FILED APR 8 2025 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. CC-24-1154-LSG DAVON JERMELL WHITE, Debtor. Bk. No. 2:24-bk-14190-NB DAVON JERMELL WHITE, Appellant, v. MEMORANDUM ∗ UST- UNITED STATES TRUSTEE, LOS ANGELES, Appellee.
Appeal from the United States Bankruptcy Court for the Central District of California Neil W. Bason, Bankruptcy Judge, Presiding
Before: LAFFERTY, SPRAKER, and GAN, Bankruptcy Judges.
INTRODUCTION
Davon Jermell White (“Debtor”) appeals the bankruptcy court’s
order dismissing his case under § 707(a). 1
Seeking the protection of the Bankruptcy Code, Debtor chose to file a
chapter 11 case and reorganize his financial affairs. Unfortunately, Debtor
∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532. 1 failed to provide the type of complete disclosures contemplated by the
Code. The bankruptcy court repeatedly warned Debtor that his case was
subject to dismissal based on Debtor’s lack of transparency.
Nevertheless, Debtor’s filings with the court continued to fall short of
the disclosures required of a debtor-in-possession under chapter 11.
Eventually, the court ordered Debtor to appear and show cause why his
case should not be dismissed or converted based on Debtor’s incomplete
and conflicting disclosures.
After the court’s entry of this order, but prior to the hearing, Debtor
requested conversion of his case to a chapter 7 case. The court entered an
order granting the request for conversion, but instructing Debtor that he
would still have to appear and show cause why his case should not be
dismissed based on his conduct as a debtor-in-possession.
Ultimately, after holding a hearing in the converted chapter 7 case,
the court decided to dismiss Debtor’s case. Specifically, the court held that
“cause” existed under § 707(a) based on Debtor’s failure to adequately
disclose his assets, liabilities, income, and expenses. The court also held
that “cause” existed under § 707(a)(1), which allows for dismissal where
there is “unreasonable delay by the debtor that is prejudicial to creditors.”
We do not condone Debtor’s actions during the pendency of his
chapter 11 petition. Debtor did not come close to satisfying his obligations
as a debtor-in-possession. Nevertheless, we hold that binding Ninth Circuit
authority precluded the bankruptcy court from dismissing Debtor’s
2 chapter 7 case under the general “cause” provision of § 707(a). We further
hold that Debtor’s pre-conversion actions as a chapter 11 debtor-in-
possession did not qualify as the type of “cause” contemplated by
§ 707(a)(1). Accordingly, we REVERSE the bankruptcy court’s decision and
REMAND for further proceedings in accordance with this Memorandum.
FACTS 2
A. Debtor’s bankruptcy filing and insufficient disclosures. On May 28, 2024, Debtor filed a chapter 11 subchapter V petition.
Two days later, the court entered a procedures order, requiring that, ahead
of the initial status conference in this case, Debtor file a status report
containing information required by the Code and the Central District of
California’s Local Bankruptcy Rules.
Prior to the initial status conference, Debtor submitted a status report
and filed his schedules and statements. As thoroughly discussed in the
court’s tentative ruling issued before the initial status conference, Debtor’s
filings contained several deficiencies.
Specifically, the court noted that Debtor: (i) failed to include required
information in his status report; (ii) did not address how he could proceed
in a chapter 11 case when he scheduled only $100 in his account, no net
income, and no unencumbered assets in his schedules; (iii) failed to attach a
2 We have taken judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 statement to his schedule I showing gross receipts related to real
properties; (iv) provided conflicting information in his schedules and
statements; and (v) provided such little explanation regarding the lack of
any income and assets that neither the court nor any party in interest could
have faith in the accuracy of Debtor’s disclosures. In light of these issues,
the court warned in its tentative ruling that Debtor’s case may be dismissed
or converted based on the issues highlighted above.
In June 2024, the court held the initial status conference. Both Debtor
and his counsel appeared. At the status conference, the court again
expressed its frustrations with Debtor’s lack of disclosures. The court
explicitly informed Debtor that, as a debtor-in-possession, he was required
to give the court, his creditors, the subchapter V trustee, and the U.S.
Trustee a “big picture” narrative of his assets, liabilities, income, and
expenses, and exactly how Debtor intended to proceed with a chapter 11
plan to resolve his financial issues. In other words, the court outlined for
Debtor and his counsel the duties attendant to being a debtor-in-possession
under chapter 11.
The U.S. Trustee also appeared and echoed the court’s concerns
about the lack of required information in Debtor’s schedules, statements,
and status report. Thus, the court set deadlines for Debtor to remedy his
deficient disclosures and to file certain required motions, such as a motion
for use of cash collateral and a budget motion. Subsequently, Debtor filed
4 certain amended schedules and statements, as well as a stipulation for use
of cash collateral.
Unfortunately, Debtor’s disclosures remained deficient. At a
continued status conference held on July 16, 2024, the court highlighted the
outstanding issues, including that Debtor failed to: (i) file a budget motion;
(ii) provide all required information in connection with a late-filed cash
collateral stipulation; and (iii) make adequate disclosures in his schedules,
including providing any explanation as to why Debtor indicated he does
not pay any income tax, any expenses related to his real properties, and
why Debtor scheduled receipt of only $8 per month.
