BAPCPA Allows Bad Faith Debtor To Escape Trustee Based on Failure To Make Necessary Filings

In a recent case described as “the poster child for a bad faith debtor,” the debtor was allowed to escape bankruptcy over the objection of his chapter 7 trustee because he failed to file meaningful schedules within 45 days from the petition date. In re Walter Lee Hall, Jr., No. 06-11248 (Bankr. W.D. Tex. 4/23/07). This result, according to the court, was mandated by BAPCPA.

The pro se Debtor filed his first case on May 17, 2006. He filed schedules and a statement of financial affairs, but omitted schedules E, F and G and the Form B22C Means test. However, his major offense was failure to provide his tax returns to the chapter 13 trustee. As a result, the Court concluded that the chapter 13 case had been automatically dismissed on the 46th day after the petition date based on 11 U.S.C. §521(i)(1).

The Debtor then filed a second chapter 13 case on August 15, 2006. He filed schedules which substantially consisted of the notations “TAB” and “To Be Amended.” The Debtor’s chapter 13 plan was similarly deficient. After a hearing, the Court declined to continue the stay in the second case. Among other things, the Court found that the Debtor was pursuing Chapter 13 for the purpose of frustrating his secured creditors without any legitimate hope to reorganize. While the Chapter 13 Trustee’s motion to dismiss was pending, the Debtor converted his case to Chapter 7. This time, he filed a Schedule B which listed two automobiles, but no other personal property. The 341 meeting was never completed due to the fact that the Debtor either failed to appear or invoked his 5th Amendment privilege against self-incrimination. In the course of other hearings, it became apparent that the Debtor had transferred three parcels of real property to a corporate entity he controlled.

The Court entered a Show Cause Order as to why the case should not be dismissed. The United States Trustee and the Chapter 7 Trustee appeared and requested that the case be retained, while the Debtor failed to appear. The Debtor then filed a motion requesting that the Court determine that his case had been automatically dismissed for failure to comply with the provisions of §521(a). The Debtor filed a Notice of Withdrawal of Document with respect to this motion on the day of the hearing.

At this point, the court was faced with a dilemma. There were assets which could be liquidated to pay creditors and no party was requesting dismissal of the case. However, the Court found that under Section 521(i)(1), “the case shall be automatically dismissed on the 45th day after the filing of the petition” if the Debtor fails to file the information required by Section 521(a). Under Section 521(i)(2), the court is required to enter an order reflecting that the case had been dismissed on request by a party in interest. Following the unambiguous statutory language, the court found that the Debtor was a party in interest and that the Court was required to dismiss the case based upon the Debtor’s failure to file the required documents even though the Debtor was no longer requesting dismissal. Thus, the Debtor, by the simple expedient of not meeting his obligations under Title 11, was able to receive an automatic dismissal of his case. To temper the result, the Court ordered that the case be dismissed with prejudice to refile for a period of two years. Thus, the Court would be protected from seeing this Debtor again for a period of two years. However, the Chapter 7 Trustee who was prepared to pursue the Debtor’s non-exempt and fraudulently transferred assets was left empty-handed.

This case stands in marked contrast to In re Cochener, 2007 Bankr. LEXIS 460 (Bankr. S.D. Tex. 2007)(discussed on this blog on 5/7/07). In that case, a Debtor who sought to evade her obligations under Title 11 was not allowed to dismiss her case and, in the end, both debtor and counsel were sanctioned for their efforts to evade the Chapter 7 trustee. In a perverse display of irony, the Court in that case cited it as an example of abuse justifying the enactment of BAPCPA. However, in the Hall case decided under BAPCPA, the Debtor was allowed a free pass out of bankruptcy court due to his own derelictions, while the diligent Chapter 7 Trustee received nothing. It is truly bizarre that BAPCPA allows the fortunate but dishonest debtor to escape from bankruptcy based on his own failings, when prior law would have brought him to account. Whether it was intentional or not, Congress has not done any favors for Chapter 7 Trustees.