Stearns v. Pratola (In re Pratola)

• Decision Date: 31 August 2018
• Docket Number: Bankr. Case No. 17-11668,Case No. 18-cv-213
• Citation: 589 B.R. 779
• Parties: Christopher V. PRATOLA, Debtor. Glenn Stearns, Chapter 13 Trustee, Appellant, v. Christopher V. Pratola, Appellee.
• Court: U.S. District Court — Northern District of Illinois

589 B.R. 779

Christopher V. PRATOLA, Debtor.

Glenn Stearns, Chapter 13 Trustee, Appellant,

v.Christopher V. Pratola, Appellee.

Case No. 18-cv-213

Bankr. Case No. 17-11668

United States District Court, N.D. Illinois, Eastern Division.

Signed August 31, 2018

Gerald Mylander, Carolyn A. Suzzi, Office of Glenn Stearns, Lisle, IL, for Appellant.

Derrick B. Hager, Attorney at Law, West Chicago, IL, for Appellee.

MEMORANDUM OPINION AND ORDER

Robert M. Dow, Jr., United States District JudgeThis case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 17-11668. Appellant Glenn Stearns, Chapter 13 Trustee ("Trustee"), appeals from the Bankruptcy Court's order and memorandum opinion dated December 27, 2017, denying the Trustee's motion to dismiss the case of Christopher V. Pratola ("Debtor") pursuant to 11 U.S.C. § 1307(c).¹ For the reasons set forth below, the Bankruptcy Court's order denying the Trustee's motion is reversed, and this matter is remanded to the Bankruptcy Court for further proceedings consistent with this opinion.

I. Background

On April 13, 2017, Debtor filed a voluntary petition in the bankruptcy court under Chapter 13 of the Bankruptcy Code. See N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 1. According to § 109(e) of the Bankruptcy Code, which defines who is eligible to file bankruptcy under Chapter 13, "[o]nly an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $394,725² and noncontingent, liquidated, secured debts of less than $1,184,200 * * * may be a debtor under chapter 13 of this title."

The Debtor's original Schedule E/F filed with the petition listed $217,115 in general unsecured debt. N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 1, at 27. This debt consisted of $194,563 in student loan debt owed to "Aes/Chase Bank" and "Aes/Nct" as well as $22,552 in credit card debt owed to various creditors. Id. , at 20–27. Debtor then filed an amended Schedule E/F that same day which added to Debtor's general unsecured debt $374,108 in federal student loans. Id. , Docket Entry 8, at 6. This debt is serviced by Federal Loan Servicing, and Debtor is repaying it pursuant to an Income Based Repayment ("IBR") agreement with Federal Student Aid. Under this agreement, Debtor makes monthly payments on the debt equal to 10% of his discretionary income for a term of twenty-five years. Upon completion of these payments, any remaining balance on the loans will be forgiven. However, if Debtor defaults, the entire remaining balance will become due. Id. , Docket Entry 23, at 4. Debtor designated this federal student loan debt as both contingent and disputed in his amended Schedule E/F. Id. , Docket Entry 8, at 6. Debtor's amended Schedule E/F thus listed $374,108 in disputed and contingent unsecured debt and $217,115 in undisputed, noncontingent, unsecured debt, for a total of $591,223.

On April 20, 2017, the Trustee moved to dismiss Debtor's case pursuant to 11 U.S.C. §§ 109(e) and 1307(c). See N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 17. Specifically, the Trustee argued that Debtor was ineligible for Chapter 13 relief because he owed unsecured debts in excess of § 109(e)'s $394,725 unsecured debt limit. According to the Trustee, owing debt in excess of the statutory limit warrants dismissal for cause under §§ 109(e) and 1307(c) of the Bankruptcy Code. Debtor filed a response to the motion, arguing that his $374,108 in federal student loan debt was contingent because it is subject to IBR repayment and could be forgiven before he has to pay the full amount. See Id. , Docket Entry 23. Only noncontingent debt is considered in determining a debtor's eligibility based on § 109(e)'s unsecured debt limit. § 109(e). Therefore, Debtor argued, this debt should not be included in a determination of his Chapter 13 eligibility. Without this federal student loan, Debtor's unsecured debt would be well below § 109(e)'s limits. Debtor made no other arguments in response to the Trustee's motion, and he conceded that if his federal student loan debt were considered noncontingent, he would be ineligible for Chapter 13 relief. See id. at 1.

The Bankruptcy Court issued an order on December 27, 2017, denying the Trustee's motion to dismiss "for lack of cause under 11 U.S.C. § 1307(c)." See N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 39. In its accompanying memorandum opinion, the Bankruptcy Court first determined that the Debtor's student loan debt subject to an IBR agreement was noncontingent because he has a current duty to pay back this debt, notwithstanding the possibility of forgiveness that the IBR payment plan may offer in the future. Docket Entry 38, at 4–6. The Bankruptcy Court then turned to the issue of whether § 1307(c), which provides that a Chapter 13 case may be converted or dismissed for cause, requires dismissal of a Chapter 13 case if the inclusion of educational debt causes a debtor to exceed the § 109(e) unsecured debt limit. The Bankruptcy Court held that it does not. Id. at 6–13.

