In re Horan, Case No. 02-35443 (Bankr. Conn. 1/22/2004)

• Decision Date: 22 January 2004
• Docket Number: DOC. I.D. NOS. 25, 32.,Case No. 02-35443.
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: IN RE: DOUGLAS K. HORAN and TAMMY E. HORAN, CHAPTER 7, DEBTORS.

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IN RE: DOUGLAS K. HORAN and TAMMY E. HORAN, CHAPTER 7, DEBTORS.

Case No. 02-35443.

DOC. I.D. NOS. 25, 32.

United States Bankruptcy Court, D. Connecticut.

January 22, 2004.

Patricia Beary, Esq., Holley L. Claiborn, Esq., New Haven, CT, Attorney for Movant United States Trustee.

Anthony J. Salzarulo, Esq., Rocky Hill, CT, Attorney for Debtors.

MEMORANDUM OF DECISION CLARIFYING ISSUES FOR TRIAL

LORRAINE MURPHY WEIL, Bankruptcy Judge.

Before the court is the United States Trustee's Motion To Dismiss Chapter 7 Case Pursuant to 11 U.S.C. Section 707(a) (Doc. I.D. No. 25, the "Motion"). In the Motion, the United States Trustee (the "UST") seeks dismissal of this chapter 7 case pursuant to 11 U.S.C. § 707(a) for "cause" as a "bad faith" filing.¹ The above-captioned debtors (the "Debtors") have filed an objection to the Motion. (See Doc. I.D. No. 32, the "Objection"). This is a "core proceeding" within the purview of 28 U.S.C. § 157(b).

I. BACKGROUND

Certain preliminary proceedings have taken place in this contested matter, and the court has determined that an evidentiary hearing will be required to adjudicate the Motion and the Objection. In order better to facilitate that hearing, the court has deemed it appropriate to issue this memorandum ruling on two preliminary issues already raised in these proceedings:²

• Is a debtors's "bad faith" in filing a chapter 7 petition per se grounds for dismissing the chapter 7 case?

• If the answer to the first is "yes," who bears the burden of proof on the issue of "bad faith"?

II. ANALYSIS

A. "Bad Faith"

In "straight" liquidation proceedings under the prior Bankruptcy Act, it was settled law that if the bankrupt, however solvent, or however impure its motive may have been, or whatever may have been the actuating purpose, saw fit to surrender its assets into the custody and jurisdiction of the court for the benefit of its creditors, the creditors as a matter of law have no cause for complaint.

State of Alabama v. Montevallo Mining Co. (In re Montevallo Mining Co.), 278 F. 989, 990 (M.D. Ala. 1922). "Good faith," although a consideration in reorganization proceedings under the prior Act, generally was not a consideration in liquidation proceedings under that Act. See Terrace Lawn Memorial Gardens v. A.H. Doty & Assocs. (In re Terrace Lawn Memorial Gardens), 256 F.2d 398, 402-03 (9^th Cir. 1958) ("[I]n a strict bankruptcy proceeding, . . . there is not the requirement of filing in good faith of a voluntary petition . . . ."). However, certain circumstances (prepetition in whole or in part) nevertheless would constitute grounds for dismissal. See, e.g., id. (noting that even in a "strict" bankruptcy proceeding, "the question of whether . . . a petition was filed in order to settle in another forum litigation then pending in the state courts has been given consideration."); Zeitinger v. Hargadine — McKittrick Dry Goods Co., 244 F. 719, 722 (8^th Cir.), cert. denied, 245 U.S. 667 (1917) (directing dismissal of case because bankruptcy was part of a scheme whereby "the whole proceedings and judgment in the circuit court would be paralyzed and rendered abortive.").

When Congress enacted Section 707(a) of the liquidation chapter of the current Bankruptcy Code, Congress introduced the term "cause" which term did not have a precise ancestor under either statute or rule. Cf. 11 U.S.C. § 95 (repealed); Fed. R. Bankr. P. 120 (rescinded). Moreover, although three examples of "cause" are set forth in Section 707(a), the enumerated grounds for a "for cause" dismissal are nonexclusive. Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1191 (9^th Cir. 2000); see also 11 U.S.C. § 102(3) (defining "including" when used in title 11 to be "not limiting"). Other than to state that the "ability of the debtor to repay his debts in whole or in part [does not] constitute[] adequate cause for dismissal," H.R. Rep. 95-595, at 380 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6336, Congress provided little guidance as to what might constitute "cause" for dismissal pursuant to Section 707(a) besides the enumerated examples. All of the foregoing have produced apparent discord among the circuits concerning whether the debtor's "bad faith" in filing the chapter 7 petition per se constitutes "cause" for dismissal under Section 707(a). The Second Circuit has not spoken on that issue.

