JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter came before the Court for final hearing on a Motion 1) to Dismiss under Section 707(a) or 2) to Convert to Chapter 11 under Section 706(b) (the "Motion") filed by creditor Gila Regional Medical Center ("GRMC") (docs 14, 16) to which Debtor objected (doc 19). GRMC is represented by its attorney Thuma & Walker, P.C. (David T. Thuma and Merrie Chappell). Debtor is represented by his attorney the Law Office of George ("Dave") Giddens, P.C. (Christopher M. Gatton). Creditor Barton and Associates, Inc. ("Barton") did not formally join in GRMC's motions, but filed a brief in support (doc 27). Barton is represented by its attorney Modrall Sperling Roehl Harris and Sisk, P.A. (Jason C. Bousliman). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A). For the reasons set forth below, the Court finds that both motions should be denied.
The issues in this case involve examining the provisions of the dismissal (11 U.S.C. § 707)
There is currently a split in the circuits on these issues. The Third
On the other hand, the Eighth
Debtor filed this voluntary Chapter 7 proceeding on June 25, 2010. The petition states that Debtor's debts are not primarily consumer debts
The Motion (filed July 21, 2010) states that the case should be dismissed for "cause" or converted to Chapter 11. The
Debtor objected to the Motion on August 8, 2010. Debtor's first argument is that Section 707(a) requires "cause" and none of the facts alleged by GRMC constitute "cause." Debtor claims that the facts alleged by GRMC are relevant only to Section 707(b) which requires the Court to dismiss a case for abuse if there is sufficient excess monthly income. However, Section 707(b) applies only to consumer debtors, not to non-consumer debtors. Therefore, Debtor claims that his excess income and alleged overstated expenses are not relevant
The Court held a preliminary hearing on August 23, 2010, fixing September 16, 2010 as the date for a final hearing. GRMC deposed Debtor on September 8, 2010.
On September 14, 2010, Barton filed a Memorandum in Support of the Motion (doc 27). Barton argues that "cause" exists to dismiss the case, citing In re Hammonds, 139 B.R. 535 (Bankr.D.Colo.1992) because the filing was done in bad faith and was made in an effort to deny payment to creditors despite an ability to pay. Barton also argues that this case is "substantial abuse" because a debtor's ability to pay a substantial portion of debt is grounds for dismissal. It further argues that courts have commonly dismissed non-consumer cases under section 707(a) for "bad faith" for reasons paralleling the factors of "substantial abuse" under section 707(b). Barton argues that Debtor's business status should have no bearing on the Court's decision.
On September 14, 2010, Debtor also filed a Memorandum in Support of his objection to the Motion (doc 28). Debtor's primary argument is that because his debts are primarily business, the "means test" and his ability to pay are explicitly not relevant and cannot be grounds for dismissal or conversion. Debtor quotes section 707(a)'s examples of "cause" that justify dismissal as including: 1) unreasonable delay prejudicial to creditors, 2) nonpayment of fees or charges required, and 3) failure of debtor to file required information (but only on motion by the United States Trustee). Debtor argues that ability to pay is fundamentally different from the items specified and should not be included as a ground. Debtor then states that when courts look to the legislative history of section 707 to determine what is "cause", they find that the legislative history specifically states that ability to repay debts in whole or in part does not constitute cause for dismissal (quoting H.R. No. 95-595, 95th Cong., 1st Sess. 380 (1977) and S.R. No. 95-989, 95th Cong., 2d Sess. 94 (1978)).
Regarding conversion to Chapter 11, Debtor argues that the same factors should be considered to deny GRMC's motion to convert. Ordering conversion would allow a creditor to circumvent the consumer debtor element necessary to find abuse.
On September 15, 2010, GRMC filed its Brief in Support of the Motion (doc 32). By this date, GRMC had a transcript of the Debtor's deposition. The Motion focused on Debtor's income and expenses. The Brief, however, changes the primary focus away from Debtor's income to "the Debtor's petition, schedules, statement of affairs, and anticipated amendments" and asks the Court to conclude that Debtor's "antics" are cause for dismissal. GRMC argues that the papers on file contain inconsistencies and are incomplete. For example, the petition failed to disclose Debtor's full name, the Debtor failed to list cash transferred to his companion's account, he failed to list a watch, he failed to list an Army pension, he failed to list stock in Lobera Imaging, Inc. or Microsoft stock, he failed to list an interest in his father's estate, he failed to list four vehicles, and he failed to list an $18,000 bonus. The Brief does reiterate the fact that Debtor makes a "ton" of money and informs the Court that Debtor testified at his deposition that he has not curbed his lifestyle. GRMC claims that the most telling evidence of bad faith was Debtor's failure to list his 2008, 2009 and year to date 2010 income on the Statement of Financial Affairs, or to disclose payments, gifts and transfers to insiders, or to disclose his involvement with a business.
GRMC argues that the Court must engage in a case-by-case analysis to determine what constitutes "cause" to warrant dismissal. Citing several cases, GRMC also argues that lack of good faith in commencing a Chapter 7 case is cause for dismissal under section 707(a). GRMC also argues that all of these factors permit conversion to Chapter 11.