In response, Debtor filed another status report, amended schedules I
and J, and a budget motion. Both in a tentative ruling and orally at a
continued status conference, the court thoroughly outlined the missing
pieces to Debtor’s disclosures. For instance, the court noted that Debtor’s
amended schedules reflected a negative income from his rental properties
and insufficient information regarding income Debtor anticipated from
recent employment with a car dealership. The court also highlighted
significant missing information from Debtor’s submitted budget, as well as
continuing inconsistencies between Debtor’s multiple filings. Again, the
court explained that Debtor did not satisfy his obligation, as a debtor-in-
possession in a chapter 11 case, for full disclosure to the estate.
5 In light of these continuing problems, the court warned at the July 30
status conference that it would be issuing an Order to Show Cause why
Debtor’s case should not be dismissed or converted to a chapter 7 case.
B. The court’s Order to Show Cause and conversion of Debtor’s case. On August 7, 2024, as promised, the court issued an Order to Show
Cause why Debtor’s case should not be dismissed with a 180-day bar or
converted (the “OSC”). The lengthy OSC set forth in detail the basis for the
court’s potential conversion or dismissal of Debtor’s case. The OSC also
contained lengthy instructions requiring Debtor to submit additional
information as well as deadlines for Debtor to do so. The court set a
hearing on the OSC for September 10, 2024.
On August 22, 2024, Debtor filed a motion to convert his case from a
chapter 11 to chapter 7 (the “Motion to Convert”). A few days later, and
prior to the court’s hearing on the OSC, the court entered an order
converting Debtor’s case to one under chapter 7 (the “Conversion Order”).
Although the court granted Debtor’s request for conversion, the court
further stated in the Conversion Order that “[n]otwithstanding the
conversion of this case to chapter 7,” the court’s hearing on the OSC “will
go forward pursuant to 11 U.S.C. § 707(b) (instead of 11 U.S.C. § 1112(a))
and Debtor is directed to appear to address whether this case should be
dismissed with a 180-day bar to being a debtor in bankruptcy pursuant to
11 U.S.C. [§] 109(g)(1).”
6 Debtor filed a response to the OSC. In his response, Debtor asserted
that § 707(b) did not apply to Debtor’s case because he did not have
primarily consumer debts, as that statute requires. Debtor also argued that,
to the extent the court intended to reference § 707(a), which allows for
dismissal of a chapter 7 case “for cause,” binding Ninth Circuit authorities
provide that bad faith does not constitute “cause” for purposes of § 707(a).
On September 10, 2024, the court held a hearing on the OSC. Ahead
of this hearing, the court issued a tentative ruling noting that the OSC
contained a typographical error and that the court anticipated dismissing
Debtor’s case under § 707(a), not § 707(b). The tentative ruling then
summarized all of Debtor’s deficient disclosures; specifically, the court
referenced: (i) several issues with Debtor’s budget motion; (ii) Debtor’s
failure to file accurate and complete monthly operating reports, status
reports, and schedules; and (iii) Debtor’s ongoing inability to explain how
he intended to make “proper use of bankruptcy.”
The court further stated that Debtor’s conversion to a chapter 7 case
did not excuse his prior bad acts during the course of his chapter 11 case.
The court tentatively held that Debtor should not benefit from the
protections of bankruptcy, such as the automatic stay and the receipt of a
discharge, if Debtor failed to provide the “quid pro quo of timely, accurate,
and complete financial disclosures.” The court also held that Debtor’s
behavior was covered by § 707(a)(1), which provides that “cause” includes
“unreasonable delay by the debtor that is prejudicial to creditors.”
7 At the hearing on the OSC, the court adopted its tentative ruling and
dismissed Debtor’s case. At that time, the court addressed Debtor’s
argument that binding Ninth Circuit authorities did not recognize bad faith
as a basis to dismiss a petition under § 707(a). In the bankruptcy court’s
view, those cases barred courts from dismissing chapter 7 cases based on a
debtor’s pre-filing bad faith conduct, but did not bar courts from
dismissing a chapter 7 case based on a debtor’s post-filing, pre-conversion
misuse of the bankruptcy system.
On September 12, 2024, pursuant to its ruling, the court entered an
order dismissing Debtor’s case with a 180-day bar to refiling another case
(the “Dismissal Order”). Debtor timely appealed. 3
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction over this appeal under 28 U.S.C. § 158.
ISSUES
1. Was dismissal under § 707(a) based on Debtor’s failure to satisfy
his disclosure requirements appropriate?
3 After initiating this appeal, Debtor requested a stay of the Dismissal Order pending this appeal. In December 2024, a motions panel entered an order granting Debtor an injunction pending appeal (the “Injunction Order”). The Injunction Order provided that it would remain in effect until 14 days after entry of a judgment in this appeal. Thus, the Injunction Order will dissolve 14 days after entry of a judgment in accordance with this Memorandum. 8 2. Was dismissal under § 707(a)(1) based on Debtor’s pre-conversion
actions as a chapter 11 debtor appropriate?
3. Did the Dismissal Order violate Debtor’s due process rights?
STANDARDS OF REVIEW
“Whether an individual’s due process rights have been violated is a
mixed question of law and fact, reviewed de novo.” Wilborn v. Gallagher (In
re Wilborn), 205 B.R. 202, 206 (9th Cir. BAP 1996).
