Opinion
Case No. 98-4486-AJM-7
August 26, 1998
ORDER GRANTING DEBTOR'S MOTION TO DISMISS
This matter came before the Court upon the Debtor's verified motion filed on June 8, 1998 to dismiss her voluntary chapter 7 bankruptcy petition (the "Motion"). The United States Trustee objected to the Motion and hearing on the Motion and the objection was held on July 20, 1998. Present at the hearing was the Debtor in person and by counsel, Douglas Norris; the United States Trustee appeared by counsel Beth Kramer. The parties were given up to and including August 7, 1998 to submit additional authority in support of their respective positions. Counsel for the United States Trustee included authorities in the objection filed with the court on June 12, 1998; counsel for the Debtor submitted his memorandum in support of the Motion on August 7, 1998.
Background
The facts prompting the filing of the Motion are not complex: the Debtor filed her voluntary chapter 7 petition on April 3, 1998 and the first meeting of creditors was originally scheduled for May 8, 1998. Shortly before that scheduled meeting, the Debtor suffered a severe injury which required multiple surgeries. The Debtor now seeks to dismiss her chapter 7 case in order to refile another chapter 7 to include those claims for medical expenses incurred after April 3, 1998 (the "New Debt"). It does not appear that the Debtor served the Motion on those creditors to whom the New Debt is owed (the "New Creditors").
Apparently as a result Debtor's injuries and surgeries, the May 8, 1998 meeting of creditors was not held but was rescheduled for June 3, 1998. That June 3, 1998 meeting was not held but was continued and has not been rescheduled due to the pending motion to dismiss filed by the Debtor.
The United States Trustee has objected on the basis that dismissal under such circumstances would be prejudicial to the New Creditors and that dismissal for the sole reason of refiling is not sufficient cause under Bankruptcy Code Section 707(a), citing In re Branisel, 130 B.R. 502 (Bankr.N.D.Ohio 1991) and In re Compston, 161 B.R. 636 (Bankr.N.D.Ohio 1993).
The United States Trustee also attached a copy of the opinion of In re Linda Sue McComb, Case No. 96-02110-RLB-7 (May 20, 1996). In that case, Judge Bayt of this division adopted the reasoning in the Branisel case and denied the debtor's motion to dismiss upon facts substantially similar to the facts in this case.
Discussion
A debtor can move to dismiss her voluntarily filed chapter 7 case, but the right to dismissal is not absolute. A debtor must show that "cause" exists and that the dismissal is substantially justified. It is within the court's discretion to grant or deny a debtor's voluntary motion to dismiss her chapter 7 case. Generally, dismissal will be allowed provided creditors and other interested parties are not prejudiced. In re Sheets, 174 B.R. 254, 255-256 (Bankr.N.D.Ohio 1994).
In both Branisel and Compston, and also in Sheets which adopted the reasoning in Branisel, the debtor sought to dismiss a voluntary chapter 7 case in order to refile and include medical bills that had been incurred after the initial chapter 7 filing. The Compston court found four reasons why dismissal under these circumstances was improper. First, the Court found that, upon the filing, certain events which have legal consequences upon the substantive rights of all parties occur-"[s]tays are issued; the accrual of interest on certain claims is terminated; an estate is created; a Trustee is appointed; and certain debts are discharged. Dismissal for the sole purpose of filing a new petition only circumvents these provisions of the Bankruptcy Code, thus violating the limitations which Congress places upon Chapter 7 relief." Compston, 161 B.R. at 637-638.
Second, the Court found that the post petition creditors became "parties in interest" entitled to notice and hearing on the motion to dismiss. Failure of the debtors to give such notice denied the post petition creditors of procedural due process.
Third, the court, in a conclusory fashion, determined that cause had not been shown. Finally, the court found that the debtors had other recourse to obtaining the relief sought by either converting their case to a case under chapter 13, or filing a new chapter 13 case after they receive a chapter 7 discharge.
