A chapter 13 debtor filed a motion under Section 1307(b) for dismissal of right. Had he succeeded, the debtor would have been entitled to file again and attempt to discharge all his debts, because Section 349(a) says that dismissal does not bar discharging debts in a later case, unless the court orders otherwise for cause.
However, a creditor opposed the debtor’s motion for dismissal without prejudice and asked for the dismissal to be made with prejudice. Significantly, the creditor never filed a cross motion seeking dismissal with prejudice under Section 1307(c).
Finding “egregious” conduct by the debtor, the Bankruptcy Judge Martin R. Barash of Woodland Hills, Calif., dismissed the chapter 13 case with prejudice. Dismissal with prejudice had the same effect as a denial of discharge of the debtor’s then-existing debts.
Was there an error in dismissing with prejudice in the absence of a formal motion to that effect?
Writing for the Ninth Circuit Bankruptcy Appellate Panel on July 27, Bankruptcy Judge Christopher M. Klein found no error and upheld dismissal with prejudice.
Judge Klein’s erudite opinion reads like a treatise, laying out everything there is to know about the proper procedures, standards, burdens of proof and burdens of persuasion when it comes to dismissal with or without prejudice.
The Misbehaving Debtor
The debtor had filed chapter 12 petitions in 2010 and 2012. The 2012 case converted to chapter 7 followed by the entry of discharge.
The debtor filed a chapter 13 petition in 2018. A creditor, whom Judge Klein called the debtor’s nemesis, opposed confirmation of the debtor’s plan. In the objection, the creditor said that the case should be either dismissed or converted. The creditor did not file a motion to dismiss or convert.
The bankruptcy court heard witnesses and took evidence at a two-day confirmation trial. The issues included the debtor’s good faith, or lack of it.
In post-trial briefing, the creditor urged the court to dismiss with prejudice for bad faith. Again, the creditor did not file a motion to convert or dismiss with prejudice under Section 1307(c).
Conceding that his plan could not be confirmed, the debtor filed a motion to dismiss under Section 1307(b). The creditor filed an opposition to the motion to dismiss and asked for dismissal with prejudice under Section 349(a) for egregious bad faith. Again, the creditor did not file a motion to dismiss under Section 1307(c).
Section 1307(c) allows the U.S. Trustee or a party in interest to move for conversion or dismissal by showing “cause.”
The bankruptcy court held another hearing and considered the entire record. Technically speaking, the only motion before the court was the debtor’s motion to dismiss under Section 1307(b) and the creditor’s opposition with a request for dismissal with prejudice under Section 349(a).
In his decision, Bankruptcy Judge Barash cited the four-part test in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999), aff’g 209 B.R. 935 (9th Cir. BAP 1997), as governing authority to determine whether the totality of the circumstances warranted dismissal with prejudice. Judge Barash dismissed with prejudice, after finding egregious and inequitable bad faith plus manipulation and abuse of the Bankruptcy Code.
The debtor appealed, to no avail.
Procedures for Dismissal with Prejudice Under Section 349(a)
For the BAP, Judge Klein surveyed the subtle differences about dismissal under Sections 1307(b), 1307(c) and 349. “The salient point,” he said, “is that Section 349(a) is an independent question that applies to all forms of dismissal, including Section 1307(b).”
For example, Judge Klein explained how Section 349(a) and 1307(c) require “cause,” while a debtor’s motion under Section 1307(b) does not. “Unless the court, for cause, orders otherwise,” Section 1307(b) says that “the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed. . . .”
There are different forms of dismissal with prejudice. The weak form, Judge Klein said, can contain a temporary refiling prohibition or provide that a new filing will not apply the automatic stay to a particular creditor. The strong form, he said, “is tantamount to denial of discharge” and is reserved “for egregious circumstances and necessitates that courts proceed with caution and pay attention to due process requirements consistent with denial of discharge.”
The bankruptcy court properly applied Leavitt, Judge Klein said. Although Leavitt dealt with “cause” for dismissal under Section 1307(a), he saw “no principled reason” why it should not also apply to Section 1307(b) dismissals.
