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Fourth Circuit Rules Trustee May Appeal Order Denying Attempt to Dismiss Bankruptcy - McDow v. Dudley

December 12, 2011

In bankruptcy, a trustee stands in for the people who filed for bankruptcy, assuming financial responsibilities that most people handle for themselves. Depending on the situation, the trustee may not serve the best interests of the debtors; he or she has obligations to creditors as well. So our Riverside consumer bankruptcy lawyers were interested to see a recent bankruptcy appeals ruling that pitted debtors against their trustee. In McDow v. Dudley, David and Anne Dudley of Virginia filed for Chapter 13 bankruptcy in 2008, but converted to a Chapter 7 case. Their bankruptcy trustee, W. Clarkson McDow, Jr., then moved to dismiss the case as abusive, but the bankruptcy court denied it. On appeal, the district court ruled that the order was not appealable and dismissed it. The Fourth Circuit reversed, finding that a motion to dismiss for abuse is appealable.

McDow originally moved in bankruptcy court to convert to a Chapter 7 case or dismiss, so the Dudleys moved themselves to convert to a Chapter 7 case. After this was granted, McDow moved to dismiss for abuse. He argued that the Dudleys should not hve a Chapter 7 case because they failed the means test devised in the 2005 bankruptcy law changes, and that their entire case was abusive because they had the means to pay back their creditors. The Dudleys countered that the means test does not apply to conversion cases. The bankruptcy court agreed, breaking with legal authorities to find that the means test applies only to cases filed under Chapter 7 originally. It entered summary judgment for the Dudleys, and McDow appealed to the district court. That court found that it lacked jurisdiction because the bankruptcy judge's order was not final. While McDow's appeal to the Fourth Circuit was pending, the Dudleys finished their case and discharged their debts.

The Fourth reversed, finding that the district court should have been willing to consider the order final and appealable. Generally speaking, it said, finality is handled by the courts in a more practical and less legalistic way in bankruptcy. Thus, previous Fourth Circuit caselaw says bankruptcy orders may be immediately appealed if they dispose of "discrete disputes in the larger case." McDow argued that this is such a discrete dispute, and that the nature of a motion to dismiss as abusive requires expedited review. After all, he said, distributing assets to creditors in a case that is later dismissed can create inefficiency and potentially cheat creditors. Overruling the bankruptcy court, the Fourth Circuit found that the 2005 bankruptcy law changes showed Congressional intent to police all Chapter 7 cases for abuse, including converted cases. This shows the importance of resolving abuse claims quickly, the court said. Thus, it agreed with McDow that such an order should be appealable. Several appeals courts have ruled in the same way, it noted -- one after 2005. Thus, it vacated and reversed the dismissal order.

As Irvine personal bankruptcy attorneys, we agree with the Fourth Circuit that it is most efficient to appeal a motion to dismiss for abuse earlier in the case. However, we'd like to note that the courts are using the word "abuse" in a way that we find misleading. The means test in the 2005 bankruptcy law did not just establish a threshold for Chapter 7 cases; it redefined any Chapter 7 filing that doesn't meet that threshold as "abusive." Thus, starting out with a certain amount of income is now enough to make a Chapter 7 case "abusive," regardless of other circumstances. Our San Diego County individual bankruptcy lawyers believe bankruptcy judges should be given more flexibility than this, given the wide variety of circumstances faced by bankruptcy debtors in this economy.

If your family is struggling with serious debt and you'd like to discuss whether bankruptcy is right for you, Howard Law, P.C., can help. For a confidential case evaluation, call us today at 1-800-872-5925 or send us a message online.

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