Gallagher v. CohenGallagher v. Cohen
- Reporters:
- ,
- Before:
- Deborah L. Boardman
After Stephen Ormsby Gallagher, II lost his job, he filed for Chapter 7 bankruptcy. After Gallagher started a more lucrative job, he moved to dismiss his own case to avoid losing his home to his creditors. To justify dismissal, he accused himself of abusing the bankruptcy process. The U.S. Bankruptcy Court for the District of Maryland agreed that Gallagher was abusing the bankruptcy process but denied his motion to dismiss anyway. Gallagher appealed. ECF 1. He also appealed a 10-month-old order approving the application of Merrill Cohen, the Chapter 7 Trustee, for attorney‘s fees and expenses (the “Compensation Order“). Id. The appeal is fully briefed. ECF 8, 12, 19. No oral argument is necessary. See
I. Background
On August 1, 2022, Gallagher (representing himself) filed a Voluntary Petition for Relief pursuant to Chapter 7 of the U.S. Bankruptcy Code. ECF 1 in In re Gallagher, No. 22-14180-MCR. “In a Chapter 7 proceeding, an individual debtor receives an immediate unconditional discharge of personal liabilities for debts in exchange for the liquidation of all non-exempt assets.”
At the end of August, Gallagher submitted Form 122A-1, a statement of his current monthly income. ECF 36 in In re Gallagher. According to that statement, his average monthly income in the six full months preceding his filing for bankruptcy was $4,660.47 and his annual income was $55,925.68. Id. Because Gallagher‘s annual income was below $75,214—the median income for a one-person household in Maryland—the form indicated that his income did not give rise to a presumption that his Chapter 7 filing was an abuse of the bankruptcy process. Id.
As the case advanced, the bankruptcy court authorized Cohen to retain counsel. ECF 60 in In re Gallagher. He hired Stephen H. Greenfeld of Cohen Baldinger & Greenfeld, LLC. Id.
On November 8, 2022, Gallagher accepted an offer for a job with an annual salary of $110,000. ECF 70-1, at 1 in In re Gallagher. So he moved to convert his case from Chapter 7 to Chapter 13. ECF 70 in In re Gallagher. “[I]n a Chapter 13 proceeding, a debtor commits to repayment of a portion of his or her financial obligations over a specified period of time (generally three to five years) in exchange for retaining non-exempt assets and receiving a broader discharge of debt than is available under Chapter 7.” Schultz, 529 F.3d at 346. The bankruptcy court granted the motion. ECF 72 in In re Gallagher.
On December 13, 2022, Greenfeld filed an application for approval of fees and expenses incurred while the case was under Chapter 7—that is, prior to the conversion to Chapter 13. ECF 76 in In re Gallagher. Gallagher opposed the application. ECF 85 in In re Gallagher. On January
On June 2, 2023, Gallagher lost his job. ECF 3-12, ¶ 1. He remained unemployed until July 24, 2023, when he began a new job with higher pay: $137,500 per year. Id. ¶ 2.
Throughout this period of time, Gallagher proposed several Chapter 13 bankruptcy plans to repay his creditors. See, e.g., ECF 79 & 103 in In re Gallagher. The bankruptcy court denied them. See, e.g., ECF 101 & 119 in In re Gallagher. For that reason, on August 25, 2023, the bankruptcy court reconverted Gallagher‘s case from one under Chapter 13 to one under Chapter 7. ECF 121 in In re Gallagher.
On September 17, 2023, Gallagher filed a new Form 122A-1, Chapter 7 Statement of Monthly Income and a Form 122A-2, Means Test Calculation (collectively, “the Amended Means Test“) based on the income from his latest job. See ECF 3-10. The form directed him to identify “the average monthly income that you received from all sources, derived during the 6 full months before you file [sic] this bankruptcy case.” Id. at 1. Based on his pay in August 2023, Gallagher reported his monthly income as $11,489.36 and his annual income as $137,872.28. Id. at 2. The median family income for a one-person household in Maryland is $75,214.00. Id. So Gallagher checked that his income was higher than the median income for a household of his size. Id. After further calculations, Gallagher‘s form indicated that his income was so high that it gave rise to a presumption of abuse of the bankruptcy process. See id. at 4, 11. Because Gallagher‘s income created a presumption of abuse, Gallagher had the opportunity to report any special circumstances that would justify his income and expenses. See id. at 12. He reported that he had none. Id.