“[W]e review a bankruptcy court’s decision to grant or deny a motion
to dismiss for misconduct that constitutes ‘cause’ for abuse of discretion.”
Sherman v. S.E.C. (In re Sherman), 491 F.3d 948, 969 (9th Cir. 2007) (citation
omitted). However, “we review de novo whether a type of misconduct can
constitute ‘cause’ under § 707(a).” Id.
De novo review means that we review the matter anew, as if the
bankruptcy court had not previously decided it. Francis v. Wallace (In re
Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
DISCUSSION
Prior to analyzing the propriety of the Dismissal Order, it is worth
detailing the bases of the court’s dismissal of Debtor’s case. As is evident
from the OSC, the transcript of the hearing on the OSC, and the Dismissal
Order incorporating the court’s several tentative rulings, the court
factually based its dismissal on Debtor’s numerous failures to satisfy his
obligations as a debtor-in-possession. We take no issue with the court’s
findings. Debtor’s multiple failures to comply with basic disclosure
9 requirements necessary to maintain a chapter 11 case are amply supported
by the record. Debtor does not dispute those findings on appeal.
The court’s legal bases for dismissal can be distilled to two related
grounds: (i) that Debtor’s conduct was an abuse of the bankruptcy process
that qualified as “cause” under § 707(a); and (ii) that Debtor’s conduct
qualified as “unreasonable delay by the debtor that [was] prejudicial to
creditors” under § 707(a)(1).
As we discuss in section A, although we appreciate the court’s
thorough factual record regarding Debtor’s failure to comply with basic
disclosure requirements, binding Ninth Circuit authority compels us to
reverse the court’s holding with respect to the general “cause” provision of
§ 707(a). As we discuss in section B, we further hold that “cause” did not
exist for dismissal under § 707(a)(1). Finally, as we discuss in section C, we
reject Debtor’s argument that the Dismissal Order deprived Debtor of his
due process rights.
A. The bankruptcy court erred in dismissing Debtor’s case under § 707(a) based on Debtor’s misconduct during his chapter 11 case. Under § 707(a), a court may dismiss a chapter 7 case “only for cause,
including,” among other things, “unreasonable delay by the debtor that is
prejudicial to creditors.” § 707(a)(1). Although § 707(a) provides three
enumerated examples of “cause,” “[t]he grounds that § 707(a) lists as
providing ‘cause’ for dismissal are illustrative and not exhaustive.” Neary v.
Padilla (In re Padilla), 222 F.3d 1184, 1191 (9th Cir. 2000) (citing, inter alia,
10 § 102(3) (defining the word “including” to be “not limiting”)). In other
words, courts may dismiss a petition based on a type of “cause” not
explicitly set forth in § 707(a)(1)-(3).
At first glance, Congress’s decision to draft § 707(a) in a manner that
allows courts to find “cause” outside the explicit examples provided by the
statute would seem to give heft to the bankruptcy court’s conclusion that
Debtor’s misconduct during the chapter 11 phase of his case qualifies as
“cause” to dismiss his chapter 7 case. However, a closer look at certain
binding authorities gives us pause.
1. Padilla We begin with the Ninth Circuit’s decision in Padilla. There, the
Ninth Circuit assessed whether a debtor’s prepetition bad faith conduct
provided “cause” to dismiss his case under § 707(a). In re Padilla, 222 F.3d
at 1191-94. In Padilla, the debtor accumulated significant consumer debt in
anticipation of filing for bankruptcy. Id. at 1187-88. Based on this conduct,
the bankruptcy court concluded “cause” existed to dismiss the debtor’s
case under § 707(a). Id. at 1188.
The Ninth Circuit disagreed with the bankruptcy court’s conclusion.
Id. at 1194. The Court of Appeals first referenced four specific Code
provisions that protect creditors in the case of misconduct by a chapter 7
debtor, namely: (i) § 523(a), which allows creditors to except certain types
of debt from discharge; (ii) § 727(a), which allows parties in interest to
prevent debtors from receiving a discharge for pre- or postpetition
11 conduct; (iii) § 707(b), which allows for dismissal of a case where a debtor
has primarily consumer debts and abuses the provisions of chapter 7; and
(iv) § 707(a), which enumerates three explicit grounds that “have been
described as being technical and procedural violations of the Bankruptcy
Code.” Id.at 1192 (internal quotation marks omitted).
The Circuit acknowledged that “cause” under § 707(a) was not
limited to the three specifically enumerated examples set forth in
§ 707(a)(1)-(3). Id. Nevertheless, the Circuit observed that “[s]tatutory
construction canons require that where both a specific and a general statute
address the same subject matter, the specific one takes precedence. . . .” Id.
(internal quotation marks omitted). “Therefore, a debtor’s misconduct
should be analyzed under the most specific Code provision that addresses
that type of misconduct.” Id.
In light of this, the Circuit explained that, because no provision in the
Code “explicitly uses the words ‘good faith’ or ‘bad faith,’” the appropriate
question was whether the “nature of the debtor’s actions or inactions that
have given rise to the ‘bad faith’ label” were contemplated by specific
provisions in the Code. Id.
