In re Dinova

• Decision Date: 19 September 1997
• Docket Number: Bankruptcy No. 96 B 16755,BAP No. 97-50015.
• Citation: 212 BR 437
• Parties: In re Francis J. DINOVA, Debtor. Francis J. DINOVA, Plaintiff-Appellant, v. Gregory G. HARRIS, Ch. 7 Trustee, and Mary Elizabeth Tom, Acting United States Trustee, Defendant-Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

212 B.R. 437 (1997)

In re Francis J. DINOVA, Debtor Francis J. DINOVA, Plaintiff-Appellant, v. Gregory G. HARRIS, Ch. 7 Trustee, and Mary Elizabeth Tom, Acting United States Trustee, Defendant-Appellees.

Bankruptcy No. 96 B 16755, BAP No. 97-50015.

United States Bankruptcy Appellate Panel of the Second Circuit.

Argued June 13, 1997.

Decided September 19, 1997.

COPYRIGHT MATERIAL OMITTED

Richard Croak & Associates, P.C. by Richard Croak, Albany, NY, for Debtor.

Harris & Bixby by Karen B. Simons, Albany, NY, for Chapter 7 Trustee Gregory G. Harris.

Mary Elizabeth Tom, Acting United States Trustee by Kim F. LeFebvre, Albany, NY.

Before: NINFO, GALLET, and HARDIN, Bankruptcy Judges.

DECISION

ADALAI S. HARDIN, Jr., Bankruptcy Judge.

Francis J. DiNova (the "Debtor") appeals the dismissal of his Chapter 7 case on the ex parte application of Gregory G. Harris, the Chapter 7 Trustee (the "Trustee").¹ We have jurisdiction of this appeal pursuant to 28 U.S.C. § 158(b) and (c). Because the Trustee's ex parte motion violated 11 U.S.C. § 707(a) and failed to disclose material facts showing lack of cause for dismissal, the order of dismissal is VACATED and the case is REMANDED to the Bankruptcy Court.

Background

On December 13, 1996, the Debtor, by his attorney, Richard Croak, Esq. ("Croak"), filed a voluntary petition under Chapter 7 of the Bankruptcy Code. On December 17, 1996, the United States Trustee ("UST") appointed the Trustee, an attorney, as the Chapter 7 Trustee. Pursuant to 11 U.S.C. § 341, the first meeting of creditors was scheduled for January 21, 1997 ("341 Meeting").

On December 19, 1996, the Bankruptcy Court Clerk's Office mailed a "Notice of Commencement of Case Under Chapter 7 of the Bankruptcy Code, Meeting of Creditors, and Fixing of Dates" ("Notice of Commencement of Case") in the standard form used in the Northern District of New York to the Debtor, his creditors and parties in interest. The Notice of Commencement of Case contained a warning legend ("warning legend") in bold, capital letters stating "FAILURE BY THE DEBTOR(S) TO APPEAR at the meeting of creditors SHALL RESULT IN THE DISMISSAL OF THE CASE UPON EX PARTE ORDER." There is no dispute that the Debtor received the Notice of Commencement of Case.

Although the Debtor did not appear at the 341 Meeting, Croak did. The Trustee adjourned the 341 Meeting to February 10, 1997.² The extraordinarily sparse hearing record does not reflect why the Trustee adjourned that initial meeting or if Croak offered a reason for his client's absence.³

On February 10, 1997, the Debtor did not appear at the adjourned 341 Meeting. Croak again appeared, however, and the Trustee again adjourned the 341 Meeting, to March 18, 1997. The record does not show why the Trustee granted the Debtor a further adjournment or whether Croak offered an explanation of the Debtor's absence.⁴

On February 25, 1997, before the second adjourned 341 Meeting, the Trustee, relying on 11 U.S.C. § 707(a)(1), moved, ex parte, to dismiss the case for the Debtor's failure to appear at a 341 meeting. In his moving papers, the Trustee failed to reveal (i) that he had adjourned the 341 Meeting a second time to March 18, (ii) why he had twice adjourned the 341 Meeting or (iii) that the Debtor's attorney had appeared at both the initial and adjourned 341 Meetings. That same day, the Bankruptcy Court granted his application and signed the order from which the Debtor appeals.

This appeal raises questions as to whether the warning legend contained in the Notice of Commencement of Case satisfied the requirements of 11 U.S.C. § 707(a) and whether the Chapter 7

Trustee's conduct in connection with the ex parte motion to dismiss warrants remand to the Bankruptcy Court.

I. The requirements of section 707(a)

The Debtor seeks reversal on the sole ground that the warning legend imprinted on the Notice of Commencement of Case does not comply with the notice, hearing and cause requirements of 11 U.S.C. § 707(a). We agree.

