In In re Parker, Case No. 06-61224, 2006 Bankr. LEXIS 2236 (Bankr. N.D. Ga. September 13, 2006) (Diehl), the court held that the §109 credit counseling requirements were not jurisdictional, and the court could decline to dismiss the case where the debtor has failed to properly obtain counseling. The Court further held that dismissal for failure to file the documents required by §521 also did not require dismissal.
Note: Download a copy of this case by clicking here. Apologies in advance for the length of this post, but I wanted to provide a good summary of the analysis. Additionally, the Debtor has appealed the Order.
Debtor filed his Chapter 7 case on February 6, 2006, listing assets of $1.8 million and debts of $3.97 million. Among the many problems with the debtor’s petition and schedules were the following —
- Although the debtor purportedly received counseling, it was not from an approved agency.
- Debtor reported income of $52,000 for each of 2004, 2005 and 2006 (even though only 5 weeks had passed for 2006).
- Debtor listed payments to creditors within 90 days consisting of payments to ten creditors totaling $290,000, or nearly twice the total amount he stated he earned from 2004-2006.
- Debtor listed eleven pending lawsuits.
- Debtor identified an ownership interest in five businesses.
- Debtor identified several secured creditors to which collateral would be surrendered, but the property was not scheduled on Schedule C.
- Debtor stated under penalty of perjury in Form B22A that the presumption of abuse did not arise even though he was over the median income, but he entered "0.00" in each of the categories of allowable deductions in Part V.
Subsequent to the filing, the debtor moved for an extension of time in which to receive approved credit counseling (but failed to get the required hearing date). He did provide the trustee with a certificate from an approved agency on February 27, 2006 at the 341 meeting. During the few weeks after the petition was filed, the debtor had consented to stay relief orders from three secured creditors, and consented to extensions of time in which creditors could object to his discharge. However, when the trustee attempted to sell one item the debtor wanted to retain (a Fantasy Houseboat valued at $180,000), the debtor retained substitute counsel and filed a motion to dismiss based upon his failure to obtain counseling from an approved agency and his failure to file pay advices required by § 521. The motion was opposed by the Chapter 7 Trustee, United States Trustee and one creditor. No parties other than the debtor supported dismissal.
The first issue was whether the debtor’s failure to comply with §109(h) and obtain credit counseling required dismissal.
First, the eligibility requirements of Section 109 are not jurisdictional. The authority of the court to enter orders in a bankruptcy case is determined by 28 U.S.C. § 1334 and 28 U.S.C. § 157. This issue of whether Section 109 eligibility is jurisdictional has arisen recently in the battle among bankruptcy courts as to whether a court that determines a debtor is ineligible should "dismiss" or "strike" the case. n4 The better view is that because the bankruptcy court retains the authority to determine the debtor’s eligibility, the court must have jurisdiction over a case commenced by an ineligible debtor. Determining eligibility is certainly a matter which "arises in a case under Title 11." 28 U.S.C. § 1334(a). Collier on Bankruptcy states unequivocally with respect to Section 109 that "it is clear that it is not jurisdictional." 2 Alan N. Resnick and Henry J. Somer, Collier on Bankruptcy P109.01 at 109-6.2. This is consistent with what other courts have held in construing other issues under Section 109 prior to the enactment of Section 109(h).
The question then arises whether, given that eligibility is not jurisdictional, the requirements of Section 109(h) are waivable. The authors of Collier on Bankruptcy posit that it is waivable. "Because eligibility requirements are not jurisdictional, they may be waivable by the court … and certainly should not apply if no entity moves to dismiss the case." 2 Alan N. Resnick and Henry J. Somer, Collier on Bankruptcy P 109.09 at 109-60. Analytically, this must be true; if a court has jurisdiction over a case in which a debtor is ineligible and thus orders entered in the case are valid and binding, the non-jurisdictional requirement must be waivable.