In Padilla, the Circuit held that § 707(b) specifically contemplated the
type of abuse committed by that debtor, i.e., the accrual of significant credit
card debt directly before filing a petition. Id. at 1194. Thus, the Circuit held
that dismissal under the general “cause” provision of § 707(a) was
inappropriate. Id.
12 Importantly, the Circuit distinguished “dismissal for cause” in
chapter 7 cases from “dismissal for cause” in chapter 11 and chapter 13
cases. Id. at 1192-93. In recognizing that courts could dismiss chapter 11
and chapter 13 cases based on a finding of “bad faith,” the Circuit
reasoned:
What distinguishes Chapters 11 and 13 from Chapter 7 is the language of the Bankruptcy Code itself and the post-filing relationship between the debtor and his creditors. The Bankruptcy Code specifically mentions good faith in Chapters 11 and 13 when it permits a court to confirm a payment plan only if it is proposed in good faith. No mention of good faith or bad faith is made in Chapter 7. Also, the post-filing debtor- creditor relationship is markedly different in liquidation and reorganization bankruptcies. Chapters 11 and 13, both reorganization chapters, permit the debtor to retain its assets and reorder its contractual obligations to its creditors. In return for these benefits, the debtor must approach its new relationship with the creditors in good faith. Chapter 7, a liquidation chapter, requires no ongoing relationship between the debtor and its creditors and should be available to any debtor willing to surrender all of its nonexempt assets, regardless of whether the debtor's motive in seeking such a remedy was grounded in good faith. . . . The Bankruptcy Code's language and the protracted relationship between reorganization debtors and their creditors lead us to conclude that bad faith per se can properly constitute “cause” for dismissal of a Chapter 11 or Chapter 13 petition but not of a Chapter 7 petition under § 707(a). Id. (cleaned up).
13 2. Sherman Seven years later, the Circuit revisited Padilla. In re Sherman, 491 F.3d
at 970. There, the Circuit summarized the holding of Padilla as providing a
“two-part inquiry.” Id. “First, we must consider whether the circumstances
asserted to constitute ‘cause’ are ‘contemplated by any specific Code
provision applicable to Chapter 7 petitions.’” Id. (quoting Padilla, 222 F.3d
at 1193). “If the asserted ‘cause’ is contemplated by a specific Code
provision, then it does not constitute ‘cause’ under § 707(a).” Id. (citing
Padilla, 222 F.3d at 1194). “If, however, the asserted ‘cause’ is not
contemplated by a specific Code provision, then we must further consider
whether the circumstances asserted otherwise meet the criteria for ‘cause’
for [dismissal] under § 707(a).” Id. (citing Padilla, 222 F.3d at 1193-94).
In Sherman, the Circuit assessed whether several types of misconduct
qualified as “cause” for purposes of § 707(a). As relevant to this appeal, one
of the types of misconduct analyzed by the Circuit was the debtor’s
misrepresentation of his liabilities and expenses in his bankruptcy papers.
Id. at 973. In holding that such misrepresentations did not provide “cause”
for dismissal under § 707(a), the Circuit referenced § 727(a)(4)(A), which
prevents a debtor from receiving a discharge if “the debtor knowingly and
fraudulently, in or in connection with the case [] made a false oath or
account.” Id. (quoting § 727(a)(4)(A)).
Because § 727(a)(4)(A) covered the specific conduct by the debtor, the
Court of Appeals held that the proper remedy was to deny the debtor a
14 discharge under § 727(a)(4)(A), not dismiss the case under § 707(a). Id. “To
respect the complex statutory scheme that Congress has created to deal
with malfeasance associated with bankruptcy petitions, we are loath to
hold that a factor constitutes ‘cause’ unless the Bankruptcy Code regime is
incapable of righting wrongs of the kind alleged.” Id. at 974.
3. Marrama Padilla and Sherman were relatively straightforward in their holdings:
where a different provision of the Code specifically covers the debtor’s
conduct, that conduct may not be the basis for “cause” to dismiss a chapter
7 case under § 707(a).
Somewhat complicating our analysis, however, is the Supreme
Court’s decision in Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007).
Marrama addressed whether the Code granted a chapter 7 debtor an
absolute right to convert his case to a chapter 13 case. Id. at 367-68. There,
after filing his chapter 7 petition, the debtor made a number of
misstatements in his schedules. Id. at 368. Eventually, the debtor moved to
convert his case to a chapter 13 case. Id. at 368-69. The chapter 7 trustee and
a creditor filed objections on the basis of bad faith, and the bankruptcy
court denied the debtor’s request for conversion. Id. at 369-70.
On appeal, the Supreme Court analyzed the relevant provisions in
the Code. First, the Court noted that § 706(a) states that debtors may
convert a chapter 7 case to another chapter if the case has not previously
been converted. Id. at 370. Second, the Court referenced § 706(d), which
15 states that “a case may not be converted to a case under another chapter of
this title unless the debtor may be a debtor under such chapter.” Id. at 371.
Finally, the Court cited § 1307(c), which provides that a chapter 13 case
may be dismissed or converted “for cause” and “includes a nonexclusive
list of 10 causes justifying that relief.” Id. at 373.
