In re Amaro

• Decision Date: 30 September 2020
• Docket Number: Bankruptcy No. 20-80051
• Parties: In re: Osvaldo Amaro Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

In re: Osvaldo Amaro Debtor.

Bankruptcy No. 20-80051

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION

September 30, 2020

Chapter 7

Judge Lynch

MEMORANDUM OPINION

The question before the court is whether the United States Trustee ("UST") may proceed on his motions to dismiss this chapter 7 case pursuant to 11 U.S.C. § 707(b). The Debtor initially filed his petition under chapter 13 on January 13, 2020. He filed a proposed plan of reorganization, but before the court conducted a confirmation hearing, Mr. Amaro converted his case to chapter 7 by notice filed on February 28, 2020. The UST now seeks to dismiss the converted case through two motions under section 707(b). The first motion relies upon the so-called "means test" as applied in section 707(b)(2) to argue for the presumption of abuse. (ECF No. 70, the "(b)(2) Motion.") The second invokes section 707(b)(3) to request a determination of bad faith or abuse. (ECF No. 80, the "(b)(3) Motion.")

The Debtor objects to the UST's motions and requests the dismissal of the (b)(2) Motion. He argues, as a preliminary issue of law, that section 707(b)(2) does not apply to cases commenced under chapter 13 and that the (b)(3) Motion should be stayed until this threshold issue is resolved.¹ The UST concedes a split in authority, but he argues that the better-reasoned approach finds that section 707(b) applies to converted cases. He also notes that the divided authority relates to language in subsection (b)(1) and, therefore, affects both motions.

For the reasons discussed below, the court concludes that a case originally filed under chapter 13 and subsequently converted to chapter 7 is subject to section 707(b) of the Bankruptcy Code.

PROCEDURAL BACKGROUND

Arguing that the ruling on the legal issue could either avoid or limit evidentiary and other fact-related issues, the Debtor requested a ruling on the threshold question during the hearing on July 29, 2020. The court takes the Debtor's oral request for a ruling as akin to a motion to deny the motions for failure to state a claim upon which relief can be granted, see Fed. R. Civ. P. 12(b)(6), which the court can make applicable under Fed. R. Bankr. P. 9014(c) and 7012. For purposes of this ruling, therefore, the court accepts as true the factual allegations stated in the UST's motions, drawing reasonable inferences in his favor, without making findings of fact at this point. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

DISCUSSION

Section 707(b) of the Bankruptcy Code provides that after "notice and a hearing, the court, on its own motion or on a motion by the United States trustee,trustee . . . or any party in interest, 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 this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter." 11 U.S.C. § 707(b)(1). Subsections (b)(2) and (b)(3) set forth the standards for the court's determination of whether relief would be an "abuse" of the provisions of chapter 7. Subsection (b)(2) sets forth a mechanical "means test" based on the debtor's pre-petition income and expenses. If the debtor fails the means test then the granting of relief must be presumed abusive which presumption may be rebutted only upon a showing of "special circumstances." Id. § 707(b)(2)(B). However, if the means test "does not arise or is rebutted," the court may still dismiss a case for abuse and "shall consider - (A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances . . . ." Id. § 707(b)(3).

At issue in this case is the phrase "a case filed by an individual debtor under this chapter whose debts are primarily consumer debts" in section 707(b)(1). Courts are split on the issue of whether section 707(b) applies to converted cases. A minority of bankruptcy courts interpret the words "filed . . . under this chapter" as limiting section 707(b) to cases that were originally filed as chapter 7 cases to the exclusion of cases later converted to chapter 7. See In re Thoemke, 2014 Bankr. LEXIS 451 (Bankr. M.D. Fla. Feb. 4, 2014); In re Pate, 2012 Bankr. LEXIS 5926 (Bankr. S.D. Tex. Dec. 28, 2012); In re Layton, 480 B.R. 392 (Bankr. M.D. Fla. 2012); In re Chapman, 431 B.R. 216 (Bankr. D. Minn. 2010); McDow v. Dudley (In re Dudley), 405B.R. 790 (Bankr. W.D. Va. 2009); In re Guarin, 2009 Bankr. LEXIS 3871 (Bankr. D. Mass. Dec. 3, 2009); In re Ryder, 2008 Bankr. LEXIS 2220 (Bankr. N.D. Cal. Aug. 18, 2008); In re Miller, 381 B.R. 736 (Bank. W.D. Ark. 2008); In re Fox, 370 B.R. 639 (Bankr. D.N.J. 2007).

