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Prepetition Bad Faith Is Sufficient 'Cause' To Dismiss Chapter 7 Bankruptcy Petition

Wednesday, July 10, 2013
By Bernard J. Pazanowski

Prepetition bad faith was a sufficient reason to dismiss a voluntarily filed Chapter 7 petition, the U.S. Court of Appeals for the Eleventh Circuit held June 26 (Piazza v. Nueterra Healthcare Physical Therapy LLC (In re Piazza), 11th Cir., No. 12-12899, 6/26/13).

Under Section 707(a), a bankruptcy court may dismiss a petition “for cause.” There is a circuit split over whether prepetition bad faith falls within the realm of the statute. The Eleventh Circuit said, “based on the ordinary meaning of the statutory language and relevant principles of statutory construction, the power to dismiss 'for cause' in § 707(a) includes the power to involuntarily dismiss a Chapter 7 case based on prepetition bad faith.”

Craig Piazza filed a Chapter 7 petition to discharge business-related debts. Included in his petition was about $320,000 in unsecured debt. About half of that was a state judgment against Piazza that he owed to Nueterra Healthcare Physical Therapy LLC. He admitted that getting around the judgment “may well have been the motivating factor for filing bankruptcy.”

Nueterra asked the bankruptcy court to dismiss Piazza's case under Section 707(a). Piazza responded that filing bankruptcy to avoid garnishment is common and not bad faith, and that because Nueterra's state court suit did not allege fraud, there was no bad faith.

The bankruptcy court granted Nueterra's motion to dismiss, saying that cause existed under Section 707(a) based on bad faith. The Eleventh Circuit affirmed.

Is Bad Faith 'Cause'?
The issue was one of first impression for the Eleventh Circuit, but the Third Circuit has held that “cause” under Section 707(a) includes bad faith. The Ninth and Eighth circuits disagree.

Diving into the issue, the court here said that the Bankruptcy Code does not define “for cause.” It also said that the three examples of cause listed in Section 707(a), which include unreasonable delay, nonpayment of fees, and the debtor's failure to file required information, “are illustrative, not exhaustive.”

Perusing legal and nonlegal dictionaries, the court added that the ordinary meaning of cause is “authorizing dismissal when adequate or sufficient reason exists for such an action.”

Considering that bankruptcy courts may sanction litigants for filing documents with “any improper purpose,” and may take “any action … necessary or appropriate … to prevent an abuse of process,” the court said that there is “no reason why prepetition bad faith should not constitute an adequate or sufficient reason for dismissal.”

What About Statutory Construction?
Not willing to give up without more of a fight, Piazza argued that several canons of statutory construction helped him out. The court thought otherwise.

The court said that the specific examples of “cause” in Section 707(a) are not limiting, Piazza's reading of the statute goes against the meaning of “for cause” elsewhere in the Code, and it “runs counter to both the original understanding of ['for cause'] in § 707 as well as more than a century of federal bankruptcy law and policy.”

Piazza argued that “for cause” in Chapter 7 differs from Chapters 11 and 13. He said that “for cause” in Section 1112(b), which requires plans to be proposed in “good faith,” and in Section 1307(c), which requires reformation plans to be “proposed in good faith,” should include bad faith because they “contemplate an ongoing relationship between the debtor and creditor.”

The Ninth Circuit accepted this argument in Neary v. Padilla (In re Padilla), 222 F.3d 1184 (9th Cir. 2000)(12 BBLR 843, 9/14/00), but the Eleventh Circuit said that Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007)(19 BBLR 167, 2/22/07), “made clear” that bad faith is pertinent in all chapters of the Bankruptcy Code, regardless of whether a particular provision requires an explicit good faith filing.

The “absence of an ongoing post-petition relationship between the debtor and creditor in Chapter 7 does not in any way suggest a debtor's pre-petition bad faith can never provide 'cause' to dismiss,” the court said.

How About Superfluity?
The court swatted away the argument that interpreting “cause” to include bad faith renders superfluous other provisions in the Code that contain explicit bad faith provisions. It said, “Piazza's claims of superfluity … are overstated.” Redundancies happen, and nothing repugnant will occur if bad faith is read into Section 707(a), it said.

The court rejected Piazza's argument that the general language in Section 707(a) is limited by more specific provisions, including some in Section 523(a)(19)(B)(i), which prohibits debtors from discharging any debt that results from any state judgment, and Section 727(a)(2)(A), which denies discharge if a debtor tries to “defraud a creditor” by transferring property before filing for bankruptcy protection.

Specific statutory provisions often do trump more general ones, but not if textual indications suggest otherwise, the court said. That is the case here, it said. “Both the specific terms of the provisions as well as the general design of the Bankruptcy Code show that neither § 523 nor § 727 precludes alternative remedies 'to prevent an abuse of process,' ” it said.

Still not willing to give up, Piazza argued that because Congress amended Section 707(b) in 2005 to include the phrase “bad faith,” it must have intended to exclude bad faith from Section 707(a). Section 707(b) requires courts to consider whether a debtor filed a petition in bad faith when determining whether granting relief will be an “abuse” of the bankruptcy laws.

“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 haven for bad faith debtors,” the court said. Neither the history, text, nor structure of the two statutes shows that the selective inclusion presumption applies, it said. It explained that inclusion of the bad-faith provision in subsection (b) was intended to correct abuses in the bankruptcy system, “not limit bankruptcy courts' ability to correct such abuses in non-consumer cases or 'plac[e] additional weapons in the hands of abusive debtors.' ” It went on to say, “the text and structure of subsection (a) and (b) make clear that they are 'couched in very different terms.' ”

The appeals court concluded that the bankruptcy court did not abuse its discretion by dismissing Piazza's petition based on its finding of prepetition bad faith. The lower court properly applied a totality-of-the-circumstances analysis, and its finding of bad faith was not clearly erroneous, it said.

Judge Stanley Marcus and Sixth Circuit Judge Eugene E. Siler, sitting by designation, joined the opinion.

Kevin C. Gleason, Hollywood, Fla., argued for Piazza. Christian A. Peterson, Olive & Associates, Fort Lauderdale, Fla., argued for Nueterra. Sean M. Cowley, Department of Justice, Detroit, argued for the United States as amicus curiae.

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