Bad Faith Permits Dismissal of a Chapter 13 Case with Conditions, Judge Waites Says

In an area where the courts are split and the Fourth Circuit has no precedent, Bankruptcy Judge John E. Waites of Columbia, S.C., decided that the Bankruptcy Code allowed him to attach conditions when a debtor asks for dismissal of her chapter 13 case as of right under Section 1307(b).

The debtor refused to appear at her continued meeting of creditors. The chapter 13 trustee was hot on her trail, suspecting that she had not fully disclosed her assets and may have made voidable transfers.

The trustee filed a motion for conversion to chapter 7 under Section 1307(c). The debtor responded with a motion to dismiss as of right under Section 1307(b), which provides, “On request of the debtor at any time, . . . the court shall dismiss a case under this chapter.” [Emphasis added.]

The trustee and creditors objected to dismissal.

In his September 29 opinion, Judge Waites laid out the split. The Second, Sixth and Ninth Circuits, he said, give a chapter 13 debtor “an absolute and unqualified right to dismiss a Chapter 13 case that has not been previously converted.” In the Ninth Circuit, the case is Nichols v. Marana Stockyard & Livestock Market Inc. (In re Nichols), 20-60043, 2021 BL 368629, 2021 Us App Lexis 29302 (9th Cir. Sept. 1, 2021). To read ABI’s report on Nichols, click here.

On the other side of the fence, Judge Waites cited opinions from the Fifth and Eighth Circuits holding that dismissal under Section 1307(b) may be conditioned on the debtor’s good faith.

The Fifth and Eighth Circuits rested their decisions in part on Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), where the Supreme Court held under Section 706(a) that the bankruptcy court has discretion to deny conversion of a chapter 7 case to chapter 13 as a consequence of the debtor’s bad faith.

But then came Law v. Siegel, 571 U.S. 415 (2014), where the Supreme Court held that a bankruptcy court may not use its equitable powers under Section 105(a) to contravene express provisions of the Bankruptcy Code. More particularly, the Court held that a bankruptcy court may not employ equitable powers to invade a debtor’s homestead exemption.

Judge Waites also mentioned that Marrama was a 5/4 decision. The dissenters in Marrama saw nothing in the text of Section 706(a) to deprive the debtor of the right to convert.

On motions by a debtor to dismiss under Section 1307(b), Judge Waites said that “[r]ecent and more convincing authorities” have taken Law to mean that a chapter 13 debtor may not “be precluded from voluntarily dismissing his or her Chapter 13 case in the face of a pending motion to convert or allegations of bad faith conduct.”

Nonetheless, Judge Waites said that his understanding of Section 1307(b) “does not preclude the view that other portions of the Bankruptcy Code, such as 11 U.S.C. § 349(a) or 11 U.S.C. § 109(g), provide the Court with authority to issue remedial orders in addition to an order granting a debtor’s motion to dismiss under § 1307(b) to address a debtor’s bad faith conduct or abuse of the bankruptcy process.”

Judge Waites was prepared to hold a hearing to decide whether he would dismiss with prejudice. Had he done so, the debtor’s debts outstanding on the filing date would have become nondischargeable if the debtor were to file again.

To fend off a disastrous ending to her chapter 13 case, the debtor negotiated a settlement where she agreed that the order of dismissal would bar another filing for two years. She also agreed that creditors could serve process by mail in state court proceedings.

Judge Waites entered an order dismissing and effecting the compromise.