Opinion ID: 1435190
Heading Depth: 2
Heading Rank: 2

Heading: The Denial of Smith's Dismissal Motion

Text: Motions to dismiss a bankruptcy petition are governed by section 707 of the Bankruptcy Code, which provides: The [bankruptcy] court may dismiss a case . . . 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 and charges required under chapter 123 of title 28; and (3) failure of the debtor in a voluntary case to file, within fifteen days . . . the information required by paragraph (1) of section 521, but only on a motion by the United States trustee. 11 U.S.C. § 707(a). Although this provision does not specifically provide for a debtor's motion to dismiss a voluntarily-filed petition, courts have routinely held that section 707(a) applies to such cases. See, e.g., Turpen v. Eide (In re Turpen), 244 B.R. 431, 434 (8th Cir. BAP 2000); In re Schwartz, 58 B.R. 923, 925 (Bankr. S.D.N.Y.1986); In re Klein, 39 B.R. 530, 532 (Bankr.E.D.N.Y.1984). Under section 707(a), the debtor has no absolute right to dismissal of a Chapter 7 case. Turpen, 244 B.R. at 434; see also In re Klein, 39 B.R. at 532. Rather, a debtor seeking dismissal must show cause. 11 U.S.C. § 707(a); see Dinova v. Harris (In re Dinova), 212 B.R. 437, 442 (2d Cir. BAP 1997). However, the Bankruptcy Code does not define cause, and the three examples given in section 707(a) are illustrative, not exclusive. See Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1191 (9th Cir.2000); Dionne v. Simmons (In re Simmons), 200 F.3d 738, 743 (11th Cir.2000). Where, as here, a debtor moves for dismissal, courts in this Circuit have determined whether cause exists by looking at whether dismissal would be in the best interest of all parties in interest. Dinova, 212 B.R. at 442; see also In re Schwartz, 58 B.R. at 925; In re Hull, 339 B.R. 304, 307 (Bankr.E.D.N.Y.2006). We agree that this is the appropriate analysis. The best interest of the debtor lies generally in securing an effective fresh start upon discharge and in the reduction of administrative expenses leaving him with resources to work out his debts. Dinova, 212 B.R. at 441 (quotation marks omitted). With regard to creditors, the issue is typically one of prejudice: [C]reditors can be prejudiced if the motion to dismiss is brought after the passage of a considerable amount of time and they have been forestalled from collecting the amounts owed to them. A prejudicial delay also creates the appearance that such an abusive practice is implicitly condoned by the Code. Id. (quotation marks omitted). Because the weighing of these factors is guided by equitable considerations, the determination of whether cause exists is committed to the sound discretion of the bankruptcy court. In re Hull, 339 B.R. at 308; see also 6 Collier on Bankruptcy § 707.03 (15th ed. rev.2006) (The court has substantial discretion in ruling on a motion to dismiss under section 707(a), and in exercising that discretion must consider any extenuating circumstances, as well as the interests of the various parties.). Accordingly, we will disturb a decision to deny dismissal under section 707(a) only if the bankruptcy court has exceeded the bounds of the discretion afforded by the statute. See State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1307 (2d Cir.1996) (noting that decisions [that] invoke the exercise of a bankruptcy court's equitable powers, and are thus dependent upon the facts and circumstances of each case, are reviewed for an excess of allowable discretion). A bankruptcy court exceeds its allowable discretion where its decision (1) rest[s] on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, or (2) cannot be located within the range of permissible decisions, even if it is not necessarily the product of a legal error or a clearly erroneous factual finding. Schwartz v. Aquatic Dev. Group, Inc. (In re Aquatic Dev. Group, Inc.), 352 F.3d 671, 678 (2d Cir.2003) (internal quotation marks omitted). We begin our analysis of the Bankruptcy Court's decision with a threshold question: can a debtor's ability to repay her creditors constitute adequate cause for dismissal? A frequently cited passage of the legislative history of section 707(a) appears to answer this question in the negative: [This] section does not contemplate . . . that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal. To permit dismissal on that ground would be to enact a non-uniform mandatory chapter 13, in lieu of the remedy of bankruptcy. S.Rep. No. 95-989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880; H.R.Rep. No. 