Kelly, In re

Decision Date02 March 1988
Docket NumberNo. 87-1560,87-1560
Parties18 Collier Bankr.Cas.2d 560, 17 Bankr.Ct.Dec. 611, Bankr. L. Rep. P 72,218 In re Thomas G. KELLY III and Pauline A. Kelly, Debtor. Robert W. and Carolyn B. ZOLG and Tucson Realty & Trust Company, Appellants, and United States of America, Intervenor, v. Thomas G. KELLY III and Pauline A. Kelly, Appellees, and Alan Solot, Trustee in Bankruptcy.
CourtU.S. Court of Appeals — Ninth Circuit

Michael McGrath, Stompoly & Stroud, Tucson, Ariz., for appellants.

Thomas G. Kelly III, Blaser, Kelly & Don, Tucson, Ariz., for appellees.

Scott A. Harbottle, Civil Div., Dept. of Justice, Washington, D.C., for intervenor.

Appeal from the Bankruptcy Appellate Panel for the Ninth Circuit.

Before SCHROEDER, POOLE and KOZINSKI, Circuit Judges.

KOZINSKI, Circuit Judge:

We consider whether the bankruptcy appellate panel erred in reversing the bankruptcy court's dismissal of appellees' chapter 7 bankruptcy petition as a "substantial abuse" of the Bankruptcy Code.


Robert and Carolyn Zolg sold their home to the Kellys; Tucson Realty acted as the real estate agent for this transaction. Subsequently, the Kellys sued the Zolgs and Tucson Realty, charging fraud and breach of contract and seeking damages for loss of the benefit of their bargain, repairs to the house, punitive damages and attorney's fees. On September 6, 1983, the Arizona Superior Court found for the defendants on all counts and awarded them attorney's fees and costs in the amount of $16,369.90, plus interest from the date of judgment.

The Kellys appealed. In lieu of a supersedeas bond, as called for by Arizona law, they posted security in the form of a $17,056.90 irrevocable reserve against their home equity credit line with the Valley National Bank (VNB). The Arizona Superior Court stayed execution on the judgment until December 31, 1984, when the line of credit was scheduled to expire, but the court's order provided that the stay would remain in effect thereafter if the credit agreement was extended. Clerk's Record (CR) 15 exh. C. VNB promised to extend the agreement for an additional year if the Kellys' credit remained satisfactory, and the line of credit was in fact so extended. CR 15 p 6 & exh. B.

The Arizona Court of Appeals affirmed the judgment against the Kellys on February 8, 1985, and awarded defendants an additional $5,610.73 in attorney's fees and costs. Not long thereafter, without notifying defendants or seeking permission from the court, Kelly instructed VNB to cease holding the reserve for the Zolgs and Tucson Realty. Excerpt of Record (ER) at 61-62, 79.

The Arizona Supreme Court denied the Kellys' petition for review on June 12, 1985. Having exhausted all recourse in the state courts, the Kellys turned to the federal courts, filing a petition for relief under chapter 7 of the Bankruptcy Code. In their petition the Kellys listed $181,350 in assets, $147,000 in debt secured by mortgages against their home, and $25,000 in unsecured debt owed to the Zolgs, Tucson Realty, and the other defendants in the original state court action. Before filing for bankruptcy, the Kellys paid off all their other unsecured creditors, consolidating some of this debt into their secured line of credit with VNB. ER at 67a, 69-70; CR 18 at 38-46. Shortly after filing this petition, Kelly sold back his one-third interest in his law firm, Blaser, Kelly & Don, P.C., for the nominal sum of $100.

On August 30, 1985, Kelly was examined pursuant to Bankruptcy Rule 2004. Thereafter, on October 16, 1985, the bankruptcy judge on his own motion held a hearing to determine whether the Kellys' petition should be dismissed under 11 U.S.C. Sec. 707(b). The court found that the Kellys owed "primarily consumer debts" and that granting their petition would be a "substantial abuse" of the Code because they could easily pay all of their debts. Accordingly, the bankruptcy court dismissed the petition. The Kellys moved for reconsideration, and after a second hearing on January 13, 1986, the court reaffirmed the dismissal. In re Kelly, 57 B.R. 536 (Bankr.D.Ariz.1986) (Scanland, J.).

