Absolute Right to Dismiss v. Bad Faith

Posted by NCBRC - September 6, 2021

Section 1307(b) grants debtors an absolute right of dismissal which is not limited by the court’s inherent power to punish bad faith conduct. Nichols v. Marana Stockyard & Livestock Market, No. 20-60043 (9th Cir. Sept. 1, 2021).

After the debtors filed their chapter 13 petition, they were indicted on a scheme to defraud the Marana Stockyard & Livestock Market. In order to avoid disclosing information that might harm their federal criminal case, the debtors declined to attend their 341 meeting of creditors, provide tax returns, or submit a proposed plan. Marana, acting as a claimant in the bankruptcy case, eventually moved to have the case converted to chapter 7 and the debtors responded with a motion to stay the bankruptcy proceedings. The bankruptcy court denied the motion for stay and granted the motion for conversion “for cause.” The debtors then moved for voluntary dismissal under section 1307(b) which provides: “On request of the debtor at any time, if the case has not been converted . . ., the court shall dismiss a case under this chapter.”

Denying the debtors’ motion for voluntary dismissal, the bankruptcy court relied on In re Rosson, 545 F.3d 764 (9th Cir. 2008), where the circuit court held that there was an implied bad faith exception to a debtor’s right to voluntarily dismiss. The Bankruptcy Appellate Panel for the Ninth Circuit affirmed.

On appeal to the circuit court, the debtors argued that Rosson had been effectively overruled by Law v. Siegel, 571 U.S. 415 (2014), which established that the bankruptcy court lacks power to punish a debtor’s bad behavior in a way that is contrary to the plain language of the Code.

In Rosson, the bankruptcy court ordered the debtor to contribute an arbitration award to his chapter 13 plan. When the debtor failed to do so, the court ordered conversion of the case to chapter 7. While the conversion was pending, the debtor moved for voluntary dismissal. The bankruptcy court denied the motion to dismiss stating that it would be a gross miscarriage of justice to allow the debtor to “abscond” with estate property. The Ninth Circuit affirmed, finding that under Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), which involved conversion from chapter 7 to chapter 13 under section 706(a), the debtor’s right to convert was constrained by the bankruptcy court’s power under section 105(a) to police bad faith.

Seven years later, the Court addressed the limits of the court’s power to punish bad faith in Law v. Siegel. There, the debtor perpetrated a fraud on the court, and the trustee sought to recover costs of undoing the fraud by taxing the debtor’s exempt property. The Court held that the bankruptcy court could not use its equitable power in a way that contravened the express provisions of the Code. Where section 522(k) specified that exempt property could not be used to pay administrative expenses, the Court found that the bankruptcy court’s order was in error.

Marana argued that it was possible to reconcile Rosson with Law by reading Rosson not as an application of the court’s powers under section 105(a) to limit a debtor’s right to dismiss, but as saying only that a debtor’s bad faith may be “cause” for conversion to chapter 7 under section 1307(c).

The court rejected that argument as contrary to the actual holding in Rosson where the court explicitly ruled that “even otherwise unqualified rights in the debtor are subject to limitation by the bankruptcy court’s power under § 105(a) to police bad faith and abuse of process.” The court found that Law undercut the reasoning in Rosson such that the two cases were irreconcilable and Rosson must give way.

Applying Law to this case, the court found the language of section 1307(b) to be unambiguous and mandatory, leaving a court with no discretion to deny a debtor’s voluntary dismissal. Furthermore, the court found that section 1307(c), which provides for discretionary dismissal or conversion by the court, does not limit the debtor’s absolute right to voluntarily dismiss under section 1307(b). In the face of Marana’s argument that the court’s reading of section 1307(b) would effectively nullify the court’s power to convert under section 1307(c), the court found that the reverse was also true, as conversion precludes later voluntary dismissal. In fact, the court found that reading section 1307(b) as granting an absolute power of dismissal harmonized with the legislative policy of keeping chapter 13 a wholly voluntary avenue for relief.

The court concluded that “§ 1307(b)’s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception noted expressly in the statute itself. Consequently, the bankruptcy court here erred in denying the Nicholses’ motion to dismiss based solely on its finding of abuse of the bankruptcy process.” It reversed and remanded.

Nichols 9th Cir Sept 2021


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