On September 15, 2010, Debtor also filed an Amended Statement of Financial Affairs ("SFA"), doc 33, and Amended Schedules B, D, E and F, doc 34. The Amended SFA discloses Debtor's income for 2008, 2009, and 2010 year to date; it discloses on question 9 [sic, should be question 10] a transfer of a house valued at $100,000.00 on Mary Stewart Street in El Paso, Texas to his father Alejandro Lobera; discloses Debtor's involvement with a business, Lobera Imaging; and lists a former spouse on question 16.
The Amended Schedule B adds Debtor's interest in stock of Lobera Imaging, Inc. (value $0.00), and Microsoft (value $0.00); his interest in a retirement account (value $1,331.81); his interest in a 401-K account (value $11,000.00) and an Ameritrade account (value $400.00).
The Amended Schedule D transfers the debt owed to Barton from Schedule F (unsecured) to Schedule D (secured). The Amended Schedule E adds $733,945.00 of priority tax debt owed to the IRS and State of New Mexico. Amended Schedule F deletes the Barton debt.
The Motion came on for hearing on September 16, 2010. As the first item of business the Court raised the issue of the change in focus from the Motion, which had focused only on excess income, to the Brief, which raised the new allegations of
Debtor testified first. The first subject of examination was his name. His 2008 and 2009 tax returns (ex. 22) show his name as "Alex Lobera Rodriguez", but the petition lists his name as "Alex Lobera." Debtor testified that he was originally from Puerto Rico and in Puerto Rico one customarily uses both parents' last names. He originally filed tax returns in Puerto Rico, and used that convention. When he moved to the mainland United States he dropped his mother's name. However, the Internal Revenue Service continues to list him with both last names. He further testified that there was not a single debt on his bankruptcy schedules that was incurred in a name other than Alex Lobera or Lobera Imaging, Inc. (except, obviously, IRS debt which was not included on the original petition.)
Debtor admitted he signed the Schedules (ex. 16). He admitted that a property listed on Schedule A as "281 Mariposa Drive" was actually "281 Maricopa Drive."
Debtor listed one wristwatch on his Schedule B valued at $500.00. He testified that he actually owns two, but one is broken. He paid $500.00 for the one that still works.
Debtor listed his household goods on Schedule B at $15,000.00. He testified that he really did not know for sure the current values of the used goods, but sat down in his attorney's office and attempted to estimate what things were worth, e.g., a seven year old television. He also stated that maybe one-half of it belonged to his companion.
Debtor listed $2000.00 of firearms on Schedule B. Again, he estimated the values and explained to the Chapter 7 Trustee at the first meeting of creditors how he had arrived at the values.
Debtor's original Schedule B listed no retirement plans. At Debtor's deposition he was asked about retirement plans and recalled he did have an IRA or 401(k) when he was in the Army. He had lost track of it and had not received any statements for years, and forgot to list it on Schedule B.
Debtor's original Schedule B did not list his interest in Lobera Imaging, P.C. Lobera Imaging, P.C. is a debtor in Case No. 7-10-12751-SL, currently pending in the Bankruptcy Court for the District of New Mexico. The SFA in that case, question 16, states that Debtor is the 100% owner of Lobera Imaging, P.C. At the time of the hearing, Lobera Imaging was not operating, had no income, and its only assets were old accounts receivable. Debtor testified that he had not understood that information regarding Lobera Imaging, P.C. had to be duplicated on his personal schedules, particularly in light of the fact that it was worthless and he had no intention of having anything more to do with it. He had listed it as a co-debtor where appropriate and included all its debts on his schedules.
Debtor's original Schedule B also omitted some small amount of Microsoft stock. His amended Schedule B lists the stock but places no value on it.
Debtor admitted to giving a Mini Cooper to his companion and a 1994 Mercedes to his eighteen year old son. He was not asked when these transfers were made. Debtor pays insurance on all the vehicles. Debtor also pays ongoing health insurance for himself, his companion, all the children and his ex-wife. Debtor purchased a laptop computer and paid the tuition for his
Exhibit 1 is Debtor's contract ("Contract") with Virtual Radiologic Professionals, L.L.C. ("Practice"). It recites that: 1) Debtor is an independent medical practitioner specializing in radiology, 2) Practice is a professional medical practice that provides radiology interpretation and consulting services, and 3) Practice desires to engage Debtor as an independent contractor in accordance with the terms and conditions of this Contract and Debtor is agreeable to such engagement. The term of the contract is five years, but is terminable without cause by either party upon one hundred eighty days notice. Debtor's Schedule G listed no executory contracts. Debtor testified he had not understood the Contract needed to be listed separately; he believed he had listed his relationship by disclosing his income on Schedule I which discloses the Practice, its address, and his compensation. Under the terms of the Contract, if Debtor performs additional work above that required, he will receive bonuses based on the amount and type of work he performed. He had been employed by Practice for three months when he filed his case, see Ex. 16, Schedule I, and did not receive a bonus until after the filing. At the time of filing he hoped he would receive a bonus, but was not expecting it and did not know what amount it would be. He also testified that the bonus was for an unusual three month period when he was the only radiologist at the facility, which has since hired a new person. He did not expect a bonus for the next three month period.