Both Industrial Insurance Services, Inc. v. Zick (In re Zick), 931 F.2d 1124 (6^th Cir. 1991), and Tamecki v. Frank (In re Tamecki), 229 F.3d 205 (3d Cir. 2000), hold that "bad faith" in filing the chapter 7 petition per se constitutes "cause" for dismissal under Section 707(a). Both Zick and Tamecki have been read as framing the question of "bad faith" as a "jurisdictional" issue. See Buchbinder, D.L., Implicit Good Faith Implicit Requirement in Chapter 7 Cases, 18 No. 2 Bankr. Strategist 1, 7 (December, 2000) ("[T]he Third Circuit in Tamecki . . . ha[s] adopted the view of Zick that good faith is an implicit jurisdictional prerequisite to filing for Chapter 7 relief."). On the other hand, both In re Huckfeldt, 39 F.3d 829 (8^th Cir. 1994), and In re Padilla, supra, reject dismissal under a "bad faith" label as unhelpful, electing instead to proceed under the statutory term "cause." It has been suggested that "[t]he different approaches among the circuits . . . are merely differences in degree and not in kind . . . ." Buchbinder, supra at 6.³

Both the Eighth Circuit and the Ninth Circuit have rejected the "bad faith" label based (in part) upon the following concerns:

"[S]ome conduct constituting cause to dismiss a Chapter 7 petition may readily be characterized as bad faith. But framing the issue in terms of bad faith may tend to misdirect the inquiry away from the fundamental principles and purposes of Chapter 7. Thus, we think the § 707(a) analysis is better conducted under the statutory standard, `for cause.'"

Padilla, 222 F.3d at 1192 (citing Huckfeldt, 39 F.3d at 832). In other words, Section 707(a) "cause" is Section 707(a) "cause," and the "bad faith" label does not advance (and perhaps hinders) the Section 707(a) analysis. This court shares that view.⁴ If this court were writing on a cleaner slate, the court similarly would reject the "bad faith" label. However, the court believes that to take such a step at this point would give a false impression of the importance of what is, after all, only a label. Accordingly, the court will accept the "bad faith" label as a term of art for a certain class (or classes) of circumstances (prepetition in whole or in part) which, when analyzed under Section 707(a), constitute "cause" for dismissal.⁵ What might constitute such "bad faith" will be determined on a case-by-case basis giving consideration to all the relevant facts and circumstances of the case. Cf. C-TC 9^th Avenue Partnership v. Norton Co. (In re C-TC 9^th Avenue Partnership), 113 F.3d 1304, 1312 (2d Cir. 1997) ("[A] determination of bad faith [as `cause' under Section 1112] requires a full examination of all the circumstances of the case; it is a highly factual determination . . . .").

The Debtors argue that the enumerated examples of Section 707(a) "cause" (all of which refer to the debtor's postpetition conduct) make it plain that Congress intended to limit "cause" to apply only to the debtor's postpetition conduct. That argument proves too much because it would mean that, in enacting Section 707(a), Congress intended to eliminate the court's power to dismiss cases based on prepetition events even in situations where that power was well established under prior law. Cf. Terrace Lawn Memorial Gardens, supra; Zeitinger, supra. This court declines so to hold. Rather, this court joins those courts which hold that, in appropriate circumstances, prepetition events (or some mix of prepetition and postpetition events) can constitute Section 707(a) "cause."

B. Burden of Proof

In her Supplemental Memorandum (Doc. I.D. No. 35), the UST argues that "[o]nce a debtor's good faith is put at issue, the debtor has the burden of establishing good faith." (Supplemental Memorandum at 3-4.)⁶ As explained below, the court rejects that formulation of the burden of proof on a motion to dismiss a chapter 7 case for "bad faith." Rather, the court holds that the burden of producing a prima facie case of "bad faith," as well as the ultimate risk of non-persuasion on that issue, is on the movant.

"Section 707(a) clearly states that a case shall only be dismissed for cause. See 11 U.S.C. § 707(a). Therefore the burden for showing cause is on the moving party." Dionne v. Simmons (In re Simmons), 200 F.3d 738, 743 (11^th Cir. 2000). "Dismissal for cause cannot mean that a debtor must show an absence of cause; it can only mean that the party moving for dismissal must demonstrate cause." In re Love, 957 F.2d 1350, 1355 (7^th Cir. 1992) (discussing dismissal for "cause" under Section 1307). There is no support on the face of Section 707(a) for distinguishing "bad faith" from any other Section 707(a) "cause" for purposes of allocation of the burden of proof. Cf. Grogan v. Garner, 498 U.S. 279, 287-88 (1991) (discussed more fully below). Moreover, it is only when "good faith" is an explicit statutory requirement that the burden is on the debtor with respect to that issue. See Love, supra (drawing distinction for burden of proof purposes between Section 1325(a)(3) which explicitly states that a plan shall be confirmed if it "has been proposed in good faith," and Section 1307(c) which does not specifically require that a debtor file a petition in good faith); In re Edwards, No. 03-10018, 2003 WL 22016324 (Bankr. D. Vt. Aug. 26, 2003).⁷ Cf. Marine Harbor Properties, Inc. v. Manufacturer's Trust Co., 317 U.S. 78 (1942) (Since under the prior Act Congress explicitly required that a reorganization petition be filed in "good faith," on a motion to dismiss the debtor had the burden of proof on that issue.). The allocation of the burden of proof with...