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March 29, 2004.

In re: KELLY L. WAGNITZ, Debtor; JOHN NOVAK, Appellant

The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge


Appellant John Novak appeals a June 4, 2003 order of the bankruptcy court denying his motion for extension of time to file an adversary proceeding against Debtor Kelly Wagnitz ("Wagnitz" or "Debtor"), seeking dismissal of her Chapter 7 bankruptcy petition under 11 U.S.C. § 707(a). Novak sought to conduct further discovery to determine whether Wagnitz had filed the petition in bad faith which, he claimed, constitutes "cause" for dismissal under the statute. Without directly addressing whether bad faith is in fact "cause" for dismissal, the bankruptcy court found that Novak's assertion of bad faith was based solely on his belief that Wagnitz has the ability to repay her debts, and that such ability cannot alone support dismissal under § 707(a). Novak appealed to this court, arguing that Wagnitz's ability to repay her debt is just one factor in the totality of circumstances suggesting bad faith. For the reasons set forth here, the decision of the bankruptcy court is affirmed in part and vacated in part.


  The parties agree that there are no factual issues relevant to this appeal and that the court need only decide legal questions regarding the proper scope of 11 U.S.C. § 707(a). The court will Page 2 nonetheless provide a brief factual background to place the legal dispute in context. The facts are drawn from the parties' submissions before the bankruptcy court and are assumed true solely for purposes of this appeal.

  Wagnitz filed for bankruptcy under Chapter 7 of the Bankruptcy Code on December 10, 2002. At that time, she identified Novak as a creditor in the amount of $18,805.20.*fn1 (Debtor's Response to Creditor's Motion for Extension of Time to File Complaint for Bad Faith Filing (hereinafter "Debtor Response"), at 1.) Wagnitz is employed as a Senior Special Agent with the Illinois Department of Revenue/Illinois Gaming Board and earns $64,000 per year. She reportedly takes home $4,454 per month in net income and has total monthly expenses of $5,990. (Schedule I and J, Exs. to Novak's Motion for Extension of Time to File Complaint for Bad Faith Filing (hereinafter "Novak Motion").) Wagnitz is currently married but separated and has two children — a 7-month-old by her estranged husband, Craig Wagnitz, and a 13-year-old by a former husband, George Jackowiec. (Debtor Response, at 2.)

  On January 6, 2003, Wagnitz and Novak attended a § 341 meeting of creditors before interim bankruptcy trustee Joseph Voiland. 11 U.S.C. § 341 ("[w]ithin a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors"). At the meeting, Wagnitz indicated that her estranged husband Craig had been unemployed for more than a year and that she had not received any support from him during that time. Wagnitz acknowledged receiving $1,671 permonth in child support from her ex-husband, George Jackowiec, but she informed Novak and his counsel that shortly after she filed for bankruptcy, she learned that Jackowiec had lost his job as a financial consultant with Peat Marwick and would be unable to maintain the payments. (Debtor Response, at 2.) Wagnitz stated that she rents a residence in Geneva, Illinois, rather than in a community with a lower cost of living, because Page 3 Jackowiec lives there and she wants their 13-year-old son to be near to him. Wagnitz indicated that the most pressing reason for her bankruptcy was that Novak had obtained a judgment against her and was starting to garnish her wages which, she claimed, was "detrimental to the survival of the debtor and her children." (Id. at 2-3.)

  After the § 341 meeting, interim trustee Voiland reported the matter to the office of the U.S. Trustee as a no-asset bankruptcy. (Id. at 2.) Novak, however, began requesting information from Wagnitz, Craig Wagnitz, and Jackowiec, apparently in an effort to establish that Wagnitz filed the Chapter 7 petition in bad faith. (Id. at 3.) Wagnitz produced a check tendered to her attorneys for payment of bankruptcy fees that was returned for insufficient funds. In addition, Jackowiec produced a letter confirming that he had been fired from Peat Marwick and that his child support payments would be reduced from $1,671 per month to $110 per month. Jackowiec also testified at a deposition that his son lives in Geneva to be close to him, and that Wagnitz has to pay ongoing expenses for a tutor because the son has a reading disability. (Id. at 3-4.)

  On February 10, 2003, Novak filed a Motion for Extension of Time to File Complaint for Bad Faith Filing, arguing that "[c]onsidering Debtor's income, debts, and lifestyle ascertained from Schedule J, creditor is now conducting discovery in order to ascertain whether he will file an action to dismiss the debtor's petition as a bad faith filing" pursuant to § 707(a). (Novak Motion ¶ 5.) According to Novak, there is evidence that Wagnitz has the ability to repay her debt; that she filed Chapter 7 bankruptcy solely to frustrate one particular creditor (Novak); that she has not made any attempt to pay Novak; and that she is unwilling to make any lifestyle changes. In his reply brief, Novak cited In re Collins, 250 B.R. 645 (Bankr. N.D. III. 2000), where the court adopted a "totality of the circumstances" for determining bad faith, apparently deeming "bad faith" as sufficient to establish cause for dismissal under § 707(a). (Reply Brief to Debtor's Motion to Determine Standing (hereinafter "Novak Reply"), at 2-3.) Wagnitz opposed the motion, arguing that it was Page 4 premised solely on her ability to repay her consumer debt, which is an issue that can only be raised by the court or by a bankruptcy trustee under § 707(b). (Debtor Response, at 9.)

  On June 4, 2003, the bankruptcy court denied Novak's motion, finding that it was based exclusively on Novak's belief that Wagnitz is able to repay her debt. In the court's view, "[m]otions to dismiss based upon the ability to repay debts must be brought pursuant to § 707(b) by a trustee." (Memorandum Opinion Denying Creditor's Motion for Extension of Time to File Complaint for Bad Faith Filing (hereinafter "Opinion"), at 3-4.) See, e.g., Costello v. Bodenstein, No. 01 C 9696, 2002 WL 1821663, at *3 (N.D. III. Aug. 7, 2002) (ability to pay is the "primary" or "principal" factor in determining "substantial abuse" under § 707(b)).


  I. Standard of Review and Jurisdiction

  This court has subject matter jurisdiction over Novak's appeal from the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1), which vests the district court with jurisdiction over appeals from "final judgments, orders and decrees" issued by the bankruptcy court. The district court functions as an appellate court when reviewing bankruptcy court decisions. Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D. III. 1995) (citing FED. R. BANKR. P. 8013). In a bankruptcy appeal, the court examines the "bankruptcy court's factual findings for clear error and its legal conclusions de novo." Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994). The parties in this case raise exclusively questions of law, which the court will review de novo.

  This case presents an issue of first impression in the Seventh Circuit; namely, whether bad faith constitutes "cause" for dismissal under § 707(a) of the Bankruptcy Code and, if so, the proper test for determining bad faith. The bankruptcy court did not directly decide this issue but considered only "whether a creditor may bring an action under § 707(a) based on an alleged ability to repay debts." (Opinion, at 1.) Novak argues that his motion ...

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