The Court noted that none of the above statutes mention bad faith
conduct as a basis for cause. Id. Nevertheless, the Court held that the
debtor’s bad faith conduct with respect to his chapter 7 filing precluded
conversion to a chapter 13. Id. at 373-74. The Court relied heavily on the
fact that bankruptcy is meant for the “honest but unfortunate debtor,” and
that a failure to qualify as such a debtor precludes the ability to be a debtor
in a chapter 13 case. Id. at 374-75. Thus, the “text of § 706(d) . . . provides
adequate authority for the denial” of the motion to convert. Id. at 374.
In support of its holding, the Court also referenced “the broad
authority granted to bankruptcy judges to take any action that is necessary
or appropriate ‘to prevent an abuse of process’” stemming from § 105(a) of
the Code. Id. at 375. The Court also expressed concern that allowing a
chapter 7 debtor to convert to a chapter 13 case “may provide a debtor with
an opportunity to take action prejudicial to creditors” by, for example,
taking possession of property of the estate from the chapter 7 trustee. Id.
4. Law After Marrama, the Supreme Court decided Law v. Siegel, 571 U.S. 415
(2014). In Law, the Court analyzed whether the bankruptcy court had the
16 authority, under § 105(a), to surcharge the debtor’s exempt property based
on the debtor’s misconduct. Id. at 417.
The Court held that bankruptcy courts lack such authority. Id. at 420-
23. The Court explained that, although § 105(a) “confers authority to ‘carry
out’ the provisions of the Code,” the statute does not authorize courts to
take action in contravention of the Code. Id., at 421. Because a different
statute, § 522(k), prohibited the type of surcharge ordered by the
bankruptcy court, the Supreme Court held that the bankruptcy court
exceeded its authority by using § 105(a) in lieu of § 522(k). Id. at 421-22.
The Court also concluded that Marrama did not compel a different
result. Id. at 425-26. First, the Law Court distinguished Marrama by noting
that, in Marrama, the debtor failed to satisfy an “express condition” of
§ 706(d), namely, the ability to be a debtor under chapter 13. Id. Second, the
Court referred to the Marrama Court’s comments regarding § 105(a) as
dicta. Id.
5. Application of authorities to this case. Here, there is no dispute that § 707(a) governed dismissal of Debtor’s
case. At the time the court assessed whether dismissal was appropriate,
Debtor’s case had been converted to a chapter 7, such that dismissal was
governed by § 707. In addition, the court acknowledged that § 707(b) did
not apply to Debtor’s case, leaving only § 707(a).
17 As noted above, the court based its dismissal under § 707(a) on
Debtor’s failure to make complete and accurate disclosures in his
schedules, statements, and other court filings. 4
If Padilla and Sherman were the only authorities governing this case,
our analysis would be relatively straightforward. The specific misconduct
on which the court based its dismissal here – whether that conduct is
described as “bad faith” or not – is remedied by other provisions in the
Code, as further discussed below.
However, we must contend with Marrama, an intervening Supreme
Court decision. See Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re
Nichols), 10 F.4th 956, 962 (9th Cir. 2021) (intervening Supreme Court
decision overrules prior, contradictory Ninth Circuit authority). As
explained above, Marrama relied on language from §§ 706(a), (d), and
1307(c) to conclude that the debtor’s obfuscations during his chapter 7 case
4 In a memorandum supplementing the bankruptcy court’s indicative ruling, filed after Debtor initiated this appeal, the bankruptcy court noted that it did not dismiss Debtor’s case on the basis of bad faith, and instead dismissed the case based on Debtor’s failure to satisfy his disclosure requirements. However, under Padilla and Sherman, the relevant inquiry is whether a different Code provision covers the conduct that formed the basis for dismissal, not whether the court explicitly finds bad faith or not. As we discuss below, in this case, there is a different Code provision covering Debtor’s conduct. In addition, the court’s OSC explicitly stated that the court would be assessing whether Debtor’s failure to make accurate and complete disclosures constituted an abuse of the bankruptcy system. As we discuss below, there is little difference between dismissal on this basis and the dismissal based on the debtor’s misrepresentations in Sherman. Thus, the bankruptcy court’s contention notwithstanding, the court’s dismissal is appropriately analyzed under Padilla and Sherman. 18 precluded conversion to chapter 13, because such conduct constituted
cause to dismiss or convert a chapter 13 case under § 1307(c).
Although we are confronted with a conversion from a chapter 11 to a
chapter 7, as opposed to a conversion from chapter 7 to chapter 13 as was
the case in Marrama, it is difficult to ignore the similarities between the
statutes applicable here and the statutes at issue in Marrama. Like § 706(a),
which states that a chapter 7 “debtor may convert a case under this
chapter” unless certain factors not relevant to this appeal are present,
§ 1112(a) states that a chapter 11 “debtor may convert a case under this
chapter” unless certain factors not relevant to this appeal are present.
In addition, § 706(d) provides that “[n]otwithstanding any other
provision of this section, a case may not be converted to a case under
another chapter of this title unless the debtor may be a debtor under such
chapter.” Section 1112(f) sets forth identical language. Finally, § 1307(c)
provides for dismissal or conversion “for cause,” and provides a non-
exhaustive list of situations that qualify as “cause.” As discussed above,
§ 707(a) also allows dismissal “for cause,” and provides a non-exhaustive
list of situations that qualify as “cause.”
