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In re Zarnel

August 26, 2010



On appeal from the November 8, 2006 final judgment of the United States District Court for the Southern District of New York (Brieant, J.), petitioner-appellant Diana G. Adams, United States Trustee, argues that she has standing to appeal bankruptcy court orders striking the bankruptcy petitions of respondents-appellees and that, under the strictures of the Bankruptcy Code, the bankruptcy court was compelled to dismiss the cases of these debtors upon finding that they were ineligible for bankruptcy due to their failure to comply with credit counseling requirements. We conclude that the Trustee has standing to bring the appeal; that the appeal is not moot; and that the filing of a bankruptcy petition by a debtor who has failed to satisfy credit counseling requirements commences a bankruptcy case and invokes the automatic stay.


The opinion of the court was delivered by: Livingston, Circuit Judge

Argued: October 14, 2008

Before: LEVAL, KATZMANN, and LIVINGSTON, Circuit Judges.

This case requires us to interpret the interplay of provisions of the Bankruptcy Code that arises when an individual or entity files a petition for bankruptcy without complying with the credit counseling requirements created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub. L. No. 109-8, 119 Stat. 23. In the course of our analysis, we interpret the credit counseling requirement, 11 U.S.C. § 109(h), the provisions that govern the commencement of bankruptcy cases, 11 U.S.C. §§ 301, 302, and 303, and the statutory section governing automatic stays, 11 U.S.C. § 362.

Petitioner-appellant Diana G. Adams, United States Trustee ("Trustee"), appeals from a final judgment entered November 8, 2006 in the United States District Court for the Southern District of New York (Brieant, J.) dismissing her appeal for lack of standing and in the alternative affirming the bankruptcy court's decision to strike the bankruptcy petitions filed by respondents-appellees ("debtors") rather than to dismiss their cases. We determine that the Trustee has standing to bring this appeal; that the appeal is not moot; and that the filing of a bankruptcy petition by a debtor who has failed to satisfy credit counseling requirements commences a bankruptcy case and invokes the automatic stay. We do not, however, pronounce on the question of what action a bankruptcy court may take with respect to such a petition given these determinations.


The appeal before this Court is of a consolidated matter, generated by three unrelated filings of bankruptcy in the United States Bankruptcy Court for the Southern District of New York. As the facts are not in dispute, we take them largely from the bankruptcy court's opinion. See In re Elmendorf, 345 B.R. 486 (Bankr. S.D.N.Y. 2006).

Lena Elmendorf, represented by counsel, filed a voluntary Chapter 7 petition on November 29, 2005. Although this proceeding was her first bankruptcy filing and her petition was accompanied by the correct schedules, she neither filed a credit-counseling certificate, see 11 U.S.C. § 521(b), nor sought an extension of time to do so, see id. § 109(h)(3)(A). The United States Trustee's Office ("Trustee") moved to dismiss the case on February 1, 2006. In re Elmendorf, 345 B.R. at 491.

Diana Finlay filed a Chapter 13 petition on April 3, 2006, as a pro se debtor, attaching none of the requisite schedules. She sought an extension of time to file her credit-counseling certificate, which the bankruptcy court denied for failure to state that the debtor sought counseling within five days of filing. Id. at 492. Finlay had recently filed two prior Chapter 13 petitions: one on August 31, 2005, and one on November 28, 2005. Both were dismissed for failure to file the appropriate bankruptcy schedules. Id. The Trustee filed a motion to dismiss the case on May 3, 2006.

Shayna Zarnel, the third relevant debtor, filed a Chapter 13 petition on March 13, 2006. Although this was Zarnel's first bankruptcy filing, her husband had filed five bankruptcy petitions with the court since January 2004. Id. She sought an extension of time to file her credit counseling certificate but failed to allege exigent circumstances meriting a waiver; the bankruptcy court therefore denied the extension. Id. at 493. On April 3, 2006, nonetheless, Zarnel filed a credit counseling certificate attesting that she had received counseling on March 21, 2006. The Trustee then moved to dismiss the case.

After holding a hearing on the motions in the Elmendorf and Zarnel proceedings, and reserving decision on the motions in all three cases, the bankruptcy court determined in a July 18, 2006 opinion to "strike" the case of each debtor rather than to dismiss each case as requested by the Trustee. Id. at 504-05. It arrived at this decision by examining the credit-counseling requirement codified at 11 U.S.C. § 109(h). The court observed that the provision, which it said "was intended to provide debtors with education as to all of their options when experiencing financial difficulty, before a resort to bankruptcy protection was necessary," had as a policy matter "not proven to be of assistance to debtors in seeking relief outside of the bankruptcy context." Id. at 490. The court nonetheless concluded that compliance with § 109(h)'s requirement that a debtor seek credit counseling before obtaining bankruptcy relief was "an absolute pre-requisite to individual bankruptcy eligibility." Id. at 495. The court acknowledged that debtors may in certain circumstances obtain an extension of time to receive counseling under § 109(h)(3)(A). The court noted, however, that the difficulties of satisfying each of the statutory factors necessary to have a request for extension granted are substantial, particularly for a pro se debtor.*fn1 Id. at 496.

