Summary:
Mr. and Dr. Edwards, whose combined monthly gross income as health care professionals is $25722.67, filed Chapter 7, listing nearly $850,000 in general unsecured debts, which were primarily business debts. Dr. Dori Thomas, with whom Dr. Edwards had previously been in medical practice and was a co-guarantor, and Wells Fargo, which held a third lien for $695,000 against property, sought dismissal of the case under 11 U.S.C. § 707(a), as § 707(b) did not apply since the Edwards did not have primarily consumer debts.
Following In re Marino, 388 B.R. 679, 682 (Bankr. E.D.N.C. 2008), the bankruptcy court began that “[c]ause for dismissal under § 707(a) has been held to include a lack of good faith in filing the petition.” The factors from Marino include:
1. The debtor reduces creditors to a single creditor in the months prior to the filing of the petition;
2. The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle;
3. Debtor filed the case in response to a Judgment pending litigation . . . ;
4. The debtor made no efforts to repay his debts;
5. The unfairness of the use of Chapter 7;
6. The debtor has sufficient resources to pay his debts;
7. The debtor is paying debts to insiders;
8. The schedules inflate expenses to disguise financial well-being;
9. The debtor transferred assets;
10. The debtor’s overly utilizing the protections of the Code to the unconscionable detriment of creditors;
11. The debtor employed a deliberate and persistent plan of evading a single major creditor;
12. The debtor failed to make candid and full disclosure;
13. The debts are modest in relation to assets and income; and
14. There are multiple bankruptcies or other procedural “gymnastics.”
In applying these factors the court noted that due to overlap, they “evolve into something akin to the ‘smell test’”. That Dr. Thomas would be solely liable as a co-guarantor for a large majority of the debt in effect “reduces creditors to a single creditor.” Further, the court found that the Edwards not only failed to make lifestyle adjustments to “tighten their belts”, but had, in fact, increased their expenses with the purchase of newer vehicles and substantial increases in charitable donations. (While charitable donations are an allowed deduction under § 707(b), that does not apply under § 707(a). See In re Gilman, No. 11-06036-8-SWH, 2012 WL 1230276, (Bankr. E.D.N.C. Apr. 12, 2012)). Additionally, while no lawsuits had been filed prior to the bankruptcy, several creditors had sent demand letters regarding enforcing liability under the guarantees. Lastly, and perhaps having most impact, was the fact that the Edwardses’ annual gross income exceeds $300,000. Accordingly, the bankruptcy court dismissed the case for a lack of good faith.
Commentary:
This case continues to rest on a flawed reading from Marino of § 707(a), which provides that:
(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under chapter 123 of title 28; and
(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.
While the “including” is not, pursuant to 11 U.S.C. § 102(3), a term of limitation, but instead meant to be illustrative, under the canon of statutory construction of ejusdem generis,whereby when a class of things is followed by general wording that is not itself expansive, the general wording is usually restricted things of the same type as the listed items.
An example of this comes from Justice Holmes in McBoyle v. United States, 283 U.S. 25, 26, 27 (1931), where he interpreted a criminal statute that provided that the “term 'motor vehicle' shall include an automobile, automobile truck, automobile wagon, motor cycle, or any other self-propelled vehicle not designed for running on rails” to exclude aircraft, stating that:
To make the warning fair, so far as possible, the line should be clear. When a rule of conduct is laid down in words that evoke in the common mind only the picture of vehicles moving on land, the statute should not be extended to aircraft simply because it may seem to us that a similar policy applies, or upon the speculation that, if the legislature had thought of it, very likely broader words would have been used. United States v. Thind, 261 U. S. 204, 261 U. S. 209.
Following this reasoning, § 707(a) includes a unreasonable and prejudicial delay by a debtor, nonpayment of fees, and the failure to timely file schedules required under § 521(a)(1). These are, in essence, matters related to expeditious filings in case. It would seem that the relationship between the promptness in a filings in a case is even less analogous to the “good faith” factors of Marino than aircraft were to motor vehicles.
Further, as Dan Press has pointed out, the legislative history for legislative history on Section 707(a) states in pertinent part:
This section does not contemplate ... that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal.
S.Rep. No. 95-989, 95th Cong., 2d Sess. 94, reprinted in1978 U.S.Code Cong. & Admin.News 5787, 5880. See also Green v. Staples (In re Green), 934 F.2d 568 (4th Cir. 1991).
An involuntary Chapter 11, which includes a debtors earnings under §1115(a)(2) but lacks the mostly absolute right of voluntary dismissal that debtors have under §1208(b) and § 1307(b), could raise questions of involuntary servitude under the 13th Amendment. Whether this can be cured with an implied right of dismissal is a deeper question, but see Involuntary Servitude Claim Raised in Involuntary Chapter 11.
This would not, however, leave the bankruptcy court powerless in dealing with a debtor with primarily business debts. Upon the motion of any party in interest, pursuant to 11 U.S.C. § 706(b), the court could involuntarily convert the case to Chapter 11. (Contrast this with the prohibition in §706(c) on involuntary conversions to Chapter 12 or 13.) Once in Chapter 11, the court could dismiss the case under the standards set out in 11 U.S.C. § 1112(b). This may seem to be an exercise in futility, but could actually provide creditors with greater protections, as there is likely to be a more efficient, equitable and organized repayment of debts in Chapter 11 than there would be outside of bankruptcy.
For a copy of the opinion, please see:
Edwards- Dismissal under 11 U.S.C. § 707(a)
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