In re Reece

• Decision Date: 20 August 2013
• Docket Number: No. 11–51044.,11–51044.
• Citation: 498 B.R. 72
• Court: U.S. Bankruptcy Court — Western District of Virginia
• Parties: In re Terrance REECE and Leslie Roher–Reece, Debtors.

498 B.R. 72

In re Terrance REECE and Leslie Roher–Reece, Debtors.

No. 11–51044.

United States Bankruptcy Court,

W.D. Virginia,

Harrisonburg Division.

Aug. 20, 2013.

Daniel M. Press, Chung & Press PC, McLean, VA, for Debtors.

MEMORANDUM OPINION

REBECCA B. CONNELLY, Bankruptcy Judge.

The question before this Court is whether the United States Trustee (UST) may proceed on her Motion to Dismiss pursuant to 11 U.S.C. §§ 707(b) and (a) when the case was not originally filed under chapter 7. The debtors seek dismissal of the UST's motion because, according to the debtors: (1) section 707(b) does not apply to cases converted to chapter 7; and (2) section 707(a) is inapplicable to dismiss a case for “bad faith.” The Court disagrees with the debtors. For the reasons described below, the Court concludes a case originally filed under chapter 13 and subsequently converted to chapter 7 is subject to 11 U.S.C. § 707(b). The Court further concludes that cause to dismiss a case pursuant to 11 U.S.C. § 707(a) includes bad faith. The UST may proceed and be heard on her motion to dismiss under section 707.

Findings of Fact & Procedural History

Terrance Reece and Leslie Roher–Reece filed a chapter 13 petition on July 20, 2011. The following day, they filed a motion to quash a garnishment held by credit card servicer FIA Card Services for a debt of approximately $5,000. The Court entered an order quashing the garnishment on July 22, 2011. The debtors filed three chapter 13 plans. None was confirmed. The chapter 13 trustee objected to confirmation on grounds that the proposed plan was not filed in good faith pursuant to 11 U.S.C. § 1325(a)(3) and that the proposed plan did not provide all of the debtors' projected disposable income during the applicable commitment period to payments to unsecured creditors pursuant to 11 U.S.C. § 1325(b). Specifically, the trustee objected to deductions claimed on Form 22C lines 30, 31, 32, 43, 45, 55, and 60. In addition, the trustee protested that the female debtor's income was under-reported. The hearings on the objections were continued by consent, and the Court did not address the substance of the chapter 13 trustee's objections. The hearings were continued in part to permit the debtors to first address other concerns: namely the objection filed by Bank of America to the valuation of its collateral, the debtors' objections to certain proofs of claim, and an action to strip off a wholly unsecured second mortgage from the debtors' home. Although the debtors resolved these other objections and obtained an order avoiding the wholly unsecured second mortgage, the chapter 13 trustee's objections regarding disposable income and good faith were not adjudicated or resolved. At a continued confirmation hearing held on September 5, 2012, more than twelve months after the petition date, the debtors and the chapter 13 trustee were no closer to resolving the disposable income and good faith objections than at the first hearing. The Court then ordered the debtors to file a response or comply with the trustee's objection by September 28, 2012. In re Reece, No. 11–51044 (Bankr.W.D.Va. September 12, 2012), ECF No. 60.¹ At approximately 11:50 P.M. on September 28, the deadline for providing the chapter 13 trustee with the requested documents or a response as to why not, the debtors docketed a notice of conversion to chapter 7 citing section 1307(a) and Rule 1017(f). The morning of the next business day, on October 1, 2012, the Court entered an order, without notice or hearing, converting the case to chapter 7.

The UST timely filed a notice as required by 11 U.S.C. § 704(b)(1)(A) that the chapter 7 case was presumed to be an abuse under section 707. Subsequently, the UST filed a motion, and an amended motion, to dismiss the case pursuant to sections 707(a) and 707(b). The debtors oppose the motion and seek dismissal of the UST's Motion.² The debtors contend that the UST cannot proceed on its motion because the law is inapplicable to these factual circumstances. The parties presented oral argument and submitted briefs.

The following facts are uncontested:

(1) Mr. and Mrs. Reece filed an original chapter 13 petition;

(2) Mr. and Mrs. Reece filed a chapter 13 plan, plus two amended plans. No plan was confirmed;

(3) The chapter 13 trustee maintained a disposable income objection to each of Mr. and Mrs. Reece's chapter 13 plans, and the disposable income objection was not resolved nor adjudicated before the case was converted;

(4) The debtors achieved the following results in chapter 13: elimination of a garnishment, disallowance of two unsecured claims, disallowance of the secured status of one claim,³ and avoidance of a wholly unsecured second mortgage; ⁴

(5) The debtors converted to chapter 7;

(6) UST is seeking dismissal under section 707(b) alleging an abuse, or in the alternative, under section 707(a) alleging “bad faith” as cause.