Relying on its reasoning in a previous case, In re Rios, 336 B.R. 177 (Bankr. S.D.N.Y. 2005), the bankruptcy court found that the statutory language of § 109(h), which provides that an individual "may not be a debtor" without prior credit counseling, bars such filers from commencing a case under 11 U.S.C. § 301. In re Elmendorf, 345 B.R. at 497. Moreover, if a case is not commenced, the court determined, the automatic stay against creditor actions provided for in 11 U.S.C. § 362 does not operate to protect the ineligible filer. Id. at 497-98. Nonetheless, it found that it still had jurisdiction over the matter even if a case was not properly commenced by the filing. Id. at 499. Therefore, under the equitable powers granted by 11 U.S.C. § 105(a), the bankruptcy court determined that because Congress had not explicitly directed the action a court should take in response to a bankruptcy petition failing to commence a case, it had the power to strike the petitions before it rather than to dismiss the cases, as urged by the Trustee.*fn2 Id. at 503. The court noted that in its view dismissal, which has the potential effect of limiting access to or the duration of § 362's automatic stay in a subsequent filing, is for the most part "an inappropriate remedy for a debtor's innocuous failure to obtain counseling, prior to filing a bankruptcy petition," id. at 491, and it concluded that it could always strike a case with prejudice to future filings if it found such a measure to be warranted by a filer's bad faith or other such circumstances, id. at 504.

Because Elmendorf had not filed any previous bankruptcy petitions nor were there other indications of bad faith, the court ordered her case stricken without prejudice. Id. In the case of Finlay, the bankruptcy court noted that the debtor had filed "three back-to-back bankruptcy petitions," and that she "sought, and obtained, an extension of time to file her credit counseling certificate in her prior case," and was thus "not ignorant of the requirement." Id. Noting that "[t]he circumstances in Ms. Finlay's filings are indicative of a pattern of delay and an abuse of the provisions of Section 362," relating to the automatic stay, the court suggested that it might have been "inclined to grant some sort of preclusive relief," but because the Trustee had not requested any relief other than dismissal, the court merely struck the case without prejudice. Id. at 504-05. Finally, it also struck Zarnel's case without prejudice on the ground that, although her husband had repeatedly filed for bankruptcy, this was Zarnel's first filing. Id. at 505. Acting on its own volition, the bankruptcy court then certified its orders for direct appeal to this Court under 28 U.S.C. § 158(d)(2). On November 17, 2006, we consolidated and dismissed those appeals because no party had filed a petition for permission to appeal under Federal Rule of Appellate Procedure 5(a).

The Trustee appealed the bankruptcy court's decision in each instance to the district court on the issue of whether the bankruptcy court had erred in ruling that the petitions of ineligible debtors had not commenced cases and that the petitions could thus be struck rather than dismissed. Adams v. Finlay, No. 06 civ. 6039, 2006 WL 3240522 (S.D.N.Y. Nov. 3, 2006). In its opinion of November 3, 2006, the district court sua sponte raised the issue of the Trustee's standing to appeal the denials of its motions to dismiss. Applying the bankruptcy standing test of this Court that requires an appellant to be a "person aggrieved," meaning "a person 'directly and adversely affected pecuniarily by' the challenged order of the bankruptcy court,'" Int'l Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744, 747 (2d Cir. 1991) (quoting In re Cosmopolitan Aviation Corp., 763 F.2d 507, 513 (2d Cir. 1985)), the district court found that the Trustee was not aggrieved because no creditor's rights were affected by these decisions and no substantive actions had been taken between the filing and the striking of the cases. Therefore, it held, the Trustee lacked standing to appeal. It nonetheless proceeded to decide the merits in the alternative after confessing that it had "no great confidence" in its standing determination. Finlay, 2006 WL 3240522, at *4.

The district court concluded that the bankruptcy court's interpretation of the interplay between §§ 109(h), 301, and 362(a) was the correct one -- that a case is not commenced nor does the automatic stay come into existence when a bankruptcy petition is filed by an individual who fails to fulfill the credit-counseling requirement. It then expounded on the court's equitable powers, noting that motions to strike pleadings, although fallen from favor, were once common in the federal courts and have not since that time been prohibited. Furthermore, it added, Federal Rule of Civil Procedure 12(f) permits a court to strike a pleading, as do Bankruptcy Rules 7012(b) and 9011. Given the latitude provided the bankruptcy court under § 105(a), the district court found it was not beyond the bankruptcy court's judicial powers to strike the petition of a debtor who has not satisfied the credit counseling requirement and thus has not commenced a case. Therefore, in the alternative to dismissing the appeals for want of standing, it affirmed the bankruptcy court's orders in all respects.

The Trustee timely appealed the district court's decision to this Court. In order to assist in the development of arguments on appeal, this Court appointed Sanford I. Weisburst, Esq. amicus curiae on behalf of the pro se ...

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