Grundy Nat. Bank v. Shortt
| Decision Date | 17 December 1987 |
| Docket Number | Civ. A. No. 87-0250-A. |
| Citation | 80 BR 802 |
| Court | U.S. District Court — Western District of Virginia |
| Parties | GRUNDY NATIONAL BANK, Plaintiff, v. David W. & Nancy J. SHORTT, Defendants. |
Michael L. Shortridge, Norton, Va., for plaintiff.
John Lamie, Abingdon, Va., for defendants.
This appeal is before the court on the Order of the United States Bankruptcy Court dated August 27, 1987 denying appellant's motion to dismiss appellees' Chapter 11 proceeding.
The appeal raises one primary and several secondary issues. The most noteworthy question is whether persons not engaged in business may seek relief under Chapter 11 of the Bankruptcy Code. The federal appellate courts are divided on this issue and precedent from within the Fourth Circuit is almost nonexistent. The secondary issues raised by the appellant are factual disputes as to whether the debtors actually were engaged in business and whether they operated in good faith. Intertwined with these factual issues is a question concerning the procedural correctness of the bankruptcy court's findings of fact and whether they are entitled to be considered under the clearly erroneous standard of review. The court affirms the bankruptcy court's August 27 Order and dismisses the appeal.
The court holds that Chapter 11 is available to non-business debtors. Because of that holding, it is unnecessary to rule on whether the debtors actually were involved in business or on the bankruptcy court's finding of fact on that issue. The court further finds that the bankruptcy court did not make a finding of fact or otherwise rule on the good faith question. Accordingly, the court is not in a position to decide that issue on appeal. Because it was not properly before the court, however, the court's dismissal of the good faith issue is without prejudice.
Pursuant to Bankruptcy Rule 8012, appellant has requested oral argument. After examination of the briefs and record, however, this court determines that the facts and legal arguments are adequately presented in the briefs and record and the decisional process would not be significantly aided by oral argument. Oral argument is denied.
The resolution of this appeal depends upon interpretations of law, not fact. In light of this, the court refrains from a detailed factual recitation and presents only those facts necessary to put the appeal in context.
On February 4, 1987, David and Nancy Shortt filed a Chapter 13 bankruptcy. In their petition for relief, they listed unsecured loans to Grundy National Bank of one hundred fifteen thousand dollars ($115,000). These loans were listed as contingent and disputed. In actuality, they were neither contingent nor disputed and amounted to approximately one hundred eighteen thousand dollars ($118,000). The parties dispute the reason and motives for the incorrect filing. Upon motion of Grundy National Bank, the bankruptcy court found the debtors ineligible for Chapter 13 relief because their unsecured debt exceeded one hundred thousand dollars ($100,000). The court dismissed the Chapter 13 case and granted leave for the Shortts to file in Chapter 11. Grundy National Bank then moved to dismiss asserting that the Shortts were not business debtors and they therefore were ineligible for Chapter 11 relief. Grundy National Bank also alleged that the Shortts had been operating in bad faith.
Mr. Shortt is an employee and part owner of a small corporation not in bankruptcy. The parties dispute the involvement of Mrs. Shortt in her sister's dress shop in North Carolina. On August 27, 1987, the bankruptcy court denied Grundy National Bank's motion to dismiss. In doing so, it stated its belief that a "business criteria" is not necessary to file in Chapter 11. It also found, as a matter of fact, that the Shortts actually were engaged in business. Grundy National Bank appeals the court's denial of its motion to dismiss.
In its August 27 Order denying Grundy National Bank's motion to dismiss, the bankruptcy court rejected its contention that nonbusiness debtors were ineligible for relief under Chapter 11. The court now directs its attention to this issue.
The bankruptcy court relied on 11 U.S.C.A. § 109(d) of the Bankruptcy Code to reject Grundy's argument. This section states that "only a person that may be a debtor under chapter 7 of this title, except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of this title." 11 U.S.C.A. § 109(d) (Supp. 1987). The criteria for chapter 7 eligibility clearly does not include a business debt requirement. See 11 U.S.C.A. § 109(b) (Supp.1987). Moreover, the term "person" includes an individual. 11 U.S.C.A. § 101(35) (Supp.1987). A plain reading of the statutory language, therefore, does not preclude nonbusiness debtors from utilizing Chapter 11 of the Bankruptcy Code.
