In re Fishel

583 B.R. 474

IN RE: Victoria Sue FISHEL, Debtor.

Case No.: 17–14180–13

United States Bankruptcy Court, W.D. Wisconsin.

Signed March 30, 2018

Michael S. Georg, Debt Advisors, SC, 2600 N. Mayfair Road, Suite 700, Milwaukee, WI 53226, Attorney for Debtor.

Leslie Brodhead–Griffith, Office of Standing Chapter 13 Trustee, 131 W. Wilson Street, Suite 1000, Madison, WI 53703–3260, Attorney for Chapter 13 Trustee.

MEMORANDUM DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

Victoria Sue Fishel ("Debtor") is a consumer debtor with a car loan, tax debt, credit card and charge account debt, and a small amount of medical bills. She also has student loans dating back almost seven years. She is an above-median debtor with disposable income.

To address her debts, she filed a Chapter 13 petition. Debtor's bankruptcy schedules list unsecured, nonpriority debts in the amount of $147,891.30, including student loan debt of $16,184.78. The schedules also list certain other student loans as owed in unknown amounts. Debtor's Plan proposes to devote all disposable income for five years toward payment of her creditors.

The Trustee objects to confirmation of the Plan based on an issue of eligibility. The Trustee points to scheduled student loan debt in the amount of $132,000. The servicer for the U.S. Department of Education ("DOE"), on the other hand, filed a claim for $341,136. Attached to the claim were itemizations of amounts and a statement that the servicer had no copies of any promissory notes because it did not receive them from "the originating lender or prior servicer." The Trustee points out in his objection that the Proof of Claim filed by the DOE contains insufficient information to determine whether some of its claim overlaps with the claims the Debtor scheduled.

DISCUSSION

1. Jurisdiction

The Trustee argues that, based on the DOE claim, the noncontingent, liquidated unsecured claims exceed the statutory amount of $394,725 set forth in 11 U.S.C. § 109(e). The Trustee thus asserts the Debtor is not eligible to be a debtor in a Chapter 13.

There is a split of authority among the courts that have considered this question. The minority view holds that Chapter 13 eligibility requirements under section 109(e) are jurisdictional. The majority view holds that eligibility is not jurisdictional. Instead, "the eligibility requirements of § 109(e) create a gateway into the bankruptcy process, not an ongoing limitation on the jurisdiction of the bankruptcy courts." Glance v. Carroll (In re Glance) , 487 F.3d 317, 321 (6th Cir. 2007).

The Seventh Circuit has not yet ruled on whether section 109(e) is jurisdictional or merely sets forth a debtor's eligibility. Courts in the Seventh Circuit have interpreted other subsections of 109 in a manner consistent with the majority view. The Northern District of Illinois considered eligibility under section 109(h) and ruled that "eligibility to be a debtor under a particular chapter of the Bankruptcy Code is not the equivalent of a jurisdictional question." In re Arkuszewski , 550 B.R. 374, 377–78 (N.D. Ill. 2015) (citing In re Lane , No. 12-10718-M, 2012 WL 1865448, at *5 (Bankr. N.D. Okla. May 22, 2012) ). Rather, the filing of a petition "sets in motion a series of events" and the "court may properly dismiss a petition at a later date if it is determined that the debtor is ineligible under § 109." Id. (emphasis supplied). Jurisdiction is determined by good-faith allegations rather than by what the evidence eventually might show. St. Paul Mercury Indemnity Co. v. Red Cab Co. , 303 U.S. 283, 288–90, 58 S.Ct. 586, 82 L.Ed. 845 (1938). The Court agrees with the majority view. This Court has jurisdiction.

2. Conversion or Dismissal

Having jurisdiction, the Court has authority to evaluate this case under section 1307(c). Section 1307(c) instructs the court "may convert ... or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including" a series of scenarios that are not relevant here. (Emphasis supplied).

Eligibility is not expressly listed as "cause" under the statute. The threshold question therefore is whether the list in section 1307(c) is exhaustive. If not, then the Court will need to determine whether lack of eligibility constitutes cause to dismiss or convert this case.

The Seventh Circuit has consistently ruled that the list in section 1307(c) is non-exhaustive. In In re Love , the Seventh Circuit dismissed a case under section 1307(c) for lack of good faith, which is not explicitly listed in the statute. 957 F.2d 1350, 1354 (7th Cir. 1992). See also In re Smith , 848 F.2d 813, 816 n.3 (7th Cir. 1988). The Southern District of New York has articulated it more directly: "This list is ‘not exhaustive,’ but exemplary." In re Jensen , 425 B.R. 105, 109 (Bankr. S.D.N.Y. 2010). Collier's has also weighed in on the matter: "The grounds enumerated in subsections 1307(c)(1) through (11) are not exhaustive." 8 Collier on Bankruptcy ¶ 1307.04 (16th ed.).

