In a case involving a debtor’s right to dismiss a chapter 13 case, the Third Circuit harmonized the Supreme Court’s decision in Law v. Siegel, 134 S. Ct.1188 (2014), with Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007).
Interpreting a chapter 7 debtor’s right to convert under Section 706(a), the Supreme Court in Marrama allowed the bankruptcy court to attach conditions to the right of conversion when the statute arguably allows no exercise of discretion. Marrama was a 5/4 decision, with the dissenters accusing the majority of departing from the language of the statute.
Seven years later, in Law, the Supreme Court unanimously held in an opinion by Justice Antonin Scalia that exemptions are sacrosanct, even in the face of compelling equitable arguments to the contrary. The Court barred bankruptcy judges from exercising discretion where the statute authorizes none.
Law narrowed Marrama or, arguably, silently overruled the prior decision.
In the Third Circuit, the debtor and his wife had filed three chapter 13 petitions to forestall foreclosure. In the husband’s second case, the lender filed a motion to dismiss or convert to chapter 7. If the court decided to dismiss, the lender asked the judge to bar the husband from filing again for 180 days or provide that there be no automatic stay blocking foreclosure if the husband or wife were to file again.
Before the lender’s motion came up for hearing, the husband filed a motion to dismiss under Section 1307(b). At the hearing on the lender’s motion, the bankruptcy judge dismissed with prejudice and granted relief more broad than the lender requested by barring the husband from filing again without the court’s permission. The district court upheld the lower court’s rulings.
In the Third Circuit, the husband argued that a debtor’s right to dismiss precluded the bankruptcy court from imposing a filing injunction. The June 6 opinion by Circuit Judge Thomas I. Vanaskie upheld the bankruptcy court’s ability to issue a filing injunction alongside a debtor’s voluntary dismissal “because nothing in the Bankruptcy Code’s express terms says otherwise.”
If a case has not previously been converted from chapters 7, 11, or 12, Section 1307(b) provides that the “court shall dismiss” a chapter 13 case “[o]n request of the debtor at any time.”
The circuits are split on whether a chapter 13 debtor’s right to dismiss is absolute. Some say it is, while other courts permit the bankruptcy court to weigh the debtor’s bad faith by first addressing a creditor’s competing motion to convert. Judge Vanaskie avoided taking sides in the split, saying that the bankruptcy court could have attached a filing injunction to a dismissal order.
Addressing the debtor’s argument, Judge Vanaskie interpreted Law to mean that a “bankruptcy court’s general authority” under Section 105(a) “does not extend to actions that conflict with ‘specific,’ ‘explicit,’ and ‘express’ terms of the Bankruptcy Code.” Citing Marrama, he said that whether a filing injunction undermines the “purposes” of other sections of the Code “is not the question.” He cited the earlier Supreme Court opinion as brushing “back an argument that its decision would undermine the purpose of other Code provisions.”
Harmonizing the two high court decisions, Judge Vanaskie said that Marrama focused on whether there was anything in the statute “that prohibited the bankruptcy court’s order.” Law, he said, prevents the court from issuing an order that conflicts “with the ‘explicit mandates’ and ‘express terms’” of the statute.
Judge Vanaskie held that a filing injunction was permissible since the case was more like Marrama than Law, because nothing in Section 1307(b) “prohibits the entry of a filing injunction.”
The Third Circuit nonetheless reversed and remanded to the bankruptcy court because the bankruptcy court had abused its discretion in tailoring the filing injunction by giving no reasons explaining why the debtor’s conduct warranted an order that was broader than the creditor had requested.
Because the debtor was appealing pro se, the appeals court appointed William H. Burgess to serve as amicus curiae on behalf of the debtor. The circuit court thanked Burgess, a former Third Circuit clerk, for his “valuable assistance.” Burgess is a partner in the Washington, D.C., office of Kirkland & Ellis LLP.