In a published opinion, the Fourth Circuit affirmed the denial of confirmation of an above-median Chapter 13 debtor’s plan that proposed to pay off three recently purchased vehicles while paying unsecured creditors less than eight cents on the dollar. In Goddard v. Burnett, No. 25-1303 (4th Cir. Apr. 28, 2026), the court held that technical compliance with the disposable-income test under Section 1325(b) does not insulate a plan from the separate good-faith requirement of Section 1325(a)(3). This ruling creates a circuit split on this issue with the case of Drummond v. Welsh (In re Welsh), 711 F.3d 1120 (9th Cir. 2013).
[Read more…] about Fourth Circuit Holds Good-Faith Review May Consider Whether Secured Property Is Necessary for Above-Median Chapter 13 DebtorsThe Sixth Circuit Reverses Bankruptcy Court’s Denial of Discharge Based on Intent to Hinder Trustee
Facts
Jason and Leah Wylie filed for Chapter 7 bankruptcy in 2020 following financial hardships caused by Mr. Wylie’s health issues. Before filing, they delayed filing tax returns for 2018 and 2019. When the returns were filed, the Wylies elected to apply their substantial overpayments from those years to future tax liabilities instead of requesting refunds.
The bankruptcy trustee filed an adversary proceeding under 11 U.S.C. § 727 to deny discharge, alleging the Wylies transferred anticipated tax refunds from the bankruptcy estate with the intent to hinder, delay, or defraud creditors. The bankruptcy court agreed with the trustee on one count—related to post-petition transfers—and denied discharge. On appeal, the district court reversed, and the trustee appealed to the Sixth Circuit.
Analysis
The Sixth Circuit focused on whether the bankruptcy court’s finding of specific intent to hinder the trustee was clearly erroneous. Section 727(a)(2) requires evidence of actual intent to hinder, delay, or defraud a creditor or the trustee.
The court found no evidence that the Wylies acted with such intent. The bankruptcy court had itself noted that the Wylies’ primary motive was to ensure their taxes were paid, not to hinder the trustee. The Sixth Circuit emphasized that a mere preference to pay certain creditors, such as taxing authorities, over others does not meet the statute’s specific intent requirement. It also pointed out that the Wylies were not intimately familiar with the Bankruptcy Code’s priority scheme, undermining the trustee’s claim of intentional hindrance.
The court found the bankruptcy court’s reasoning inconsistent, as it had dismissed a similar claim related to pre-petition transfers due to a lack of specific intent. The Sixth Circuit ultimately affirmed the district court’s decision and remanded the case for entry of discharge.
Conclusion
The Sixth Circuit’s decision highlights the high burden of proof required under § 727(a)(2). Without clear evidence of specific intent to hinder creditors or the trustee, courts are reluctant to deny debtors a discharge, given the extreme consequences of such a penalty.
NCBRC and NACBA filed an amici brief in support of the debtor.
The 9th Circuit Confirms that Chapter 13 Debtors Have an Absolute Right to Dismiss
In TICO Constr. Co. v. Van Meter (In re Powell), Case No. 22-60052 (9th Cir. October 1, 2024) the court considered whether a debtor has an absolute right to dismiss a Chapter 13 bankruptcy case under 11 U.S.C. § 1307(b), even if the debtor is potentially ineligible for Chapter 13 relief at the time of filing due to bad faith.
Holding:
The court held that a debtor has an absolute right to voluntarily dismiss their Chapter 13 bankruptcy case under 11 U.S.C. § 1307(b), regardless of bad faith allegations or ineligibility for Chapter 13 relief at the time of filing.
Facts:
Powell, the debtor, filed for Chapter 13 bankruptcy. TICO Construction Company, a creditor, challenged Powell’s eligibility for Chapter 13 relief, asserting that he should proceed under a different chapter of the Bankruptcy Code. Powell sought to dismiss his case under § 1307(b) voluntarily, and the bankruptcy court granted his request. The key issue was whether Powell could dismiss his Chapter 13 case despite his alleged ineligibility.
The case was decided based on a disputed interpretation of the law, particularly whether Powell’s eligibility for Chapter 13 impacted his right to voluntary dismissal under § 1307(b).
Analysis:
The court focused on the plain language of 11 U.S.C. § 1307(b), which gives a debtor the right to dismiss their Chapter 13 case as long as they meet four requirements: they request dismissal, they are a debtor, the case is under Chapter 13, and the case has not been converted to another chapter under Title 11. The court held that Powell met these requirements, and thus had an absolute right to dismiss his case, regardless of his eligibility for Chapter 13 relief or whether he had filed the petition in bad faith.
The court relied on the precedent set in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), which similarly recognized the debtor’s right to dismissal under § 1307(b). The majority emphasized that a debtor’s certification of eligibility when filing under Chapter 13 is presumptively valid and that any challenge to eligibility does not negate the debtor’s right to voluntary dismissal.
