Ignore the Court at Your Own Peril: First Circuit Affirms Denial of Discharge Based on Debtor’s Failure to Comply with Orders of the Bankruptcy Court
Debtors who ignore instructions from the Bankruptcy Court do so at their own peril, as a recent case from the First Circuit Court of Appeals illustrates. In In re Francis, the First Circuit reminds debtors and practitioners that “the road to a bankruptcy discharge is a two-way street, and a debtor must comply (or at least make good-faith efforts to comply) with lawful orders of the bankruptcy court.” Otherwise, debtors risk dismissal of their petition and denial of a discharge.
The debtor filed a Chapter 13 bankruptcy petition and shortly thereafter was informed that his case was subject to dismissal because his liabilities exceeded the then-current secured debt limit. The debtor moved to convert his case to Chapter 11, which the bankruptcy court granted. The debtor then failed to comply with a court order obligating him to file certain documents. As a result, the Trustee moved to convert the case to Chapter 7 “for cause,” i.e., failing to provide certain documents, current insurance information, and for delay. The bankruptcy court granted the Trustee’s motion and separately ordered the debtor to file a list of post-petition creditors (or verification that he had none) and a statement of intention. The debtor filed neither, and failed to appear at a subsequent scheduled meeting of creditors.
The bankruptcy court then entered an order requiring the debtor to file his overdue documents or face a denial of discharge. The debtor again failed to file the requisite documents, and the court ordered the debtor to show cause why he should not be denied a discharge. The debtor’s counsel represented that they would have the requisite documents by August 30, but the court – again – received nothing. Thereafter, the court scheduled a show-cause hearing, and, just days before the hearing, the debtor filed several of the documents at issue. The debtor explained that he “delegated responsibility to his wife to collect the mail and handle financial matters,” that his wife took an extended break, and upon her return, suffered a second-degree burn that further delayed the debtor’s response.
The bankruptcy court rejected the debtor’s explanation, noting that the debtor’s “problem[s]” have “been going on since March 2017”. Finding that the debtor “repeatedly ignored lawful orders of the Court”, and “exhibited a ‘conscious practice of ignoring mail, address to [him] and marked with the seal of this Court,” the court denied the debtor a discharge and dismissed his petition. The Bankruptcy Appellate Panel for the First Circuit affirmed the bankruptcy court’s decision, and the debtor filed an appeal.
The debtor presented four arguments on appeal: (1) the “automatic dismissal” provision should have been applied mechanically to dismiss the debtor’s case without prejudice when he failed to file the required documents; (2) bankruptcy courts cannot order denials of discharge sua sponte; (3) the debtor did not willfully disregard the bankruptcy court’s orders; and (4) the denial of discharge infringed debtor’s due process rights.
The First Circuit found these arguments unpersuasive. First, as to the “automatic dismissal” claim, the First Circuit noted that while some bankruptcy courts “have interpreted [Section 521(i)(1)] as demanding mechanical application”, the First Circuit “has already staked out a position in this debate, holding that . . . a mechanical application of the automatic dismissal provision is contrary to congressional intent.” The court rejected the debtor’s attempt to distinguish precedential case law on the issue.
Second, as to question of the bankruptcy court’s authority to order denials of discharge sua sponte, the First Circuit opined that the debtor’s “argument overlooks 11 U.S.C. § 105(a) . . . which makes clear that Congress did not intend any provision of this title . . . to preclude the court from, sua sponte, taking any action . . . to prevent an abuse of process.”
Third, as to willful disregard, the First Circuit explained that the “debtor’s attempt to delegate responsibility to a spouse, without more, is not a legally cognizable excuse for non-compliance with a court order and may constitute willful disobedience.”
Finally, the court dismissed the debtor’s due process arguments by noting that at least two of the bankruptcy court’s orders expressly informed the debtor of the possibility of denial of discharge as a consequence of non-compliance, and that the debtor acknowledged receiving those orders. The court further noted that the show-cause proceeding provided a “constitutionally sufficient opportunity” for the debtor to be heard.
As this case illustrates, Debtors do not have an automatic and inviolable right to the protection of the bankruptcy court: those courts possess the equitable power to dismiss the petitions of and deny discharges to debtors that repeatedly fail to comply with court orders.