Stearns v. Pratola

Filing 20

MEMORANDUM OPINION AND ORDER Signed by the Honorable Robert M. Dow, Jr. on 8/31/2018. This case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 17-11668. Appellant Glenn Stearns, Chapter 13 Trustee ("Trustee"), appeals from the Bankruptcy Court's order and memorandum opinion dated December 27, 2017, denying the Trustee's motion to dismiss the case of Christopher V. Pratola ("Debtor") pursuant to 11 U.S.C. § 1307(c). For the reasons set forth below, the Bankruptcy Court's order denying the Trustee's motion is reversed, and this matter is remanded to the Bankruptcy Court for further proceedings consistent with this opinion. Mailed notice(cdh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
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)
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Debtor.
____________________________________ )
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GLENN STEARNS, Chapter 13 Trustee
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Appellant,
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v.
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CHRISTOPHER V. PRATOLA,
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)
Appellee.
CHRISTOPHER V. PRATOLA,

Case No. 18-cv-213
Judge Robert M. Dow, Jr.
On appeal from the U.S. Bankruptcy Court
for the Northern District of Illinois,
Eastern Division
Bankr. Case No. 17-11668
Judge Janet S. Baer

MEMORANDUM OPINION AND ORDER
This case is on appeal from the United States Bankruptcy Court for the Northern District
of Illinois, Eastern Division, Case No. 17-11668. Appellant Glenn Stearns, Chapter 13 Trustee
(“Trustee”), appeals from the Bankruptcy Court’s order and memorandum opinion dated
December 27, 2017, denying the Trustee’s motion to dismiss the case of Christopher V. Pratola
(“Debtor”) pursuant to 11 U.S.C. § 1307(c).1 For the reasons set forth below, the Bankruptcy
Court’s order denying the Trustee’s motion is reversed, and this matter is remanded to the
Bankruptcy Court for further proceedings consistent with this opinion.
I.

Background
On April 13, 2017, Debtor filed a voluntary petition in the bankruptcy court under Chapter

13 of the Bankruptcy Code. See N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 1. According

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This Court also has pending before it a related appeal, Case No. 18-cv-2450. On August 9, 2018, the
parties to that appeal filed a status report [7] in which they agreed that the related appeal “would be moot
and no additional proceedings would be necessary” if the Court agreed with the Trustee’s position in this
appeal. The Court agrees that the disposition of this appeal dictates the result in the related appeal and will
issue an order in that appeal vacating the Bankruptcy Court’s order confirming Debtor’s Chapter 13 Plan.

to § 109(e) of the Bankruptcy Code, which defines who is eligible to file bankruptcy under Chapter
13, “[o]nly an individual with regular income that owes, on the date of the filing of the petition,
noncontingent, liquidated, unsecured debts of less than $394,7252 and noncontingent, liquidated,
secured debts of less than $1,184,200 * * * may be a debtor under chapter 13 of this title.”
The Debtor’s original Schedule E/F filed with the petition listed $217,115 in general
unsecured debt. N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 1, at 27. This debt consisted
of $194,563 in student loan debt owed to “Aes/Chase Bank” and “Aes/Nct” as well as $22,552 in
credit card debt owed to various creditors. Id., at 20–27. Debtor then filed an amended Schedule
E/F that same day which added to Debtor’s general unsecured debt $374,108 in federal student
loans. Id., Docket Entry 8, at 6. This debt is serviced by Federal Loan Servicing, and Debtor is
repaying it pursuant to an Income Based Repayment (“IBR”) agreement with Federal Student Aid.
Under this agreement, Debtor makes monthly payments on the debt equal to 10% of his
discretionary income for a term of twenty-five years. Upon completion of these payments, any
remaining balance on the loans will be forgiven. However, if Debtor defaults, the entire remaining
balance will become due. Id., Docket Entry 23, at 4. Debtor designated this federal student loan
debt as both contingent and disputed in his amended Schedule E/F. Id., Docket Entry 8, at 6.
Debtor’s amended Schedule E/F thus listed $374,108 in disputed and contingent unsecured debt
and $217,115 in undisputed, noncontingent, unsecured debt, for a total of $591,223.
On April 20, 2017, the Trustee moved to dismiss Debtor’s case pursuant to 11 U.S.C.
§§ 109(e) and 1307(c). See N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 17. Specifically,
the Trustee argued that Debtor was ineligible for Chapter 13 relief because he owed unsecured
debts in excess of § 109(e)’s $394,725 unsecured debt limit. According to the Trustee, owing debt
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These amounts are adjusted every three years. See 11 U.S.C. § 104(a).

