In re Layton
In re Layton
Opinion of the Court
MEMORANDUM OPINION ON UNITED STATES TRUSTEE’S MOTION TO DISMISS
Bankruptcy Code § 707(b)(1) provides for the dismissal or voluntary conversion of a “case filed by an individual debtor under this chapter [i.e., chapter 7] whose debts are primarily consumer debts ... if [the Court] finds that the granting of relief would be an abuse of the provisions of [chapter 7].”
It is undisputed in this case that the Debtor fails the Means Test and a presumption of abuse arises. However, the Debtor contends that § 707(b) is not applicable here because she did not file her petition under chapter 7. Instead, the Debtor filed her petition under chapter 13, but later converted the case when she could not afford to fund her chapter 13 plan. Thus, the issue before the Court is whether § 707(b) applies to debtors who originally filed their case under chapter 13 and later convert the case to chapter 7.
Several courts have previously addressed this issue, and two lines of precedent have developed. The majority position is the so-called “common sense” view, which holds that converted cases are subject to § 707(b) because Congress intended for the Means Test to be applied in all chapter 7 cases.
Both positions cite anomalies within the Bankruptcy Code and the accompanying Rules that would occur if the opposite view were to prevail.
Factual Background,
On January 29, 2010, the Debtor filed her petition under chapter 13 of the Bankruptcy Code. The Court subsequently confirmed the Debtor’s chapter 13 plan, which provided for the abandonment of the Debt- or’s undersecured homestead and a 100% payout to the Debtor’s unsecured creditors. Unfortunately, the Debtor lost her job following the confirmation of her plan and was unable to make timely payments to the chapter 13 Trustee. As such, on December 7, 2011, the Debtor voluntarily converted to a chapter 7 case in accordance with § 1307(a) and subsequently amended her schedules to reflect her unemployment.
Following the conversion, the Debtor was fortunate enough to find a new position and became re-employed prior to receiving her chapter 7 discharge. However, pursuant to this new employment, the Debtor now has disposable monthly income of at least $1,282.94 — an amount far in excess of that allowed under the Means Test. Accordingly, the Trustee has moved to dismiss the case pursuant to § 707(b)(1).
Conclusions of Law
Section 707(b)(1) of the Bankruptcy Code provides in relevant part that:
After notice and a hearing, the court ... may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of [the Bankruptcy Code], if it finds that the granting of relief would be an abuse of the provisions of [chapter 7].9
The section does not appear to be ambiguous on its face.
The arguments for and against both interpretations are discussed below. The first two arguments could be grouped with the “common sense” view in that they clearly aim to apply § 707(b) to all chapter 7 cases whether originally filed under chapter 7 or filed under another chapter and then converted to chapter 7. However,
The third argument is what the Court considers to be the true “common sense” approach. At its heart, this argument implies that the BAPCPA
1. The Hybrid Arguments
The first hybrid argument leading to the “common sense” result is the grammatical rule of last antecedent. Under this rule, “[a] limiting clause or phrase ordinarily is to be read as modifying only the noun or phrase it immediately follows.”
This Court is not persuaded that the rule of last antecedent can be used in interpreting this statutory language. Applying the last antecedent rule in this fashion creates a strange irony in that it presupposes the drafters took great care and precision in drafting the language of § 707(b), but simultaneously ignores the bulk of superfluous language left in the wrath of its interpretation.
In a similar vein, some courts utilizing the hybrid approach have re-defined the word “filed” to mean “to enter (e.g., a legal document) on public official rec
Moreover, this definition of “filed” is contrary to the word’s settled meaning in other chapter 7 contexts. As the court in In re Fox has correctly noted, the words “filed” and “filing” refer to the initial petition filing in §§ 342(d), 707(b)(3), 707(b)(4)(A), 707(c)(2) and 707(c)(3).
2. The Common Sense Argument
The court in In re Perfetto
Courts applying the “common sense” interpretation hold that both of the above exceptions are applicable in the present context. First, courts correctly note that a primary goal of the BAPCPA amendments was to prevent chapter 7 discharges in cases where debtors possessed disposable income that could be paid to creditors.
Thus, while “common sense” courts readily acknowledge anomalies in other sections of the Code created by their interpretation,
3. The Plain Language Argument
In contrast to the long and analytical analysis required by the “common sense” interpretation, the so-called “plain language” view is straight forward. In sum, the statute says what it says and should be applied accordingly.
Due to the simplicity of this argument, most courts adopting the “plain language” view spend a large portion of their opinion explaining why they are not adopting the contrary view. This Court will follow suit.