95-595, at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6336. Several courts have relied on this passage to conclude that a debtor's ability to repay her debts cannot constitute cause for dismissal. See, e.g., Turpen, 244 B.R. at 434-35; In re Stephenson, 262 B.R. 871, 875 (Bankr.W.D.Okla.2001); Kirby v. Spatz (In re Spatz), 221 B.R. 992, 994 (Bankr. M.D.Fla.1998); In re Williams, 15 B.R. 655, 657-58 (E.D.Mo.1981). Other courts have held that section 707(a)'s legislative history indicates that the provision was not intended to apply when it is the debtor  as opposed to a creditor or another party  who seeks dismissal. See In re Aupperle, 352 B.R. 43, 47 (Bankr.D.N.J.2005) ([T]he entire excerpt [of the legislative history] refers to circumstances justifying cause for involuntary dismissal sought by a party other than the debtor.). We agree with the latter view. Congress's fear of enacting a non-uniform mandatory chapter 13 makes sense only in the context of an involuntary dismissal. If a creditor is permitted to base a motion for Chapter 7 dismissal on the debtor's ability to repay her debts, the debtor may have no other choice but to file a Chapter 13 petition (under which debtors are required to pay off their debts over a set period of time, see 11 U.S.C. §§ 1301 et seq.) or to avoid bankruptcy altogether, thus potentially creating a non-uniform mandatory Chapter 13. There is no such risk when it is the debtor who seeks dismissal voluntarily. [3] We therefore hold that the legislative history of section 707(a) does not preclude a debtor's ability to repay her debts from constituting cause for dismissal. This does not mean, however, that a debtor's ability to repay her debts is per se grounds for dismissal. Rather, we agree with the District Court that the significance of [a debtor's] ability to repay her creditors is merely a[] part of the required inquiry into `whether dismissal would be in the best interest of all parties in interest.' Smith v. Geltzer (In re Sueann M. Smith), No. 06 CV 2994, slip. op. at 9 (E.D.N.Y. Oct. 18, 2006) (quoting Dinova, 212 B.R. at 442). Here, the Bankruptcy Court provided three reasons for its conclusion that Smith's proposal to repay her creditors in full did not constitute adequate cause for dismissal: first, it was not in Smith's best interest to be represented by Schwartz and Ginsberg; second, the parties' failure to agree on Geltzer's appropriate fees and commission would needlessly create additional litigation; and third, there was a concern that Smith had been imposed upon by Schwartz and Ginsberg. While we are sympathetic to the Bankruptcy Court's desire to protect Smith from the consequences of her own choices, its reasons are insufficient to justify denial of Smith's dismissal motion, at least on the record that was before the Court. First, dismissal would clearly have benefitted Smith's creditors. In responding to this appeal, the trustee reiterates the argument  rejected by the Bankruptcy Court  that dismissal would result in substantial prejudice to Smith's creditors because nearly two years have passed since the commencement of the Bankruptcy Case. This argument is wholly without merit. Under Smith's proposed arrangement, all of her creditors would be paid in full, including interest, immediately, whereas without dismissal, the creditors will have to wait for the completion of the personal injury action before being paid, and if that action proves unsuccessful, they will receive nothing. We believe it to be indisputable that dismissal under Smith's proposal  assuming that the Bankruptcy Court supervises the disbursement of the monies advanced by Setareh  would be in the best interest of Smith's creditors. Second, in determining that dismissal was not in Smith's best interest, the Bankruptcy Court focused on the misconduct of Schwartz and Ginsberg and gave almost no consideration to the most important factor in the analysis: whether the debtor is able to secure an effective fresh start, Dinova, 212 B.R. at 441 (quotation marks omitted). While the Bankruptcy Court may be correct that the trustee's choice of counsel would do a better job of prosecuting the personal injury action than would Schwartz and Ginsberg, under Smith's proposed arrangement, her ability to secure an effective fresh start  with all of her debts paid  would be unaffected by whether the personal injury action proves successful. Thus, the Bankruptcy Court's concerns about Schwartz and Ginsberg are unrelated to that aspect of the debtor's