The Fourth Circuit invalidated a local housekeeping rule that permitted bankruptcy judges to dismiss chapter 13 cases without a hearing.
The debtor filed a chapter 13 petition but did not begin making plan payments within 30 days, as required by Section 1326(a). In the Eastern District of Virginia, Local Bankruptcy Rule 3070-1(C) follows the statute by requiring a debtor to begin plan payments within 30 days of filing.
If “payments [by a debtor] are not received as required,” the local rule goes on to say that the chapter 13 trustee “shall certify” the debtor’s failure to comply with the statute. The local rule then states that “the Clerk shall enter an order dismissing the case” on receipt of the certification.
In the case on appeal, the chapter 13 trustee filed a certification stating that the debtor had not begun making payments. The trustee separately filed a motion to dismiss and a notice of motion saying there would be a hearing on February 9 to consider dismissal, with responsive papers due five days before the hearing. Utilizing the local rule permitting dismissal on certification that the debtor had not begun making payments, the bankruptcy court entered an order dismissing the case on January 17, more than three weeks before the scheduled hearing.
The debtor appealed, but the district court affirmed, ruling that dismissal was proper under the local rule. When the debtor appealed again, the Fourth Circuit appointed Paula S. Beran of Richmond, Va., as amicus counsel for the debtor, who was appearing pro se.
Circuit Judge Allyson K. Duncan reversed the lower courts, holding that the local rule was invalid because it was inconsistent with Section 1307.
If a debtor fails to commence making timely plan payments, Section 1307(c)(4) provides that the court may, on “request” of a party in interest, dismiss or convert the case “after notice and a hearing.”
Judge Duncan read the “plain text” of the statute as permitting dismissal “only after an opportunity for a hearing.” She rejected the trustee’s contention that Section 1307 did not apply because dismissal was not based on a motion but rather on the court’s own authority. She said that the certification constituted a “request” invoking Section 1307.
Bankruptcy Rule 9029(a), Judge Duncan said, allows local rules that are “consistent with . . . Acts of Congress.” “[W]e must reverse,” she said, because the local rule allowed dismissal “without the hearing that [Section] 1307 requires.”
The opinion does not discuss the rule of construction in Section 102(1)(A), which defines “after notice and a hearing” to mean notice or hearing that “is appropriate in the particular circumstances.” Section 102(1)(B) permits dispensing with a hearing if one “is not requested timely.”
In the case at hand, Section 102(1) would not justify the lack of a hearing because dismissal occurred before the deadline for filing answering papers. Presumably, therefore, the local rule may remain valid if the clerk were to dismiss on certification, but only if the debtor did not file responsive papers by the deadline.
Judge Duncan’s opinion is the latest of several recent decisions showing the Fourth Circuit to be a debtor-friendly venue, despite its overall reputation for being conservative.
In the last year, for example, the Richmond-based court held that events after a chapter 7 filing cannot undermine a homestead exemption (Bellinger v. Buckley, 17-2138, 2018 BL 164297 (4th Cir. May 9, 2018)); a debtor in some circumstances can invoke the exemptions from his or her previous domicile (Sheehan v. Ash, 17-1867, 2018 BL 159093 (4th Cir. May 4, 2018)); and a chapter 13 debtor may strip off a subordinate mortgage even if the lender has not filed a claim (Burkhart v. Community Bank of Tri-County (In re Burkhart), 886 F.3d 434 (4th Cir. March 29, 2018)); the Fourth Circuit upheld a bankruptcy court’s denial of the principal creditor’s motion to dismiss a solvent individual’s chapter 7 filing (Janvey v. Romero, 883 F.3d 406 (4th Cir. Feb. 21, 2018)); the majority on a panel upheld a debtor’s ability to deduct pension plan contributions from disposable income (Gorman v. Cantu, 713 Fed. Appx. 200 (4th Cir. Dec. 18, 2017)); the Fourth Circuit widened a circuit split by holding that a finding of “indubitable equivalent” in a cramdown opinion is reviewed for clear error, not de novo (Bate Land Co. LP v. Bate Land & Timber LLC (In re Bate Land & Timber LLC), 877 F.3d 188 (4th Cir. Dec. 6, 2017)); the court held that a deposit into one’s own bank account is not a “transfer” within the meaning of Section 101(54) and therefore provides no basis for a fraudulent transfer with actual intent to hinder or delay creditors under Section 548(a)(1)(A) (Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205 (4th Cir. Jan. 31, 2017)); and res judicata does not bar a debtor from objecting to allowance of unsecured claims after confirmation of a chapter 13 plan (LVNV Funding LLC v. Harling, 852 F.3d 367 (4th Cir. March 17, 2017).