The overarching concern of the courts adopting the “common sense” approach is that debtors will game the system in order to achieve an unintended and explicitly forbidden result. However, as several courts have noted, there are other avenues for dealing with such bad-faith debtors.
In light of these alternatives, the reasons for adopting the “common sense” approach appear to be heavily outweighed by the negative statutory and practical consequences of such approach. Among the anomalies of the “common sense” approach is the statutory conflict between § 707(b) and § 342(d).
Next, a practical Means Test issue exists that would act to the detriment of numerous debtors were the court to adopt the “common sense” view. Namely, the Means Test requires a mechanical computation of the debtor’s current monthly income for purposes of determining presumed abuse.
As one court has feared, this may result in a debtor being cycled through “a perpetual ‘do loop’ of failures in chapter 13, followed by brief tenures in chapter 7, followed by further re-conversions to chapter 13.”
Despite determining that the “plain language” view is the better interpretation of the statute, the Court does not ignore an unavoidable conflict arising from such a determination. Bankruptcy Rule 1019(2) sets out a time extension for filing § 707(b) motions to dismiss where a case has been converted to chapter 7.
Importantly, the statute enabling the adoption of rules of practice and procedure in bankruptcy cases under title 11 specifically provides: “Such rule shall not abridge, enlarge, or modify any substantive right.”
Conclusion
Section 707(b) unambiguously requires a case to be filed under chapter 7 in order for the section to be applicable. A case that is converted to chapter 7 is not filed under chapter 7; it is instead filed under the chapter in which it originated.
A separate order denying the Motion will be entered consistent with this Memorandum Opinion.
. 11 U.S.C. § 707(b)(1) (italics added).
. 11 U.S.C. § 707(b)(2). See, e.g., In re Ralston, 400 B.R. 854, 858-59 (Bankr.M.D.Fla. 2009).
. United States Trustee's Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(1) and (3) (Doc. No. 84) (''Motion”).
. See, e.g., In re Perfetto, 361 B.R. 27 (Bankr.D.R.I. 2007); In re Kellett, 379 B.R. 332 (Bankr.D.Ore. 2007); In re Lassiter, 2011 WL 2039363 (Bankr.E.D.Va. 2011).
. In re Fox, 370 B.R. 639 (Bankr.D.N.J. 2007); In re Dudley, 405 B.R. 790 (Bankr.W.D.Va. 2009); In re Ryder, 2008 WL 3845246 (Bankr.N.D.Cal. 2008).
. Compare Perfetto, 361 B.R. at 31 (noting various conflicts with the Bankruptcy Rules under "plain language” interpretation), with Fox, 370 B.R. at 645 (noting impossibility of dual compliance with §§ 342(d) and 707(b) under "common sense” interpretation).
.The United States Trustee (“Trustee'') has also raised the issue of whether the case should be dismissed for bad faith under 11 U.S.C. § 707(b)(3). The Court previously indicated in open court that the issue of dismissal under § 707(b)(3) may be considered separately. However, upon further reflection, the Court now concludes that bi-furcation is not necessary. Like the Means Test, § 707(b)(3) is not a stand-alone dismissal provision. Instead, § 707(b)(3) is merely a guide for what constitutes abuse under § 707(b)(1). Because the Court concludes that § 707(b)(1) does not apply in this case, the Trustee cannot prevail on the § 707(b)(3) argument.
. The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
. 11 U.S.C. § 707(b)(1) (emphasis added).
. See, e.g., In re Perfetto, 361 B.R. 27, 29 (Bankr.D.R.I. 2007) (before eventually opting for the “common sense” view, the court found that "a look at the statute makes it clear that § 707(b) is not at all ambiguous”).
. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 119 Stat. 23 (2005) ("BAPCPA”).
. See, e.g., Justice v. Advanced Control Solutions (In re Justice), 2008 WL 4368668, *4 (W.D.Ark. 2008); In re Kerr, 2007 WL 2119291, at *3 (Bankr.W.D.Wash. 2007). See also In re Lassiter, 2011 WL 2039363, at *4 (Bankr.E.D.Va.); Branigan v. Bateman (In re Bateman), 515 F.3d 272, 277 (4th Cir. 2008).
. Justice, 2008 WL 4368668, at *4 (citing Jama v. Immigration & Customs Enforcement, 543 U.S. 335, 342-43, 125 S.Ct. 694, 160 L.Ed.2d 708 (2005)).
. Id.
. See In re Dudley, 405 B.R. 790, 793 (Bankr.W.D.Va. 2009).
. 11 U.S.C. § 707(b)(1).
. See 11 U.S.C. § 103(b). See also Dudley, 405 B.R. at 793.
. Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992).
. 11 U.S.C. § 707(b)(1).