interest that is most relevant to the dismissal inquiry. We do not intend to imply that it was inappropriate for the Bankruptcy Court to have considered Smith's longterm financial interests, including whether remaining in bankruptcy would afford her more competent counsel to prosecute the personal injury action and possibly allow her to retain a greater interest in the eventual proceeds from that action. These factors are certainly relevant to an analysis of the debtor's interests. But even if these factors tilt against dismissal, they must be weighed against the ability of the debtor to secure an effective fresh start, which is of paramount importance to the dismissal inquiry. See id. On remand, the Bankruptcy Court should consider both the benefits of Smith's proposed arrangement  including that it would allow her to pay off her creditors immediately, and also allow her to avoid the harms of discharging her debts through bankruptcy, such as the potential difficulty of securing future credit and the inability to receive Chapter 7 relief again for eight years, see 11 U.S.C. § 727(a)(8)  and the arrangement's potential costs  including that the high rate of interest charged by Setareh could reduce significantly any judgment or settlement amount eventually secured by Smith. The debtor's best interest also lies in the reduction of administrative expenses, Dinova, 212 B.R. at 441 (quotation marks omitted), but there is no evidence in the record establishing what Smith's administrative costs would be under her dismissal proposal. As a result, the Bankruptcy Court had no basis on which to determine how such costs compare to those that Smith would incur if she remained in bankruptcy proceedings. On remand, the Court should make such a determination based on evidence submitted by the parties. We note that potential litigation over the trustee's fees should not, by itself, constitute a basis for denying a dismissal motion that would otherwise benefit both the debtor and her creditors. The Bankruptcy Court could hold an expedited hearing to determine what is owed to the trustee and could make dismissal contingent on Smith's willingness and ability to pay that amount. The Bankruptcy Court's final reason for its decision was its concern that Smith had been imposed upon by Schwartz and Ginsberg. If it were true that Smith moved for dismissal only under duress or out of a lack of understanding as to what she was proposing, that would surely be grounds for denying the motion. Smith, however, was represented by independent counsel when she brought the motion, and she was present in the courtroom during the dismissal hearing, when the proposed arrangement was discussed in detail. Moreover, while Setareh's interest rate was far higher than the federal interest rate, it was not necessarily unreasonable for Smith to accept Setareh's terms given that Setareh would receive nothing if the personal injury action were unsuccessful. Accordingly, we cannot on this record credit the Bankruptcy Court's suggestion that Smith, in choosing to move for dismissal, may not have been acting voluntarily or in what she believed were her best interests. We therefore conclude that, on the record that was before it, the Bankruptcy Court's denial of Smith's dismissal motion cannot be located within the range of permissible decisions, Schwartz, 352 F.3d at 678, and its order should have been vacated by the District Court. However, because the Bankruptcy Court's concern that Smith may not have been fully informed or acting freely is not unfounded, and because the issue of the trustee's fees and commissions is still unsettled, the proper course is to remand the case to the Bankruptcy Court for it to reconsider its dismissal decision and determine, in conjunction with any notice and hearing that may be appropriate, (1) whether Smith fully understands the terms and consequences of her dismissal proposal, including the significant difference between the federal interest rate and that charged by Setareh; (2) the proper amount owed to the trustee, and whether Smith is willing and able to pay that amount; and (3) the appropriate mechanism by which to ensure that the trustee's fees and commission are paid and that all of Smith's creditors are repaid in full plus interest. If all of these conditions are satisfied, the fact that Smith will be able to immediately pay all debts and fees  and thus secur[e] an effective fresh start, In re Dinova, 212 B.R. at 441  should weigh heavily in favor of granting the dismissal motion.