On September 28, Gallagher moved to dismiss his Chapter 7 case based on the presumption of abuse his Amended Means test indicated. ECF 3-12. On October 3, the Clerk of Court confirmed
On November 1, 2023, the bankruptcy court held a hearing on Gallagher‘s motion to dismiss. ECF 3-17; ECF 4. At the outset, the parties agreed that there were no facts in dispute. ECF 3-17; ECF 4, at 4:17-24. To double check that the parties were in agreement about the facts, the bankruptcy court recited the material background, highlighting that “after completing the means test analysis, the means test indicates that there is a presumption of abuse based on [Gallagher‘s] disposable income.” ECF 4, at 5:3-12. Then the bankruptcy court asked each party whether the court‘s recitation of the facts was correct and complete. Id. at 5:10-13, 18-19. The parties agreed that it was. Id. at 5:14, 5:20-6:18, 6:21-22. Both parties also accepted the bankruptcy court‘s framing of the sole question in dispute: “whether a case should be dismissed when the means test indicates that there is a presumption of abuse.” Id. at 4:8-16. Ultimately, the bankruptcy court determined that even when the means test gives rise to a presumption of abuse, the bankruptcy court retains the discretion to deny a motion to dismiss based on that presumption of abuse. ECF 3-17. Applying that interpretation of the law to the case at hand, the court denied Gallagher‘s motion to dismiss because Gallagher had enjoyed the benefits of the bankruptcy process for over a year, the Trustee had been administering the case, and Gallagher‘s creditors would be prejudiced by dismissal. Id. On November 7, the bankruptcy court entered a corresponding order denying Gallagher‘s motion to dismiss his Chapter 7 bankruptcy case. ECF 3-18.
On November 17, Gallagher appealed the bankruptcy court‘s denial of his motion to dismiss. ECF 1. On January 13, 2024, Gallagher filed his opening brief. ECF 8. On February 13, the Trustee filed his opposition. ECF 12. On March 9, Gallagher replied. ECF 19.
The bankruptcy court proceedings continued as to matters not involved in the appeal. On February 13, 2024, the Trustee had moved to strike Gallagher‘s Amended Means Test on the ground that Gallagher had reported his August 2023 income when the form required that he report only his income in the six months before he filed for bankruptcy. ECF 167 in In re Gallagher. On March 27, the bankruptcy court held a hearing on the motion. ECF 172 in In re Gallagher. On March 28, 2024, the bankruptcy court granted the motion to strike. ECF 173 in In re Gallagher.
II. Standard of Review
III. Discussion
Gallagher appeals the Compensation Order and the denial of his motion to dismiss. His appeal of the Compensation Order is untimely, so this Court lacks jurisdiction to hear it. The order denying the motion to dismiss is vacated.
A. Compensation Order
Gallagher appeals the bankruptcy court‘s order that he pay the fees and expenses of the Chapter 7 Trustee‘s attorney. Under
Gallagher‘s appeal is untimely. The bankruptcy court issued the Compensation Order on January 9, 2023. It became final on January 23, 2023. Gallagher filed this appeal on November 17, 2023—nearly 300 days later. So this Court has no jurisdiction over Gallagher‘s belated appeal. See id. at *3.
Acknowledging that this conclusion “is accurate and well taken,” Gallagher asserts that he is not appealing the Compensation Order at all, but rather the order issued in the wake of the
Accordingly, Gallagher‘s appeal from the Compensation Order is dismissed for lack of jurisdiction.
B. Denial of the Motion to Dismiss
Gallagher also appeals the bankruptcy court‘s denial of his motion to dismiss. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA“), a bankruptcy court
on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor‘s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
Gallagher‘s Amended Means Test, filed in September 2023, indicated that his income exceeded the statutory threshold, rendering his case a presumptive abuse of the bankruptcy process. And Gallagher did not report any special circumstances that could rebut the presumption. On those grounds, Gallagher moved to dismiss his own case as abusive.
Gallagher contends that under these circumstances, the bankruptcy court had to grant his motion to dismiss. On his reading of
On the Trustee‘s account, Gallagher‘s finances did not warrant any presumption of abuse in the first place. Even if they did, the bankruptcy court had the discretion to deny Gallagher‘s
1. Presumption of Abuse
The first question is whether, as the bankruptcy court found, Gallagher‘s income gave rise to a presumption of abuse. Whether the bankruptcy court was right or wrong about that, both parties expressly accepted that finding below. So the Trustee may not challenge it now.