. In re Kerr, 2007 WL 2119291, at *3 (Bankr.W.D.Wash. 2007) (citing Websters II New Riverside University Dictionary 477 (1988)).
. Dudley, 405 B.R. at 794-95 (W.D.Va. 2009).
. Id.
. In re Fox, 370 B.R. 639, 644 (Bankr.D.N.J. 2007).
. Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 570, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995) (citing Dep't of Revenue of Oregon v. ACF Indus., Inc., 510 U.S. 332, 342, 114 S.Ct. 843, 127 L.Ed.2d 165 (1994)).
. In re Perfetto, 361 B.R. 27 (Bankr.D.R.I. 2007).
. Id. at 29.
. Id. (citing U.S. v. Ron Pair Enters. Inc., 489 U.S. 235, 289, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); In re Sours, 350 B.R. 261, 266 (Bankr.E.D.Va. 2006)).
. See H.R.Rep. No. 109-31, pt. 1, at 2 (2005), 2005 U.S.C.C.A.N. 88, 89 (Congress "intended to ensure that debtors repay creditors the maximum they can afford”).
. In re Kellett, 379 B.R. 332, 338 (Bankr.D.Ore. 2007).
. Id. See also Perfetto, 361 B.R. at 30. In fact, the facts of the Perfetto case suggest that the debtor was obviously trying to abuse the purported Means Test loophole. There, the debtor filed her chapter 13 petition and almost immediately converted her case to chapter 7 without any explanation as to why she was doing so. The only logical inference was that the debtor was actively trying to avoid the Means Test, which would have otherwise forbidden her from receiving her chapter 7 discharge.
. Fed. R. Bankr.P. 1019(b). See also Perfetto, 361 B.R. at 31.
. See, e.g., Perfetto, 361 B.R. at 31.
. Id.
. Id.
. In re Fox, 370 B.R. 639 (Bankr.D.N.J. 2007).
. Id. at 643. See also In re Dudley, 405 B.R. 790, 793 (Bankr.W.D.Va. 2009); In re Ryder, 2008 WL 3845246 (Bankr.N.D.Cal. 2008).
. See Dudley, 405 B.R. at 799-801; Ryder, 2008 WL 3845246, at *2.
. 11 U.S.C. § 707(a). See also Dudley, 405 B.R. at 800.
. See, e.g., Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1191 (9th Cir. 2000) (holding that bad faith is not a cause for dismissal under § 707(a)).
. See In re Bilzerian, 258 B.R. 850 (Bankr.M.D.Fla. 2001) (citing Indus. Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126-27 (6th Cir. 1991) (holding that lack of good faith warrants dismissal under § 707(a))).
. 11 U.S.C. § 105(a). See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
. See Marrama, 549 U.S. at 375, 127 S.Ct. 1105.
. For an example of this fact pattern, see In re Perfetto, 361 B.R. 27 (Bankr.D.R.I. 2007).
. 11 U.S.C. § 707(b). More logically, the abuse contemplated herein actually occurs under the provisions of chapter 13. The debt- or is not subjected to the Means Test in chapter 13, so they file the 13 with no intention of proceeding thereunder. Thus, the real provision being abused in this scenario is § 1307(a), granting the right to convert to chapter 7. 11 U.S.C. § 1307(a).
. See Chambers v. NASCO, 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991).
. 11 U.S.C. § 342(d).
. Id. See also In re Fox, 370 B.R. 639, 645 (Bankr.D.N.J. 2007).
. In re Kerr, 2007 WL 2119291, at *4 (Bankr.W.D.Wash. 2007); In re Kellett, 379 B.R. 332, 337 (Bankr.D.Ore. 2007).
. 11 U.S.C. § 707(b)(2)(A)(i).
. 11 U.S.C. § 101(10A). See, e.g., In re Perfetto, 361 B.R. 27, 31 (Bankr.D.R.I. 2007).
. Perfetto, 361 B.R. at 31.
. Kellett, 379 B.R. at 339.
. In re Fox, 370 B.R. 639, 648 (Bankr.D.N.J. 2007).
. Fed. R. Bankr.P. 1019(2).
. 28 U.S.C. § 2075.
. Compare 28 U.S.C. § 2072(b) with 28 U.S.C. § 2075. The supersession clause was removed from the bankruptcy rule enabling statute in 1978. See Bankruptcy Act of 1978, Pub. L. 95-598.
. 28 U.S.C. § 2072(b).
. 28 U.S.C. § 2075.
. Id. See also In re Fox, 370 B.R. at 645 at n. 4.
. Section 348 provides that “the conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted.” Section 348 does not change the date of the filing of the case, nor does it change the fact that a petition was originally filed under another chapter.
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