At the hearing there was a great deal of questioning about the Mary Stewart Street property that Debtor disclosed as a transfer on the Amended SFA. Despite the questioning, no clear picture emerged as to what actually took place or when. Debtor purchased the house years ago for his father, to repay a previous loan. The house was in Debtor's name. Debtor's father is currently 94 years old. There were two mortgages on the property. Debtor made the mortgage payments, but fell behind on the second mortgage because he could not pay it. The second mortgagee foreclosed and the property was sold. Debtor (or perhaps his companion) employed an attorney for the father, who dealt with the purchaser at the foreclosure, and eventually the father purchased the property in his own name with his own funds from that purchaser. Debtor still pays the first mortgage. Debtor testified that this subject never came up in his deposition.
Because Debtor's father is alive, there was no improper omission of Debtor's interest in the father's estate because there is no such estate.
The original SFA Question 1 did not list Debtor's previous income. In response to questioning, he testified that when he filed the petition his taxes had not been done for several years. He made a mental note to ask the attorney how he should handle this and simply forgot. The attorney apparently did not catch it, and the SFA was filed with Question 1 unanswered. Debtor finally received his tax returns from the preparer on the date of his deposition. He amended the SFA to include the prior years income and he calculated current year income from Lobera Imaging, P.C. from January to March, and Practice from March forward.
Barton obtained a judgment against Debtor and Lobera Imaging and recorded a transcript of judgment. Debtor did not learn of the transcript until after the bankruptcy, which is why he originally listed Barton as unsecured. Barton also obtained
Debtor received $400,000 from Lobera Imaging in April, 2010. This transaction is reported on the Lobera Imaging SFA as a draw. Debtor testified that he did not use any of it to pay Barton. He stated that he had offered a payment plan to Barton but Barton would not agree to it unless Debtor granted a mortgage on his house. He refused. He testified that he used the funds for various things including becoming current on the mortgage on Maricopa, bringing the first mortgage current on his residence, paying a debt owed to his father, paying an attorney in Utah for child custody matters for his companion, performing house and pool repairs and landscaping, taking the children to Puerto Rico for a family visit, paying about $33,000 to Memorial, etc. He testified emphatically that he was not contemplating personal bankruptcy at the time of this payment
Debtor testified that the arrangement he has with his companion involves her being the billpayer. He transfers money into her account every month, then they confer during the month to discuss additional funds needed and where they are financially. He testified that usually by the end of the month they are bouncing checks for their expenses. Debtor also testified that due to this arrangement, he was not sure exactly what the monthly bills were, but felt he had a good estimate.
When asked why he filed the bankruptcy, Debtor testified that he could not pay his bills. He owed too much, there was a judgment against him and he knew he owed taxes. He could not support his family. He also testified that he thought he had carefully reviewed all schedules and statements and that they were correct. He was not trying to conceal anything; furthermore, he did not have anything left to conceal. He also testified that any omissions or failures to disclose were unintentional. Certain items, e.g. the Mini Cooper, were not listed because they were in his companion's name and she in fact owned them. During the hearings, creditors suggested that Debtor should have listed himself as being in a common law marriage and therefore should have listed all of his companion's assets and liabilities. Debtor testified that although they live as married, there was never any intention to actually be married and that his attorneys had advised him to file as an unmarried person.
Debtor testified that he forgot to list on Schedule J a yearly contribution he makes to a medical school in Puerto Rico.
On re-examination, counsel for both creditors pressed Debtor on specific amounts paid with the $400,000 draw. While Debtor had some general ideas, it became clear that he really did not know the specifics. Debtor's counsel attempted to call Ms. Lorina Quiroz, Debtor's companion, as a witness to answer these questions. She had not been listed on the witness list, however, and the creditors objected. Initially the Court sustained the creditors' objections, then recessed to review the situation. The Court reviewed
On October 14, 2010 the Court resumed the final hearing. The first matter of business was a stipulated admission of deposition exhibits 26 through 32. Ms. Lorina Quiroz then testified. She does not consider herself married to Debtor, although in certain social circumstances they refer to each other as spouses. Debtor has filed tax returns as a single person. Ms. Quiroz pays all bills and takes care of everything related to the "account." Neither Debtor nor Ms. Quiroz may sign each other's checks. Every month Debtor deposits an amount into her account, usually $20,000, and she pays the bills, mortgages, utilities, etc. Sometimes she writes a check to cash and gives it to one of the children to cash and buy groceries and return the excess cash to her. She keeps all of her receipts. She has a savings account attached to her checking account that has about $100 in it. She has no other accounts. Neither she nor Debtor gamble. Sometimes Debtor will transfer additional amounts, as needed, during the month. On cross-examination Ms. Quiroz was asked if she knew if Debtor filed gift tax returns for his gifts to her. She responded that she did not know, but assumed not because the transfers were not gifts, they were to pay "his household expenses, our household expenses."