2

in excess of the statutory limit warrants dismissal for cause under §§ 109(e) and 1307(c) of the
Bankruptcy Code. Debtor filed a response to the motion, arguing that his $374,108 in federal
student loan debt was contingent because it is subject to IBR repayment and could be forgiven
before he has to pay the full amount. See Id., Docket Entry 23. Only noncontingent debt is
considered in determining a debtor’s eligibility based on § 109(e)’s unsecured debt limit. § 109(e).
Therefore, Debtor argued, this debt should not be included in a determination of his Chapter 13
eligibility. Without this federal student loan, Debtor’s unsecured debt would be well below
§ 109(e)’s limits. Debtor made no other arguments in response to the Trustee’s motion, and he
conceded that if his federal student loan debt were considered noncontingent, he would be
ineligible for Chapter 13 relief. See id. at 1.
The Bankruptcy Court issued an order on December 27, 2017, denying the Trustee’s
motion to dismiss “for lack of cause under 11 U.S.C. § 1307(c).” See N.D. Ill. Bankr. Case No.
17-11668, Docket Entry 39. In its accompanying memorandum opinion, the Bankruptcy Court
first determined that the Debtor’s student loan debt subject to an IBR agreement was noncontingent
because he has a current duty to pay back this debt, notwithstanding the possibility of forgiveness
that the IBR payment plan may offer in the future. Docket Entry 38, at 4–6. The Bankruptcy
Court then turned to the issue of whether § 1307(c), which provides that a Chapter 13 case may be
converted or dismissed for cause, requires dismissal of a Chapter 13 case if the inclusion of
educational debt causes a debtor to exceed the § 109(e) unsecured debt limit. The Bankruptcy
Court held that it does not. Id. at 6–13.
After noting that ineligibility under § 109(e) is usually cause for dismissal or conversion
of a Chapter 13 case but is not an absolute bar, the Bankruptcy Court concluded that it was without
clear direction from either the Bankruptcy Code or case law as to whether cause for dismissal

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under § 1307(c) exists in this situation. Id. at 7. Based on this perceived ambiguity, the
Bankruptcy Court turned to legislative history and policy considerations regarding educational
debt to determine whether Debtor’s case should be dismissed. The Bankruptcy Court concluded
that based on the history surrounding the debt limits’ enactment, Congress could not have intended
to exclude someone like Debtor, an otherwise eligible individual exceeding § 109(e)’s unsecured
debt limit solely because of educational debt, from Chapter 13 relief. The Bankruptcy Court also
noted that the failure of the unsecured debt limit to account for the changing nature and increasing
amount of educational debt in the United States creates an absurd situation for individuals like
Debtor, who could be ineligible for Chapter 13 relief despite being best suited for it. Id. at 9–12.
Based on these considerations, the Bankruptcy Court held that there was no cause for
dismissal of Debtor’s Chapter 13 case under § 1307(c). The Bankruptcy Court specifically noted
that “[d]ismissing [Debtor’s] case would not advance the Congressional intent behind the debt
limits, and doing so would hinder the principal purpose of the Bankruptcy Code—to grant a ‘fresh
start’ to the honest but unfortunate debtor.” Id. at 12 (citation omitted). The Bankruptcy Court
determined that its decision declining to dismiss the case advanced the best interests of the
creditors and the estate because Debtor would be able to continue making payments on his
educational debt and pay other general unsecured creditors a percentage of their claims; dismissal
or conversion to Chapter 7 or Chapter 11 would not necessarily lead to that same outcome. Id. at
13.
The Trustee filed this appeal on January 11, 2018, [see 1], and filed his brief on March 22,
2018, [see 9]. Debtor has filed a response brief [12], and the Trustee has filed a reply [14]. The

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United States Trustee has filed an amicus curiae brief in support of the Trustee and reversal of the
Bankruptcy Court’s decision. [See 10].3
After this appeal was filed, Debtor’s Chapter 13 case proceeded. The Trustee moved to
stay the bankruptcy proceedings pending appeal and objected to confirmation of Debtor’s Chapter
13 plan. See N.D. Ill. Bankr. Case No. 17-11668, Docket Entries 52, 58. The Bankruptcy Court
denied both motions and entered an order confirming Debtor’s Chapter 13 plan on March 23, 2018.
See id., Docket Entries 71, 72, 73, 74.4
The Trustee raises the following issues on appeal [see 9, at 4–5]:
(1)
(2)

II.

Whether the Bankruptcy Court abused its discretion in denying the Trustee’s
motion to dismiss.
Whether 11 U.S.C. § 109(e) requires dismissal or conversion of a Debtor’s Chapter
13 petition upon determination of ineligibility of the Debtor to qualify under
Chapter 13 of Title 11 (§§ 1301 et seq.).

Standard of Review
“District courts sit as appellate courts when hearing appeals from bankruptcy courts.”

Hijjawi v. Five N. Wabash Condo. Ass’n, 491 B.R. 876, 880 (N.D. Ill. 2013). The Bankruptcy
Court’s factual findings are scrutinized for clear error, while its legal conclusions are reviewed de
novo. Kovacs v. United States, 739 F.3d 1020, 1023 (7th Cir. 2014). To the extent that the
Bankruptcy Code commits a decision to the discretion of the Bankruptcy Court, that decision is
reviewed for abuse of discretion. Belson v. Olson Rug Co., 483 B.R. 660, 664 (N.D. Ill. 2012)
(citing Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009)). “In general terms,

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Pursuant to 11 U.S.C. § 307(c), “[t]he United States trustee may raise and may appear and be heard on
any issue in any case or proceeding.”

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The Trustee has appealed the Bankruptcy Court’s orders overruling his objection to the Plan and the
Bankruptcy Court’s Order confirming Debtor’s Chapter 13 Plan. See N.D. Ill. Case No. 18-cv-2450. As
noted above, in disposing of the related appeal, this Court will enter an order vacating the Bankruptcy
Court’s confirmation order.

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a court abuses its discretion when its decision is premised on an incorrect legal principle or a
clearly erroneous factual finding, or when the record contains no evidence on which the court
rationally could have relied.” In re KMart Corp., 381 F.3d 709, 713 (7th Cir. 2004).
III.

Analysis
A.