In Marrama, the language of these statutes, coupled with the Court’s
overarching conclusion that the Code is meant only for the “honest but
unfortunate debtor,” guided the Court’s holding that a chapter 13 case
could be dismissed based on bad faith conduct and, as a result, allowing a
chapter 7 debtor to convert to a chapter 13 case was essentially futile.
19 Of course, the Court’s general statement that bankruptcy is for the
“honest but unfortunate debtor” applies equally to chapter 7 debtors. And,
as is evident from the comparison of the statutes above, the statutes at issue
here are strikingly similar to the statutes at issue in Marrama.
We also note that the Ninth Circuit’s holding in Padilla represents a
minority view. 5 The Third, Fourth, Fifth, Sixth, Seventh, and Eleventh
Circuits all hold the opposite, namely, that “bad faith” is an appropriate
ground for dismissal under § 707(a). See Janvey v. Romero, 883 F.3d 406, 412
(4th Cir. 2018) (aggregating cases showing the split in circuit authority and
taking the majority view). At least two of the Circuits explicitly relied on
Marrama in reaching their conclusion that bad faith provides grounds for
dismissal under § 707(a). See Krueger v. Torres (In re Krueger), 812 F.3d 365,
373 (5th Cir. 2016); Piazza v. Nueterra Healthcare Physical Therapy, LLC (In re
Piazza), 719 F.3d 1253, 1263 (11th Cir. 2013). Several bankruptcy courts also
have disagreed with the holding in Padilla on the basis that Marrama sets
forth a contrary holding. See, e.g. In re Reece, 498 B.R. 72, 82 (Bankr. W.D.
Va. 2013); In re Aiello, 428 B.R. 296, 302 (Bankr. E.D.N.Y. 2010).
Nevertheless, we hold that we are bound by Padilla notwithstanding
the Supreme Court’s decision in Marrama. Marrama involved a conversion
from a chapter 7 to a chapter 13, i.e., from a case in which a trustee had
5 The Eighth Circuit’s approach to dismissal under § 707(a) is similar to the Ninth Circuit’s; the Eighth Circuit requires “extreme misconduct falling outside the purview of more specific Code provisions” to dismiss a chapter 7 case for “cause” under § 707(a). Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829, 832 (8th Cir. 1994). 20 control over the debtor’s assets and operations to a case in which the
debtor would have such control. In fact, the Marrama Court itself noted that
allowing a chapter 7 debtor an absolute right to convert to a chapter 13 case
would provide the debtor an opportunity to retake control of property of
the estate and potentially “take actions that would impair the rights of
creditors.” Marrama, 549 U.S. at 375 n.13.
In addition, the Ninth Circuit placed great importance on the
difference between a chapter 7 case, on the one hand, and chapter 11 or
chapter 13 cases, on the other hand. Padilla, 222 F.3d at 1192-93. As
explained by the Circuit, unlike chapter 7, chapters 11 and 13 allow debtors
not only to retain assets but to continue their relationship with creditors. Id.
And, while chapters 11 and 13 explicitly invoke good faith as a
requirement to plan confirmation, chapter 7 is silent with respect to good
or bad faith. Id.
Moreover, like the out-of-circuit courts referenced above, we
recognize the similarities between the statutes related to conversion of a
case out of chapter 7 and the statutes related to conversion into chapter 7.
However, there is a slight difference in the applicable statutes that
distinguishes § 707(a) from § 1112(b) or § 1307(c). Unlike § 707(a), § 1112(b)
and § 1307(c) allow for dismissal or conversion to a chapter 7 case for
cause. While this difference may seem elementary, it is integral to why
conversions to chapter 7 are different from conversions from chapter 7.
21 Specifically, the Code itself contemplates placing a debtor into a
chapter 7 case – even against the debtor’s will – as an alternative to
dismissal of a chapter 11 or chapter 13 case. As acknowledged by the Court
in Marrama, a bankruptcy court that finds that there is “cause” in the form
of bad faith for purposes of § 1307(c) may dismiss or convert the case to a
chapter 7. Marrama, 549 U.S. at 374. 6
We believe these distinctions place Padilla beyond the holding of
Marrama. Given that proceeding with a chapter 7 case is itself a remedy to
bad faith conduct in a chapter 11 or chapter 13 case, and because of the
different relationship a chapter 7 debtor has with the estate as compared to
chapter 11 and chapter 13 debtors, it is unlikely that Marrama overruled
Padilla.
Further, the Supreme Court’s decision in Law clarified some of the
language in Marrama that may have been interpreted to give bankruptcy
courts broader authority. Specifically, Law held that § 105(a) does not give
bankruptcy courts authority to contravene specific provisions in the Code.
As a result, Law actually bolsters the holding in Padilla, which essentially
provides that, where available, bankruptcy courts must apply specific
remedies set forth in the Code.
6In addition, the effect of the Marrama Court’s denial of the debtor’s request to convert his case to a chapter 13 was that debtor stay in a chapter 7 case, not dismissal of the case altogether. 22 Finally, although Padilla predates Marrama, Sherman was decided
approximately five months after Marrama. We presume the Circuit was
aware of Marrama when it decided Sherman.
For all these reasons, we hold that we remain bound by Padilla.
Under Padilla, the conduct that formed the basis of the OSC does not
qualify as “cause” under § 707(a) because other provisions in the Code
govern such conduct.
