In re Adolph

• Decision Date: 28 January 2011
• Docket Number: No. 09 B 32836,09 B 32836
• Citation: 441 B.R. 909
• Parties: In re Braden J. ADOLPH, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

441 B.R. 909

In re Braden J. ADOLPH, Debtor.

No. 09 B 32836.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Jan. 28, 2011.

Rollin J. Soskin, Rollin J. Soskin & Associates, Ltd., Lincolnshire, IL, for Charles C. Happ.

Carey M. Stein, Ashman & Stein, Chicago, IL, for debtor Braden J. Adolph.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

The chapter 7 bankruptcy of debtor Braden J. Adolph is before the court on the motion of creditor Charles C. Happ to dismiss the case pursuant to 11 U.S.C. § 707(a) and (b) on the ground that the case was filed in bad faith. For the reasons that follow, the motion will be denied.

1. Jurisdiction

The court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (J), and (O). See In re Rooney, 436 B.R. 454, 455 (Bankr.N.D.Ohio 2010); In re Camp, 416 B.R. 304, 305 (Bankr.E.D.Tex.2009); In re Bruckman, 413 B.R. 46, 51 (Bankr.E.D.N.Y.2009).

2. Background

The following facts are not disputed. Charles Happ and Braden Adolph were shareholders in a business called Eclectic Products & Resources, Inc. Happ and Adolph quarreled over some promissory notes Adolph had given to Happ, and Happ brought an action against Adolph in Illinois state court, eventually obtaining a default judgment against him. Adolph was able to obtain an order vacating the default judgment on the condition that he pay $2,100 to Happ's attorney, an amount the state court later increased to $4,200. Rather than make the payment, Adolph filed this chapter 7 case on September 3, 2009.

On October 5, 2010, Happ moved to dismiss the bankruptcy case pursuant to 11 U.S.C. § 707(b) on the ground that the case had been filed in bad faith. In his motion, Happ asserted that Adolph made misrepresentations in his schedules, concealed assets, made false statements at his Rule 2004 examination, made payments Happ termed "preferential," filed bankruptcy solely to elude a single creditor, and enjoyed and continues to enjoy a "lavish lifestyle." (Dkt. No. 125). Several weeks later, Happ sought and received leave to file a nine-page supplement to his motion. (Dkt. No. 144). In the supplement, Happ requested dismissal of the case on essentially the same bad faith grounds as the original motion but pursuant to 11 U.S.C. § 707(a). (Dkt. No. 137).

Three weeks after filing the supplement, Happ commenced an adversary proceeding against Adolph. Happ's nine-count complaint alleges claims under 11 U.S.C. § 523(a) objecting to the dischargeability of Adolph's debt and claims under 11 U.S.C. § 727(a) objecting to Adolph's discharge. (Dkt. No. 147; Adv. Pro. No. 10 A 2306, Dkt. No. 1). The section 727 claims (claims under sections 727(a)(2)(A), 727(a)(3), and 727(a)(5)) overlap with the grounds of Happ's motion to dismiss under section 707.

Adolph objects to the motion to dismiss. He argues that bad faith is a cognizable ground for dismissal only under section 707(b), not section 707(a), and that section 707(b) does not apply to this case. A "better remedy" for Happ, he says, "wouldbe in an adversary complaint." (Dkt. No. 154 at 7).

3. Discussion

Adolph is right. Bad faith is not a ground for dismissal under section 707(a). And although bad faith is a ground for dismissal under section 707(b), Happ may not resort to section 707(b) under the circumstances of this case. Happ's motion will therefore be denied.

a. Section 707(a)

Happ cannot assert bad faith as a ground for dismissal under section 707(a). Bad faith is a ground for dismissal only under section 707(b).

Whether a chapter 7 case can be dismissed on bad faith grounds under section 707(a) is one of the older debates in bankruptcy law. See Robert J. Landry III, Viability of Bad-Faith Dismissals Under § 707(a), Am. Bankr. Inst. J., March 2008, at 1. Courts are deeply divided on the question. Two courts of appeals have endorsed bad faith dismissals under section 707(a), see In re Perlin, 497 F.3d 364, 369-70 (3d Cir.2007); In re Tamecki, 229 F.3d 205, 207 (3d Cir.2000); Industrial Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126-27 (6th Cir.1991), and two have rejected the idea, see In re Sherman, 491 F.3d 948, 970 (9th Cir.2007); In re Padilla, 222 F.3d 1184, 1191 (9th Cir.2000); In re Huckfeldt, 39 F.3d 829, 832 (8th Cir.1994). The Seventh Circuit has yet to consider the question. Trial court decisions on the subject are too numerous to cite.¹

The better view—the view most consistent with the language of the statute and the structure of the Bankruptcy Code—is that section 707(a) does not permit a case to be dismissed because the debtor filed the case in "bad faith." This is so for three reasons.