"Absent Debtors' representation that dismissal of the pending Chaper 7 case will enable them to file another Chapter 7 case for purposes of including postpetition debt, there is no evidence showing `cause' for dismissal . . ." Compston, 161 B.R. at 638.
I find the reasoning in both Branisel and Compston unpersuasive when applied to the facts here. First, the debt incurred for which the Debtor now wants to dismiss her chapter 7 case was for unforeseen medical bills and is a kind over which she had no control and to which no fault of her own can be attributed. The amount of these New Debts may very well exceed the amount of the debts originally sought to be discharged, thus placing the Debtor in a worst posture than she was in when this chapter 7 case was first filed. If this occurs, it is this court's opinion that the Debtor's "fresh start" to which she is entitled would be severely hampered. Far from "circumventing the provisions of the Bankruptcy Code", the Debtor would not be receiving the relief for which bankruptcy was intended and to which she would have been entitled but for the unfortunate timing of the filing of her current chapter 7 case.
Second, this Court does not believe the New Creditors are parties in interest and therefore have standing to object in this chapter 7 proceeding. Section 707(a) of the Bankruptcy Code states that a case may be dismissed for cause "only after notice and a hearing". Bankruptcy Rule 2002 generally states that the clerk shall give . . ."all creditors" at least 20 days notice of the hearing on the dismissal of a chapter 7 case. Section 101(10)(A) defines "creditor" as "an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor". If the Clerk is required to give notice only to "creditors" (although the Clerk may designate to whom else noticed should be sent), then, it is difficult to see, from the literal language of the Bankruptcy Code and Rules, that failure to give notice to holders of claims that did not arise at the time of or before the order for relief is a denial of procedural due process.
This Court is aware of cases that have held that postpetition creditors are "parties in interest" and thus entitled to be heard with respect to a debtor's motion to dismiss. A finding that the postpetition creditors are parties in interest is based on the theory that postpetition creditors have extended credit to the debtor in reliance on the "fresh start" that the debtor will be receiving, with the expectation that their postpetition debt will not be part of the debt discharged. However, if a debtor makes representations to a postpetition creditor upon which that creditor relies, all the while knowing that she will seek dismissal of her chapter 7 case to refile and add the postpetition debt (which will be prepetition debt in the refiled case, subject to discharge), the creditor may file a complaint to determine dischargeability under Section 523 in the refiled case. Thus, the Court fails to see why such post petition creditors are "entitled" to notice in the current case, and why failure to give such notice is a reason for denying a debtor's motion to dismiss. Here, none of those that are truly "creditors" with claims that have arisen pre petition have objected to the Debtor's Motion, and therefore the Court finds that no prejudice will result if the dismissal is granted.
See, Matter of Poirier, 16 B.R. 691, 695 (Bankr.D.Conn. 1982) where the Court indicated that postpetition creditors "become parties in interest for the purpose of notice and the right to be heard" apparently for the reason that the postpetition creditors extending credit "may have done so in reliance upon the Debtor's fresh start", but also acknowledging earlier cases that allowed voluntary dismissals of chapter 7 petitions without notice to postpetition creditors.
Also important to the Court's decision is the fact that the injury and resulting surgery which caused the New Debts occurred approximately thirty days after the Debtor filed her chapter 7 case, and a first meeting of creditors has not yet been held. Because of the close proximity here between the filing of the chapter 7 case and the creation of the New Debts, the opportunity for postpetition creditors to extend credit "in reliance of the debtor's fresh start" is diminished. Conversely, had the New Debts been incurred well after the first meeting of creditors, or well after the Debtor received a discharge, (see footnote 7, infra), chances are greater that the Debtor would have been on the road to financial recovery, having already enjoyed the benefits of the discharge of her debts and possibly becoming eligible for chapter 13 relief by virtue of increased cash flow. Under such circumstances, the Court may have found that dismissal of the case would be prejudicial to postpetition creditors, and therefore may have denied the relief sought here by the Debtor.