Conclusions of Law

The question before the Court is whether the Court must dismiss the UST's motionas flawed because: (1) the debtors did not originally “file under” chapter 7 and, therefore, are immune from 707(b) actions; and (2) “bad faith” cannot be cause to dismiss a chapter 7 case under 707(a). The Court will address the arguments.

A. May a court dismiss a case as an abuse under 11 U.S.C. § 707(b) if the case was not originally filed under Chapter 7?

The UST has alleged that the case should be dismissed under section 707(b). The debtors have argued that the Court cannot, as a matter of law, dismiss this case pursuant to section 707(b) because the case was not originally filed under chapter 7.

Section 707(b) states in relevant part: “[a]fter notice and a hearing, the court, on its own motion or on a motion by the United States Trustee ... may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts....” 11 U.S.C. § 707(b)(1) (emphasis added). Courts are divided over whether a case that has been converted to chapter 7 can be dismissed under section 707(b). That split is adroitly summarized by the Bankruptcy Court for the Middle District of Florida in In re Layton⁵ as a division between, on the one hand, the “hybrid arguments” and “common sense approach;” and on the other hand, the “plain language” approach. Both the “hybrid arguments” and “common sense approach” conclude section 707(b) applies to cases converted to chapter 7. The “plain language” approach concludes section 707(b) does not apply to cases converted to chapter 7.

The “hybrid arguments,” as coined by Judge Williamson, apply one of two analytical methods. The first method uses the grammatical rule of last antecedent ⁶ to conclude that the phrase “case filed” is modified by “by individual debtor” rather than “under this chapter.” The second method relies upon non-bankruptcy sources to define terms not defined under the Code ⁷ in order to conclude the term “filed” incorporates a voluntary conversion into chapter 7. The “common sense approach,” as described by Judge Williamson, considers legislative intent and a desire to avoid absurd results as sufficient justification to conclude that section 707(b) must apply to cases converted to chapter 7. On the other hand, the “plain language” approach simply finds the language is unambiguous and has a single meaning: that section 707(b) applies only to cases originally filed under chapter 7.

Four years ago, Judge Ross W. Krumm, now retired, of this Court adopted the “plain language” view described above. McDow v. Dudley (In re Dudley), 405 B.R. 790, 792–98 (Bankr.W.D.Va.2009). Since that time, no other judge of this Court appears to have addressed the issue. The Court in Dudley acknowledged that it was adopting the minority view. This Court has reconsidered its position. This Court concludes the “plain language approach” as described by Dudley and Layton is not an accurate reflection of the plain language of the statute.⁸ This Court believes that the so-called “hybrid arguments” and the “common sense approach,” defined by Judge Williamson, reflect a more correct reading of the statute.

1. The Plain Language Approach

The “plain language approach” previously adopted by this Court is based on the application of certain canons of statutory interpretation. Dudley, 405 B.R. at 794–95. One of the first canons mentioned by the Court in Dudley is “when the meaning of the statute is in dispute, the analysis begins with the statute itself.” Id. at 792. This Court agrees. In a case requiring statutory construction, the Court must look at the language of the statute itself. McNeill v. United States, –––U.S. ––––, 131 S.Ct. 2218, 2221, 180 L.Ed.2d 35 (2011) (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997)). In doing so, however, a Court must look at the language of the statute itself in the specific context in which the language is used. Id. The inquiry into statutory construction ceases if the statutory language is unambiguous and the statutory scheme is coherent and consistent. Sebelius v. Cloer, –––U.S. ––––, 133 S.Ct. 1886, 1895, 185 L.Ed.2d 1003 (2013) ( quoting Barnhart v. Sigmon Coal Co., 534 U.S. 438, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002)).

a. The statutory language

The meaning of the phrase “filed by an individual debtor under this chapter” is the dispute; in particular, whether “filed” is modified by “by an individual debtor” or “under this chapter.” In examining the language at issue— filed by an individual debtor under this chapter—the terms “individual” and “chapter” are fairly certain. Although “individual” is not defined by the Bankruptcy Code, generally the term has been applied to a natural person. ⁹ “Chapter” refers to the Chapter of Title 11 of the United States Code under which a bankruptcy proceeds. While the meaning of the phrase “under this chapter” may be in dispute depending on whether it is read as modified by the word “filed,” there is no dispute that to be subject...