Concluding that Law v. Siegel, 571 U.S. 415 (2014), implicitly overruled its own precedent, the Ninth Circuit held on September 1 that a bankruptcy court must dismiss a chapter 13 case on motion by the debtor under Section 1307(b), regardless of the debtor’s abusive conduct.
Significantly, the appeals court left the door open for the bankruptcy court to address the debtor’s misconduct alongside dismissal.
The Sixth Circuit reached the same result less than three months ago. See Smith v. U.S. Bank N.A. (In re Smith), 20-3150, 2021 BL 318517 (6th Cir. June 9, 2021). There, the Cincinnati-based appeals court held that the bankruptcy court must dismiss a chapter 13 petition, even when the latest repeat filing was in bad faith. To read ABI’s report, click here.
Like the Ninth Circuit, the Sixth Circuit hinted that a debtor cannot dismiss to evade the consequences of misconduct.
The Facts
Husband and wife debtors filed a chapter 13 petition. Later, they were indicted in federal court for fraud.
According to the opinion by Circuit Judge Diarmuid F. O’Scannlain, the debtors refused to make disclosures in bankruptcy court for fear of compromising their defenses in the criminal action. They refused to hold a meeting of creditors, did not file tax returns, and did not propose a plan.
The creditor who was the victim of the alleged fraud filed a claim in the chapter 13 case, along with a motion for conversion to chapter 7 under Section 1307(c). The bankruptcy court decided that conversion would be proper under Section 1307(c) and (e), but the debtors asked for more time to cure their defaults.
The bankruptcy court gave them 30 days. The debtors did not comply but filed a motion for voluntary dismissal under Section 1307(b) before the 30 days ran out.
Relying on Ninth Circuit authority, Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir. 2008), the bankruptcy court denied the motion to dismiss and converted to chapter 7. The debtor appealed, but the Ninth Circuit Bankruptcy Appellate Panel affirmed.
The outcome in the Ninth Circuit turned on Law and Section 1307(c), which provides that, “On request of the debtor at any time, . . . the court shall dismiss a case under this chapter.”
Law Overrules Rosson
In Rosson, the debtor had been directed to deposit proceeds from an arbitration award. When the debtor didn’t, the bankruptcy court intended to convert the case to chapter 7 sua sponte. Before the bankruptcy court could convert, the debtor filed a motion to dismiss under Section 1307(b). The bankruptcy court converted and denied the motion to dismiss.
Noting a circuit split but upholding conversion, the Ninth Circuit in Rosson read Marrama to mean that an unqualified right to dismiss was subject to the bankruptcy court’s powers under Section 105(a). Id. at 773.
Six years later, the Supreme Court handed down Law, reversing the Ninth Circuit. Judge O’Scannlain paraphrased Law as making clear “that a bankruptcy court may not use its equitable powers under § 105(a) to contravene express provisions of the Bankruptcy Code.”
Judge O’Scannlain had “no doubt that Law undercuts the reasoning of Rosson.” He therefore held that “Rosson has been effectively overruled by Law and is no longer binding precedent in this Circuit.”
Freed from circuit precedent, Judge O’Scannlain held:
Section 1307(b)’s text plainly requires the bankruptcy court to dismiss the case upon the debtor’s request. There is no textual indication that the bankruptcy court has any discretion whatsoever.
Judge O’Scannlain acknowledged that the Fifth and Eighth Circuits had held to the contrary, but both decisions came down before Law. Those decisions, he said, both rely on a “now-discredited theory.” He noted that no circuit has aligned itself with those two circuits after Law.
Judge O’Scannlain said that the “absolute right” to dismiss is “entirely consistent” with the policy of Section 303(a), designed to make chapter 13 a voluntary alternative to chapter 7. He thus held that the “debtor [has] an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception” in Section 1307(b) for debtors whose cases previously had been converted from chapters 7, 11 or 12.
Immediately before reversing and remanding, Judge O’Scannlain said:
We are confident that the Bankruptcy Code provides ample alternative tools for bankruptcy courts to address debtor misconduct.
Observations
Can a chapter 13 debtor play fast and loose with the court and creditors, then lay down a get-out-of-jail-free card if it doesn’t go well? Does the Ninth Circuit mean that a bankruptcy court must dismiss immediately when the debtor files a voluntary dismissal motion under Section 1307(b)?
In line with Judge O’Scannlain’s reference to “ample alternative tools,” perhaps a court could defer dismissal long enough for a creditor to obtain relief from the automatic stay.
Perhaps also, the bankruptcy court could defer dismissal for long enough to impose sanctions under Rule 11.
And most significantly, perhaps the bankruptcy court could dismiss, but dismiss with prejudice, and thereby render claims nondischargeable.
It is difficult to believe that Congress wrote a statute to mean that debtors can evade the consequences of their own misconduct.
Concluding that Law v. Siegel, 571 U.S. 415 (2014), implicitly overruled its own precedent, the Ninth Circuit held on September 1 that a bankruptcy court must dismiss a chapter 13 case on motion by the debtor under Section 1307(b), regardless of the debtor’s abusive conduct.
Significantly, the appeals court left the door open for the bankruptcy court to address the debtor’s misconduct alongside dismissal.
The Sixth Circuit reached the same result less than three months ago. See Smith v. U.S. Bank N.A. (In re Smith), 20-3150, 2021 BL 318517 (6th Cir. June 9, 2021). There, the Cincinnati-based appeals court held that the bankruptcy court must dismiss a chapter 13 petition, even when the latest repeat filing was in bad faith. To read ABI’s report, click here.
The last briefs were filed in the Ninth Circuit months before oral argument on July 9. None of the parties brought Smith to the attention of the Ninth Circuit, and the California-based appeals court did not cite Smith. It’s a pity that the clerks didn’t pick up Smith, because the Sixth Circuit used the same rationale as the Ninth Circuit in concluding that Law undercut the continuing validity of Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), and the rationale of courts believing that dismissal is not mandatory on a chapter 13 debtor’s motion to dismiss.
Like the Ninth Circuit, the Sixth Circuit hinted that a debtor cannot dismiss to evade the consequences of misconduct.