Judge Bruce M. Selya of the First Circuit examined the decisions of the Bankruptcy Appellate Panel (the “BAP”) and the United States Bankruptcy Court for the District of Massachusetts (the “Bankruptcy Court”) and affirmed the Bankruptcy Court’s denial of discharge and refusal to allow the Debtor to dismiss his case.
In In re Paul Francis (Case No. 19-9011), the debtor and his wife owned five rental properties that the debtor collected income from. The properties were encumbered by over $2,000,000 of debt primarily in the form of mortgage loans and taxes. On April 13, 2017, the debtor filed his first petition for chapter 13 relief in the Bankruptcy Court. Shortly thereafter, the case was dismissed by the Bankruptcy Court given the debtor’s failure to file required documents. Three months later, the debtor filed another chapter 13 petition. This time the Bankruptcy Court notified the debtor that his chapter 13 case was subject to dismissal because his liabilities exceeded the statutory allowed secured debt limit. The debtor moved to convert his case to a chapter 11 reorganization. The case was converted on September 17, 2017.
Subsequently, the debtor consented to an Order requiring that a disclosure statement and chapter 11 plan be filed by January 26, 2018 among other deadlines. The debtor failed to comply and on January 30, 2018, the United States Trustee (the “UST”) moved to convert the case to a chapter 7. The UST charged the debtor with failing to comply with the Court’s Order wherein the debtor failed to furnish information requested by the UST, failed to file a plan and disclosure statement and failed to pay certain fees. The Bankruptcy Court granted the UST’s motion and set forth certain deadlines that the debtor would need to comply with otherwise the case would be dismissed. The debtor failed to appear at the scheduled meeting of the creditors and missed filing documents that were subject to deadlines. The Bankruptcy Court ordered the debtor to show cause as to why he should not be denied his discharge given his failure to obey respective Court Orders. At the show cause hearing, the debtor blamed his failures on his wife, claiming that his wife had been tasked with collecting relevant information and had suffered a second-degree burn that prevented her from completing his own required tasks. The debtor testified that he had abstained from opening any mail in his wife’s absence as she was the responsible party. Given the debtor’s failure to comply with Court Orders several times and throughout the case and his failure to file required documents, the Bankruptcy Court denied the debtor’s discharge and dismissed his case.
The debtor appealed the Bankruptcy Court’s decision to the BAP, which affirmed the Bankruptcy Court’s ruling. The debtor then appealed the BAP’s decision to the First Circuit raising four issues (i) that Section 521(i)(1) of the Bankruptcy Code was misapplied and the case should have been dismissed without prejudice when he failed to timely file required documents; (ii) that the Bankruptcy Court lacked authority to order a denial of discharge sua sponte; (iii) that the record did not support a finding that the debtor willfully failed to obey the Bankruptcy Court’s orders; and (iv) that the Bankruptcy Court’s denial of a discharge violated his due process rights. The First Circuit addressed each of the debtor’s arguments in turn, ultimately ruling that the “denial of discharge was well within the universe of permissible responses to the debtor’s feckless course of conduct.”
Section 521(i)(1) of the Bankruptcy Code provides that “if an individual debtor…fails to file all of the information required under subsection (a)(1) within 45 days after the date of the filing of the petition, the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition.” Some courts mechanically apply this provision, while others excuse untimely filed documents even where documents are filed after the deadline prescribed in Section 521(i)(1). The First Circuit had already rejected the “mechanical approach” and followed the Sixth and Ninth Circuits by holding that the Bankruptcy Court has three options when a debtor misses filing deadlines. The Court may (1) dismiss, (2) decline to dismiss if a good-faith exception applies, or (3) decide that the documents were not required. Segarra-Miranda v. Acosta-Rivera (In re Acosta-Rivera), 557 F.3d 8, 13 (1st Cir. 2009). The First Circuit noted that these three alternatives were not an exhaustive list. Further, the holding in Acosta-Rivera allowed the Bankruptcy Court to waive the filing deadline if dismissal would further the debtor’s “abusive conduct.” Id. at 14. Without “serious question,” Judge Selya ruled that “the circumstances here are consistent with the bankruptcy court’s exercise of its discretion to deny a discharge instead of dismissing the debtor’s petition without prejudice.”
The debtor’s second argument sought approval for the notion that the Bankruptcy Court could not deny discharge sua sponte because Section 727(c)(1) provides that the “trustee, a creditor, or the United States trustee may object to the granting of a discharge under subsection (a) of this section.” Judge Selya reasoned that the debtor was attempting to “place handcuffs on the bankruptcy court that Congress never envisioned” by overlooking Section 105(a). This section of the Bankruptcy Code provides the court with broad authority and equitable powers to act to promote the Bankruptcy Code’s provisions.
On the debtor’s third issue, whether or not the debtor willfully failed to obey the Court’s orders, the First Circuit examined the plain language of Section 727(a)(6)(A). Specifically, the Court reviewed whether the debtor had in fact “refused” to obey a number of the Bankruptcy Court’s lawful orders. Judge Selya found that the debtor had “stonewalled no fewer than three lawful orders of the [B]ankruptcy [C]ourt without any legitimate justification– and he did so despite receiving pointed warnings from the court that his discharge hung in the balance.” The debtor had repeatedly ignored the Bankruptcy Court’s orders without any legitimate reason and therefore, the Bankruptcy Court’s finding of the debtor’s willful refusal to obey orders was justified.
With regard to the debtor’s allegations that the Bankruptcy Court’s denial of a discharge contravened the debtor’s due process rights Judge Selya held that this argument was “the same old whine in a new bottle.” The debtor claimed that only one of the Bankruptcy Court’s orders warned of dismissal, while the other orders did not adequately warn about the possibility of denial of discharge if the debtor failed to comply. The First Circuit agreed that debtors are entitled to due process protections, including notice and an opportunity to be heard. However, in this case, the debtor received several constitutionally sufficient notices that explicitly informed the debtor that his discharge could be denied if he failed to file requested documents. No additional notice was necessary and the debtor had an opportunity to be heard at the show-cause hearing. There was a hearing, the debtor was represented by counsel and was questioned at length about whether he received the Bankruptcy Court’s orders and what he did in response to such notices. The debtor had ample opportunity to explain his conduct, and he failed to give any valid justifications for his dilatory response. The debtor’s due process rights could not have been violated by the Bankruptcy Court, where the debtor received multiple sufficient notices warning him of legal consequences and his attendance at a hearing where he had a fair opportunity to be heard.
The First Circuit’s ruling in this case warns debtors to heed Bankruptcy Court orders as failure to comply and abide by court-ordered deadlines can have serious consequences like denial of discharge, as well as dismissal of the case, and a bar to future filing.