Splitting with two other circuits, the Sixth Circuit ruled that the bankruptcy court must dismiss a chapter 13 petition, even when the latest repeat filing was in bad faith.
The debtor bought a home with a $530,000 mortgage and defaulted a year later. Days before the scheduled foreclosure in 2007, he filed a chapter 13 petition. The sale was cancelled, and the debtor dismissed the petition a few days later.
The debtor used the same tactic in 2017 and in 2019, stopping a foreclosure sale with a chapter 13 filing and dismissing the petition a few days later.
In his five-page opinion on June 9, Circuit Judge Raymond M. Kethledge mentioned that the lender in the most recent chapter 13 filing had not made a motion before dismissal seeking sanctions under Rule 9011 for filing petitions in bad faith, nor had the lender filed a motion to modify the automatic stay.
However, the lender in the last case filed a motion four months after dismissal to reopen the case under Rule 9024. The bankruptcy court granted the motion and lifted the automatic stay for two years.
The debtor appealed and filed a motion for a stay in district court. The district judge denied the stay motion but granted leave for an interlocutory appeal. The appeals court agreed to hear the appeal, to determine whether the district court’s denial of a stay amounted to an abuse of discretion.
The outcome turned on Section 1307(b). If a chapter 13 case has not been previously converted from chapters 7, 11, or 12, the section provides that, “On request of the debtor at any time, . . . the court shall dismiss a case under this chapter.”
Judge Kethledge said that the “provision is mandatory,” by use of the word “shall.” In comparison, Section 1307(c) says that the court “may” dismiss a case for “cause.” He found “nothing in § 1307 that renders § 1307(b) discretionary in cases where the debtor filed the bankruptcy petition in bad faith.”
The Fifth and Ninth Circuits, Judge Kethledge said, relied on Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), to hold that the bankruptcy court has discretion to deny dismissal of a chapter 13 case if the petition was filed in bad faith. See Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010); and Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 773–74 (9th Cir. 2008).
In Marrama, the majority’s opinion said:
On the contrary, the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate “to prevent an abuse of process” described in § 105(a) of the Code, is surely adequate to authorize an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.
Marrama, supra, 549 U.S. at 375.
Judge Kethledge proceeded to pick apart the precedential value of Marrama. First, Marrama involved a motion under Section 706(a) for conversion of a chapter 7 case to chapter 13. That section provides that the court “may” convert, not “shall.” He also characterized the language quoted above as dicta.
More to the point, Judge Kethledge interpreted Law v. Siegel, 571 U.S. 415 (2014), as “largely reject[ing] that dictum.” He read Law as “flatly reject[ing] the idea that § 105(a) vests in the bankruptcy courts equitable power to disregard the Code’s provisions when they lead to results that seem unfair.”
Judge Kethledge said that the “command of § 1307(b) is no mere procedural nicety, which is likely why no circuit court has accepted [the lender’s] argument since Law was decided in 2014.”
Judge Kethledge reversed the district court’s denial of a stay and remanded with instructions for the bankruptcy court to dismiss the most recent chapter 13 filing. However, he said that the “bankruptcy court need not take any action to restore the status quo prior to its . . . reinstatement of [the chapter 13] case.”
Observations
With respect, the federal judiciary is a co-equal branch of government. Do our courts today believe that Congress is capable of adopting statutes that cannot be abused? Why can’t courts exercise powers under Section 105 of the Bankruptcy Code to prevent abuse of title 11?
Law was a different type of case. There, the bankruptcy court attempted to deprive a debtor of his statutory right to the ownership of property, based on equitable considerations. The appeal in the Sixth Circuit dealt with delaying a procedural right to afford time to prevent an abuse of the Bankruptcy Code.
In the case on appeal, the debtor’s home was sold at foreclosure after the bankruptcy was reopened and the stay modified in favor of the lender. By saying that the bankruptcy court was not required to restore the status quo, the Sixth Circuit is apparently suggesting that the violation of the debtor’s procedural right didn’t require setting aside actions in reliance on court orders.
Perhaps the Sixth Circuit’s opinion means that a bankruptcy court may delay dismissal to afford time for a creditor to petition the court for relief to avoid an abuse of the Bankruptcy Code.
If that’s what it means, debtors won’t be able to abuse the right to dismiss. If it means more, we have a problem.
The foregoing are the opinions and commentary of this writer, not ABI.
Splitting with two other circuits, the Sixth Circuit ruled that the bankruptcy court must dismiss a chapter 13 petition, even when the latest repeat filing was in bad faith.
The debtor bought a home with a $530,000 mortgage and defaulted a year later. Days before the scheduled foreclosure in 2007, he filed a chapter 13 petition. The sale was cancelled, and the debtor dismissed the petition a few days later.
The debtor used the same tactic in 2017 and in 2019, stopping a foreclosure sale with a chapter 13 filing and dismissing the petition a few days later.
In his five-page opinion on June 9, Circuit Judge Raymond M. Kethledge mentioned that the lender in the most recent chapter 13 filing had not made a motion before dismissal seeking sanctions under Rule 9011 for filing petitions in bad faith, nor had the lender filed a motion to modify the automatic stay.