The current trend and majority approach, including that of two courts of appeal, holds that the operative language at issue here provides that the section can only apply to voluntary cases of natural persons who are currently proceeding under chapter 7. Thus, they hold that section 707(b) may apply to a case converted to chapter 7. See Pollitzer v. Gebhardt, 860 F.3d 1334 (11th Cir. 2017); Advanced Control Solutions, Inc. v. Justice, 639 F.3d 838 (8th Cir. 2011); Fokkena v. Chapman (In re Chapman), 447 B.R. 250 (8th Cir. B.A.P. 2011); In re Kruse, 545 B.R. 581 (Bankr. W.D. Wisc. 2016); In re Croft, 539 B.R. 122 (Bankr. W.D. Tex. 2015); In re Burgher, 539 B.R. 868 (Bankr. D. Colo. 2015); In re Hayes, 2015 Bankr. LEXIS 161 (Bankr. S.D. Tex. Jan. 16, 2015); In re Pollitzer, 2014 Bankr. LEXIS 4729 (Bankr. S.D. Fla. Nov. 12, 2014); In re Summerville, 515 B.R. 651 (Bankr. M.D. Fla. 2014); In re Reece, 498 B.R. 72 (Bankr. W.D. Va. 2013); In re Davis, 489 B.R. 478 (Bankr. S.D. Ga. 2013); In re Lassiter, 2011 Bankr. LEXIS 1927 (Bankr. E.D. Va. May 24, 2011); In re St. Jean, 515 B.R. 864 (Bankr. M.D. Fla. 2011); In re Kraft, 2010 Bankr. LEXIS 5121 (Bankr. D. Wy. Aug. 13, 2010); In re Willis, 408 B.R. 803 (Bankr. W.D. Mo. 2009); Justice v. Advanced Control Solutions, Inc., 2008 U.S. Dist. LEXIS 81046 (W.D. Ark Sept. 22, 2008); In re Kellett, 379 B.R. 332 (Bankr. D. Oreg. 2007); In re Kerr, 2007 Bankr. LEXIS 2474 (Bankr. W.D. Wash. July 18, 2007); In re Perfetto,361 B.R. 27 (Bankr. D. R.I. 2007). Additionally, the Supreme Court has suggested in dicta that section 707(b) applies to converted cases. In Hamilton v. Lanning, a chapter 13 case, the Court rejected an argument that the debtor "might have been able to obtain relief by filing under chapter 7 or by converting her chapter 13 petition to one under chapter 7," stating that the "availability of Chapter 7 to debtors like respondent who have above-median incomes is limited" because in the "respondent's case, a presumption of abuse would attach under § 707(b)(2)(A)(i)" based on her disposable income. 560 U.S. 505, 523 (2010).

I. The Language of Section 707(b)(1) Is Ambiguous.

When a "statute's language is plain, the sole function of the courts - at least where the disposition required by the text is not absurd - is to enforce it according to its terms." Lamie v. United States Trustee, 540 U.S. 526, 534 (2004) (internal citation and quotation marks omitted). The minority view of section 707(b)(1) is that it clearly applies only to cases initially commenced under chapter 7 and not to cases converted to that chapter. The court disagrees. As discussed below, the court must conclude that the critical language in question provides that subsection (b) shall apply to any voluntary chapter 7 case so long as the debtor is an individual regardless of which chapter the petition was originally filed under. As the court found in In re Lassiter, "[b]oth of these readings of § 707(b)'s critical language are coherent, grammatically sound, and completely plausible. Thus, the Court cannot rely solely on the plain meaning of 11 U.S.C. § 707(b), as it does not have a singular meaning." In re Lassiter, 2011 Bankr. LEXIS 1927, at *8.

The phrase "a case filed by an individual debtor under this chapter whose debts are primarily consumer debts" literally read, admits of at least two plausible interpretations, one applying only to cases where the initial petition was filed under chapter 7 and the other as including cases where the debtor is currently proceeding under chapter 7 due to conversion of the case. This arises from grammatical ambiguity as to what the phrase "under this chapter" relates to and from linguistic ambiguity as to whether to "file" a case "under" chapter 7 includes conversion to that chapter.

The Debtor, advocating for the minority approach, argues that the phrase "under this chapter" is an adverbial phrase modifying the passive verb "filed." Accordingly, the word "case" must mean a case "filed under this chapter." This is a plausible interpretation. But the phrase could also plausibly relate to and modify the term "debtor" or even the word "case," instead. The phrases "debtor under chapter 7" and "case under chapter 7" could include cases converted to chapter 7 even if not originally filed under that chapter, for after conversion the case would become a "case under chapter 7" and the debtor a "debtor under chapter 7." Indeed, of these three interpretations, there is a strong grammatical argument that the phrase modifies the word "debtor." As noted by the court in Justice v. Advanced Control Solutions, Inc., this interpretation better satisfies the doctrine of "last antecedent" that a "limiting clause or phrase ordinarily is to be read as modifying only the noun or phrase it immediately follows." 2008 U.S. Dist. LEXIS 81046, at *10 (citing Jama v. Immigration & Customs Enforcement, 543 U.S. 335, 342-43 (2005)). Applying thisdoctrine, "the noun 'case' could be modified by the phrase 'filed by an individual debtor' that immediately follows it, and the noun 'debtor' could be modified by the phrase 'under this chapter' that immediately follows it." In re Reece, 498 B.R. 72, 79-80 (Bankr. W.D. Va. 2013).

Even if the court were to accept the...