Ms. Quiroz had prepared a schedule that listed all disbursements from the $400,000. It was admitted as Exhibit A. The schedule totaled $407,000. She testified that, even with these payments, Debtor was still behind on a vehicle with GMAC and with Heritage, the second mortgage on Debtor's house.
She testified that Debtor had not transferred any assets to her, other than the money into her account, before his Chapter 7. She also testified that he had not transferred anything to her to "hide" assets from the Court or creditors.
The Court found Ms. Quiroz to be completely credible and forthright in her testimony. She is intelligent, well organized, and very capable in dealing with ordinary financial matters. The Court also found Debtor to be completely credible, although confused on some matters, particularly his own financial affairs. He no doubt relies on Ms. Quiroz to handle things, and this appears to have worked out sufficiently in the past for him to have a continuing reasonable basis that things are being dealt with financially. Although normally a debtor would usually keep track of his or her own affairs, he relied on her and she appears to have done the job. The Court had no sense that Debtor, or for that matter Ms. Quiroz, had attempted to hide assets from the Court or creditors, or had attempted to hide transactions that would result in recoveries by a trustee. Both seemed completely honest. The Court also finds that Debtor appeared, and actually admitted, that the financial matters over the last year have caused him great stress and embarrassment, and this may have impeded his ability to be more effective in the preparation of his bankruptcy. It is also apparent that he relied on his counsel, perhaps more than he should have, but in a way which was not unreasonable under the circumstances. In sum,
In addition, the Court finds that Debtor has been an employee or independent contractor at all relevant times, first for Lobera Imaging and now for his current employer. He himself is not a "business." Debtor does not have business assets, other than some small amount of used office equipment. He has an employment contract which is obviously not assignable under Section 365(c)(1)(A), and no other business contracts or leases. He has no business to reorganize. He chose to liquidate.
Before launching into the details, the Court will review some basic bankruptcy definitions and processes. "The term `consumer debt' means debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. 101(8). A debtor's debts are "primarily consumer debts" if they exceed fifty percent of the total debt. Stewart v. United States Trustee (In re Stewart), 175 F.3d 796, 808 (10th Cir.1999). Consequently, the entire universe of debtors consists of consumer debtors and non-consumer debtors
Section 301(a) describes how a voluntary case is initiated: "A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter." The term "entity" includes a "person." Section 101(15). The term "person" includes an "individual." Section 101(41). A "petition" is the document filed with the court to commence the case. Section 101(42).
Section 109 determines what entities may file under what chapters. Section 109(b) states that "A person may be a debtor under chapter 7 of this title only if such person is not—[certain things not relevant to this case, e.g., a foreign bank]". Section 109(d) states that "Only a railroad, [or] a person that may be a debtor under chapter 7 of this title (except a stockbroker or a commodity broker) ... may be a debtor under chapter 11 of this title." Sections 109(b) and 109(d) have no additional requirements to file a chapter 7 or 11.
Toibb, 501 U.S. at 160-61, 111 S.Ct. 2197.
Furthermore, a chapter 7 or 11 debtor need not allege insolvency. Green v. Staples (In re Green), 934 F.2d 568, 572 (4th Cir.1991). Compare Section 109(c)(3) (A municipality may be a chapter 9 debtor if and only if insolvent.) Similarly, a chapter 7 or 11 debtor need not allege that the filing of the petition
Debtor has elected to file a petition under chapter 7. GRMC and Barton have moved to dismiss the case for cause under section 707(a), which provides:
"Cause" is not defined by the bankruptcy code. And, the word "including" is not limiting. Section 102(3) ("In this title `includes' and `including' are not limiting."); see also Padilla, 222 F.3d at 1191. Therefore, the first task for the Court is to determine what constitutes "cause" for dismissal. The Court will first discuss things which are not "cause" under section 707(a). Then the Court will suggest what is "cause" under section 707(a).
Barton, in its joinder brief, argues that despite Debtor's status as a non-consumer debtor, he is abusing the bankruptcy system and process by filing chapter 7 when he has considerable excess income from which he could repay creditors. GRMC's Motion made the same argument.
In 1984, Congress amended the Bankruptcy Code and added a new section 707(b) to address concerns that consumer
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub. L. No. 109-8, 119 Stat. 23 (2005) which further amended section 707(b). That section now reads, in part:
The current Section 707(b) allows the Court to dismiss for "abuse" instead of "substantial abuse." And, the current statute sets out a mechanical test ("means test") for abuse: if current monthly income less certain current items that are specifically allowed exceeds a certain dollar amount or percentage of unsecured debt, the Court must presume abuse
This Court finds that the language of Section 707 is plain, clear and unambiguous. Section 707(a) applies to all Chapter 7 debtors and allows the court to dismiss for "cause." Section 707(b) applies only to consumer debtors and allows the court to dismiss for "abuse." A non-consumer debtor's case can only be dismissed for "cause" while a consumer debtor's case can be dismissed for "cause" or "abuse." See In re Adolph, 441 B.R. 909, 913 (Bankr.N.D.Ill.2011) (After BAPCPA this is the most reasonable interpretation of Section 707). This interpretation of the statute also comports with Congress' intent to stop consumer abuse.
Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). See also Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004):
In this case, the Court believes the inquiry is complete. Section 707(b) does not apply to non-consumer debtors.
If the Court were to apply 707(b) to non-consumer debtors it would have to rewrite the statute to omit the term "whose debts are primarily consumer debts" found in Section 707(b)(1). Courts may not rewrite or ignore the plain text of a statute even if they believe the statute is susceptible to improvement. Commissioner v. Lundy, 516 U.S. 235, 252, 116 S.Ct. 647, 133 L.Ed.2d 611 (1996). Furthermore, it is a fundamental rule that a court should give effect to every clause and word in a statute. Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001)(citing United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 99 L.Ed. 615 (1955)). And, the court should be especially unwilling to ignore a term that occupies a pivotal place in the statutory scheme. Id. BAPCPA was designed to prevent consumer abuse and the heart of that scheme was Section 707. This Court should be especially unwilling to ignore the term "whose debts are primarily consumer debts" in Section 707(b) because that would defeat the purpose of the statute.
Finally, if Congress intended 707(b) to apply to non-consumer debtors it would have said so. And, if that had been Congress' intention, there would not even be a need for section 707(b); section 707(a) could simply say that a case could be dismissed for cause or abuse. It did not.
The only mention of "bad faith" in all of Chapter 7 is in Section 707(b)(3)(A). Its location indicates that the analysis for bad faith arises only in a consumer debtor case when the presumption of abuse does not arise or is rebutted. If Congress intended "bad faith" to be a reason for dismissal of any Chapter 7 case, it would have added that term to section 707(a) which applies to all chapter 7 cases. It did not. When Congress uses a term in one place in a statute and not in another, the omission is deemed to be intentional.
Duncan, 533 U.S. at 173, 121 S.Ct. 2120. See also Stephens v. Holbrook (In re Stephens), 402 B.R. 1, 7 (10th Cir. BAP 2009):
The entire Bankruptcy Code uses the term "bad faith" in only three places: 1) involuntary petitions filed in bad faith (Section 303(i)(2)), 2) bad faith conversions from Chapter 13 (Section 348(f)(2)), and 3) bad faith dismissals of chapter 7 consumer debtors (Section 707(b)(3)(A)). Because Congress used the term "bad faith" elsewhere, the Court must presume that Congress did not intend it to apply in Section 707(a) where the term was not used.
On July 1, 1898, Congress passed Chapter 541, 30 Stat. 544, "An Act To establish a uniform system of bankruptcy throughout the United States." ("Act"). With various amendments, this was the law until passage of the Bankruptcy Reform Act of 1978 (Pub. L. No. 95-598, 92 Stat. 2549 (November 6, 1978)). Act Section 4 provided that "Any person who owes debts, except a corporation, shall be entitled to the benefits of this Act as a voluntary bankrupt." The statute made no reference
Id. at 307-08. See also Alabama v. Montevallo Mining Co. (In re Montevallo Mining Co.), 278 F. 989, 990 (M.D.Ala. 1922):
Cf. Green, 934 F.2d at 570:
(Footnote omitted.) And compare In re Victory Const. Co., Inc., 9 B.R. 549, 551-52 (Bankr.C.D.Cal.1981), vacated as moot, 37 B.R. 222 (9th Cir. BAP 1984):
In conclusion, historically, good faith was required only in reorganization cases, and then in 1984 Congress added a good faith requirement for consumer debtors in liquidation proceedings.
Section 707(a) provides:
Congress defined "cause" by listing three examples of cause. This suggests that "cause" is a class of things or items that have some relationship to each other. If this were not the intent of Congress, the statute could simply state "The court may dismiss a case under this chapter only after notice and a hearing for any reason." Because the statute was not written this way, Congress must have had an idea of what "cause" was.
One approach to analyze this statute is application of the statutory construction tool of ejusdem generis.
Norman J. Singer and J.D. Shambie Singer, Sutherland Statutory Construction § 47:17 (7th ed.) (footnotes omitted).
Id. at § 47:18 (footnotes omitted.)
