In Case Of First Impression, Eleventh Circuit Holds Pre-Petition Bad...

Creditors and other parties in Chapter 7 Bankruptcy cases filed in the Eleventh Circuit just got more ammunition from the Court of Appeals to seek dismissal of cases in which the debtor filed only to avoid a single, large debt, even in the absence of fraud or misconduct.

In In re Piazza, 719, F.3d 1253, 2013 U.S. App. LEXIS 13072 (11th Cir. 2013) (click here for opinion), the Debtor’s Chapter 7 case was dismissed for “cause” pursuant to 11 U.S.C.  §707(a), based upon Debtor’s pre-petition bad faith.  The Bankruptcy Court found that the filing was for the purpose of avoiding a single large judgment, the judgment was a significant part of his overall debt, he transferred significant amounts of money to relatives in the two year period before filing, he failed to make lifestyle adjustments to pay his debts, and he had sufficient resources to pay his debts.  Notably, the state court judgment did not involve claims of fraud or similar misconduct, but was based on a business guarantee.   The District Court affirmed the dismissal, and the Debtor appealed.

The primary issue on appeal, which was one of first impression in the Circuit, was “whether prepetition bad faith constitutes ’cause’ to dismiss involuntarily a Chapter 7 petition under  §707(a).” The Court noted that other Circuits were divided on the issue.

The first place to start is the plain language of the statute:

Section 707(a) provides that a bankruptcy court “may dismiss a case under this chapter only after notice and a hearing and only for cause, including”–

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees or charges required under chapter 123 of title 28; and

(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.

The Bankruptcy Code does not define “for cause,” and the three enumerated examples in § 707(a) are illustrative, not exhaustive… When Congress enacted § 707′s “for cause” language in 1978, Black’s Law Dictionary defined “cause,” in relevant part, simply as “reason” or “justification.” Black’s Law Dictionary 279 (4th ed. 1968). Subsequent editions of Black’s Law Dictionary have maintained that basic understanding of “cause.” See, e.g., Black’s Law Dictionary 200 (5th ed. 1979) (defining “cause” as “[a] reason for an action” or a “ground of a legal action”). The most recent edition, in particular, defines “for cause” straightforwardly as “[f]or a legal reason or ground.” Black’s Law Dictionary 717 (9th ed. 2009). This understanding of “cause,” moreover, is not limited to legal dictionaries. See, e.g., Funk & Wagnalls College Standard Dictionary 198 (1941) (defining “cause” as “[a]ny rational ground for choice or action; reason”). Non-legal sources from 1978 to the present have con-sistently defined “cause” as “[g]ood or sufficient reason,” American Heritage Dictionary, New College Edition 214 (6th ed. 1976), as “[g]ood, proper, or adequate ground of action,” 2 Oxford English Dictionary 1000 (2d ed. 1989), or as “reasonable grounds for doing . . . something,” New Oxford American Dictionary 272 (3d ed. 2005)….Thus, in applying § 707(a), we adhere to the ordinary meaning of “cause,” as authorizing dismissal when adequate or sufficient reason exists for such an action.

The next question is whether prepetition bad faith falls within the ordinary meaning of “for cause” under § 707(a)–that is, whether such bad faith is an adequate or sufficient reason to dismiss involuntarily a Chapter 7 petition. We hold that it is. Bad faith bankruptcy filings significantly burden the legal system in general and bankruptcy courts in particular. In 2012, there were approximately 1.2 million bankruptcy filings in the United States. See U.S. Bankruptcy Courts–Cases Commenced During the 12-Month Period Ending December 31, 2012 (Table F-2), available at http://www.uscourts.gov/uscourts/Statistics/Bankruptcy Statistics/BankruptcyFilings/2012/1212_f2.pdf. Of those, over 840,000 were Chapter 7 filings. See id. Although these numbers do not tell us how many cases were filed in bad faith, they do indicate we should not artificially limit the tools Congress has given bankruptcy courts to protect their “jurisdictional integrity.” Cf. Little Creek, 779 F.2d at 1072. Considering bankruptcy courts may sanction litigants for filing documents with “any improper purpose,” see Fed. R. Bankr. P. 9011(b)(1), as well as “tak[e] any action . . . necessary or appropriate . . . to prevent an abuse of process,” see 11 U.S.C. § 105(a), we see no reason why prepetition bad faith should not constitute an adequate or sufficient reason for dismissal. To hold otherwise would “create the appearance that such an abusive practice is implicitly condoned by the [Bankruptcy] Code.” Dinova v. Harris (In re Dinova), 212 B.R. 437, 441 (B.A.P. 2d Cir. 1997) (internal quota-tion marks omitted). Accordingly, prepetition bad faith constitutes “cause” for involuntary dismissal under § 707(a), because such conduct provides adequate or sufficient reason to dismiss a debtor’s case.

The Court disagreed with the Debtor’s argument that “cause” must be of the “same kind, class or nature” of the enumerated examples in the statute, that the Court’s interpretation of “cause” contravenes the meaning elsewhere in the Bankruptcy Code,  and that it runs counter to the original understanding of the term and contravenes more than a century of Bankruptcy law and policy.  The Court also disagreed that the Court’s interpretation would render superfluous other Code sections that contain an explicit bad faith provisions, such as §707(b).

In essence, Piazza argues that our interpretation makes it so that parties in interest will use subsection (a) as the primary device for dismissal under Chapter 7 and ignore subsection (b), thus rendering it superfluous. But the material differences between § 707(a) and (b) undermine Piazza’s argument. First, the provisions cover different types of debt. Section 707(b) governs dismissal of Chapter 7 petitions involving “primarily consumer debts.” See § 707(b). Section 707(a) contains no such limitation and on its face governs dismissal of consumer and non-consumer debts. See § 707(a). Therefore, in those cases involving non-consumer or primarily non-consumer debts there will be no overlap with subsection (b). That is certainly true in this case, where Piazza has repeatedly stressed that his debts are “primarily business” related and involve little, if any, consumer debt….Unlike subsection (a), subsection (b) allows for a presumption of “abuse”–that is, a presumption that dismissal is warranted–under certain circumstances… Once established, the debtor must produce highly specific evidence to rebut the presumption of abuse. See generally § 707(b)(2)(B). In stark contrast, § 707(a) establishes no such presumption of bad faith or “cause” for dismissal. See § 707(a). Under this Court’s precedent, the movant always bears the burden of showing “cause” for dismissal under § 707(a).

Finally, Piazza argues that, because Congress amended § 707(b) in 2005 to include the phrase “bad faith,” it must therefore have intended to exclude bad faith from the meaning of “cause” under § 707(a). See The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, Title I, § 102(a)(2)(C), 119 Stat. 23. In support of this contention, Piazza relies on the general rule of thumb that, when Congress “includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”… Piazza’s reliance on the “selective inclusion” presumption is misplaced, as Congress’s inclusion of “bad faith” in § 707(b) did not, by implication, transform § 707(a) into a safe harbor for bad faith debtors. As the Supreme Court has instructed, we are not to draw sweeping inferences “from congressional silence” when such inferences are “contrary to all other textual and contextual evidence of congressional intent.”

Having determined that dismissal for cause can be based upon pre-petition conduct, the Court reviewed the Bankruptcy Court’s decision that the Debtor’s conduct warranted dismissal.  The Court reviewed the findings and found sufficient grounds for affirming the holding.  I will not review the specific facts in detail, but recommend reading the opinion and findings of fact.