The Kellys appealed, arguing (1) that section 707(b) is unconstitutional; (2) that they did not have "primarily consumer debts" because most of their debts were secured by real estate mortgages; and (3) that their ability to repay all their unsecured debts was irrelevant to the question of whether granting their petition would be a "substantial abuse." The BAP agreed with the second contention and reversed. Kelly v. Solot (In re Kelly), 70 B.R. 109 (Bankr. 9th Cir.1986). The Zolgs and Tucson Realty in turn appealed to this court, and the United States intervened to defend the constitutionality of section 707(b).

I. Jurisdiction

Our jurisdiction over appeals from the BAP is limited to "appeals from all final decisions, judgments, orders and decrees." 28 U.S.C. Sec. 158(d) (Supp. III 1985). In determining whether a decision is final, "[w]e look, first, to see whether the order of the bankruptcy court was final, and second, to whether the decision of the BAP is final. Both decisions must be final." King v. Stanton (In re Stanton), 766 F.2d 1283, 1285 (9th Cir.1985) (citations and footnote omitted). Turning first to the bankruptcy court's order, it is obvious that a dismissal of a debtor's bankruptcy petition is final, terminating, as it does, all litigation in the case. The more difficult question is whether the BAP's reversal of that dismissal is also final.

A decision affirming or reversing a final order of a bankruptcy court is also deemed final for purposes of appealability. In re Stanton, 766 F.2d at 1287. However, where the BAP remands for further factual findings on "a central issue," the decision is not appealable, because review of such decisions would violate the traditional "policy disfavoring piecemeal appeals." Id.

Here, the BAP reversed a final order of the bankruptcy court and remanded for "a determination of the nature of the unsecured debt" and for reconsideration of the proper test for substantial abuse. 70 B.R. at 112, 113. The latter question is clearly one of law. As for the former, the only matter left unresolved was whether appellants' judgment for attorney's fees qualifies as a "consumer debt" under 11 U.S.C. Sec. 101(7). Since the underlying facts are not disputed, 1 the question is one in which legal issues predominate and is thus subject to de novo review. United States v. McConney, 728 F.2d 1195, 1199-1204 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984). The policies of judicial efficiency and finality are best served by our resolving the question now.

II. Section 707(b) Dismissal

Title III of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 355 (the 1984 Act) added the so-called consumer credit amendments to the Bankruptcy Code as it had been originally enacted by the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549 (the 1978 Act). Included in these amendments was new subsection 707(b), which provided:

After notice and a hearing, the court, on its own motion and not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter . There shall be a presumption in favor of granting the relief requested by the debtor.

11 U.S.C. Sec. 707(b) (Supp. III 1985). 2 The Kellys dispute the applicability of this provision to their case.

A. Primarily Consumer Debts

1. The first question we must address is whether some or all of the Kellys' debts constitute "consumer debts" within the meaning of the Code. As an initial matter, the Kellys argue that debts secured by real property are never consumer debts, relying on floor statements made in the House and Senate prior to the enactment of the 1978 Act. See 124 Cong.Rec. S17,406 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini) ("[a] consumer debt does not include a debt to any extent the debt is secured by real property"); 124 Cong.Rec. 32,393 (1978) (statement of Rep. Edwards) (same). Since approximately 85 percent of the Kellys' debt is secured by real property (their home), they contend that they cannot have "primarily consumer debts" and thus are exempt from dismissal under section 707(b).

This argument stands the process of statutory interpretation on its head, resorting to legislative history without first considering the language of the statute. As the Supreme Court has noted, "legislative history, ... by traditional canons of interpretation[,] is irrelevant to an unambiguous statute." United Air Lines, Inc. v. McMann, 434 U.S. 192, 199, 98 S.Ct. 444, 448, 54 L.Ed.2d 402 (1977); accord Valentine v. Mobil Oil Corp., 789 F.2d 1388, 1391 (9th Cir.1986). Here, resort to legislative history is not appropriate because the statutory language is clear and precisely addresses this situation.

The Code defines "consumer debt" as "debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. Sec. 101(7) (1982). "Debt" means "liability on a claim," 11 U.S.C. Sec. 101(11) (1982), and "claim," in turn, is broadly defined as any "right to payment, whether or not such right is ... secured, or unsecured." 11 U.S.C. Sec. 101(4)(A) (1982) (emphasis added). A literal reading of the Code's simple language leads inexorably to the conclusion that consumer debt includes secured debt. Indeed, section 521(2) of the Code, also added by the 1984 Act, makes special provision for "consumer debts which are secured by property of the estate," an unambiguous indication that Congress intended that the "secured or unsecured" language of the definition apply to consumer debts.

Nor is there any indication that debts secured by...

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