Gallagher v. Cohen

659 B.R. 57

Stephen Ormsby GALLAGHER, II, Plaintiff, v. Merrill COHEN, Defendant.

Civ. No. DLB-23-3135

United States District Court, D. Maryland

Signed April 15, 2024

Merrill Cohen, Harbeson, DE, Appellee, Pro Se.

Steven Harold Greenfeld, Law Offices of Steven H. Greenfeld, LLC, Gaithersburg, MD, for Defendant.

MEMORANDUM OPINION

Deborah L. Boardman, United States District Judge

After Stephen Ormsby Gallagher, II lost his job, he filed for Chapter 7 bankruptcy. After Gallagher started a more lucrative job, he moved to dismiss his own case to avoid losing his home to his creditors. To justify dismissal, he accused himself of abusing the bankruptcy process. The U.S. Bankruptcy Court for the District of Maryland agreed that Gallagher was abusing the bankruptcy process but denied his motion to dismiss anyway. Gallagher appealed. ECF 1. He also appealed a 10-month-old order approving the application of Merrill Cohen, the Chapter 7 Trustee, for attorney's fees and expenses (the "Compensation Order"). Id. The appeal is fully briefed. ECF 8, 12, 19. No oral argument is necessary. See Fed. R. Bankr. P. 8019. Under these perplexing circumstances, Gallagher's appeal of the Compensation Order is dismissed for lack of jurisdiction and the denial of the motion to dismiss is vacated.

I. Background

On August 1, 2022, Gallagher (representing himself) filed a Voluntary Petition for Relief pursuant to Chapter 7 of the U.S. Bankruptcy Code. ECF 1 in In re Gallagher, No. 22-14180-MCR. "In a Chapter 7 proceeding, an individual debtor receives an immediate unconditional discharge of personal liabilities for debts in exchange for the liquidation of all non-exempt assets." Schultz v. United States, 529 F.3d 343, 346 (6th Cir. 2008). At the time Gallagher filed for Chapter 7 bankruptcy, he was unemployed. ECF 20, at 18 in In re Gallagher. His most significant asset was his house at 1319 Grandin Avenue in Rockville, Maryland. See ECF 34, at 1, 3 in In re Gallagher. The bankruptcy court appointed Cohen to serve as Chapter 7 Trustee of the bankruptcy estate. ECF 6 in In re Gallagher.

At the end of August, Gallagher submitted Form 122A-1, a statement of his current monthly income. ECF 36 in In re Gallagher. According to that statement, his average monthly income in the six full months preceding his filing for bankruptcy was $4,660.47 and his annual income was $55,925.68. Id. Because Gallagher's annual income was below $75,214—the median income for a one-person household in Maryland—the form indicated that his income did not give rise to a presumption that his Chapter 7 filing was an abuse of the bankruptcy process. Id.

As the case advanced, the bankruptcy court authorized Cohen to retain counsel. ECF 60 in In re Gallagher. He hired Stephen H. Greenfeld of Cohen Baldinger & Greenfeld, LLC. Id.

On November 8, 2022, Gallagher accepted an offer for a job with an annual salary of $110,000. ECF 70-1, at 1 in In re Gallagher. So he moved to convert his case from Chapter 7 to Chapter 13. ECF 70 in In re Gallagher. "[I]n a Chapter 13 proceeding, a debtor commits to repayment of a portion of his or her financial obligations over a specified period of time (generally three to five years) in exchange for retaining non-exempt assets and receiving a broader discharge of debt than is available under Chapter 7." Schultz, 529 F.3d at 346. The bankruptcy court granted the motion. ECF 72 in In re Gallagher.

On December 13, 2022, Greenfeld filed an application for approval of fees and expenses incurred while the case was under Chapter 7—that is, prior to the conversion to Chapter 13. ECF 76 in In re Gallagher. Gallagher opposed the application. ECF 85 in In re Gallagher. On January 9, 2023, the bankruptcy court issued the Compensation Order, which approved the application and ordered Gallagher to pay $1,615.00. ECF 87 in In re Gallagher. To date, Gallagher has not paid.

On June 2, 2023, Gallagher lost his job. ECF 3-12, ¶ 1. He remained unemployed until July 24, 2023, when he began a new job with higher pay: $137,500 per year. Id. ¶ 2.

Throughout this period of time, Gallagher proposed several Chapter 13 bankruptcy plans to repay his creditors. See, e.g., ECF 79 & 103 in In re Gallagher. The bankruptcy court denied them. See, e.g., ECF 101 & 119 in In re Gallagher. For that reason, on August 25, 2023, the bankruptcy court reconverted Gallagher's case from one under Chapter 13 to one under Chapter 7. ECF 121 in In re Gallagher.

