In re Daily Corp.

• Decision Date: 17 April 1987
• Docket Number: Bankruptcy No. 86-00401F.
• Citation: 72 BR 489
• Parties: In re DAILY CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

72 B.R. 489 (1987)

In re DAILY CORPORATION, Debtor.

Bankruptcy No. 86-00401F.

United States Bankruptcy Court, E.D. Pennsylvania.

April 17, 1987.

Marvin Krasny, John F. Murphy, Adelman Lavine Krasny Gold & Levin, Philadelphia, Pa., for debtor, Daily Corp.

Edward J. DiDonato, Ciardi, Fishbone & DiDonato, Philadelphia, Pa., for Creditors' Committee.

OPINION

BRUCE FOX, Bankruptcy Judge:

At issue before me is the power of this court to dismiss a chapter 11 bankruptcy case sua sponte. The debtor argues that this court does not have any power to act pursuant to 11 U.S.C. § 1112(b) and that the recent amendment to 11 U.S.C. § 105(a) is not yet effective in this district. Thus, the debtor asserts that I am without any authority to act on my own motion.

I.

On January 20, 1986, this debtor filed a voluntary petition in bankruptcy under chapter 11. A committee of unsecured creditors was then appointed under 11 U.S.C. § 1102 which retained counsel as permitted by 11 U.S.C. § 1103. On April 29, 1986 the first meeting of creditors was held. To date, no reorganization plan or disclosure statement has been filed; therefore, on March 10, 1987, a hearing was scheduled for the debtor to show cause why this case should not be dismissed for reasons set forth in 11 U.S.C. § 1112(b)(2)(4) — that is, for the debtor's failure to propose a plan or otherwise prosecute its case.

Notice of this hearing was provided, inter alia, to the debtor and the creditors' committee. The debtor's counsel attended and challenged this court's power to act on its own motion. The committee's counsel attended and took no position on this question and declined the opportunity to brief the issue. Clearly, the committee has made no motion, either written or oral, seeking dismissal or conversion of this matter, although it does not appear to be opposing dismissal or conversion. See In re Tiana Queen Motel, 749 F.2d 146 (2d Cir. 1984), cert. denied, 471 U.S. 1138, 105 S.Ct. 2681, 86 L.Ed.2d 699 (1985) (creditor's oral motion to dismiss is sufficient under § 1112(b)). Thus, any action taken in this matter would be sua sponte.

II.

Prior to its amendment in 1986, 11 U.S.C. § 1112(b) permitted a court to dismiss a chapter 11 case, or convert it to one under chapter 7, solely "on request of a party in interest."¹ In interpreting this particular phrase, most courts concluded that a bankruptcy court was not a party in interest and thus could not act sua sponte. The leading case for this holding is In re Gusam Restaurant Corp., 737 F.2d 274 (2d Cir.1984) ("Gusam"). Accord, e.g., In re Moog, 774 F.2d 1073 (11th Cir.1985); In re Mandalay Shores Co-Op Housing Association, Inc., 63 B.R. 842, 853 (N.D.Ill.1986); Cournoyer v. Town of Lincoln, 53 B.R. 478, 486 (D.R.I.1985), aff'd, 790 F.2d 971 (1st Cir.1986). Matter of Lozano, 42 B.R. 971 (D.P.R.1984); In re Management Data Services, Inc., 43 B.R. 962, 968-69 (Bankr. W.D.Wash.1984). See also 5 Collier on Bankruptcy ¶ 1112.034 (15th ed. 1987). In reaching this conclusion, these courts (and commentator) have looked to the legislative history surrounding both § 1112(b) and the Code itself.

The original House version of § 1112(b) contained only the language "party in interest" while the Senate version expressly provided that a bankruptcy court could dismiss or convert a case on its own motion. Compare H.R. 8200, 95th Cong., 1st Sess. (1977) with S. 2266, 95th Cong., 1st Sess. (1977). The Senate conferees acquiesced to the House version which became law. In their statements, Congressman Edwards and Senator DiConcini made clear that the House version was adopted to prevent bankruptcy courts from acting sua sponte. 124 Cong.Rec. 32,393 (1978) (statement of Cong. Edwards); 124 Cong.Rec. 33,993 (1978) (statement of Sen. DeConcini); accord, Gusam, 737 F.2d at 277. This specific legislative history was buttressed by statements showing a Congressional desire to remove bankruptcy judges from their administrative functions which were part of their activities under the Bankruptcy Act of 1898. Gusam, 737 F.2d at 276. Those administrative duties would be assumed by the proposed United States Trustee. See In re A-1 Trash Pick Up, Inc., 802 F.2d 774 (4th Cir.1986), aff'g, 57 B.R. 380 (E.D.Va.1986).