After noting that ineligibility under § 109(e) is usually cause for dismissal or conversion of a Chapter 13 case but is not an absolute bar, the Bankruptcy Court concluded that it was without clear direction from either the Bankruptcy Code or case law as to whether cause for dismissal under § 1307(c) exists in this situation. Id. at 7. Based on this perceived ambiguity, the Bankruptcy Court turned to legislative history and policy considerations regarding educational debt to determine whether Debtor's case should be dismissed. The Bankruptcy Court concluded that based on the history surrounding the debt limits' enactment, Congress could not have intended to exclude someone like Debtor, an otherwise eligible individual exceeding § 109(e)'s unsecured debt limit solely because of educational debt, from Chapter 13 relief. The Bankruptcy Court also noted that the failure of the unsecured debt limit to account for the changing nature and increasing amount of educational debt in the United States creates an absurd situation for individuals like Debtor, who could be ineligible for Chapter 13 relief despite being best suited for it. Id. at 9–12.

Based on these considerations, the Bankruptcy Court held that there was no cause for dismissal of Debtor's Chapter 13 case under § 1307(c). The Bankruptcy Court specifically noted that "[d]ismissing [Debtor's] case would not advance the Congressional intent behind the debt limits, and doing so would hinder the principal purpose of the Bankruptcy Code—to grant a ‘fresh start’ to the honest but unfortunate debtor." Id. at 12 (citation omitted). The Bankruptcy Court determined that its decision declining to dismiss the case advanced the best interests of the creditors and the estate because Debtor would be able to continue making payments on his educational debt and pay other general unsecured creditors a percentage of their claims; dismissal or conversion to Chapter 7 or Chapter 11 would not necessarily lead to that same outcome. Id. at 13.

The Trustee filed this appeal on January 11, 2018, [see 1], and filed his brief on March 22, 2018, [see 9]. Debtor has filed a response brief [12], and the Trustee has filed a reply [14]. The United States Trustee has filed an amicus curiae brief in support of the Trustee and reversal of the Bankruptcy Court's decision. [See 10].³

After this appeal was filed, Debtor's Chapter 13 case proceeded. The Trustee moved to stay the bankruptcy proceedings pending appeal and objected to confirmation of Debtor's Chapter 13 plan. See N.D. Ill. Bankr. Case No. 17-11668, Docket Entries 52, 58. The Bankruptcy Court denied both motions and entered an order confirming Debtor's Chapter 13 plan on March 23, 2018. See id. , Docket Entries 71, 72, 73, 74.⁴

The Trustee raises the following issues on appeal [see 9, at 4–5]:

(1) Whether the Bankruptcy Court abused its discretion in denying the Trustee's motion to dismiss.

(2) Whether 11 U.S.C. § 109(e) requires dismissal or conversion of a Debtor's Chapter 13 petition upon determination of ineligibility of the Debtor to qualify under Chapter 13 of Title 11 (§§ 1301 et seq. ).

II. Standard of Review

"District courts sit as appellate courts when hearing appeals from bankruptcy courts." Hijjawi v. Five N. Wabash Condo. Ass'n , 491 B.R. 876, 880 (N.D. Ill. 2013). The Bankruptcy Court's factual findings are scrutinized for clear error, while its legal conclusions are reviewed de novo. Kovacs v. United States , 739 F.3d 1020, 1023 (7th Cir. 2014). To the extent that the Bankruptcy Code commits a decision to the discretion of the Bankruptcy Court, that decision is reviewed for abuse of discretion. Belson v. Olson Rug Co. , 483 B.R. 660, 664 (N.D. Ill. 2012) (citing Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009) ). "In general terms, a court abuses its discretion when its decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." In re KMart Corp. , 381 F.3d 709, 713 (7th Cir. 2004).

III. Analysis

A. Jurisdiction

Although no party has contested the Court's jurisdiction over this appeal, the Court has an independent duty to satisfy itself that jurisdiction exists. See Hijjawi , 491 B.R. at 880. The parties assert that jurisdiction exists pursuant to 28 U.S.C. § 158(a), which grants district courts jurisdiction to hear appeals "from final judgments, orders, and decrees" of the bankruptcy court. 28 U.S.C. § 158(a)(1). "Finality in a bankruptcy appeal is considerably more flexible than in an ordinary civil appeal taken under 28 U.S.C. § 1291 and, in the bankruptcy context, does not require the termination of the entire bankruptcy proceeding." Schaumburg Bank & Tr. Co., N.A. v. Alsterda , 815 F.3d 306, 312 (7th Cir. 2016) (citing Bullard v. Blue Hills Bank , –––...