In this case, the only party to raise ineligibility is Debtor himself. The United States Trustee, the Chapter 7 Trustee, and the only creditor to appear at the hearing on the motion all urge the Court not to dismiss the case. The Court must determine whether Debtor has waived any right he may have to raise the Section 109(h) issue. A waiver may be found when there is an "intentional and voluntary relinquishment of a known right." Black’s Law Dictionary, p. 1417 (5th rev. ed. 1979); Johnson v. Zerbst, 304 U.S. 458, 464, 58 S. Ct. 1019, 82 L. Ed. 1461 (1938). The facts of this case are replete with evidence of waiver by Debtor. The fact which most clearly supports a waiver is that Debtor filed his Motion to Extend Time For Credit Counseling (Docket No. 10) on February 21, 2006, just fifteen days after the filing of his bankruptcy petition. Debtor affirmatively sought approval from the Court for obtaining post-petition services to comply with the credit briefing requirement. If Debtor, fully aware of the requirement for a briefing under Section 109(h) and his apparent failure to comply with the requirement, had desired to avail himself of this defect to dismiss his case, he certainly had the opportunity to do so. Additional support for a waiver is found in the numerous instances in which Debtor continued to actively participate in his Chapter 7 case after he became aware of the Section 109(h) issue: negotiation and consent to Orders Granting Relief From Stay, attendance at the Section 341 meeting of creditors at which he presented the Trustee with a copy of a certificate from an approved Credit Counseling Agency and agreement to court orders granting parties an extension of time to object to his discharge. There is no indication that Debtor ever raised the issue of his eligibility in any of these matters. It is only when the Trustee was proceeding with the sale of the Fantasy Houseboat, which Debtor intended to retain and reaffirm, that Debtor hired new counsel and did an about-face as to eligibility issue. The Court finds that Debtor waived his rights to rely on his ineligibility.
Support for denial of the Motion to Dismiss can also be found in the concept of judicial estoppel. Unlike waiver, judicial estoppel focuses on the effect of a position taken by a party to litigation… "[W]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him… In this case, the application of judicial estoppel is wholly appropriate. In taking the initial position that he had complied with the requirement of Section 109(h) and seeking an extension of time to file evidence of his compliance, Debtor obtained the benefits of the automatic stay to halt no less than eleven separate lawsuits pending against him and to forestall repossession and foreclosure actions against his real and personal property. The Debtor’s action also caused the Chapter 7 Trustee to take action to engage professionals, expend administrative time to investigate causes of action and to take actions to liquidate property of the estate for the benefit of unsecured creditors in the case. The Court entered a number of Orders with the consent of the Debtor based upon Debtor’s implicit representation that he was eligible for bankruptcy relief. Allowing the Debtor to change his position would make a mockery of the bankruptcy process — the precise situation that the application of judicial estoppel guards against.
The next issues was under what circumstances is a case "automatically dismissed" under §521(i) for failure to file pay advices required by §521(a)(1)(B)(iv) —
First and foremost, Section 521(a)(1)(B)(iv) only requires the filing of documents which actually exist. If a debtor did not receive payment advices or other evidence of payment from an employer, none are required to be filed… In this case, Debtor has not made a prima facie showing that payment advices even exist…The Trustee indicated that Debtor testified at the Section 341 meeting that he had no payment advices, and the Trustee submitted a form to the United States Trustee confirming that fact…
It is worthwhile to note that Section 521(i) refers to the information required by Section (a)(1) and not to any specific documents. Moreover, Section 521(a)(1)(B) which is all of the information that Section 521 addresses with the exception of a list of creditors (which appears in Section 521(a)(1)(A)), is prefaced by the phrase "unless the court orders otherwise." Section 521 does not set forth the time period within which the Court can "order otherwise," as BAPCPA does in numerous other sections. The statute would seem to permit the Court to excuse the filing requirements in a case at any time, before or after the 45-day period, under appropriate circumstances.
