In Perlin v. Hitachi Capital Am. Corp (In re Perlin),[1] the U.S. Court of Appeals for the Third Circuit affirmed a bankruptcy court’s order denying a creditor’s motion to dismiss the debtors’ chapter 7 petition. Creditor Hitachi Capital moved to dismiss the Perlins’ chapter 7 petition pursuant to 11 U.S.C. §707(a), which permits dismissal after notice and hearing only for cause. The statute furnishes three nonexclusive examples of cause, but does not include bad faith among them. Hitachi Capital alleged that the petition was filed in bad faith, finding the debtors’ substantial income and expenses especially objectionable. The bankruptcy court refused to consider the debtors’ high income and expenses, reasoning that the presumption of abuse provisions in the context of the means test in 11 U.S.C. §707(b) precluded such an examination in adjudging a motion to dismiss pursuant to 11 U.S.C. §707(a).[2] It found that other indicia of bad faith, e.g., debtors’ lack of truthfulness with the court and creditors and manipulative conduct, were absent. Consequently, the bankruptcy court found no bad faith and denied Hitachi Capital’s motion.
Upon the appellate challenge, the court of appeals affirmed the bankruptcy court’s decision based on the case’s facts and circumstances, but diverged from its construction of the Bankruptcy Code, particularly the dismissal for cause provision in 11 U.S.C. §707(a) and the means-test provisions of 11 U.S.C. §707(b), as well as the topics of the debtors’ good faith and their ability to pay as shown by their income and expenses.
The appellate review first addressed the issue of whether the specific financial provisions of the means test, with its presumption of abuse under certain circumstances, precluded an examination of a debtor’s income and expenses in adjudging a dismissal action under the “cause” basis in 11 U.S.C. §707(a). It found that the concept of negative implication, invoked by the bankruptcy court, did not apply in a comparison of two statutory provisions that were not so closely related as to comprise, together, a commonly associated group or series that went hand in hand. In this case, the applications and history of 11 U.S.C. §707(a) and 11 U.S.C. §707(b) were so distinguishable as not to implicate the concept. The appeals court observed that the former was enacted far earlier, and for wider application to all filings, than the latter, with its more focused application to filings primarily involving consumer debts. Furthermore, nothing in the legislative history of BAPCPA indicates that the changes to 11 U.S.C. §707(b) imply anything regarding dismissal for cause under 11 U.S.C. §707(a). Consequently, the two statutory sections were not so closely related as to give rise to expressio unius est exclusio alterius, or negative implication.
Next, the court addressed the issue of whether a decision to dismiss for cause may properly consider a debtor’s income and expenses. It concluded, based especially on legislative history, that such a decision may consider a debtor’s ability to repay his debts, as shown by his income and expenses in assessing a debtor’s good faith, but only in company with other factors. The court provided some guidelines for the necessarily fact-intensive good-faith inquiry. For example, a finding of bad faith should be made cautiously and be carefully limited to debtor’s conduct that sinks as low as fraud, misconduct or gross negligence. Examples of such conduct may include concealment or misrepresentation of assets or income, artificially inflating expenses or making every effort to avoid repaying debts when a debtor is capable of at least partial repayment.
Some may find the reasoning of the appeals court less than satisfactory. Debtors may be troubled by the apparent grant to creditors of two opportunities to contest a chapter 7 petition for financial reasons: first, by the means-test provisions of 11 U.S.C. §707(b), and second, by the ability to pay factors that may be considered in a bad-faith challenge for cause pursuant to 11 U.S.C. §707(a). Others may perceive an expressio unius est exclusio alterius difficulty with the apparent duplication of the bad-faith basis for abuse found in 11 U.S.C. §707(b)(3) and the bad-faith basis-for-cause that the appeals court found in 11 U.S.C. §707(a). Presumably, the court would find no negative implication difficulty, based on the reasoning described above, that 11 U.S.C. §707(a) and 11 U.S.C. §707(b) are so distinguishable in so many ways that the issue is avoided.
[1] No. 06-3199, 2007 U.S. App. LEXIS 18461 (3d Cir. Aug. 3, 2007).
[2] The court applied a traditional rule of statutory interpretation, expressio unius est exclusio alterius, otherwise known as the doctrine of negative implication. Under this rule, if one portion of statute specifically treats a topic, e.g., the specific treatment of a debtor’s income and expenses in the means test in 11 U.S.C. §707(b), then another statutory provision that is less specific, e.g., the general dismissal “for cause” under 11 U.S.C. §707(a), would not include consideration of the specific topic.