Although the legislative history of § 1112(b) seemed to evince a clear legislative intent concerning sua sponte dismissals, not every court agreed with Gusam's holding. Some courts looked to Code provisions other than § 1112(b) for their authority to act, such as sections 105(a), 305, 1108, and 1129, and, thus, did not view this legislative history as dispositive. See, e.g., In re Coram Graphic Arts, 11 B.R. 641 (Bankr.E.D.N.Y.1981). In addition, Gusam did not discuss the generally accepted inherent power of courts to control their dockets and dismiss cases for lack of prosecution, even absent authority from a specific rule or statutory provision. Link v. Wabash Railroad Co., 370 U.S. 626, 630-31, 82 S.Ct. 1386, 1388-89, 8 L.Ed.2d 734 (1962); Titus v. Mercedes Benz of North America, 695 F.2d 746, 749 (3d Cir.1982); 5 Moore's Federal Practice ¶ 41.112, at 41-109 to 111 (2d ed. 1986) ("Moore's").² For some courts, this inherent judicial power over case management was a source of authority separate from § 1112(b). In re Ray, 46 B.R. 424 (S.D.Ga.1984); In re Coram Graphic Arts, 11 B.R. at 644.

Most interesting was an analysis of legislative history somewhat different from that provided in Gusam. That analysis focused upon Congressional statements noting the important public interest in the proper administration of bankruptcy cases and the need for oversight of these cases. For example,

The practice in bankruptcy is different for several reasons. First, there is a public interest in the proper administration of bankruptcy cases. Bankruptcy is an area where there exists a significant potential for fraud, for self-dealing, and for diversion of funds. In contrast to general civil litigation, where cases affect only two or a few parties at most, bankruptcy cases may affect hundreds of scattered and ill-represented creditors. In general civil litigation, a default by one party is relatively insignificant, and though judges do attempt to protect parties\' rights, they need not be active participants in the case for the protection of the public interest in seeing disputes fairly resolved. In bankruptcy cases, however, active supervision is essential. Bankruptcy affects too many people to allow it to proceed untended by an impartial supervisor.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 88 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6050 (footnotes omitted).

The original House version of what ultimately became the Bankruptcy Reform Act of 1978 provided for the creation of the U.S. Trustee position which would assume various administrative and oversight duties. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 100-102, 104-105 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6061-63, 6065-66. The Senate bill initially did not contain a U.S. Trustee provision and thus reserved to bankruptcy judges those administrative responsibilities. While the Senate may have ultimately accepted the House version of § 1112(b), it did not accept a nationwide U.S. Trustee program. For some courts, depriving a bankruptcy court of the power to act on its own, in those districts where there was no U.S. Trustee system and in those cases where there was no active creditors' committee, was contrary to Congressional intent. Matter of Nikron, 27 B.R. 773 (Bankr.E.D.Mich.1983); accord, In re Harvey Probber, Inc., 44 B.R. 647 (Bankr.D. Mass.1984).

The Gusam holding also provided theoretical difficulties for courts struggling with the concept of the "good faith" bankruptcy filing. The requirement of "good faith" is not express in the Code but is usually implied based upon an historical analysis. See In re Victory Construction Co. Inc., 9 B.R. 549 (Bankr.C.D.Cal.1981), order vacated on other grounds, 37 B.R. 222 (Bankr. 9th Cir.1984). To the extent a statutory source is mentioned, the most common has been § 1112(b) ("cause"). In re Johns-Manville Corp., 36 B.R. 727 (Bankr.S.D.N.Y.1984), leave to appeal denied, 39 B.R. 234 (S.D.N.Y.1984), mandamus denied, 749 F.2d 3 (1984); Matter of Northwest Recreational Activities, Inc., 4 B.R. 36, 39 (Bankr.N.D.Ga.1980). In discussing good faith dismissals, courts have relied upon administrative oversight concepts designed to protect both the court and creditors from debtor abuse:

Good faith, in the sense perceived by this court to have continued relevance, is merged into the power of the court to protect its jurisdictional integrity from schemes of improper petitioners seeking to circumvent jurisdictional restrictions and from petitioners with demonstrable frivolous purposes absent any economic reality.

Matter of Northwest Recreational Activities, Inc., 4 B.R. at 39. Courts dealing with the good faith issue, sua sponte, have almost been forced to carve out an exception to the Gusam holding. See Matter of Little Creek Development, 779 F.2d 1068, 1071 n. 1 (5th Cir.1986).

III.

Against this background, Congress passed the Bankruptcy Judge, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554 (1986 Act), with an enactment date of October 27, 1986. The main purposes underlying the 1986 Act were the authorization of additional bankruptcy judges, the creation of a new chapter 12 to assist economically distressed family farmers, and the phased nationwide expansion of the United States Trustee program. In addition, § 203 of the 1986 Act states:

SEC. 203. POWER OF COURT.

Section 105(a) of title 11, United States Code, is amended by adding at the end thereof the following new sentence: "No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or

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