The words Congress used in Section 707(a) are: 1) unreasonable delay, 2) nonpayment of required court fees, and 3) failure to file documents required by Section 521(a)(1)
The cases that find a good faith filing requirement for Chapter 7 all assume that only a poor, honest and deserving debtor is entitled to bankruptcy relief. Typical language includes:
Zick, 931 F.2d 1124, 1129-30 (citing In re Jones, 114 B.R. 917, 926 (Bankr.N.D.Ohio 1990) (in turn citing Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934))). These cases also apparently (and groundlessly) assume that unless the poor debtor is left destitute he or she is receiving a "head start." Because exemption laws limit the amount of property the debtor carries into his or her new life, it is difficult
Zick is one of the leading cases cited
First, Zick cites In re Sky Group Int'l, Inc., 108 B.R. 86 (Bankr.W.D.Pa.1989) for the proposition that "a showing of bad faith can result in dismissal under 11 U.S.C. § 707(a)." In fact, Sky Group was an involuntary case and the issue before the Court was whether the involuntary petition had been filed in bad faith. Id. at 90. The Court found that it was not brought in bad faith, and the case was not dismissed. Id. Sky Group also cites In re Khan, 35 B.R. 718 (Bankr.W.D.Ky.1984) (hereafter "Kentucky Khan
Second, Zick cites In re Maide, 103 B.R. 696 (Bankr.W.D.Pa.1989). Mr. Maide was a non-consumer debtor that could not be dismissed under Section 707(b). Id. at 697 n. 4. The court noted that Mr. Maide earned over $5,050 per month and that it did not approve of the way he spent his money. Id. at 697-98. The court also found that he had not cooperated with the trustee and failed to obey a court order directing him to amend schedules. Id. at 699. "This Debtor who has acted in bad faith and is able to meet his obligations cannot use this court as an escape hatch simply because he has primarily business debts." Id. at 700. The Maide court could have properly dismissed for delay or failure to obey a court order. This case is not very authoritative for Zick.
Third, Zick cites In re Brown, 88 B.R. 280 (Bankr.D.Hi.1988) for the proposition that good faith is an "implicit jurisdictional requirement." Brown, in turn, cites Kentucky Khan for this statement. The court then stated, without any authority, that "Congress never intended that bankruptcy be a refuge for the unscrupulous and cunning individual." Id. at 284. The Court found that Dr. Brown was not a poor, unfortunate debtor in need of a "fresh start." Id. Rather, he was a capable doctor able to earn substantial income and if only he would adjust his life style he could pay a portion of his debt to his primary creditor, the "unfortunate victim" of his negligence
Fourth, Zick cites In re Bingham, 68 B.R. 933 (Bankr.M.D.Pa.1987) for the proposition that once debtor's good faith is questioned, the debtor bears the burden of proving good faith
Fifth, Zick cites In re Kragness, 63 B.R. 459 (Bankr.D.Or.1986) for the proposition that the concept of good faith is not open to serious debate. Kragness does state that. Id. at 465. However, it continues:
Id. at 465. The court then commented that it "has failed to uncover any cases where a bankruptcy case was dismissed where the debtors' sole motivation was to avail themselves of legitimate protection afforded by the Bankruptcy Code." Therefore, the court did not find bad faith in this case, and Zick's reliance was on dicta. The Kragness court also refused to dismiss the case because the debtors' debts were not primarily consumer debts and it believed that Section 707(b) was the sole remedy for dismissal for ability to pay debts. Id. at 466.
Sixth, and finally, Zick cites Kentucky Khan, 35 B.R. 718 (W.D.Ky.) [sic, should be (Bankr. W.D. Ky. 1984)], remanded for clarification,
First, Kentucky Khan cites Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). In that case, the Supreme Court explained:
442 U.S. at 128-29, 99 S.Ct. 2205. (Footnote omitted.) Basically, the Supreme Court is stating the obvious: if a debtor has committed acts before bankruptcy that result in nondischargeable debts, then the bankruptcy will not discharge them. Despite Khan's characterization, this case does not discuss eligibility to file, good faith, or the court's jurisdiction. And, it does not end up dismissing the case.
Second, Kentucky Khan cites Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964). In Bruning the parties were arguing over whether interest should accrue on nondischargeable tax debts. Id. at 361, 84 S.Ct. 906. The Supreme Court ruled in favor of the government:
Id. at 361, 84 S.Ct. 906. (Footnote omitted.) Despite Khan's characterization, this case does not discuss eligibility to file, good faith, or the court's jurisdiction. Nor does it dismiss a debtor's case.
Third, Kentucky Khan cites the famous case of Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1933). Virtually all of the good faith filing requirement cases quote Local Loan's statement "One of the primary purposes of the Bankruptcy Act is to `relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh...'". Id. at 244, 54 S.Ct. 695. However, this snippet is taken out of context. The whole passage states:
Id. at 244-45, 54 S.Ct. 695. (Emphasis added; citations omitted.) Despite Khan's characterization, Local Loan does not discuss eligibility to file, good faith, or the court's jurisdiction. Rather, the case stands for, among others, the proposition that an honest business debtor, willing to surrender his property, should have a new opportunity in life.
Fourth, Kentucky Khan cites Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct. 142, 77
Shapiro then filed suit against Robinson and obtained a judgment. Id. Shapiro took this judgment to the Delaware court claiming that the conveyance by Robinson to the corporation was a scheme to hinder and delay creditors, and asked that as a judgment creditor he be allowed to seize property in the receiver's possession and to sell it to satisfy his debt. Id. at 353, 53 S.Ct. 142. The request was denied, and the denial affirmed on appeal. Id. at 353, 53 S.Ct. 142.