Jurisdiction

Although no party has contested the Court’s jurisdiction over this appeal, the Court has an
independent duty to satisfy itself that jurisdiction exists. See Hijjawi, 491 B.R. at 880. The parties
assert that jurisdiction exists pursuant to 28 U.S.C. § 158(a), which grants district courts
jurisdiction to hear appeals “from final judgments, orders, and decrees” of the bankruptcy court.
28 U.S.C. § 158(a)(1). “Finality in a bankruptcy appeal is considerably more flexible than in an
ordinary civil appeal taken under 28 U.S.C. § 1291 and, in the bankruptcy context, does not require
the termination of the entire bankruptcy proceeding.” Schaumburg Bank & Tr. Co., N.A. v.
Alsterda, 815 F.3d 306, 312 (7th Cir. 2016) (citing Bullard v. Blue Hills Bank, -- U.S. --, 135 S.
Ct. 1686, 1691–92 (2015); Zedan v. Habash, 529 F.3d 398, 402 (7th Cir. 2008)). Courts instead
look to see if the decision “finally disposed of a discrete dispute within the larger case.” Id. (citing
Bullard, -- U.S. --, 135 S. Ct. at 1692; In re Bulk Petroleum Corp., 796 F.3d 667, 671 (7th Cir.
2015)); see also In re Oakley, 344 F.3d 709, 711 (7th Cir. 2003) (district court’s order reversing
bankruptcy order sustaining trustee’s objection to claimed exemption was final “because it cannot
be affected by the resolution of any other issue in the [Chapter 7] proceeding, and therefore no
purpose would be served by postponing the appeal to the proceeding’s conclusion”).
Whether the denial of the motion to dismiss in this instance is an appealable final order
presents a question on which the case law remains somewhat murky. In the Chapter 7 context, the
Seventh Circuit has indicated that a decision denying a motion to dismiss may be appropriate for
appeal if it “resolve[s] all of the contested issues on the merits and [leaves] only the distribution
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of estate assets to be completed.” See In re Ross-Tousey, 549 F.3d 1148, 1152–53 (7th Cir. 2008)
(denial of motion to dismiss under §§ 707(b)(2) and 707(b)(3)(B) was final and appealable),
abrogated on other grounds, Ransom v. FIA Card Servs., N.A., 562 U.S. 61 (2011); see also McDow
v. Dudley, 662 F.3d 284, 289–90 (4th Cir. 2011) (agreeing with the Seventh Circuit’s holding in
Ross-Tousey and noting that orders denying a § 707(b) motion to dismiss a Chapter 7 case as
abusive are final and appealable because “Section 707(b) creates a statutory gateway based on
whether the case is abusive, and an order denying that motion dismiss as abusive, in effect, finally
and conclusively resolves the issue. If the denial of a § 707(b) motion to dismiss cannot be
appealed immediately to the district court, the Chapter 7 proceedings would have to be completed
before it could be determined whether the proceedings were abusive in the first place”); In re
Randle, 2007 WL 2668727, at *4 (N.D. Ill. July 20, 2007) (orders denying dismissals of Chapter
7 cases for substantial abuse are appealable “because the orders end litigation on the merits, leaving
only the execution of judgment”). However, the Seventh Circuit concluded in In re Jartran, Inc.,
886 F.2d 859, 863–64 (7th Cir. 1989), that a bankruptcy court’s order denying a motion to dismiss
pursuant to § 1112(b), which parallels language in § 1307(c) for Chapter 11 filings, was not final.
See also COMM 2013 CCRE12 Crossing Mall Road, LLC v. Tara Retail Grp., LLC, 2017 WL
2837015, at *4 (N.D. W. Va. June 30, 2017) (same).5
Fortunately, in the present posture of the case the question of finality is a moot point, for
after this appeal was taken, the Bankruptcy Court entered an order confirming Debtor’s Chapter
13 plan. The parties filed a separate notice of appeal from the confirmation order, and that related

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The Third Circuit has held that a motion to dismiss a Chapter 13 case pursuant to § 1307(c) was final and
appealable in one instance. See In re Klaas, 858 F.3d 820, 825–26 (3d Cir. 2017) (order denying creditor’s
motion to dismiss Chapter 13 case was final and appealable, noting that “[t]he practical effect of that
conclusion was to certify the case as eligible for a completion discharge * * * [t]his functionally ended the
bankruptcy case and thus affected Creditor’s claim on the estate”).

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appeal has been stayed pending the resolution of this one. Even if the original dismissal order was
not final for purposes of appeal, a premature notice of appeal takes effect when the final judgment
is entered. See Fed. R. Bankr. P. 8002(a)(2); cf. Trade Well Int’l v. United Cent. Bank, 778 F.3d
620, 625 (7th Cir. 2015) (citing Fed. R. App. P. 4(a)(2)). And, in any event, it would be a futile
gesture to dismiss the initial appeal so that all of the issues presented here could be folded into the
related appeal, which was taken from a judgment that was indisputably final. See In re Wade, 991
F.2d 402, 406 (7th Cir. 1993).
B.

