While most courts more recently are allowing the debtor to dismiss a chapter 13 case even when creditors prefer conversion to chapter 7, a decision by Bankruptcy Judge Michael A. Fagone of Bangor, Maine, shows when the court can dismiss with a bar to refiling.

While a couple were divorcing, the wife filed a chapter 13 petition that effectively halted the division of marital property in state court. Twice, the wife filed chapter 13 plans that failed the best-interests test.

When the husband filed a motion for conversion to chapter 7 under Section 1307(c), the debtor-wife responded with a motion to dismiss under Section 1307(b). The husband contended there is no right to dismiss when there is “cause” for conversion. If dismissal was warranted, the husband wanted dismissal with prejudice.

The dueling motions for conversion and dismissal called on Judge Fagone to find the answer in Section 1307.

“On request of the debtor at any time . . . ,” subsection (b) provides that “the court shall dismiss a case under this chapter.” On motion, subsection (c) says that “the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including . . . .”

In his March 14 opinion, Judge Fagone said there was “no serious dispute that cause exists to convert to chapter 7.” He said that the First Circuit “has suggested, in dicta, that a bankruptcy court has little, if any, discretion to deny a debtor’s motion to dismiss.”

Judge Fagone went on to say that “many courts” hold “that there is no room for discretion when the debtor asks for dismissal because the word ‘shall’ signifies a command.” For the proposition that courts must dismiss, he cited, among other authority, Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols), 10 F.4th 956, 963 (9th Cir. 2021); and Smith v. U.S. Bank, N.A. (In re Smith), 999 F.3d 452 (6th Cir. 2021). To read ABI’s reports on Nichols and Smith, click here and here.

Judge Fagone said that “the absolute view is not uniform.” The Fifth and Ninth Circuits 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).

Unlike the Fifth and Ninth Circuits, Judge Fagone said that Marrama “does not support the result that [the husband] seeks here.” In the case before him, he saw “statutory limitations analogous to those discussed in Marrama that expressly limit or qualify the dismissal right granted by § 1307(b).”

Focusing on the facts of the case, Judge Fagone said that the “debtor may not have been a model citizen in chapter 13, but the procedural shortcomings that [the husband] complains about in his renewed motion to convert are not the stuff of bad faith that might justify limiting the right to dismiss under § 1307(b).”

“Instead,” Judge Fagone said, “the circumstances in this case warrant dismissal with a ban under 11 U.S.C. § 349(a).” He proceeded to find cause “to condition dismissal and impose a prohibition on the debtor’s commencement of a subsequent case under Title 11, in this jurisdiction or in any other jurisdiction, until March 15, 2027.”

Judge Fagone settled on a bar to refiling so the state court could “complete the divorce proceeding and allocate the parties’ marital property under nonbankruptcy law without the disruption caused by the automatic stay.”

In the dismissal order, Judge Fagone allowed the husband to file a motion for expansion of the bar to refiling if the state court has not divided marital property by March 15, 2027. Likewise, he allowed the wife to shorten the refiling bar date if the state court were to divide marital property before March 15, 2027.