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Orders Denying Motions to Dismiss Chapter 7 Bankruptcy Cases for Abuse are Final Orders

Tuesday, December 13, 2011

Adrienne Woods | Bloomberg LawMcDow v. Dudley, No. 10-1732, 2011 BL 301408 (4th Cir. Nov. 30, 2011) 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. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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