On September 17, 2023, Gallagher filed a new Form 122A-1, Chapter 7 Statement of Monthly Income and a Form 122A-2, Means Test Calculation (collectively, "the Amended Means Test") based on the income from his latest job. See ECF 3-10. The form directed him to identify "the average monthly income that you received from all sources, derived during the 6 full months before you file [sic] this bankruptcy case." Id. at 1. Based on his pay in August 2023, Gallagher reported his monthly income as $11,489.36 and his annual income as $137,872.28. Id. at 2. The median family income for a one-person household in Maryland is $75,214.00. Id. So Gallagher checked that his income was higher than the median income for a household of his size. Id. After further calculations, Gallagher's form indicated that his income was so high that it gave rise to a presumption of abuse of the bankruptcy process. See id. at 4, 11. Because Gallagher's income created a presumption of abuse, Gallagher had the opportunity to report any special circumstances that would justify his income and expenses. See id. at 12. He reported that he had none. Id.

On September 28, Gallagher moved to dismiss his Chapter 7 case based on the presumption of abuse his Amended Means test indicated. ECF 3-12. On October 3, the Clerk of Court confirmed that the information Gallagher had filed indicated that a presumption of abuse had arisen. ECF 3-11.

On November 1, 2023, the bankruptcy court held a hearing on Gallagher's motion to dismiss. ECF 3-17; ECF 4. At the outset, the parties agreed that there were no facts in dispute. ECF 3-17; ECF 4, at 4:17-24. To double check that the parties were in agreement about the facts, the bankruptcy court recited the material background, highlighting that "after completing the means test analysis, the means test indicates that there is a presumption of abuse based on [Gallagher's] disposable income." ECF 4, at 5:3-12. Then the bankruptcy court asked each party whether the court's recitation of the facts was correct and complete. Id. at 5:10-13, 18-19. The parties agreed that it was. Id. at 5:14, 5:20-6:18, 6:21-22. Both parties also accepted the bankruptcy court's framing of the sole question in dispute: "whether a case should be dismissed when the means test indicates that there is a presumption of abuse." Id. at 4:8-16. Ultimately, the bankruptcy court determined that even when the means test gives rise to a presumption of abuse, the bankruptcy court retains the discretion to deny a motion to dismiss based on that presumption of abuse. ECF 3-17. Applying that interpretation of the law to the case at hand, the court denied Gallagher's motion to dismiss because Gallagher had enjoyed the benefits of the bankruptcy process for over a year, the Trustee had been administering the case, and Gallagher's creditors would be prejudiced by dismissal. Id. On November 7, the bankruptcy court entered a corresponding order denying Gallagher's motion to dismiss his Chapter 7 bankruptcy case. ECF 3-18.

On November 17, Gallagher appealed the bankruptcy court's denial of his motion to dismiss. ECF 1. On January 13, 2024, Gallagher filed his opening brief. ECF 8. On February 13, the Trustee filed his opposition. ECF 12. On March 9, Gallagher replied. ECF 19.

Meanwhile, on January 3, 2024, the Trustee moved to sell Gallagher's house. ECF 159 in In re Gallagher. So on January 16, 2024, Gallagher filed an emergency motion to stay the bankruptcy proceedings pending this appeal. ECF 9. On March 6, this Court held a hearing, determined that Gallagher specifically sought to prevent the sale of his property while the appeal was pending, and found that Gallagher's appeal had divested the bankruptcy court of jurisdiction over the Trustee's motion to sell the property. So the Court denied the motion as moot. ECF 17.

The bankruptcy court proceedings continued as to matters not involved in the appeal. On February 13, 2024, the Trustee had moved to strike Gallagher's Amended Means Test on the ground that Gallagher had reported his August 2023 income when the form required that he report only his income in the six months before he filed for bankruptcy. ECF 167 in In re Gallagher. On March 27, the bankruptcy court held a hearing on the motion. ECF 172 in In re Gallagher. On March 28, 2024, the bankruptcy court granted the motion to strike. ECF 173 in In re Gallagher.

II. Standard of Review

28 U.S.C. § 158(a) authorizes appeals from the bankruptcy court to the district court. See R&J Contractor Servs., LLC v. Vancamp, 652 B.R. 237, 239, 241 (D. Md. 2023). In an appeal from the bankruptcy court, the district court acts as an appellate court, In re Modanlo, 342 B.R. 238, 241 (D. Md. 2006), reviewing the bankruptcy court's findings of fact for clear error and its conclusions of law de novo, Binswanger Cos. v. Merry-Go-Round Enters., Inc., 258 B.R. 608, 611 (D. Md. 2001) (citing First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir. 1995)). A factual finding is clearly erroneous if "the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed." Vancamp, 652 B.R. at 241 (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). "The district court may affirm, modify, or reverse a bankruptcy judge's order, or remand with instructions for further proceedings." Vancamp, 652 B.R. at 241 (citing Fed. R. Bankr. P. 8013; In re White, 128 F. App'x 994, 999 (4th Cir. 2005)).

III. Discussion

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