In contrast, Judge Collins dissented, arguing that eligibility for Chapter 13 relief is a precondition for the rights and procedures afforded, including the right to voluntary dismissal. According to Collins, Powell’s ineligibility for Chapter 13 should have led the court to deny his request for dismissal and instead convert the case to a different chapter. However, the majority rejected this view, prioritizing the plain language of § 1307(b) over any concerns about eligibility or bad faith at the time of filing.
NCBRC submitted an amicus brief in support of the debtor/appellee.
The 6th Circuit To Determine Whether the Debtors’ Post-Petition Application of Their Tax Refund to Future Tax Liabilities is Per Se Intent to Hinder a Trustee Justifying a Denial of Discharge
The Sixth Circuit in Wylie v Miller is reviewing the decision of the District Court for the Eastern District of Michigan. The district court reversed the bankruptcy court’s decision, holding that the bankruptcy court erred in applying a per se rule that the debtors’ post-petition application of their tax overpayment to future tax liabilities constituted an intent to hinder the trustee.
Facts
Jason and Leah Wylie filed for Chapter 7 bankruptcy and were denied discharge under 11 U.S.C. § 727(a)(2)(B) by the bankruptcy court. The denial was based on the Wylies’ post-petition election to apply a $20,736 tax overpayment from their 2019 tax return to their 2020 tax liabilities, which the bankruptcy court interpreted as an intent to hinder the trustee.
Analysis
The court’s analysis centered on the bankruptcy court’s application of a per se rule regarding the debtors’ intent. The bankruptcy court found that the Wylies’ election to apply their 2019 tax overpayment to their 2020 tax liabilities was sufficient to establish an intent to hinder the trustee. This conclusion was drawn without direct evidence of the Wylies’ intent but rather inferred from the action itself, effectively applying a per se rule that such an action always constitutes intent to hinder.
The court found this application problematic because it did not consider the specific circumstances or the debtors’ actual intent. The court highlighted that intent to hinder, delay, or defraud must be supported by concrete evidence and not merely inferred from the action of applying tax overpayments. The Wylies had consistently made similar elections pre-petition, which the bankruptcy court had previously found were made without intent to hinder, delay, or defraud. The court emphasized that exceptions to discharge must be narrowly construed, and a broad per se rule undermines this principle by potentially denying a fresh start without sufficient evidence.
The court also noted that the bankruptcy court failed to account for the Wylies’ testimony, which consistently stated that their intent was to ensure payment of future tax liabilities, not to hinder the trustee. The bankruptcy court’s failure to distinguish between intent to prefer one creditor over another and intent to hinder the trustee further weakened its position. Therefore, the application of a per se rule was inappropriate, and the court reversed the decision, remanding for entry of a discharge.
NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellee.
Debtor Misled Lender as to Discharge of Debt
The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).
When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.
At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.
The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.
The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”
Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.
The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.
The debtor has filed an appeal to the Third Circuit, case no. 23-1358.
Debt Collector Can’t Blame Debtor or FDCPA for Discharge Violation
A debt collector’s efforts to collect an unsecured judgment that had been discharged in bankruptcy violated the discharge injunction even though the debtor requested information about the debt. The statement sent to the debtor was explicitly designated an “attempt to collect a debt,” and the debt collector had sufficient information to alert it to the debtor’s bankruptcy discharge. Skaggs v. Gooch (In re Skaggs), No. 17-50941 (Bankr. W.D. Va. Jan. 19, 2023).
In 1988, Virginia Cellular One, Inc., obtained a judgment against the debtor on a contract liability. The debtor owned no real estate so the judgment was unsecured. The debtor filed for bankruptcy in 2017. In 2019, he received his discharge, including Virginia Cellular’s judgment. Months later, he inherited real property. When he attempted to sell the property, the title agency erroneously told him that he would have to pay the judgment. The debtor contacted the debt collection agency handling the debt, the defendants in this case, and they provided him with a payoff statement and a discounted payoff amount. The payoff statement stated that it was “an attempt to collect a debt.” The debtor then emailed the defendants informing them that the debt had been discharged in bankruptcy. There was continued correspondence between the debtor and the defendants concerning repayment of the debt until the debtor’s bankruptcy attorney stepped in and informed the title agency that the debt had been discharged. The sale of the property was then completed, and the defendants’ collection efforts stopped.
The bankruptcy court found that the defendants’ collection efforts violated the discharge injunction and held a separate hearing to determine the appropriate damages. The debtor sought $25,000 in attorney’s fees and an additional $2,000 in various other costs.
The court noted at the outset that the defendants’ conduct did not warrant punitive damages because they ceased collection efforts and there was therefore no need to coerce compliance with the discharge order. Turning to the question of remedial damages, the court took into consideration whether the defendants had acted in good faith, finding that a court may consider good faith when determining the amount of compensatory damages.