There is no meaningful distinction between the conduct at issue in
this case and the conduct at issue in Sherman. Here, the conduct that
formed the basis of the court’s dismissal was Debtor’s failure to provide
accurate or complete information in his filings. In Sherman, the conduct at
issue was the debtor’s misrepresentation of his liabilities and expenses in
his filings. Either way, both cases involve inaccuracy in disclosure.
Consequently, as in Sherman, the debtor’s conduct is governed by
§ 727(a)(4), which provides for the denial of a debtor’s discharge as a
remedy in such cases. As a result, we are bound by the holding of Sherman
and must reverse the court’s holding with respect to the general “cause”
provision of § 707(a). 7
7 We appreciate that, under the unusual circumstances of this case, had this case remained in a chapter 11 prior to conversion, the bankruptcy court may have had authority to dismiss Debtor’s case under § 1112(b) based on the conduct outlined in the OSC. However, we cannot ignore the Conversion Order. Upon converting Debtor’s case, the applicable statute related to dismissal became § 707(a). Our application of that statute is controlled by the Ninth Circuit’s holding in Padilla. 23 B. The bankruptcy court erred in dismissing Debtor’s case under § 707(a)(1). The bankruptcy court also referenced § 707(a)(1) as a legal basis for
dismissing Debtor’s case. Unlike the general “cause” provision of § 707(a),
the holding of Padilla would not apply to a dismissal under § 707(a)(1)
because § 707(a)(1) is one of the explicitly enumerated types of “cause”
contemplated by § 707(a).
As stated above, § 707(a)(1) allows for dismissal of a chapter 7 case
where there is “unreasonable delay by the debtor that is prejudicial to
creditors.” Here, the court held that Debtor unreasonably delayed adequate
disclosures, and that such delay was prejudicial to creditors because it:
prevent[ed] them from knowing Debtor’s true ability to pay any dividend to creditors (or at least prevent[ed] creditors from obtaining such knowledge without the expense and delay of attempting to extract discovery out of Debtor, which for most creditors would mean throwing good money after bad, given the high cost and low present value of any discovery in attempting eventually to collect their claims). Dismissal Order, p. 6.
The Panel could not find, and the bankruptcy court did not reference,
any cases regarding whether § 707(a)(1) applies to conduct that delayed a
case under a different chapter prior to conversion of the case to a chapter 7.
In fact, there is a dearth of case law on § 707(a)(1) altogether.
As a preliminary note, our analysis of § 707(a)(1)-(3) necessarily
differs from our analysis of the general reference to “cause” in § 707(a). As
24 discussed above, the general reference to “cause” in § 707(a) is broad, and
interpretation of that statute is mostly limited by binding Circuit
authorities and considerations regarding the nature of chapter 7 cases
compared to other chapters.
However, where Congress provides specific examples of abuse that
may lead to dismissal, our interpretation is narrowed and limited by the
language and context of the statute itself. In addition, we continue to be
guided by the general principles related to chapter 7 cases outlined above,
namely, that dismissal of a chapter 7 case is an extraordinary remedy, and
that chapter 7 contains alternative remedies for courts and parties in
interest to police abuse by debtors. See, e.g., § 727(a).
“The starting point in discerning congressional intent is the existing
statutory text.” Lamie v. U. S. Tr., 540 U.S. 526, 534 (2004). “[W]hen the
statute’s language is plain, the sole function of the courts – at least where
the disposition required by the text is not absurd – is to enforce it according
to its terms.” Id. (internal quotation marks omitted).
However, “[w]here statutory language is ambiguous, courts may
look beyond the specific statute itself to the context in which it is used and
to relevant legislative history, if it exists.” Ryan v. United States (In re Ryan),
389 B.R. 710, 713 (9th Cir. BAP 2008). “Our duty, in matters of statutory
construction, is to give effect to the intent of Congress.” A-Z Int’l v. Phillips,
323 F.3d 1141, 1146 (9th Cir. 2003) (internal quotation marks and citations
omitted).
25 On its face, § 707(a)(1) does not specify whether “delay” includes
preconversion delay of the case under a different chapter. In other words,
whether its application is broad or limited is ambiguous.
On the one hand, it may be argued that Congress refrained from
adding detail to this statute because it intended the statute to have the
broadest possible application. However, other considerations lead us to a
different conclusion.
Pursuant to § 103(b), “[s]ubchapters I and II of chapter 7 of this title
apply only in a case under such chapter.” Section 707(a)(1) is part of
subchapter I of chapter 7. In addition, under § 103(g), subject to § 901,
subchapter I of chapter 11, which includes § 1112(b), applies only to
chapter 11 cases. Similarly, § 103(j) provides that all statutes under chapter
13 apply only to cases under chapter 13.
Sections 707, 1112, and 1307 are not identical. Although some
subsections in each statute contain similar language, ultimately, Congress
took care to draft a different statute applicable to the dismissal or
conversion in each section.
For example, like § 707(a)(1), § 1307(c)(1) also allows for dismissal
based on “unreasonable delay by the debtor that is prejudicial to
creditors.” However, § 1112 contains no such language. Instead, unlike
§ 707(a)(1) and § 1307(c)(1), § 1112(b) contains different examples of cause
that are unique to a chapter 11 case, such as a debtor’s mismanagement of
the estate or inability to confirm a plan.