The Bankruptcy Court’s Order and Memorandum Opinion

No party has questioned the Bankruptcy Court’s determination that Debtor’s educational
debt is noncontingent. Therefore, the parties do not dispute that all $591,223 of the unsecured debt
listed on Debtor’s Schedule E/F is noncontingent and liquidated, including Debtor’s educational
debt subject to an IBR plan.
The only issue on appeal relates to whether the Bankruptcy Court abused its discretion in
concluding that the existence of educational debt in excess of § 109(e)’s limit is not cause for
dismissal or conversion under § 1307(c). Because there are no factual or evidentiary issues
associated with this decision, whether the Bankruptcy Court abused its discretion turns on the
Court’s legal determination that Debtor could proceed under Chapter 13 despite the amount of his
unsecured debt.
The Trustee argues that the Bankruptcy Court abused its discretion in denying its motion
to dismiss on that basis. According to the Trustee, if a debtor exceeds § 109(e)’s unsecured debt
limit, he cannot proceed under Chapter 13—regardless of the substantive nature of the debt—and
his case must be dismissed or converted to another chapter under § 1307(c). [9, at 6–7.] The
United States Trustee, as amicus curiae, agrees that a debtor who cannot satisfy § 109(e) cannot

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seek relief under Chapter 13. [10, at 6–8.] Debtor argues that the Bankruptcy Court’s order should
be affirmed, as the Bankruptcy Court has discretion to carve out an exception to § 109(e)’s debt
limits for those debtors who exceed those limits solely due to educational debt. [12, at 5–7.]
Therefore, according to Debtor, the Bankruptcy Court did not abuse its discretion by doing so in
his case. [Id.]
1.

Relevant Portions of the Bankruptcy Code

Section 109 of the Bankruptcy Code is titled “Who May Be A Debtor.” The various
subsections contained within this section “serve an important gatekeeping role. Those provisions
‘specify who qualifies—and who does not qualify—as a debtor under the various chapters of the
Code.’” Puerto Rico v. Franklin California Tax-Free Trust, -- U.S. --, 136 S. Ct. 1938, 1947
(2016) (quoting Toibb v. Radloff, 501 U.S. 157, 161 (1991)). Section 109(e) defines who may be
a Chapter 13 debtor:
Only an individual with regular income that owes, on the date of the filing of the
petition, noncontingent, liquidated, unsecured debts of less than $394,725 and
noncontingent, liquidated, secured debts of less than $1,184,200, or an individual
with regular income and such individual’s spouse, except a stockbroker or a
commodity broker, that owe, on the date of the filing of the petition, noncontingent,
liquidated, unsecured debts that aggregate less than $394,725 and noncontingent,
liquidated, secured debts of less than $1,184,200 may be a debtor under chapter 13
of this title.
11 U.S.C. § 109(e). As with the other subsections of § 109, this subsection creates a “gateway”
into the Chapter 13 bankruptcy process for those who are eligible. In re Glance, 487 F.3d 317,
321 (6th Cir. 2007). Filing under Chapter 13 “allow[s] a relatively small debtor to reschedule his
payment obligations to his creditors, ‘retain his property and avoid the stigma of a straight
bankruptcy.’” Id. (quoting In re Pearson, 773 F.2d 751, 753 (6th Cir. 1985)).
Because § 109(e) has no internal enforcement provision, the Trustee moved to dismiss
Debtor’s case under § 1307(c). Section 1307(c) provides that “on request of a party in interest or
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the United States trustee and after notice and a hearing, the court may convert a case under this
chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever
is in the best interests of creditors and the estate, for cause.” 11 U.S.C. § 1307(c). This subsection
provides a nonexhaustive list of what may constitute “cause” for conversion or dismissal.
§ 1307(c)(1)–(11); see also In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992) (determining that lack
of good faith, although not listed in § 1307(c), constitutes cause for dismissal under Chapter 13);
In re Jensen, 425 B.R. 105, 109 (Bankr. S.D.N.Y. 2010) (stating that the list of causes in § 1307(c)
“is not exhaustive, but exemplary”) (internal quotation marks and citation omitted).
2.

The Bankruptcy Court Order Was Premised on a Legal Error

After initially determining that Debtor’s educational debt subject to an IBR agreement is
noncontingent for purposes of § 109(e)’s unsecured debt limit, the Bankruptcy Court considered
whether Debtor’s unsecured debt in excess of that limit required dismissal of his case under
§ 1307(c). The Bankruptcy Court first looked to the text of § 1307(c) and noted that, while “cause”
is not defined in the statute, courts agree that ineligibility based on exceeding the statutory debt
limit is usually cause for either dismissal or conversion. See N.D. Ill. Bankr. Case No. 17-11668,
Docket Entry 38, at 7 (citing In re Day, 747 F.2d 405, 407 (7th Cir. 1984); In re Dobkin, 12 B.R.
934, 936 (Bankr. N.D. Ill. 1981)). The Court also stated, however, that ineligibility based on
exceeding the debt limit is not an “absolute” cause for conversion or dismissal. Id. (citing United
States v. Edmonston, 99 B.R. 995, 995 (E.D. Cal. 1989)). The Bankruptcy Court next concluded
that neither § 1307(c) nor § 109(e) expressly required dismissal of a case where educational debt
alone causes a debtor to exceed § 109(e)’s unsecured debt limit. The Court thus turned to the
legislative history of § 109(e)’s debt limits, along with the practical realities of Debtor’s situation,

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in order to reach its decision that no cause exists to dismiss or convert Debtor’s Chapter 13 case.
Id.
The Court respectfully disagrees with the Bankruptcy Court’s conclusion that § 109(e) and
§ 1307(c) are ambiguous. To the contrary, the text of § 109(e)’s eligibility requirement plainly
bars Debtor from proceeding under Chapter 13, and under § 1307(c) his case must either be
dismissed or converted. Because the Bankruptcy Court’s decision is premised on the incorrect
legal principle that Debtor may proceed under Chapter 13 despite his ineligibility, the Bankruptcy
Court abused its discretion in denying the Trustee’s motion to dismiss. See Cooter & Gell v.
Hartmarx Corp., 496 U.S. 384, 405 (1990) (noting that a court “would necessarily abuse its
discretion if it based its ruling on an erroneous view of the law”).
a.

