Mantas Valiunas, Anything but Automatic: Dismissal Under § 521

• Publication year: 2011

ANYTHING BUT AUTOMATIC: DISMISSAL UNDER § 521

INTRODUCTION

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), bankruptcy cases are dismissed more often for apparent violations of the Bankruptcy Code (the “Code”). These dismissal decisions under BAPCPA are being rendered at an increasing rate. Despite the commonality of dismissal decisions, the opinions justifying them tend to range from a strict interpretation of the alleged plain language of the Bankruptcy Code to judgments creating new tests and various loopholes in interpretation. The main purpose of the Code is to provide a procedure by which honest

consumers are entitled to a discharge of debts and a fresh start.1 Through

bankruptcy, honest debtors can “reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life’”2 without having to worry about the encumbrances and restrictions of their past obligations.3 The Code is designed to restrict such opportunity to the “honest but unfortunate debtor”4 and weed out debtors who file in bad faith. However, this raises an important question: what happens when a dishonest debtor seeks to take advantage of the Bankruptcy Code and uses provisions meant to protect honest debtors and creditors to his own unfair advantage?

This Comment will look at how a narrow reading of § 521(i) leads to an automatic dismissal which encourages abuse of the bankruptcy system by dishonest debtors.5 While a strict and rigid application of § 521(i) requirements allows dishonest debtors to manipulate the system, it also leads to unfavorable outcomes for honest debtors. If any documents or information have not been

filed in a timely manner, then a bankruptcy case may be dismissed automatically. Although there are several solutions, including the promotion of

1. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 286–87 (1991) (“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’”)).

2. Grogan, 498 U.S. at 286.

3. Id.; Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (“[The] purpose of the [bankruptcy] act has been . . . [to give] to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the

   pressure and discouragement of preexisting debt.”).

4. Marrama, 549 U.S. at 367; Local Loan Co., 292 U.S. at 244.

5 See 11 U.S.C. § 521(i) (2006).

judicial discretion and the use of waiver forms, this Comment suggests an amendment to the Code that will promote fairer results for debtors.

An example will illustrate how dishonest debtors can abuse the Code. Imagine that Blake, an orthopedic surgeon, had to declare bankruptcy since neither his personal practice nor his investments were doing as well as he had hoped. His creditors pursued him for months without avail, while he continued to ignore them. Seeing no end in sight and in dire need of the automatic stay, Blake filed for chapter 7. His scheduled assets indicated a home in Sandy Springs, Georgia (valued at $2,500,000), a 2010 Jeep Wrangler (valued at

$35,000), and other minor assets. Unknown to the chapter 7 trustee, fifty days

before filing Blake conveyed virtually all his interest in another home (valued at $1,500,000) and a 2011 Maserati GranTurismo MC Stradale (valued at

$205,000) to a corporate entity named Canttouchthis, Inc., which he controlled. Blake did not notify his creditors or obtain court authorization. Notwithstanding Blake’s efforts, the chapter 7 trustee eventually found out about the hidden assets. As a result, Blake amended the schedules to include the newly found property and proposed a new plan. Blake, seeing that he would not be able to keep his prized possessions, did not agree with the plan and moved for an order dismissing his case for failure to file a complete statement of monthly net income, as required by § 521. Using § 521 to his advantage, Blake intentionally failed to file a complete statement since he wanted to make sure he could get out of the bankruptcy proceedings if things were not going his way. After waiting forty-five days without providing all the necessary information, the court would have no other choice but to order dismissal. After enough time had passed, Blake again filed for chapter 7. This time his prized possessions were out of the trustee’s reach. The creditors were left with only a partial repayment of his debt while the cunning Blake was able to keep his highly valued assets.

On the other hand, the same provision can work painfully against honest debtors. Imagine Emma, a single mother who has been burdened by numerous bills, child support, and a recent layoff from work. She has been living paycheck to paycheck, and the current economic slump has not helped her situation. Harassed by debt collectors every day and barely able to feed her children, she decides to file for chapter 7 to get a fresh start through bankruptcy. She attempted to compile all the necessary information as advised by her attorney, but unfortunately her employer could not provide pay stubs for the last week of her employment because a fire destroyed the business. Since her paycheck was the same amount every week, her attorney extrapolated the

information for the last pay stub and provided it to the court. A few months after filing, a creditor asked the court to provide an order stating that the case has been automatically dismissed after forty-five days since Emma did not provide all the information required by § 521. Emma’s failure to provide the last pay stub from her employer did not meet the requirements of § 521 and her case was automatically dismissed on the forty-sixth day despite her honest need for bankruptcy protection. Emma was an honest but unfortunate debtor who filed her information in good faith but was denied bankruptcy relief because of a minor technicality.