Perhaps the most compelling reason here to allow dismissal is that, unlike Branisel and Compston, the Debtor here is not eligible for chapter 13 relief. Counsel for the Debtor in the hearing stated that the Debtor has no disposable income in which to fund a chapter 13 plan. Without this alternate relief available, the Debtor has no choice but to proceed with her currently-filed chapter 7 case without relief from the New Debts and thus being denied the "fresh start" which is at the very heart of the Bankruptcy Code. This debtor's right to a "fresh start" should not hinge entirely on the Debtor's timing in the filing of her chapter 7 case.
Even if the Debtor had sufficient disposable income to fund a meaningful chapter 13 plan, it is debatable whether she would be able to include the New Debts incurred post petition but pre conversion in her chapter 13 plan. Section 348(d) provides that debts incurred after the filing of a chapter 13 but before conversion to chapter 7 are to be treated as pre petition debts, but the reverse (i.e. debts incurred after the filing of a chapter 7 but before conversion to a chapter 13) is not true; the Code affords the special treatment set forth in Section 348(d) only to those claims that arise during a chapter 11 or chapter 13 case before the case is converted to a liquidation case. In re Morris, 155 B.R. 422,425 (Bankr.W.D.Tex. 1993).
Finally, it should be noted that certain provisions under chapter 13 provide a mechanism for obtaining relief from precisely the type of postpetition medical debts present here without prior conversion or dismissal of the case. A postpetition medical debt can be provided for in a chapter 13 plan and "allowed" pursuant to Sections 1322(b)(6) and 1305(a)(2) if: (1) the trustee approves the allowance and payment of the claim; (2) the claim holder did not and should not have known that prior approval of the trustee was necessary; or (3) prior approval of the trustee is not practicable under the circumstances. See, In re Philips, 219 B.R. 1001, 1007 (Bankr.W.D.Tenn. 1998).
See also, the legislative history behind Bankruptcy Code Section 1305 at H.R. Rep. No. 595, 95th Cong., 1st Sess. 427-28 (1977); and In re Pritchett, 55 B.R. 557,559 (Bankr.W.D.Va. 1985). If the drafters of the Code at least recognized the importance of providing certain limited relief to chapter 13 debtors from postpetition medical bills under these sections, this same relief should be available to chapter 7 debtors that wish to dismiss their case and refile. If the Debtor here were eligible for chapter 13 relief, she could add the New Debts (provided the holders of such debt file proofs of claims) to her chapter 13 plan without dismissing her case and could be afforded the relief from the New Debts which she seeks here. It hardly seems equitable that, but for the misfortune of her chapter 13 ineligibility and the timing of her chapter 7 filing, she cannot obtain the same relief under these circumstances.
For these reasons, I must conclude that, given the circumstances in this case, the Debtor should be allowed to dismiss her chapter 7 case in order to refile to add the New Debts. That is not to say that there will not be those cases in which dismissal should not be allowed. Had the Debtor sought to refile to add voluntarily incurred credit card debt, or had the Debtor already received a discharge of her currently scheduled chapter 7 debts, the result could have been quite different. Since voluntary dismissal is not an automatic right but rather left to the court's discretion, the propriety of such dismissals will be viewed on a case-by-case basis. Just as this Court here exercises its discretion in determining that "cause" has been shown and that creditors will not be prejudiced, it likewise could find that any subsequent motions to dismiss by this Debtor here are not warranted, thus curbing the Debtor's potential to "circumvent" the bankruptcy process. Accordingly, the United States Trustee's objection is overruled and the Debtor's Motion to Dismiss is GRANTED. This case is hereby DISMISSED.
See, for example, In re Walker, 1996 WL 677129 (Bankr.W.D.Tenn) where the Debtor sought to dismiss the chapter 7 case after a discharge had been entered and In re Baumgarten, 154 B.R. 66 (Bankr.S.D.Ohio 1993) where the debtors granted a security interest in their Corvette automobile to a family member and sought to dismiss their chapter 7 case to in order to moot the chapter 7 trustee's attempt to avoid the security interest as a preferential transfer.