Debtor is Ineligible for Chapter 13 Relief Because He Owes Debt
In Excess of Section 109(e)’s Unsecured Debt Limit

The Court first addresses whether § 109(e) allows a debtor to be eligible for Chapter 13
relief—despite having debts in excess of the statutory limit—based on the nature of the debts
owed. Based on the unambiguous text of this subsection, it does not.
“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and
it is our obligation to interpret the Code clearly and predictably using well established principles
of statutory construction.” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639,
649 (2012). According to such principles, courts “must give effect to the clear meaning of statutes
as written.” Star Athletica, L.L.C. v. Varsity Brands, Inc., -- U.S. --, 137 S. Ct. 1002, 1010 (2017)
(citing Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 476 (1992)). “We thus begin and
end our inquiry with the text, giving each word its ‘ordinary, contemporary, common meaning.”
Id. (citing Walters v. Metro. Educ. Enter., Inc., 519 U.S. 202, 207 (1997)); see also In re Miller,
493 B.R. 55, 59 (Bankr. N.D. Ill. 2013) (“When a statute is clear, a court’s only task is to give
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effect to its meaning. Once that is done, judicial inquiry is complete.”) (internal quotation marks
and citations omitted); In re Cannon, 2013 WL 6499304, at *10 (Bankr. D. Utah Dec. 11, 2013)
(“Where the language of a statute is clear, the sole function of the courts is to enforce it according
to its terms.”), aff’d, 521 B.R. 686 (D. Utah 2014).
Section 109(e)’s text unambiguously prevents Debtor, who the parties agree owed
$591,223 in noncontingent, liquidated, unsecured debt on the date of his petition, from proceeding
under Chapter 13. According to the statute, “[o]nly an individual with regular income that owes,
on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than
$394,725” may be a Chapter 13 debtor.6 § 109(e) (emphasis added). Beyond specifying that the
debt subject to this limit must be noncontingent, liquidated, and unsecured, the statute contains no
reference to specific types of debt or any indication that the type of debt would affect a debtor’s
eligibility to file a petition under Chapter 13. The statute says only that an individual, with a
regular income, owing less than the unsecured debt limit may be a Chapter 13 debtor. Debtor owes
more than the unsecured debt limit: despite the educational nature of this debt, under the plain
language of § 109(e), he is ineligible for Chapter 13. See Miller, 493 B.R. at 58–59 (rejecting
argument, based on the plain language of § 109(e), that joint debtors who exceeded the unsecured
debt limit should nonetheless be eligible to file under Chapter 13 because they would have been
allowed to file separate individual cases: the debt limits in § 109(e) are clear, and therefore debtors
were “plainly ineligible” to be Chapter 13 debtors); see also 2 COLLIER

ON

BANKRUPTCY

¶ 109.06[1] (2018) (“The eligibility criteria set forth in section 109(e) are specific and restrictive,

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Debtor lists no secured debt in his bankruptcy petition, and the parties have not referenced any secured
debt that Debtor may owe. Therefore, this opinion limits its discussion of § 109(e)’s limits to the unsecured
debt limit.

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with monetary amounts established to govern eligibility so as to ensure that those persons for
whose benefit the chapter is directed are those who employ its provisions.”).
This reading of the statute is supported by Seventh Circuit case law. The Seventh Circuit
has stated that a debtor whose unsecured obligations exceed § 109(e)’s limits “cannot obtain relief
under Chapter 13.” In re Day, 747 F.2d 405, 407 (7th Cir. 1984). In Day, a creditor moved to
dismiss the debtor’s Chapter 13 petition, claiming that under § 506(a) the unsecured portion of a
debtor’s secured debts should be treated as unsecured for purposes of § 109(e), which would cause
the debtor to exceed the statutory unsecured debt limit. The bankruptcy court denied the motion,
but the district court reversed on appeal. The Seventh Circuit affirmed the district court, holding
that the unsecured portion of the debt counted against the debt limit. Id. at 407. Because the
debtor’s unsecured debts exceeded the § 109(e) limit, the debtor could not obtain Chapter 13 relief.
Id. The Seventh Circuit has similarly affirmed dismissal of a Chapter 13 bankruptcy petition where
the debtor’s disputed debt was noncontingent, liquidated, and unsecured: the lower court had
“properly included the State’s claim when computing Mr. Knight’s eligibility for chapter 13 relief,
and correctly found that his unsecured debts exceeded the debt ceiling on eligibility.” In re Knight,
55 F.3d 231, 232 (7th Cir. 1995). The Seventh Circuit did not engage in a statutory analysis of
§ 109(e) in either of these decisions, nor did it assess how the nature of the debts affected a debtor’s
eligibility for Chapter 13 relief. However, these decisions do support the proposition that a
debtor’s ineligibility based on exceeding § 109(e)’s debt limits clearly makes that debtor ineligible
under the statute.
Other circuit courts, district courts, and bankruptcy courts similarly have dismissed Chapter
13 cases because the debtor at issue exceeded § 109(e)’s limits. These courts have done so without
considering whether the nature of the debt that placed the debtor over the unsecured debt limit