Unfortunately, an analysis of this question cannot stop at a reading of the Code. Relying on the statutory structure of chapter 11 and its legislative history, several courts have denied chapter 11 relief to individual nonbusiness debtors. See, e.g., Wamsganz v. Boatmen's Bank of De Soto, 804 F.2d 503 (8th Cir.1986); In re Lange, 75 B.R. 154 (Bankr.N.D.Ohio 1987); In re Bendig, 74 B.R. 47 (Bankr.D.Conn.1987). Other courts have emphasized the business nature of chapter 11, essentially adding support to Grundy's position. See, e.g., In re Little Creek Development Corp., 779 F.2d 1068 (5th Cir.1986); In re Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir. 1985); In re Ponn Realty Trust, 4 B.R. 226 (Bankr.D.Mass.1980). Yet, judicial opinion is not unanimous. In fact, the question has split the appellate courts. See, e.g., In re Moog, 774 F.2d 1073 (11th Cir.1985) (). Nor is the Eleventh Circuit standing alone on this issue; several other courts have also allowed individual consumers to file under Chapter 11. See, e.g., In re Warner, 30 B.R. 528 (9th Cir. BAP 1983); In re Young, 76 B.R. 376 (Bankr.D.Del.1987); In re Greene, 57 B.R. 272 (Bankr.S.D.N.Y.1986); In re Gregory, 39 B.R. 405 (Bankr.M.D.Tenn.1984). Depending on how one interprets the actual holding of Winshall Settlor's Trust, supra, the authority of Gregory may be in question because Tennessee is in the Sixth Circuit. Nevertheless, Gregory remains as persuasive precedent for this court.
In Wamsganz, the debtors were a married couple who never owned or operated a business enterprise. Their income was derived from social security, pensions, and property rental. Wamsganz, 804 F.2d at 504. Although the court acknowledged that Chapter 11 contained "no explicit limitation excluding persons not engaged in business," it concluded that the legislative history of the Bankruptcy Code "shows that Congress meant for Chapter 11 to be available to businesses and persons engaged in business, and not to consumer debtors." Id. at 504-05. The court then engaged in a lengthy legislative analysis that, admittedly, demonstrates that Chapter 11 was primarily designed for business debtors. See also the extensive legislative history cited in In re Ponn Realty Trust, 4 B.R. 226, 229-31 (Bankr.D.Mass.1980).
Nevertheless, the mere fact that Congress intended Chapter 11 to be primarily for business debtors does not mean that it wished to preclude consumer debtors. Relying also upon legislative history, the Eleventh Circuit determined that "while Chapter 11 is primarily aimed at business debtors, consumer debtors might find Chapter 11 appropriate under certain circumstances." In re Moog, 774 F.2d at 1074. Because the debtor in Moog had no regular source of income, she could not qualify for reorganization under Chapter 13. She did have a source of periodic income, however, that possibly could sustain a Chapter 11 reorganization plan. If she was precluded from utilizing Chapter 11, her only recourse would be a Chapter 7 liquidation that would result in the loss of her home. The court believed that her case presented "the unique circumstance where Chapter 11 is preferable over Chapter 13 for a consumer debtor who wishes to reorganize." Id. at 1075.
This court is of the opinion that the Bankruptcy Code does not preclude nonbusiness debtors from filing under Chapter 11. Several commentators have reached the same conclusion. See Herbert, Consumer Chapter 11 Proceedings: Abuse or Alternative?, 91 Com.L.J. 234 (1986) (); Morris, Substantive Consumer Bankruptcy Reform in the Bankruptcy Amendments Act of 1984, 21 Wm. & Mary L.Rev. 91, 97 (1985) (); 2 Collier on Bankruptcy ¶ 109.04 (15th ed. 1987) (In re Moog, supra).
Although it was written before the Eighth Circuit's opinion in Wamsganz, Professor Herbert's article addresses the same cases and materials upon which the court in Wamsganz relied. Accordingly, the article provides a useful and convincing rebuff to those who contend that consumers may not file under Chapter 11. Herbert states that "although the economics of Chapter 11 make it probable that consumers will rarely elect it as an alternative to Chapters 7 and 13, it is an appropriate vehicle for those consumer debtors who wish to reorganize but for whom Chapter 13 is unavailable, inadequate, or unduly expensive." Herbert, supra, at 251. Upon examination of the relevant United States Senate and House of Representatives reports, he concludes "that Chapter 11 is available—just unwise" for consumer debtors. Id. at 238. For example, the Senate report states that Herbert, supra, at 238 (citing S.Rep. No. 989, 95th Cong., 2nd Sess....
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