Concluding that recent Ninth Circuit authority gives the debtor an absolute right to dismiss a chapter 13 case, the Bankruptcy Appellate Panel for the Ninth Circuit held “that ineligibility to be a chapter 13 debtor does not deprive the debtor of the near-absolute right to dismiss the chapter 13 case.”
The debtor was sued by his former employer for breach of a noncompetition and nondisclosure agreement, along with misappropriation of trade secrets. The former employer won a judgment for about $215,000. The employer recorded the judgment to obtain a lien on the debtor’s real property.
The debtor filed a chapter 13 petition, listing some $87,000 in unsecured debt plus $950,000 in secured debt, including $364,000 owing to the former employer.
The employer filed an adversary proceeding in bankruptcy court alleging that the debt was nondischargeable as a willful and malicious injury to property or a fraud while acting in a fiduciary capacity. The employer also alleged that the debtor transferred property fraudulently to his former wife, to shield assets from creditors. In addition, the employer objected to the debtor’s homestead exemption alongside a motion to value the property.
The debtor responded by moving to dismiss the chapter 13 case under Section 1307(b). The former employer opposed dismissal, arguing that dismissal would further the debtor’s wrongdoing.
Of greater weight, the former employer contended that the debtor had too much unsecured debt for chapter 13 and therefore should be considered a chapter 7 debtor, where dismissal is not automatic.
Bankruptcy Judge Natalie M. Cox of Las Vegas overruled the objection and permitted dismissal. The former employer appealed again, losing a second time in an October 21 opinion for the BAP by Bankruptcy Judge Robert J. Faris.
The Split on Dismissal
The controlling statute is Section 1307(b), which provides, “On request of the debtor at any time, . . . the court shall dismiss a case under this chapter.” [Emphasis added.]
Interpreting that section, the Second, Sixth and Ninth Circuits give a chapter 13 debtor a seemingly absolute right to dismiss a chapter 13 case that has not been previously converted from chapters 7, 11 or 12. 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, the Fifth and Eighth Circuits held that dismissal under Section 1307(b) may be conditioned on the debtor’s good faith. Those circuits rested their opinions 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. However, those decisions came down before 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.
Arguably, Law cut the ground out from underneath the Fifth and Eighth Circuits’ decisions on Section 1307(b).
Dismissal Notwithstanding Bad Faith
In the Ninth Circuit before Nichols, the governing authority had been Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir. 2008), where the appeals court upheld denial of a motion to dismiss under Section 1307(b) and conversion to chapter 7.
Judge Faris pointed out that “the Ninth Circuit’s recent Nichols decision overruled Rosson and made clear that chapter 13 debtors have an absolute right to dismiss their case at any time, so long as the case had not been previously converted.” In other words, Rosson was no longer good law after Law.
Judge Faris held that the text of Section 1307(b) gives the debtor an absolute right to dismiss, if there has not been a prior conversion.
The employer contended that Nichols was not controlling because the debtor had too much debt for chapter 13. Judge Faris was willing to accept that contention, for the sake of argument.
If he were to deny dismissal because the debtor had too much debt for chapter 13, Judge Faris said that he “would create a new limitation, not found in § 1307(b), on the debtor’s absolute right to dismiss a chapter 13 case. This is exactly what Law forbids.”
Judge Faris added, “Nothing in the text of § 1307(b) limits voluntary dismissal to only “eligible” debtors.” Because the debtor’s case had not been converted, he affirmed the bankruptcy court for allowing dismissal.
At the end of his opinion, Judge Faris alluded to the statement in Nichols that the bankruptcy court has “other tools” to deal with abuse. An example, he said, would be imposing a bar to refiling or other conditions under Section 105(a).
Observation
Could “another tool” be sanctions under Bankruptcy Rule 9011(c)(1)(A)?
Concluding that recent Ninth Circuit authority gives the debtor an absolute right to dismiss a chapter 13 case, the Bankruptcy Appellate Panel for the Ninth Circuit held “that ineligibility to be a chapter 13 debtor does not deprive the debtor of the near-absolute right to dismiss the chapter 13 case.”
The debtor was sued by his former employer for breach of a noncompetition and nondisclosure agreement, along with misappropriation of trade secrets. The former employer won a judgment for about $215,000. The employer recorded the judgment to obtain a lien on the debtor’s real property.
The debtor filed a chapter 13 petition, listing some $87,000 in unsecured debt plus $950,000 in secured debt, including $364,000 owing to the former employer.
The employer filed an adversary proceeding in bankruptcy court alleging that the debt was nondischargeable as a willful and malicious injury to property or a fraud while acting in a fiduciary capacity. The employer also alleged that the debtor transferred property fraudulently to his former wife, to shield assets from creditors. In addition, the employer objected to the debtor’s homestead exemption alongside a motion to value the property.
The debtor responded by moving to dismiss the chapter 13 case under Section 1307(b). The former employer opposed dismissal, arguing that dismissal would further the debtor’s wrongdoing.