A party may not raise a new argument for the first time on appeal, at least absent extraordinary circumstances. Williams v. Prof‘l Transp. Inc., 294 F.3d 607, 614 (4th Cir. 2002). Courts honor this rule “so that district courts will not serve merely as way stations en route to the court of appeals.” Rusnack v. Cardinal Bank, N.A., 695 F. App‘x 704, 711 (4th Cir. 2017) (citations omitted). “The same rationale applies with equal force to arguments not raised before the bankruptcy court.” Id. Accordingly, the Fourth Circuit and district courts within its jurisdiction have all but uniformly refused to consider arguments in bankruptcy appeals that were not raised before the bankruptcy court. See United Rentals, Inc. v. Angell, 592 F.3d 525, 531 n.2 (4th Cir. 2010); Rusnack, 695 F. App‘x at 711; In re Modanlo, 342 B.R. 238, 244 (D. Md. 2006) (citing Wheatley v. Wicomico Cnty., Md., 390 F.3d 328, 335 (4th Cir. 2004)); In re Richmond, 615 B.R. 758, 765 (M.D.N.C. 2020); Waterproofing Specialties, Inc. v. Weaver Cooke Constr., LLC, 564 B.R. 276, 284-85 & 284 n.6 (E.D.N.C. 2017); In re Paschall, 408 B.R. 79, 87 (E.D. Va. 2009) (citing In re Endicott, 157 B.R. 255, 258 (W.D. Va. 1993)). The sole exception is when the novel argument concerns subject matter jurisdiction. See State of Md. v. Antonelli Creditors’ Liquidating Tr., 123 F.3d 777, 786 (4th Cir. 1997) (holding state may raise sovereign immunity argument for the first time on appeal from the bankruptcy court only “because that immunity has jurisdictional aspects“).
Nevertheless, in this appeal the Trustee argues for the first time that Gallagher‘s finances did not warrant a presumption of abuse. The Trustee advances two arguments that Gallagher overrepresented his income by reporting his earnings for the wrong period of time. First, Cohen contends that the time period material under the statute and requested by the form is the six full months prior to the debtor‘s Chapter 7 filing: February 2022 to July 2022. Gallagher, however, completed the form in September 2023 on the basis of his August 2023 income from a job he began well after filing for bankruptcy. In the correct timeframe, Gallagher‘s income was too low to create a presumption of abuse. Second, Cohen argues that even if the relevant timeframe is the six full months before Gallagher‘s case was reconverted from Chapter 13 back to Chapter 7—February 2023 to July 2023—Gallagher‘s income still did not warrant a presumption of abuse. The income Gallagher reported on the form in September 2023 reflected his first two paychecks in August 2023—pay the bankruptcy court should never have considered. So again, the bankruptcy court should not have found that there was a presumption of abuse.
Cohen has a point. Gallagher should have reported his income for the six-month period before the month he filed for bankruptcy: February 2022 to July 2022. See Lynch, 395 B.R. at 347-48. Gallaher calculated his income based on his higher pay in August 2023—triggering a presumption of abuse that would not have arisen if Gallagher had reported his income for the correct timeframe. No wonder that after Gallagher appealed, the Trustee moved to strike Gallagher‘s Amended Means Test and the bankruptcy court granted that motion. But Cohen‘s point comes too late. Because the Trustee did not challenge the bankruptcy court‘s finding that
2. Rebuttal
A stray remark in the hearing transcript requires a word about rebuttal. As noted above, the BAPCPA provides that
the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances . . . justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
Gallagher did not even attempt to rebut the presumption of abuse. See ECF 3-10, at 12; ECF 4, at 14:8-10. He conceded he had no special circumstances. ECF 3-10, at 12. Understandably, then, the bankruptcy court‘s written explanation of its decision to deny the motion to dismiss did not mention rebuttal at all. Instead, the bankruptcy court concluded that the presumption of abuse gave the court “discretion whether to dismiss the case” and then decided to deny the motion “because the Debtor has enjoyed the benefits of the automatic stay for 15 months, the Trustee has been administering the case, and creditors would be prejudiced by dismissal.” ECF 3-17. At the hearing, the bankruptcy court‘s initial explanation of its denial of the motion to dismiss did not address rebuttal either. There, too, the bankruptcy court explained that in light of the presumption of abuse, it had the discretion to “determine whether dismissal, remaining in Chapter
However, toward the close of the hearing, the bankruptcy court asked the parties for argument on “whether it is better that this case remain in a Chapter 7 for Mr. Cohen to administer the estate, or whether the case should be converted to Chapter 13.” Id. at 12:5-7. After some back and forth on that question, Gallagher tried to relitigate the denial of his motion to dismiss: “My understand [sic] is the language in the statute says, the Court shall presume abuse, and the only way to overturn that is with special circumstances, which I don‘t qualify for.” Id. at 14:8-10. In response, the bankruptcy court said: “the Court has presumed abuse and the Court has concluded that that presumption has been rebutted.” ECF 4, at 14:11-13. That raises the question of whether the bankruptcy court found that the presumption had been rebutted, and if so, what to make of that finding.