The Court must therefore determine whether, based on the facts here, the apparent lack of eligibility under section 109(e) constitutes "cause" for conversion or dismissal. Section 1307 gives the Court discretion to dismiss but does not compel the Court to dismiss under any scenario.

Although the Court "has the power," it is not necessarily compelled to exercise that authority.

Once again, there is no decision from the Seventh Circuit on whether lack of section 109(e) eligibility constitutes "cause" under section 1307 and whether dismissal is therefore mandated. Several lower courts have ruled lack of 109(e) eligibility constitutes cause. For example, after determining an unsecured claim was non-contingent and liquidated, the Northern District of Indiana ruled that "[d]ebtor's failure to fulfill the eligibility requirements of 11 U.S.C. § 109(e) constitutes cause, as required by 11 U.S.C. § 1307(c), to dismiss this case." In re McGovern , 122 B.R. 712, 717 (Bankr. N.D. Ind. 1989). In In re Day , the Bankruptcy Court dismissed a case for lack of eligibility under section 109(e). It did not reach section 1307. After parsing through the definition of "secured," the Seventh Circuit determined some debts to be unsecured, therefore putting the debtor over the 109(e) limits. The Court affirmed the dismissal. 747 F.2d 405, 407 (7th Cir. 1984).

The list in section 1307(c) contains causes such as unreasonable delay, failure to file a plan, and failure to make plan payments. Each of these establishes a volitional act—or failure to act—by the debtor. Even if the Court determines cause exists under 1307(c), it may still decline to convert or dismiss. Under section 1307, "the court is not required to dismiss or convert the case if it concludes that the debtor is appropriately entitled to Chapter 13 relief and has the ability to confirm and consummate a plan." W. Homer Drake, et al., Chapter 13 Practice & Procedure § 20:5 (2017). The Court's analysis on whether to convert or dismiss must hinge on what is in the best interests of creditors and the estate. Id.

In re Santana presented a motion to dismiss for ineligibility under section 109(g)(2). 110 B.R. 819 (Bankr. W.D. Mich. 1990). The court refused to dismiss despite what some may characterize as an unambiguous statute reasoning that such an application to the facts before the court "would produce, if not an absurd result, then certainly one which goes far beyond the scope of the abuse which it appears Congress was attempting to cure." Id. at 821. As the court reasoned in In re Manalad , "[n]owhere in Title 11 is there a provision setting forth the remedy for failure to comply" with sections 109(e) and (h). 360 B.R. 288, 295 (Bankr. C.D. Cal. 2007). Further, "the filing of a petition in bankruptcy court seeking assistance in the restructuring of debtor-creditor relations is at the core of federal bankruptcy power." Id. at 299 (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. , 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) ).

As noted by the court in In re Pratola , the debt limits in section 109(e) expanded chapter 13 eligibility to a larger group of individuals with regular income. In re Pratola , 578 B.R. 414, 419–20 (Bankr. N.D. Ill. 2017). The limits were intended to permit small business owners and other individuals "for whom a chapter 11 reorganization is too cumbersome a procedure to proceed under chapter 13 ...." H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977).

It is a recognized canon of statutory construction that "[j]udicial interpretation of a statute outside its literal terms is appropriate only when a literal application of the statute would lead to an absurd or unconstitutional result." In re Stuart , 297 B.R. 665, 668 (Bankr. S.D. Ga. 2003). This canon has been repeatedly applied by courts in deciding whether to exercise the discretion granted in determining whether to dismiss a case.

For instance, in Shovlin v. Klaas , the Western District of Pennsylvania affirmed a bankruptcy court's refusal to dismiss where the debtor had materially defaulted. There, debtor missed a payment, which caused her to be short at the end of her 60–month plan. The Trustee argued the shortage amounted to a material default under section 1307(c)(6). Even so, the court reasoned the material default did not significantly alter the distributions to creditors and declined to dismiss. On appeal, the Third Circuit affirmed that holding. 539 B.R. 465, 471 (W.D. Pa. 2015), aff'd sub nom. Shovlin v. Klaas (In re Klaas) , 858 F.3d 820 (3d Cir. 2017).

The Northern District of Illinois has followed a similar line of reasoning. In In re Grant , the court emphasized the discretionary nature of section 1307 and reasoned "[g]enerally, a court will find conversion or dismissal appropriate when efforts to cure a default are unsuccessful and the plan cannot be modified so as to make it feasible for completion." 428 B.R. 504, 507 (Bankr. N.D. Ill. 2010). While ...