The Supreme Court found that the original transfer was fraudulent. Id. It remanded the case to the District Court to enter an order in the alternative either 1) for payment of the judgment out of the funds in the hands of the receivers or 2) an order allowing execution against the assets. Id. The Supreme Court did not dismiss the case as filed in bad faith. It basically granted stay relief. It did not discuss eligibility to file or jurisdiction.
Fifth, Kentucky Khan cites Stellwagen v. Clum, 245 U.S. 605, 38 S.Ct. 215, 62 L.Ed. 507 (1918). This case does not discuss good faith, eligibility to file, or jurisdiction. Rather, in dicta it states the policy of bankruptcy:
Id. at 617. In fact, this case reinforces the concepts behind the language omitted by most courts when quoting Local Loan. That is, an honest debtor who surrenders property gets a new start in life. It did not dismiss the case.
Sixth, Kentucky Khan cites Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 35 S.Ct. 289, 59 L.Ed. 713 (1915). Despite Khan's characterization, this case does not discuss good faith, eligibility to file, or jurisdiction. One relevant paragraph states:
Id. at 554-55, 35 S.Ct. 289. (Citations omitted). Again, this case reinforces the concepts behind the language omitted by
Seventh, and finally, Kentucky Khan cites Wetmore v. Markoe, 196 U.S. 68, 25 S.Ct. 172, 49 L.Ed. 390 (1904). Despite Khan's characterization, this case does not discuss good faith, eligibility to file, or jurisdiction. It is an alimony/dischargeability case. The Court did not dismiss the case, it declared a debt nondischargeable. Id. at 76, 25 S.Ct. 172. It reinforces the concept that business debtors should be able to find relief from business misfortunes:
Id.
In sum, most of these Supreme Court cases discuss the honest, unfortunate debtor afloat in a sea of indebtedness. None, however, specifically discuss a good faith filing requirement for Chapter 7 or jurisdiction of the courts. Zick and Kentucky Khan both read between the lines of these cases and make a leap to find a good faith filing requirement that is "implicitly jurisdictional"
The bankruptcy code contains many sections that provide specific remedies for specific actions. For example, section 523 contains a list of nineteen different categories of debts that are not discharged in chapter 7. Section 727 contains a list of behaviors that will prevent a debtor's discharge altogether. Section 362(b) prevents the automatic stay from applying to criminal or police power matters and to certain, defined, actions that commence or continue matters against a debtor. Section 362(d)(1) allows a court to terminate the automatic stay for "cause," which can include things such as prejudice to a creditor that was ready for trial in a nonbankruptcy forum. In re SCO Group, Inc., 395 B.R. 852, 860 (Bankr.D.Del.2007). Sections 362(c)(3) and (4) severely limit automatic stay protections for repeat filers. Section 522(g) prevents a debtor from exempting property voluntarily transferred before the bankruptcy filing. Sections 547 and 548 allow a trustee to recover money or other property transferred preferentially or fraudulently. Section 549 allows a trustee to recover property transferred post-petition that was not authorized by the court.
If any of the evils addressed by these statutes were "cause" to dismiss a chapter 7 case all of these statutes would be meaningless. For example, if a debtor incurred a debt by fraud or failed to keep business records, instead of having the debt declared nondischargeable or having the discharge denied, the creditor could simply have the case dismissed. There would be no need for the remedial statute, rendering all of them superfluous.
This conclusion derives from the rule of statutory construction that a court should not read a statute in a way that makes other parts of the same statute nugatory. Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998):
See also TRW, Inc. v. Andrews, 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001):
(Footnote omitted).
This conclusion also derives from the rule of statutory construction that if both a specific and a general statute apply to the same set of facts, the specific statute is applicable and the general is not. Bulova Watch Co., Inc. v. United States, 365 U.S. 753, 758, 81 S.Ct. 864, 6 L.Ed.2d 72 (1961); Padilla, 222 F.3d at 1192; Minnesota Khan, 172 B.R. at 624; Kimlinger and Wassweiler, 13 Bankr. Dev. J. at 72:
Provisions of the Bankruptcy Code provide specific remedies for specific problems. Treating any of them as grounds to dismiss a case under the guise of "cause" is a misapplication. In re Motaharnia, 215 B.R. 63, 68-69 (Bankr.C.D.Cal.1997):
Although arguably slightly outdated after BAPCPA, the Minnesota Khan case provides a thoughtful analysis of what demonstrates cause for Section 707(a) relief.
Khan, 172 B.R. at 625-26 (citations and footnote omitted), and at 625 n. 23:
The Court finds that there is not a good faith requirement for a non-consumer business debtor to file a Chapter 7 case. Even if there were such a requirement, GRMC and Barton have failed to prove by a preponderance of the evidence that Debtor initiated this Chapter 7 case in bad faith. To the extent only an honest and deserving debtor is eligible to file a Chapter 7 petition, the Court finds that the Debtor is eligible. The facts elucidated and arguments made by GRMC and Barton are addressable by less drastic remedies than dismissal. For example, to the extent they established facts
Section 706(b) provides: "On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time." This section is not mandatory; the Court should use its discretion in any decision to convert. See H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977) ("The decision whether to convert is left in the sound discretion of the court, based on what will most insure [sic] to the benefit of all parties in interest."); S.Rep. No. 95-989, 95th Cong., 2d Sess. at 94, 1978 U.S.C.C.A.N. 5963, 6335 (1978) ("The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.")
