Adams v. Zarnel (In re Zarnel)

2010 WL 3341428 (2d Cir. August 26, 2010)
The Court first held that the Trustee, although not “aggrieved” by the rulings of the bankruptcy court, had standing to appeal on the basis of the broad authorization found in 11 U.S.C. § 307 and the Trustee’s responsibility to protect the “public interest.” The Court also held that, under either party’s interpretation of the meaning of the word “pending” in 11 U.S.C. § 362(c), the case was not moot. Turning to the merits, the Court held that a petition filed by an ineligible debtor under §§ 301, 302 or 303 both commences a bankruptcy case and operates as a stay under § 362(a). Id. at *9. Thus, the Court concluded that each of the debtors had “commenced” a “case” in the bankruptcy court, notwithstanding their failure to comply with the credit counseling requirement of 11 U.S.C. § 109(h), and were subject to an automatic stay under § 362(a). In the process, the Court explicitly overruled its prior inconsistent holding in In re BDC 56 LLC, 330 F.3d 111 (2d Cir. 2003), finding that the intervening U.S. Supreme Court opinion in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006) was dispositive on this point. The Court remanded the case to give the bankruptcy court an opportunity in the first instance to reconsider whether, given the Court’s opinion, striking the debtors’ petitions was the appropriate disposition of the cases, rather than dismissal as argued by the Trustee.
Procedural context:
The United States Trustee appealed the district court’s judgment affirming the bankruptcy court’s orders striking the debtors’ petitions . The Second Circuit vacated the judgment of the district court and remanded the case with instructions to further remand the case to the bankruptcy court for further proceedings consistent with the opinion.
The case involves a consolidated appeal arising out of three unrelated individual bankruptcy filings in the Bankruptcy Court for the Southern District of New York. In each case, it was undisputed that the putative debtor had failed to comply with the credit counseling requirement set forth in 11 U.S.C. 109(h). After a hearing, the bankruptcy court decided “to ‘strike’ the case of each debtor, rather than to dismiss each case as requested by the [United States] Trustee.” Id. at *2. The bankruptcy court, relying on its equitable powers under 11 U.S.C. 105(a), had determined that it possessed the power to strike the petitions rather than dismiss the cases, and expressed its view that “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,’ 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. (citations omitted). Finding no such bad faith with respect to the three debtors, the bankruptcy court struck the cases without prejudice. The Trustee appealed 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.” Id. at *3. The district court raised the issue of the Trustee’s standing sua sponte, and determined that she was not “aggrieved” and therefore lacked standing to appeal. Nonetheless, the district court proceeded to decide the appeal on its merits in the alternative, and affirmed the bankruptcy court’s orders in all respects. The Trustee appealed to the Second Circuit Court of Appeals.
Leval, Katzmann and Livingston. Opinion by J. Livingston.

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