What, then, is the meaning of "automatic dismissal?" In general, dismissal of a Chapter 7 case must occur pursuant to 11 U.S.C. § 707, which requires "notice and a hearing." It seems logical, therefore, that "automatic dismissal" would not require notice and a hearing. Rather, it is a determination that the court can make with no notice to any party in interest and no hearing of any nature. This interpretation allows the language of Section 521(i)(2) to have meaning. That section provides that, with respect to a case in which all the required information had not been filed, "any party in interest may request the court to enter an order dismissing the case." If the case had already been "automatically dismissed," this language would be mere surplusage…
Here, the interests of creditors and the bankruptcy estate, as represented by the United States Trustee, the Trustee and an individual creditor, are best served by the denial of Debtor’s motion. The statute, as noted above, was primarily designed to prevent abuse of the bankruptcy system so that parties were not allowed to receive the benefits of bankruptcy without performing the requisite duties. However, interpreting "automatic dismissal" to mean that a case ceases to be pending by the mere passage of time without a court order of dismissal does not further the purposes of the statute and may cause chaos and confusion since there is no readily ascertainable way to determine whether or not a case has been dismissed…
The information which Section 521 requires to be filed is information which is normally required for a trustee to administer a bankruptcy case and for creditors to determine whether a debtor qualifies for the relief sought. It is the trustee and the creditors who are in the best position to determine whether they have sufficient information to proceed. If they do not, Section 521(i)(2) allows for an order of dismissal on an expedited basis. If a debtor inadvertently omits information, for example, failing to file one of the four payment advices received in the sixty days before filing, the trustee and creditors may consider the omission immaterial and proceed to administer the case. In such a case, Section 521 could be used to argue that an automatic dismissal had occurred even where the interests of creditors would be harmed by a dismissal. Creditors who stand to recover from the proceeds of a lawsuit brought by the trustee would find the defendant in that action raising automatic dismissal. Congress could not have intended to establish a procedure which interferes with the liquidation of an estate and the payment of creditors where the issue is not raised by creditors or their representative, the Trustee.
An "automatic dismissal" also deprives creditors of the opportunity to seek a dismissal with other conditions, such as a dismissal under Section 109(g) or Section 349(a). Each of those sections allow the court to determine that the conduct of a debtor has been such that access to the court or to the availability of a discharge of certain debts should be curtailed. In contrast, an automatic dismissal without a court order permits a debtor to return to court immediately, with the only consequence being the need to seek an extension of the automatic stay pursuant to 11 U.S.C. § 362(c)(3). Thus, a debtor facing an objection to discharge because of material omissions or errors on his schedules could defend on the ground that the case was automatically dismissed under Section 521(i) on the grounds that because of the very same material omissions, his schedules did not contain all the information required by Section 521(a). Having cured that problem, the debtor could simply re-file and obtain a discharge. Or suppose that, several months after filing the case, the trustee discovers that the debtor made a preferential transfer to a parent or spouse 60 days before the filing of the case that was not disclosed on the petition. If automatic dismissal is required, the insider preference defendant can use Section 521(i) to require dismissal of the bankruptcy case and thereby end the trustee’s preference action. The debtor can then re-file when the preference has sufficiently aged to be unavoidable. To interpret the statute in a manner that requires dismissal in this case would be to construe the statute to be at odds with its primary purpose.
Given the Court’s ability under Section 521(a)(1)(B) to "order otherwise," the Court hereby determines that no further information pursuant to Section 521(a)(1)(B)(iv) needs to have been filed or to be filed in this case. Thus, the automatic dismissal provisions, to the extent that they would have otherwise been applicable, are determined to be inoperative. Debtor’s Motion to Dismiss is denied on the grounds that there is no evidence that Debtor failed to comply with Section 521(a)(1)(B), and that any non-compliance is rendered moot by the Court’s determination that no further information is necessary.