Section 706(b) does not identify any specific grounds to order conversion. Therefore, a Court should consider anything relevant that would further the goals of the Bankruptcy Code.
In this case GRMC and Barton do not suggest any additional reasons for converting the case to Chapter 11 than they do for dismissing it under Section 707(a). Obviously, dismissal of the case would allow them to pursue Debtor in state court and might result in direct garnishments of his salary. Absent a dismissal, they seek conversion to increase their returns over that they will receive in liquidation by capturing Debtor's post-petition personal service income
However, conversion to Chapter 11 would not further the interests of the Debtor or those that depend on him for support. The obviously apparent reasons for the existence of a bankruptcy law available to individuals is to discharge debt and provide a fresh start. If the Court were to order conversion of this case to Chapter 11, the Debtor would be unable to automatically reconvert it to Chapter 7. See Section 1112(a)(3) ("The debtor may convert a case under this chapter to a case under chapter 7 of this title unless—... (3) the case was converted to a case under this chapter other than on the debtor's request.") Instead, he would be trapped
At least one case has ruled that one element a creditor must establish to convert a case to Chapter 11 is to demonstrate the probability of a confirmable plan of reorganization. In re Wet-Jet Int'l, Inc., 235 B.R. 142, 153 (Bankr.D.Mass. 1999). To the extent this is true, GRMC and Barton have failed to prove the probability of a confirmable plan. On the other hand, while Debtor suggested that no plan would be confirmable based on his tax debt and other expenses, he also failed to prove his contention to any degree.
For the reasons stated, the Court will deny the motion to convert the case under Section 706(b).
(Citations omitted.)
[T]he analysis in many of these opinions [finding a good faith filing requirement for chapter 7] opens with a sweeping pronouncement that good faith in the filing of a Chapter 7 petition is "an implicit jurisdictional requirement." This sentiment sounds all very noble, but it has more resonance for a layperson's perception of the judicial process than for a professional's understanding of it. Such pronouncements are never accompanied by a statutory citation, and for a good reason: there is none.
Minnesota Khan, 172 B.R. at 621.
In the bankruptcy context, "jurisdiction" is the basic ability of the United States District Court to exercise the power of the federal government over a debtor and its pre-bankruptcy legal relationships with its creditors. Jurisdiction over bankruptcy cases and proceedings is conferred by 28 U.S.C. § 1334(a)-(b). These provisions empower the District Court to automatically assume jurisdiction in a voluntary bankruptcy case once a debtor performs the simple, ministerial act of filing a petition for relief under Title 11, pursuant to 11 U.S.C. §§ 301 and 302.
Id. (footnotes omitted.)
Nowhere do any of these statutes, by their terms, require a debtor in a voluntary case to plead or attest to his or her good faith on the face of a petition, as a prerequisite to the opening of a case file in the bankruptcy court or as a preliminary to the assumption by that court of judicial authority over the debtor and its creditors. Zick and the other cases that posit good faith as a looming "jurisdictional requirement," then, position the issue at a level far too basic in the legal superstructure of the bankruptcy process.
Id. at 622.
(Emphasis added.) Compare Section 541(a):
(Emphasis added.)
BAPCPA changed this. After BAPCPA consumer debtors that fail the means test have the choice of dismissal or conversion to Chapter 11 or 13. See Section 707(b). And, BAPCPA expanded the Chapter 11 estate to include post-petition personal service income as does the Chapter 13 estate. Previously Congress was worried about imposing involuntary servitude on Chapter 13 debtors. Now, however, by allowing creditors to force conversion of a Chapter 7 debtor's case to Chapter 11, coupled with an inability of the debtor to voluntarily reconvert or dismiss and the inclusion of the debtor's post-petition income, Congress may have created the setting for a constitutional challenge. Compare Fitzsimmons v. Walsh (In re Fitzsimmons), 20 B.R. 237, 240 (9th Cir. BAP 1982), aff'd and remanded, 725 F.2d 1208 (9th Cir.1984) (pre-BAPCPA case) (Section 706(c) does not permit involuntary conversion to chapter 13 because of concern that post-bankruptcy earnings may not be involuntarily impounded) (Remanded for a determination of amount of income attributable to personal services income). See also Misuraca v. U.S. Trustee, 2009 WL 1212471 (D.Ariz.2009) (Bankruptcy court found 707(b) abuse and ordered dismissal. Debtor sought a stay pending appeal because he would be forced to convert to chapter 11, being ineligible for a chapter 13, and argued a violation of the Thirteenth Amendment. The District Court denied the stay and dismissed as not ripe, because the Debtor had the choice of dismissing and was not in fact in a Chapter 11.)