The two anecdotes illustrate how a rigid application of § 521(i) requirements can lead to unfavorable outcomes for honest debtors and allow dishonest debtors to manipulate the system. The Comment will first introduce the legislative reasoning for the changes provided by BAPCPA and how § 521 plays a role within the new act. Second, this Comment will look at how the majority of bankruptcy courts have interpreted § 521’s provisions after acknowledging that the provisions curtail judicial discretion. An analysis of the textualist approach to § 521 will follow. Limiting the bankruptcy court’s discretionary authority in § 521(a)(1) encourages bankruptcy abuse. Without discretionary authority, bankruptcy courts cannot prevent an abusive and manipulative debtor from having his case automatically dismissed when he

intentionally fails to comply with the § 521(a)(1) filing requirements.6

Finally, this Comment will examine the approach of a minority of bankruptcy courts, led by a limited number of circuit courts, that have attempted to discourage bankruptcy abuse by establishing the discretion necessary to waive the § 521(a)(1) filing requirement, even after the filing

deadline has passed.7 Using its discretionary authority, these courts declined to

dismiss the debtor’s case where the court determined that the debtor was abusing and manipulating the bankruptcy system.8 Similarly, these courts also refused to dismiss honest debtor’s cases where dismissal would go against the best interests of the debtor and the overall bankruptcy system.9 Their approach rests on the idea that because § 521(i) lacks a single plain meaning, the use of judicial discretionary authority in interpreting it can reduce manipulation of the

1. See Wirum v. Warren (In re Warren), 568 F.3d 1113, 1119 (9th Cir. 2009).

2. See id.; Segarra-Miranda v. Acosta-Rivera (In re Acosta-Rivera), 557 F.3d 8, 14 (1st Cir. 2009); Miller

   v. Cameron (In re Miller), 383 B.R. 767, 772 (B.A.P. 10th Cir. 2008); In re Parker, 351 B.R. 790, 802 (Bankr.

   N.D. Ga. 2006).

3. In re Warren, 568 F.3d at 1119; In re Acosta-Rivera, 557 F.3d at 14.

4. See In re Miller, 383 B.R. at 772; In re Parker, 351 B.R. at 801.

   bankruptcy process, protect the interests of honest debtors, and in doing so further the goals of BAPCPA.

   
   

   1. BACKGROUND

      
      

      1. BAPCPA and Its Attempt to Curb Bankruptcy Abuse

         
         

         Section 521 was significantly changed by BAPCPA in order to curb bankruptcy abuse.10 Congress had specific concerns that it wanted to address and it did so through the act.11 The Comment will examine the legislative history to better understand the congressional intent behind BAPCPA. Section 521 was restructured to reflect these intentions, and the Comment will analyze each section in greater detail to see what effect it may have on bankruptcy.12

         
         

         In enacting BAPCPA, Congress sought to deliver an all-inclusive package applicable to both consumer and business bankruptcy cases.13 As Congress stated, “The purpose of the bill is to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.”14 Many of the reforms that were proposed and enacted included “provisions [that were] intended to deter serial and abusive bankruptcy filings.”15 Indeed, Congress passed BAPCPA in response to growing concerns of abuse of bankruptcy procedures by dishonest debtors.16 Thus, BAPCPA is scattered with creditor- friendly language to remedy a perceived imbalance in the Bankruptcy Code favoring debtors.17

         
         

         1. Congressional Intent

            
            

            BAPCPA was enacted by broad bipartisan majorities in both houses of Congress.18 In support of creditor interests, BAPCPA was meant to “respond to many of the factors contributing to the increase in consumer bankruptcy

            
            

            10 See H.R. REP. NO. 109-31, at 2 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 89.

            11 See id. at 1.

            12 11 U.S.C. § 521 (2006).

            1. See H.R. REP. NO. 109-31, at 1.

            2. See id.

            3. See id.

            4. See id.

            5. See In re Ott, 343 B.R. 264, 266 (Bankr...