Procedurally speaking, Judge Klein ran into a problem. Although Leavitt may be the standard, the rules and the Code don’t say when or how the Section 349(a) prejudice issue must be raised.
In the case on appeal, the procedures afforded due process consistent with complaints to deny discharge under Section 727. In addition, the creditor’s opposition to the debtor’s motion to dismiss without prejudice “was a correct procedure for presenting the Section 349(a) issue to the court.”
Next, Judge Klein said that the bankruptcy court correctly treated the dispute as a Rule 9014 contested matter. He therefore found no error in the procedure leading to dismissal with prejudice.
Next, Judge Klein dealt with the burden of persuasion. The creditor, he said, has the burden because dismissal with prejudice is “tantamount to denying discharge.”
With regard to how much evidence it takes to carry the burden of persuasion, Judge Klein said that the “quantum” required to overcome the presumption of discharge without prejudice “is likewise influenced by the emphasis on egregious circumstances and the similarity to the consequences of denial of discharge.”
Even if the quantum for a strong form of dismissal with prejudice were more than the preponderance of the evidence, Judge Klein said that the creditor had proven “a ‘huge’ and egregious manipulation of bankruptcy process in bad faith.” The evidence, he said, was “overwhelming.”
The evidence and the findings were more than sufficient to justify dismissal with prejudice.
Given the findings, did the bankruptcy court abuse its discretion in dismissing with prejudice?
The bankruptcy court had employed the proper Leavitt standard and made findings supported by the record that were neither illogical nor implausible. Judge Klein thus concluded there was no abuse of discretion in dismissing with prejudice.
In short, “the debtor’s ‘right’ to dismiss under §1307(b) does not immunize the debtor from the consequences of an adverse § 349(a) determination,” Judge Klein said.
Observations
There is a split of circuit on the question of whether a court must dismiss when a debtor files a motion to dismiss under Section 1307(b).
Splitting with the Fifth and Ninth Circuits, the Sixth Circuit held in June that the bankruptcy court must dismiss a chapter 13 petition, even when the latest repeat filing was in bad faith. See Smith v. U.S. Bank N.A. (In re Smith), 999 F.3d 452 (6th Cir. June 9, 2021). To read ABI’s report, click here.
Smith and Judge Klein’s opinion are not necessarily incompatible. If importuned and if the evidence were sufficient, a court could respond to a debtor’s motion under Section 1307(b) by dismissing, except with prejudice.
If that’s true, a debtor’s motion to dismiss isn’t a get-out-of-jail-free card, nor should it be.
On Language — Old Word Resurrected
Near the end of the opinion, Judge Klein said that the debtor’s “Nemesis was not willing to let [the debtor] absquatulate.”
Quoting an academic, Judge Klein said that the word absquatulate was invented following the Panic of 1837:
The newly independent Republic of Texas gained a reputation as a popular destination for dishonorable failures. . . . “Gone to Texas,” abbreviated in “three ominous letters G.T.T.,” became a shorthand symbol found on abandoned businesses. . . . Absconding to squat on western lands and perambulate from one property to another had become so common a practice that writers invented a new verb to describe this process: to absquatulate.
A chapter 13 debtor filed a motion under Section 1307(b) for dismissal of right. Had he succeeded, the debtor would have been entitled to file again and attempt to discharge all his debts, because Section 349(a) says that dismissal does not bar discharging debts in a later case, unless the court orders otherwise for cause.
However, a creditor opposed the debtor’s motion for dismissal without prejudice and asked for the dismissal to be made with prejudice. Significantly, the creditor never filed a cross motion seeking dismissal with prejudice under Section 1307(c).
Finding “egregious” conduct by the debtor, the Bankruptcy Judge Martin R. Barash of Woodland Hills, Calif., dismissed the chapter 13 case with prejudice. Dismissal with prejudice had the same effect as a denial of discharge of the debtor’s then-existing debts.
Was there an error in dismissing with prejudice in the absence of a formal motion to that effect?
Writing for the Ninth Circuit Bankruptcy Appellate Panel on July 27, Bankruptcy Judge Christopher M. Klein found no error and upheld dismissal with prejudice.