For several reasons, the Court does not find that the bankruptcy court held that the presumption of abuse had been rebutted. First, there is little reason to think this lone remark should control over the conflicting prior explanation from the bench or the conflicting subsequent written explanation. Second, neither party below argued that the presumption had been rebutted and neither party argues now that the bankruptcy court found that the presumption was rebutted. Third, since Gallagher made no attempt whatsoever to rebut the presumption of abuse—indeed, he embraced it—any finding that he had rebutted the presumption would have been clear error. For these reasons, the Court hews to its original interpretation of the ruling: The bankruptcy court
3. Requirement of Dismissal
That leaves one question: whether under
may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor‘s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
The Fourth Circuit has never squarely decided whether an unrebutted presumption of abuse requires granting a motion to dismiss under § 707(b) or merely permits dismissal. However, in dicta, the Fourth Circuit has indicated that dismissal is mandatory. In McDow v. Dudley, 662 F.3d 284 (4th Cir. 2011), the court held that a bankruptcy court‘s denial of a motion to dismiss a Chapter 7 case as abusive is a final order appealable immediately. Id. at 285, 289-90. To justify that holding, the court examined “the precise nature and effect of the order at issue—an order denying a § 707(b) motion.” Id. at 288. “Under the means test,” the Fourth Circuit explained, “if the debtor‘s average monthly disposable income, as calculated under the statute, exceeds the statutory threshold, then the case is presumptively abusive and must be dismissed unless the debtor can show ‘special circumstances.‘” Id. (citing
Neither of the two cases the bankruptcy court cited in support of its holding concerns § 707(b) either. In In re Pagnotta, 22 B.R. 521 (Bankr. D. Md. 1982), the bankruptcy court for this district held that “a mere change of heart on the part of the debtors who now feel that it would not be in their best interests to be discharged in bankruptcy is not a sufficient reason to dismiss” their bankruptcy case. Id. at 522. Perhaps that is a plausible interpretation of what happened here: After securing a new, relatively lucrative job, Gallagher had a change of heart and moved to dismiss his bankruptcy case to avoid having to lose his home to his creditors. As the bankruptcy court observed at the hearing on Gallagher‘s motion to dismiss, “it is just extremely odd that a debtor is arguing to the Court that his case should be dismissed for abuse of the bankruptcy process.” ECF 4, at 11:13-15. But as Gallagher argued below, Pagnotta preceded the statute that governs this case—the BAPCPA—by over 20 years. See id. at 11:3-6. Pagnotta did not and could not address whether the BAPCPA requires or merely permits the bankruptcy court to grant a motion to dismiss predicated on an unrebutted presumption of abuse—an issue with no analogue in the prior version of the bankruptcy statute. See Calhoun, 650 F.3d at 340. Even setting that aside, this case is not about a “mere change of heart.” See Pagnotta, 22 B.R. at 522 (emphasis added). This case is (also) about a judicial finding that Gallagher abused the bankruptcy process. Pagnotta did not involve bankruptcy abuse at all. See id. at 521-22.
To be sure, there are good reasons to read the statute as the bankruptcy court did. After all, the statute says that if the bankruptcy court “finds that the granting of relief would be an abuse of the provisions of this chapter,” “the court . . . may dismiss a case.”
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IV. Conclusion
For the reasons above, Gallagher‘s appeal of the Compensation Order is dismissed, the bankruptcy court‘s denial of Gallagher‘s motion to dismiss is vacated, and Cohen‘s motion to dismiss the appeal is denied. This case is remanded to the bankruptcy court for further proceedings consistent with this opinion. See CWCapital Asset Mgmt., LLC v. Burcam Cap. II, LLC, Nos. 5:13-CV-278-F, 5:13-CV-279-F, 2014 WL 2864678, at *9 (E.D.N.C. June 24, 2014). A separate order follows.
Date: April 15, 2024
Deborah L. Boardman
United States District Judge