruptcy court should not confirm a debtor's plan based upon a lack of good faith in filing their petition, then the Bankruptcy Rules authorize the creditor to object to plan confirmation. The version of Bankruptcy Rule 3015(f) in effect when Creditor filed the Motion provided:
FED. R. BANKR. P. 3015(f). In addition, the Court has enacted a local rule regarding objections to confirmation, which, as of the date Creditor filed the Motion, provided:
KYEB LBR 3015-3(a)(i).
A leading bankruptcy treatise provides: "once a plan is confirmed, the confirmation order should constitute a binding determination that the petition was filed in good faith that precludes granting dismissal on the grounds that the petition was not filed in good faith." Alan N. Resnick & Henry J. Sommer, 8 COLLIER ON BANKRUPTCY ¶ 1325.08 (16th ed.). The Court concludes that it is also true that, once the deadline to object to a plan under § 1325(a)(7) has passed, this precludes a creditor from seeking dismissal based on bad faith in filing a petition as "cause" under § 1307(c). Otherwise, the objection to confirmation deadline is meaningless in the context of anything other than a creditor's plan treatment. This conclusion also serves the purposes of equity; like other matters pertaining to eligibility in bankruptcy, it can and should be determined at the outset of a chapter 13 case whether the debtor filed a petition in bad faith. See, e.g., In re Pearson, 773 F.2d 751, 756-57 (6th Cir. 1985) (explaining that it is appropriate to determine a debtor's threshold eligibility under chapter 13 expeditiously because "[t]he resources of the debtor are almost by definition limited and [thus] the means of determining eligibility must be efficient and inexpensive. To allow an extensive inquiry in each case would do much toward defeating the very object of the statute.")
The Court concludes that the addition of § 1325(a)(7) obligated Creditor to timely object to confirmation if it perceived that Debtor filed his petition in bad faith.
Congress amended the Code in 2005 and expressly included good faith in filing the petition as a confirmation requirement. With BAPCPA's addition of § 1325(a)(7), a creditor must file a timely objection to plan confirmation under that section of the Bankruptcy Code if it seeks to challenge a debtor's good faith in filing a petition. Deadlines have a purpose. A creditor may not ignore the deadline to object to plan confirmation based upon § 1325(a)(7) and sidestep that deadline by filing a motion under § 1307(c), asserting that "cause" exists to dismiss because the debtor filed the
However, courts are not unanimous on this conclusion. See In re Powers, 554 B.R. 41, 59 (Bankr. N.D.N.Y. 2016) (stating that, while "case law is sparse and no binding precedent exists to guide this Court in its analysis of" § 1325(a)(7), and while "legislative history provides no insight into the congressional intent or purpose of § 1325(a)(7)" the court did not "favor the application of either the § 1325(a)(3) or § 1307(c) tests for the reason that these are three independent statutory provisions, and each section serves a separate and distinct purpose. Section 1325(a)(3) tests the reasonableness of the plan and the sincerity of the debtor with respect to that particular plan; § 1325(a)(7) tests whether the filing is fundamentally fair and in a manner that complies with the spirit of the Code; and § 1307(c) seeks, inter alia, to prevent dishonest, ill-motivated, bad faith debtors from invoking the protections of bankruptcy altogether. By its very terms, § 1325(a)(7) contemplates only whether the `action of the debtor in filing the petition was in good faith.' 11 U.S.C. § 1325(a)(7). Because Congress purposefully added § 1325(a)(7) to the Code in 2005, in this Court's view, § 1325(a)(7) must serve a purpose different from either § 1325(a)(3) or § 1307(c).").