Section 707(a) states that the bankruptcy court "may dismiss a case under this chapter only after notice and a hearing and only for cause. . . . ." Section 102, entitled "Rules of construction," provides:

(1) "after notice and a hearing", or a similar phrase-

(a) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances; but

(B) authorizes an act without an actual hearing if such notice is given properly and if —

(i) such a hearing is not requested timely by a party in interest; or

(ii) there is insufficient time for a hearing to be commenced before such an act must be done, and the court authorizes such act;

Dismissal of a Chapter 7 case, whether voluntarily or involuntarily as to the debtor, implicates all those considerations affecting both the debtor and creditors which are at the heart of the Bankruptcy Code, such as the debtor's rights to the benefit of the automatic stay and to the discharge in bankruptcy and the creditors' rights to the benefit of the stay, to subject the debtor's property to the supervision of the Court and the control of a Chapter 7 trustee and to the fair and orderly administration of the debtor's estate. Because of the critical importance of the determination whether a case should be dismissed, section 707(a) states unequivocally that the court may dismiss "only" after notice and a hearing and then "only" for cause.

Turning first to the latter requirement of section 707(a), in determining the existence of "cause" the court must consider the interests of both the debtor and creditors. The point was well-articulated in In re Schwartz, 58 B.R. 923 (Bankr.S.D.N.Y.1986):

In determining whether cause exists, the test is whether dismissal is in the best interest of the debtor and his creditors. As to a debtor, best interest lies generally in securing an effective fresh start upon discharge and in the reduction of administrative expenses leaving him with resources to work out his debts. As to creditors, the issue is one of prejudice, and if delay is said to have prejudiced them, whether, as § 707(a) provides, the delay has been unreasonable. They are generally not prejudiced by dismissal since they will no longer be stayed from resorting to the state courts to enforce and realize upon their claims. But creditors can be prejudiced if the motion to dismiss is brought after the passage of a considerable amount of time and they have been forestalled from collecting the amounts owed to them. A prejudicial delay also creates the appearance that such an abusive practice is implicitly condoned by the Code. In re Klein, 39 B.R. 530 (Bankr.E.D.N.Y. 1984) at 533.

Other forms of potential abuse must be guarded against. Dismissal of a bankruptcy petition that was filed principally to forestall creditors should not be permitted after the delay sought has been achieved. Nor should dismissal be ordered where it is contemplated that the case might be refiled in another forum far from creditors. Mathis, 50 B.R. 482 (Bankr.E.D.Ark. 1985) at 487. Similarly, dismissal of a case after it has appeared that the debtor failed to account honestly for his assets is not to be sanctioned, for such a failure indicates the likelihood of further questionable practices to the detriment of creditors. As stated in Klein,

It may be reasonably inferred from debtor\'s questionable behavior inside of sic bankruptcy that such conduct will persist in derogation of the creditor\'s rights in the event this court were to order the dismissal of debtor\'s petition.

39 B.R. at 533.

Similarly, a strong possibility that additional assets of the estate may be discovered argues against dismissal and for retention of jurisdiction in order to assure the equitable and full distribution of newly discovered assets and voidable transfers to all creditors. In re Klein, 39 B.R. at 533; In re Ross, 21 B.R. 5 (Bankr.E.D.N.Y.1982).

In the end, the Court is to assess the vagaries of each case. (58 B.R. at 925-26).

Dismissal for cause under section 707(a) is not limited to the three examples enumerated within the section. (H.R.Rep. No. 595, 95th Cong., 1st Sess. 380 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 94 (1978)) (the types of cause enumerated in that section are "not exhaustive, but merely illustrative"). See, In re Zick, 931 F.2d 1124, 1126 (6th Cir.1991); In re Moses, 792 F.Supp. 529, 531, n. 4 (E.D.Mich.1992) (making reference to the legislative history); In re Crooks, 148 B.R. 867, 873 (Bankr.N.D.Ill. 1993) (same) (citing In re Atlas Supply Corp., 857 F.2d 1061 (5th Cir.1988)); In re 82 Milbar Blvd., 91 B.R. 213, 221 (Bankr. E.D.N.Y.1988) (same). Accordingly the courts must engage in case-by-case analysis in order to determine what constitutes "cause" sufficient to warrant dismissal. See, In re MacFarlane Webster Associates, 121 B.R. 694, 697 (Bankr.S.D.N.Y.1990) ("The language of the statute thus requires the bankruptcy courts to determine, on a case by case basis, whether an abuse constituting cause has occurred") (citing In re Sky Group Int'l., Inc., 108 B.R. 86, 90 (Bankr.W.D.Pa. 1989)).

Courts must determine whether dismissal would be in the best interest of all parties in interest. See, In re Price, 211 B.R. 170, 172 (Bankr.M.D.Pa.1997) ("A motion to dismiss is a serious matter affecting the rights of the debtor and all creditors. At a hearing on a motion to dismiss, the court is required to consider the impact the dismissal will have on the various entities and ascertain which direction satisfies the best interest of all parties"). See also, In re Harker, 181 B.R. 326, 328 (Bankr.E.D.Tenn.1995) ("The most important consideration for the court to consider when contemplating the dismissal of a Chapter 7 case is whether the dismissal is in the best interest of creditors") (citing In re Mathis Insurance Agency. Inc., 50 B.R. 482 (Bankr.E.D.Ark.1985)); In re Astin, 77 B.R. 537 (Bankr.W.D.Va.1987...