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warranted creating an exception to § 109(e)’s unambiguous requirements. See, e.g., Glance, 487
F.3d at 323 (affirming dismissal of Chapter 13 case because the sum of secured debts exceeded
§ 109(e)’s secured debt limit); In re Mazzeo, 131 F.3d 295, 305 (2d Cir. 1997) (affirming
bankruptcy court’s dismissal of Chapter 13 case where debtor’s disputed unsecured debt was
considered both noncontingent and liquidated, and this debt exceeded statutory debt limit); In re
Stebbins, 2015 WL 792095, at *8 (Bankr. E.D.N.Y. Feb. 24, 2015) (dismissing Chapter 13 case
because debtor owed liquidated, noncontingent, unsecured debt in excess of statutory limit);
Cannon, 521 B.R. at 697–98; In re Schwartz, 2012 WL 1020011, at *6 (E.D. Mich. Mar. 26, 2012);
In re Grenchik, 386 B.R. 915, 919 (Bankr. S.D. Ga. 2007) (dismissing Chapter 13 case because
debtors’ unsecured debt exceeded debt limit, and therefore “they are not eligible to be Chapter 13
debtors”); In re Ristic, 142 B.R. 856, 861 (Bankr. E.D. Wis. 1992) (dismissing Chapter 13 case
based on a lack of good faith, but also noting that debtor was ineligible for Chapter 13 relief
because his total noncontingent, liquidated, and unsecured debts exceed statutory debt limits);
Lucoski v. I.R.S., 126 B.R. 332, 342 (S.D. Ind. 1991); In re Bos, 108 B.R. 740, 742 (Bankr. D.
Mont. 1989); In re Cronkleton, 18 B.R. 792, 793 (Bankr. S.D. Ohio 1982); In re Flaherty, 10 B.R.
118, 120 (Bankr. N.D. Ill. 1981). Although the decisions of these courts are not binding, the Court
is persuaded that their approach to § 109(e) comports with the text of the statute and the Seventh
Circuit cases cited above; a debtor whose debt exceeds the unsecured or secured debt limit cannot
proceed under Chapter 13.
The Bankruptcy Court here took a different approach because it concluded that “Congress
simply could not have intended to exclude otherwise eligible individuals from being chapter 13
debtors solely because of educational debt that exceeds the limit.” N.D. Ill. Bankr. Case No. 1711668, Docket Entry 38, at 10. Specifically, the Bankruptcy Court noted that Congress enacted

14

the debt limits in § 109(e) “in order to prevent sole proprietors with large businesses from abusing
creditors by avoiding chapter 11.” Id. at 9 (citing Report of the Committee on the Judiciary). The
Bankruptcy Court reasoned that individuals with large amounts of educational debt are not the
types of debtors Congress intended to exclude from Chapter 13, since creditor protection concerns
do not apply to such individuals in the same way that they would with sole proprietors of large
businesses. Id.
The Bankruptcy Court also reasoned that Congress treats educational debt differently in
other contexts within the Bankruptcy Code: such debt is generally nondischargeable, for example,
and some courts hold that a Chapter 13 plan can classify such debt separately from other general
unsecured debt in some circumstances. N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 38, at
11. The Bankruptcy Court further noted that the Chapter 13 debt limits have only increased
gradually since they were enacted, while at the same time educational costs and debts in the United
States have skyrocketed. This “creates an absurd situation” in which “an individual with modest
income and an immense amount of educational debt is best suited for chapter 13 bankruptcy but
exceeds the § 109(e) unsecured debt limit.” Id. at 11–12. The Trustee argues that because the
statute is clear, these considerations regarding educational debt are irrelevant and should not affect
Debtor’s eligibility. [9, at 9–13.] Debtor, however, argues that courts routinely carve out
exceptions to statutes, as the Bankruptcy Court did here, and therefore consideration of these issues
was an appropriate use of discretion. [12, at 15–17.]
The Court is not unsympathetic to the policy concerns raised by the Bankruptcy Court and
highlighted by Debtor in his opposition brief regarding individuals with large amounts of
educational debt, but the power to create such an exception to § 109(e) lies with Congress rather
than the courts. See In re Milwaukee Engraving Co., Inc., 219 F.3d 635, 637 (7th Cir. 2000)

15

(“Although the bankruptcy judge believed that applying the Code literally would be inequitable,
‘[b]ankruptcy courts are not authorized in the name of equity to make wholesale substitution of
underlying law * * * but are limited to what the Bankruptcy Code itself provides.’”) (quoting
Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 24–25 (2000)); see also In re Thorpe, 881 F.3d 536,
539 (7th Cir. 2018) (“‘Venturing into legislative history [is] unnecessary’ when statutory text is
clear”) (quoting In re Bronk, 775 F.3d 871, 876 (7th Cir. 2015)); Miller, 493 B.R. at 59 (“It is not
the place of courts to rewrite the Code * * * [or] even to interpret Code provisions to further
particular congressional policies * * * if no interpretation is necessary. Section 109(e) is clear.
No interpretation is necessary.”). Courts must enforce statutes as written; they cannot “rewrite the
statute that Congress has enacted.” Puerto Rico, 136 S. Ct. at 1949 (quoting Dodd v. United States,
545 U.S. 353, 359 (2005)). Creating an exception to Chapter 13’s eligibility requirements
effectively rewrites the statute, substituting a discretionary substantive standard for the bright-line
rule established by Congress.
To the extent that courts have confronted arguments that certain types of debt should not
be counted for § 109(e) eligibility purposes, these arguments have largely been rejected. For
example, the Fifth Circuit rejected a debtor’s argument that § 109(e)’s unsecured debt limit (which
at the time was $100,000) should not apply to her because that limit “was intended only ‘to prevent
large business[es] from utilizing Chapter 13, not to thwart or inhibit the small proprietor or
individual whose debt may stretch those limits.” See In re Hammers, 988 F.2d 32, 34 (5th Cir.
1993). The Fifth Circuit still affirmed dismissal of the petition because “[t]he text [of § 109(e)] is
clear and unambiguous—an individual is an individual, and $100,000 is $100,000.” Id.
Moreover, three other recent bankruptcy court decisions have rejected arguments that
educational debt specifically should not be counted towards § 109(e)’s unsecured debt limit for