26 Taking Congress’s decision to draft separate statutes of dismissal
related to each chapter in conjunction with § 103’s instruction to apply
§ 707(a)(1) only to chapter 7 cases, we conclude that Congress likely
intended § 707(a)(1) to apply only to conduct that delays a chapter 7 case.
To be clear, we disagree with Debtor’s contention that the conduct
must occur after conversion to chapter 7. Rather, the court must analyze
whether the delay caused by the debtor delayed the chapter 7 case, and
whether such delay caused prejudice to creditors in the chapter 7 context.
This is the most straightforward interpretation of the statute, and
ensures that courts at all times apply the relevant statute of dismissal or
conversion based on the chapter of the debtor’s case. In addition, because
debtors under different chapters bear different responsibilities, it would
make little sense to read “delay” under § 707(a)(1) as inclusive of conduct
that would delay a chapter 11 case, but not a chapter 7 case.
On this point, Debtor’s case is illustrative. Much of the court’s
Dismissal Order focused on Debtor’s failure to provide adequate
disclosures in his budget motion. However, a budget motion is not
required in chapter 7 cases, and Debtor’s failure to timely submit
information in connection with that motion would be irrelevant in a
chapter 7 case.
Nor does our interpretation deprive bankruptcy courts of the ability
to police debtors’ behavior within the confines of the Code. See Law, 571
U.S. at 421-22. Where the debtor causes “unreasonable delay” while in a
27 chapter 11 or 13 case, the court may assess whether to dismiss or convert
the debtor’s case under the rubric provided in § 1112(b) or § 1307(c),
respectively. Congress has equipped courts with specific statutes
applicable to specific chapters, as well as other tools applicable to all
chapters, such as the ability to sanction certain conduct.
The bankruptcy court’s Dismissal Order noted that an interpretation
such as this one would excuse a debtor’s prior bad acts. We disagree.
Courts have the ability to police a debtor’s preconversion delay at the
point of conversion. At that time, if the court has discretion over the
conversion of a case, then the court has the opportunity to deny a request
for conversion or order dismissal instead. If the court does not have
discretion over conversion and must convert a case because it is required to
by statute, 8 then allowing the court to subvert a debtor’s absolute right to
conversion by dismissing a case immediately after conversion would
violate the Code.
To harmonize the Code and address all of the concerns above, we
hold that § 707(a)(1) requires an analysis of whether the debtor caused
unreasonable delay to the chapter 7 case that was prejudicial to creditors.
As it stands, the bankruptcy court’s analysis was limited to a discussion of
delay to Debtor’s chapter 11 case. Nothing in the record demonstrates a
8 We take no position on whether a debtor has an absolute right to conversion under § 1112(a). Here, the court granted Debtor’s request for a conversion, and we need not decide whether such conversion was required. 28 clear pathway of causation linking the conduct the court based its dismissal
on to delay in Debtor’s chapter 7 case. In fact, at the time the court
dismissed Debtor’s case, the case had been in chapter 7 for approximately
two weeks. Nevertheless, we leave any determination regarding whether
Debtor’s conduct caused unreasonable delay to the chapter 7 case to the
bankruptcy court. 9
C. The Dismissal Order did not violate Debtor’s due process rights. Due process requires notice “reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of the action
and afford them an opportunity to present their objections.” Mullane v.
Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950). “The notice must be
of such nature as reasonably to convey the required information . . . and it
must afford a reasonable time for those interested to make their
appearance.” Id. (citation omitted); see also Memphis Light, Gas & Water Div.
v. Craft, 436 U.S. 1, 14 (1978) (“The purpose of notice under the Due Process
Clause is to apprise the affected individual of, and permit adequate
preparation for, an impending ‘hearing.’”).
Debtor asserts that he was deprived of due process because the court
did not provide adequate notice of its intent to dismiss Debtor’s case under
§ 707(a). In Debtor’s view, because the OSC was entered when Debtor’s
case was in a chapter 11, after the court converted Debtor’s case, Debtor did
9 Of course, any conduct by Debtor that causes delay moving forward may also trigger dismissal of Debtor’s case under § 707(a)(1). 29 not have an adequate opportunity to respond to the OSC using standards
applicable to a chapter 7 case.
We disagree. The record demonstrates that Debtor had ample notice
of the court’s intent to dismiss his case based on the misconduct outlined in
the OSC, as well as in several oral and written admonishments before entry
of the OSC. Upon entry of the Conversion Order, the court explicitly
warned that Debtor’s case remained subject to dismissal. The Conversion
Order was entered 15 days before the hearing on the OSC. Debtor had the
opportunity to, and in fact did, respond to the OSC, including by making
substantially the same arguments Debtor now makes before this Panel.
Under these circumstances, we cannot hold that the court did not
“afford a reasonable time” for Debtor to “make [his] appearance.” Mullane,
339 U.S. at 314. Consequently, the record does not demonstrate a due
process violation.
CONCLUSION
The bankruptcy court erred in dismissing Debtor’s case under
§ 707(a). We therefore REVERSE the court’s dismissal and REMAND for
the court to assess whether dismissal is appropriate under § 707(a)(1) based
on the standard set forth herein. The Injunction Order staying the
Dismissal Order will dissolve 14 days after entry of a judgment in
accordance with this Memorandum.