Orders Denying Motions to Dismiss Chapter 7 Bankruptcy Cases for Abuse are Final Orders
Adrienne Woods | Bloomberg Law
The United States Court of Appeals for the Fourth Circuit reversed the United States District Court for the Western District of Virginia, holding that an order denying a motion to dismiss a chapter 7 case for abuse pursuant to 11 U.S.C. § 707(b) is a final and therefore immediately appealable.
Debtors’ Bankruptcy Case and the Motion to Dismiss
Anne and David Dudley (“Debtors”) filed a joint chapter 13 bankruptcy petition. The chapter 13 trustee moved to dismiss the case or, alternatively, to convert it to a proceeding under chapter 7 of the Bankruptcy Code, whereupon Debtors successfully moved to convert the case to chapter 7. Shortly thereafter, the Office of the United States Trustee (the “UST”) moved to dismiss (the “Motion to Dismiss”) Debtors’ bankruptcy case for abuse pursuant to 11 U.S.C. § 707(b)(1), alleging that Debtors failed to satisfy the means test required by 11 U.S.C. § 707(b)(2), as their income exceeded those expenses permitted by the test by more than $2,000 per month. The UST further alleged that that the case should be dismissed pursuant to 11 U.S.C. § 707(b)(3), as Debtors appeared able to repay their creditors. Debtors responded to the Motion to Dismiss by moving for summary judgment (the “Summary Judgment Motion”) on the basis that § 707(b), which provides that the bankruptcy court may dismiss a case “filed . . . under this chapter”, is inapplicable to cases filed under chapter 13 that are subsequently converted to chapter 7. The bankruptcy court, while recognizing that most courts disagreed with this interpretation, held that the plain meaning of the statute supported Debtors’ argument that the case must actually have been filed under chapter 7 to be subject to a motion to dismiss for abuse under § 707(b).
The UST appealed the bankruptcy court’s holding and the district court dismissed the appeal sua sponte for lack of subject matter jurisdiction, holding that the bankruptcy court’s order denying the Motion to Dismiss (“Order Denying Motion to Dismiss”) was not a final order as required by 28 U.S.C. § 158(a)(1). The UST appealed the district court’s ruling to the Fourth Circuit arguing that the Order Denying Motion to Dismiss was a final order for all practical purposes, as it extinguished the cause of action to dismiss the case for abuse. Debtors responded arguing that the Order Denying Motion to Dismiss was not a final order, since it did not resolve a discrete dispute within the case. Debtors further maintain that allowing immediate appeal of the order will adversely impact goals of judicial economy, substantially increasing the number of appeals and delaying resolution of the case.
District Court Erred in Holding Order Denying Motion to Dismiss Not Final
Beginning its analysis as to whether the Order Denying Motion to Dismiss was a final order, the Fourth Circuit discussed several changes made to § 707(b) during the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCA”). Notably, § 707(b) was revised to require only a showing of “abuse”, rather than the previous language which required a showing of “substantial abuse”, to dismiss a debtor’s case, and a means test was enacted which removed the presumption of good faith favoring the debtor. Additionally, Congress added new § 707(b)(3), which authorizes bankruptcy courts to dismiss cases even if the means test is satisfied, provided the court finds “bad faith” or “abuse”, considering “the totality of the circumstances”. Finally, Congress set strict time limits requiring the UST to: (i) determine whether a case is abusive based upon whether a debtor meets the means test within ten days of the statutory meeting of creditors pursuant to 11 U.S.C. § 341; and (ii) if the debtor fails the means test, file a motion to dismiss the case as abusive or, alternatively, a detailed statement as to why dismissal is not warranted within thirty days after such determination. 11 U.S.C. §§ 704(b)(1)(A) and 704(b)(2).
The Fourth Court interpreted these Congressionally-enacted modifications as a legislative mandate to police chapter 7 cases for abuse in the beginning stages of the case. The Fourth Circuit stated that all other circuits that considered the finality of orders denying motions to dismiss pursuant to § 707(b) have likewise deemed them final based upon the same reasoning. Moreover, the Fourth Circuit noted, as an additional policy consideration, that requiring the completion of a chapter 7 liquidation prior to permitting the appeal of an order denying a motion to dismiss pursuant to § 707(b) would result in the depletion of debtors’ estates that should be expended to pay creditors, and would require the UST to continue to expend scarce resources on abusive chapter 7 cases. Alternatively, the Fourth Circuit found that providing the right of an immediate appeal would allow creditors to pursue estate resources before they were depleted and would prevent the necessity of unwinding the liquidation if it was later held that the case should have been dismissed.
Based upon the clear Congressional intent that abuse of the chapter 7 bankruptcy process be addressed early in each case, as expressed through modifications made to the Bankruptcy Code through BAPCA, as well as the fact that the denial of a motion to dismiss pursuant to § 707(b) effectively bars any such claim later in the case, the Fourth Circuit held that the Order Denying Motion to Dismiss was a final order.
Fourth Circuit Reverses District Court’s Dismissal
Accordingly, the Fourth Circuit reversed the district court’s dismissal of appeal for lack of subject matter jurisdiction and remanded the matter to the district court.
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