16

policy reasons. See In re Bailey-Pfeiffer, 2018 WL 1896307, at *4 (Bankr. W.D. Wis. Mar. 23,
2018) (finding that debtor was ineligible to proceed as a Chapter 13 debtor where her unsecured
debts, which consisted partially of educational debt, vastly exceeded § 109(e)’s limits: “All of
[debtor’s] equitable arguments founder on the plain language of section 109(e).”); In re Petty, 2018
WL 1956187, at *2 (Bankr. E.D. Tex. Apr. 24, 2018) (“[S]tudent loan debts must be included in
the calculation of noncontingent, liquidated, unsecured debts for purposes of determining § 109(e)
eligibility. Further, the plain terms of the Bankruptcy Code preclude the debtors from continuing
in a chapter 13 and obtaining relief for which they are ineligible.”); In re Mendenhall, 2017 WL
4684999, at *4 (Bankr. D. Idaho Oct. 17, 2017) (concluding, despite debtor’s arguments that his
student loan debt was unliquidated, that debtor’s student loans counted towards § 109(e)’s
unsecured debt limit and, because those loans exceeded that limit, debtor needed to convert the
case or it would be dismissed).7 Although not binding, the Court finds the analysis in these
decisions persuasive. Under the plain terms of § 109(e), Debtor exceeds the statutory debt limit
and so is ineligible to proceed as a Chapter 13; the nature of his debt is irrelevant. By taking its
nature into account and considering potential policy reasons why Congress would not want to
include such debt in § 109(e)’s debt limits, the Bankruptcy Court interpreted the statute in a way
that contravened its plain text.
b.

Debtor’s Ineligibility Under Section 109(e) is Cause for
Dismissal or Conversion Under Section 1307(c)

Having determined that § 109(e) does not allow a debtor to avoid debt limits based on the
type of debt that he owes, the Court must determine whether the Bankruptcy Court’ conclusion

7

But see In re Fishel, 583 B.R. 474, 478–79 (Bankr. W.D. Wis. 2018) (concluding that debtor could proceed
with Chapter 13 bankruptcy where the Department of Education had filed a claim for federal student loan
debt that potentially exceeded § 109(e)’s limits; the amount of debt was not clearly established, the debtor
would be able to make payments on proposed plan, and “the congressional intent behind limiting the
availability of Chapter 13 through section 109(e)” was not applicable).

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that there was no “cause” to dismiss this case under § 1307(c) based on a contrary interpretation
of the statute was incorrect as a matter of law. The Court concludes that it was.
Based on its determination that Debtor’s educational debt in excess of § 109(e)’s limit did
not necessarily exclude Debtor from Chapter 13 relief, the Bankruptcy Court concluded that there
was no cause for dismissal of this case based on the express language of § 1307(c) or relevant case
law. N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 38, at 12. The Bankruptcy Court also
found that its decision not to dismiss the case advanced the best interests of both creditors and the
estate, as Debtor would be able to remain current on his educational debt and contribute future
earnings to the estate to pay other general unsecured creditors. Id.
The Court again respectfully disagrees with the Bankruptcy Court’s analysis and finds that
debtor’s ineligibility constitutes cause for dismissal or conversion under § 1307(c). Furthermore,
the discretion that the Bankruptcy Court may exercise pursuant to § 1307(c) is constrained by the
text of § 109(e)’s eligibility requirements.
As previously noted, § 1307(c) lists various situations that could constitute “cause” for
dismissal or conversion, but this list is non-exhaustive. The Seventh Circuit has not explicitly held
that ineligibility is cause to convert or dismiss, although it has affirmed the dismissal of Chapter
13 petitions without discussing or citing § 1307(c). See Knight, 55 F.3d at 232; Day, 747 F.2d at
407.8

Other courts, however, have specifically found that failure to fulfill the eligibility

requirements in § 109(e) constitutes “cause” under § 1307(c). See Petty, 2018 WL 1956187, at
*2; Bailey-Pfeiffer, 2018 WL 1896307, at *3; In re McGovern, 122 B.R. 712, 719 (Bankr. N.D.
Ind. 1989); In re Dobkin, 12 B.R. 934, 936 (Bankr. N.D. Ill. 1981); see also In re Rifkin, 124 B.R.

8

Other courts have similarly dismissed Chapter 13 petitions because the debtor exceeded the unsecured
debt limit without discussing § 1307(c). See, e.g., Mazzeo, 131 F.3d at 305; Cannon, 521 B.R. at 697–98;
Grenchik, 386 B.R. at 919.

