A chapter 13 debtor’s absolute right to dismissal under Section 1307(b) evaporates once the case converts to chapter 7, for reasons explained by the Tenth Circuit Bankruptcy Appellate Panel in a March 11 opinion by Bankruptcy Judge Mitchell L. Herren.

Before bankruptcy, the debtor sold real property, but the buyers soon sued the seller for intentional misrepresentation. Days before trial, the debtor filed a chapter 13 petition. The buyers were virtually the only creditors.

The buyers filed a proof of claim for more than $1 million, accompanied by an objection to confirmation of the debtor’s chapter 13 plan and a motion to dismiss for “cause” under Section 1307(c) or, alternatively, for conversion to chapter 7. Bankruptcy Judge Michael E. Romero of Denver converted the case to chapter 7, finding that the debtor had too much debt to qualify for chapter 13.

In the course of litigating the conversion or dismissal motion, Judge Herren said that the debtor fought dismissal and never once requested dismissal before Judge Romero converted the case to chapter 7.

The chapter 7 trustee filed avoidance actions seeking to recover fraudulent transfers from the debtor’s wife and others.

Two months after conversion, when the conversion order was final, the debtor retained new counsel and filed a motion to dismiss the bankruptcy case under Section 1307(b). The section reads: “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter.” [Emphasis added.]

Based on In re Nichols, 10 F.4th 956 (9th Cir. 2021), Judge Herren described the debtor as arguing that “§ 1307(b) is unambiguous and provides a chapter 13 debtor in his situation with an absolute right to dismissal.” To read ABI’s report in Nichols, click here.

Judge Herren responded by saying that the plain meaning doctrine “requires that an individual statutory section not be plucked out of the context of its broader, statutory framework.” On de novo review, he said that the “one issue on appeal” was “whether a debtor retains an absolute right to dismiss a bankruptcy case under § 1307(b) following entry of an order converting a chapter 13 case to a case under chapter 7.”

Judge Herron said that the Tenth Circuit had not taken a position, but he found guidance in Harris v. Viegelahn, 575 U.S. 510, 520 (2015), and quoted the Supreme Court for holding that “no Chapter 13 provision holds sway” after a case is converted from chapter 13 to chapter 7.

“As Harris pointed out,” Judge Herren said, “the Bankruptcy Code itself is clear that provisions in chapter 13 of the Code such as § 1307(b) do not apply to a case that is in chapter 7.” As further support for the inapplicability of Section 1307(b) following conversion, he cited Section 103(j), which says, “Chapter 13 of this title applies only in a case under such chapter.”

In addition, Judge Herren said that “the plain language” of Section 1307(b) itself refuted the debtor’s argument. The statute, he said, provides, “in pertinent part, ‘[o]n request of the debtor at any time . . . the court shall dismiss a case under this chapter.’” [Emphasis in original.]

Judge Herren affirmed Judge Romero’s conversion of the case to chapter 7, saying that the “Debtor did not retain an absolute right to dismiss his bankruptcy case under § 1307(b)” because the “Debtor was not in chapter 13 at the time he filed his Motion to Dismiss.”                                                                                                                          

Observation

In the case before the BAP, the conversion order was final before the debtor moved to dismiss.

Would a chapter 13 debtor be barred from filing a dismissal motion after entry of the conversion order but before the order becomes final? Would the outcome depend on whether there was an automatic 14-day stay of the conversion order?

A “pure” motion to dismiss would be a contested matter. The 14-day automatic stay of enforcement of a “judgment” under Bankruptcy Rule 7062 does not apply to contested matter under Rule 9014(c).

rgo, to preserve an ability to dismiss following entry of a conversion order, the debtor would be obliged to prevail on the bankruptcy judge to make Rule 7062 applicable to the conversion order.