First, the phrase "bad faith" does not appear anywhere in section 707(a). Section 707(a) permits a court to dismiss a chapter 7 case for "cause" and then gives three examples: (1) unreasonable delay by the debtor prejudicial to creditors; (2) nonpayment of any fees or charges; and (3) failure of the debtor in a voluntary case to file the information required under section 521(a)(1). 11 U.S.C. § 707(a)(1)-(3). "Bad faith" is never mentioned. And although the list of examples in section 707(a) is admittedly not exhaustive, the three that do appear are "technical and procedural grounds" for dismissal. Padilla, 222 F.3d at 1192. Section 707(a), then, is best read as limited to technical and procedural violations of the Code. Id.; see also United States v. Taylor, 620 F.3d 812, 814 (7th Cir.2010) (noting that under the doctrine of ejusdem generis "a statutory list of examples ... can be a clue to the statute's intended scope" since "[t]he examples are a substitute for or supplement to a definition"). A debtor's bad faith is neither a "technical" nor a "procedural" problem.

Second, the Code specifically addresses the misconduct of debtors elsewhere. Section 523(a) bars the discharge of debts incurred through various kinds of wrongdoing, see 11 U.S.C. § 523(a), section 727(a) bars a debtor's discharge altogether because of wrongdoing in connection with the case, see 11 U.S.C. § 727(a), and section 707(b) permits dismissal of a consumer case that is "an abuse of the provisions of this chapter," see 11 U.S.C. § 707(b)(1). Where a general statute and a specific one address the same subject, the specific statute governs. Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384-85, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992); Berkson v. Gulevsky (In re Gulevsky), 362 F.3d 961, 963 (7th Cir.2004). Misconduct addressed under these specific statutes cannot constitute bad faith under the more general section 707(a). Sherman, 491 F.3d at 970-71; Padilla, 222 F.3d at 1192; Huckfeldt, 39 F.3d at 832. ²

Third, and most important, Congress amended section 707(b) extensively in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), and the amendment expressly makes "bad faith" part of the analysis of "abuse." Section 707(b)(3) now provides that in considering "whether the granting of relief would be an abuse of the provisions of this chapter" when a presumption of abuse either does not arise or is rebutted, the court "shall consider—(A) whether the debtor filed the petition in bad faith." 11 U.S.C. § 707(b)(3)(A).

If there were any doubt that section 707(b) is a "specific" provision that governs over the more general section 707(a) when it comes to dismissals for bad faith, BAPCPA's enactment lays that doubt to rest. See 6 Collier on Bankruptcy ¶ 707.03[2] at 707-20 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010) (stating that the issue "was resolved by Congress in the 2005 amendments to the Bankruptcy Code"); Landry, supra, at 48. Had Congress wanted courts to address bad faith under section 707(a), it would have included the phrase in that section. Because the phrase appears in section 707(b) but not in section 707(a), the most reasonable interpretation is that bad faith is not a basis for dismissal under section 707(a).

Despite BAPCPA, however, courts continue to hold that bad faith can be addressed under section 707(a). See Landry, supra, at 1 (noting that after BAPCPA "the continued viability of bad-faith dismissals under § 707(a) seemed over," but that the issue has nevertheless "risen its head in both consumer and nonconsumer cases in the post-BAPCPA era"). Many simply cite older decisions as support, but a few specifically reject the conclusion that the amendment of section 707(b) affects the proper reading of section 707(a) post-BAPCPA. See, e.g., Perlin, 497 F.3d at 370-71; In re Boca Vill. Ass'n, Inc., 422 B.R. 318, 322 n. 1 (Bankr.S.D.Fla.2009) (rejecting the "negative implication argument" as "unpersuasive"); In re Privada, Inc., No. 07-10940 FRM, 2008 WL 4692372, at *6 (Bankr.W.D. Tex. Oct.22, 2008).

Possibly the most extensive discussion of the question post-BAPCPA appears in Perlin. There, the Third Circuit concludedthat the explicit mention of "bad faith" in section 707(b) does not bar consideration of a debtor's income and expenses in deciding a motion to dismiss under section 707(a). Perlin, 497 F.3d at 369-70. The court treated the obvious differences in sections 707(a) and (b) under a single principle of statutory interpretation, "the enumeration of one case excludes another," and noted that this principle applies "only when the expressed and unmentioned items are part of a 'commonly associated group or series.' " Id. at 370 (quoting United States v. Vonn, 535 U.S. 55, 65, 122 S.Ct. 1043, 152 L.Ed.2d 90 (2002)). The court then held that because section 707(a) is concerned with all cases and section 707(b) only with consumer ones, Congress did not treat consumer and nonconsumer cases as a "commonly associated group or series." Id. at 371 (internal quotation omitted). Finally, the court noted that BAPCPA's legislative history nowhere evinces an intent to "restrict a bankruptcy court's...