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626, 629 (Bankr. E.D.N.Y. 1991) (granting motion to dismiss pursuant to § 1307(c) because debtor
exceeded debt limits in § 109(e) without specifically addressing “cause”); In re Jerome, 112 B.R.
563, 567 (Bankr. S.D.N.Y. 1990) (same). Based on the textual analysis of § 109(e) set out above
and the Seventh Circuit’s holdings in Day and Knight, the Court concludes that failure to meet the
eligibility requirements of § 109(e) does constitute “cause” under § 109(e). A debtor who exceeds
§ 109(e)’s unsecured debt limit “cannot obtain relief under Chapter 13.” Day, 747 F.2d at 407. If
a debtor cannot obtain Chapter 13 relief, there is no basis for continuing his case under that chapter,
and it necessarily must be dismissed or converted. Cf. OneUnited Bank v. Charles Street African
Methodist Episcopal Church of Boston, 501 B.R. 1, 7 (D. Mass. 2013) (noting that pursuant to
§ 1112(b)(1), the provision for Chapter 11 bankruptcy filings analogous to § 1307(c), “ineligibility
of the entity for debtor status” can constitute cause).
The Bankruptcy Court cited United States v. Edmonston, 99 B.R. 995 (E.D. Cal. 1989), for
the proposition that ineligibility is not an absolute cause for dismissal or conversion under
§ 1307(c). However, this case is inapplicable here. In Edmonston, a creditor moved to dismiss a
debtor’s Chapter 13 case for ineligibility four months after the plan was confirmed by the
bankruptcy court. Id. at 996. The bankruptcy court denied the motion, and the district court
affirmed based on the res judicata effect of § 1327(a), which it held precludes challenges to the
debtor’s Chapter 13 eligibility post-confirmation that could have been made pre-confirmation. Id.
at 999. Although the Seventh Circuit has not ruled on this precise question, this is the majority
view. See In re Wenberg, 94 B.R. 631, 637 (9th Cir. BAP 1988) (“[T]his Panel concludes that
§ 109(e) eligibility is not jurisdictional.”); In re Pitts, 2005 WL 8157214, at *2 (Bankr. C.D. Ill.
Mar. 30, 2005) (“As most courts have recognized, eligibility for Chapter 13 as prescribed by
Section 109(e) is not jurisdictional.”). In this case, however, the Trustee filed his motion to dismiss

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Debtor’s case for ineligibility within a week of the petition date and well before confirmation. See
N.D. Ill. Bankr. Case No. 17-11668, Docket Entry 17. Therefore, there is no res judicata problem
in assessing the Trustee’s motion to dismiss Debtor’s Chapter 13 case. Moreover, the fact that the
eligibility requirements of § 109(e) may be subject to preclusion arguments does not mean that
courts “can or should, as a matter of substantive bankruptcy law, ignore the plain terms of section
109(e).” Bailey-Pfeiffer, 2018 WL 1896307, at *2. As discussed above, the plain language of
§ 109(e)’s eligibility limits forecloses any effort to distinguish certain types of noncontingent,
liquidated, unsecured debts from others in determining whether Debtor may file under Chapter 13.
Debtor argues that the Bankruptcy Court did not abuse its discretion in declining to find
cause to dismiss his Chapter 13 petition under § 1307(c) because the decision to convert or dismiss
must be made in “the best interests of the creditors and the estate,” and the Bankruptcy Court
would have abused its discretion if it did not engage in this analysis. [12, at 9–12.] While
§ 1307(c) does provide for discretion on the part of the bankruptcy court in deciding whether to
dismiss or convert a Chapter 13 case for cause, the exercise of this discretion cannot contravene
the plain language of a statute. Under § 109(e)’s plain terms, Debtor is ineligible for Chapter 13
relief. This comports with the Seventh Circuit’s holdings in Knight and Day that a debtor who
exceeds § 109(e)’s debt limit “cannot obtain relief under Chapter 13” separate and apart from any
discussion of § 1307(c). Day, 747 F.2d at 407; see also Cannon, 521 B.R. at 692 (“Congress
intended to limit the availability of Chapter 13. To do so, it adopted statutory limits on the amount
of debt an individual could carry and still qualify for Chapter 13 protection.”); In re De La Hoz,
451 B.R. 192, 203 (Bankr. M.D. Fla. 2011) (“Section 109(e) plainly indicates a congressional
intent to limit those eligible for the benefits of Chapter 13.”). Therefore, the Bankruptcy Court
has discretion under § 1307(c) to convert Debtor’s case to Chapter 7 or Chapter 11, rather than

20

dismissing it, if doing so is in the estate’s and creditors’ best interests. But the Bankruptcy Court
does not have discretion to ignore Debtor’s ineligibility for relief under § 109(e)’s plain terms and
allow him to proceed with his Chapter 13 case based on a finding that doing so is in the best
interests of the estate and creditors.
In sum, the Court concludes that the Bankruptcy Court abused its discretion in denying the
Trustee’s motion to dismiss. Under the plain language of § 109(e), Debtor is ineligible to proceed
under Chapter 13, and Debtor’s ineligibility provides “cause” to dismiss or convert the case under
§ 1307(c). The Trustee argues that, because the only option before this Court is its motion to
dismiss, the Court must not only reverse the Bankruptcy Court’s order but must also dismiss
Debtor’s case. [See 9, at 14.] However, under § 1307(c), the Bankruptcy Court may either convert
the case or dismiss it, “whichever is in the best interests of creditors and the estate.” The
Bankruptcy Court felt that the best interests of the creditors and the estate would be best served by
keeping Debtor in Chapter 13, but this result is foreclosed by Debtor’s inability to satisfy the
eligibility requirements in § 109(e). If conversion to another chapter (one other than Chapter 13)
would better serve these interests, the Bankruptcy Court has the discretion to convert the case
rather than dismiss it despite the Trustee’s request for dismissal. The Bankruptcy Court’s order
denying the Trustee’s motion to dismiss is reversed, and the case is remanded to the Bankruptcy
Court to make this determination after taking into account the views of the parties.

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IV.

Conclusion
For the reasons set forth above, the Bankruptcy Court’s order denying the Trustee’s motion

is reversed, the order confirming the Chapter 13 Plan must be vacated, and this matter is remanded
to the Bankruptcy Court for further proceedings consistent with this opinion.

Dated: August 31, 2018
___________________________
Robert M. Dow, Jr.
United States District Judge

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