The court was unconvinced by the defendant’s contention that its conduct was compelled by the FDCPA. The court found the statement here was more than “information about the debt” but was an unequivocal effort to collect the debt. Furthermore, the defendants’ effort to pass the blame to the debtor for failing to provide additional information about his bankruptcy was unavailing because the debtor had alerted the defendants to his bankruptcy and the further information they sought was a matter of public record.
The court concluded that the defendants had not demonstrated good faith such that they were worthy of a reduction in the damages award.
The defendants next asked the court to limit the award to $910.00, the loss the debtor incurred before the sale of the property when the defendants ceased their collection efforts. The court declined. “In effect, the defendants argue that it is reasonable for a bankruptcy debtor to incur greater costs and expenses to obtain reimbursement than the actual reimbursement, in effect rendering an award of compensatory damages meaningless.” The court found the amount of the attorney’s fees was reasonable and ordered the defendants to pay $25,000.00.
Turning to the debtor’s request for an additional $2,000 for damages related to time away from work, transportation expenses to attend hearings and depositions, and emotional distress, the court declined to award those damages, finding the debtor had not provided sufficient evidence to support them. Concerning emotional distress, the court added that the Fourth Circuit does not permit such damages in civil contempt cases.
Good Faith in Failure to Disclose Lawsuit
Where the debtor failed to amend her schedules before her case was closed, she forfeited the right to do so as a matter of course, but based on the facts and circumstances in this case, the debtor’s neglect was excusable. The court allowed her to reopen her case to claim an exemption in a personal injury settlement. In re Wantz, No. 18-2851 (Bankr. W.D. Mich. Jan. 5, 2023).
Prior to filing her chapter 7 petition, the debtor contacted a personal injury attorney who was representing other women suing the manufacturer of an implanted medical device to explore the possibility of filing a lawsuit. The attorney told the debtor via email that because she had not had the device removed, she would be unlikely to prevail in a lawsuit. When she filed for bankruptcy, the debtor did not disclose this potential cause of action in her bankruptcy. Shortly before receiving her discharge, she signed an Attorney Employment Contract with the personal injury attorney. That agreement stated only that the attorney would investigate her potential claim.
She received her discharge in October, 2018, and her case was closed in November, 2018. In 2020, the debtor received two emails from her personal injury attorney suggesting, but not directly stating, that a case had been filed on her behalf. In March, 2021, the debtor sought medical advice with respect to the device and, upon learning that it was the cause of her pain, had it removed. Her medical expenses were $7,000. At around the same time, the debtor learned that her personal injury case had settled and that she would net $6,500.
Three weeks later, the debtor moved to reopen her bankruptcy to add the settlement to her schedules and claim it as exempt. The trustee objected to the exemption arguing that it was untimely.
Rule 1009(a) provides that a debtor may amend a bankruptcy schedule as a matter of course any time before the case is closed. The question here was whether that automatic right to amend is reignited when a closed case is reopened. The debtor lobbied for the court to find that once a case is reopened the debtor’s right to amend her schedules is “as a matter of course,” as it would be under Rule 1009(a) and that any other conclusion would violate the holding in Law v. Siegel, 571 U.S. 415 (2014).
The court found the debtor’s interpretation of that case was overbroad. Law prohibited a court from surcharging a debtor’s exemptions based on equitable considerations and in contravention of Code provisions. Law did not deal with timeliness of an amendment to the schedule of exemptions. The court here found that because Rule 1009(a) specifically applies to a debtor’s right to amend prior to her case being closed, the obverse is not true. A debtor may not amend her schedules as a matter of course after the case is closed even if it is later reopened.
The court turned next to the impact of Rule 9006, which provides that, with certain specified exceptions, a court may extend a deadline after that deadline has expired upon a showing of excusable neglect. The debtor argued that Rule 9006 was inapplicable because that rule applies only when the act in question “is required or allowed to be done at or within a specified period by these rules.” The debtor argued that because the time for amending schedules is not circumscribed by a specific period but is tied to the non-specific point at which the case is closed, amendments are not subject to Rule 9006’s requirement of a finding of excusable neglect.
The court disagreed with the debtor and with the cases, such as Mendoza v. Montoya (In re Mendoza), 595 B.R. 849 (B.A.P. 10th Cir. 2019), supporting her position. It found that Rule 1009(a)’s requirement that an amendment be filed before the case is closed is sufficiently specific to bring it under the auspices of Rule 9006.
The court turned to whether the debtor had shown excusable neglect, finding that the inquiry was equitable in nature and involved consideration of all relevant circumstances.
The court agreed with the trustee that the debtor’s failure to disclose the lawsuit during her bankruptcy deprived the trustee of the opportunity to litigate the claim for the benefit of the estate. But the court found that prejudice to the trustee and creditors was not significant in light of the fact that the debtor could have claimed an exemption under 522(c) for the settlement at any time during her bankruptcy. The court was unwilling to agree that the trustee would likely have obtained a better outcome from the litigation had she been involved.
As to the length of the delay—three years between filing her petition and reopening her case—the court found the debtor was unaware of several salient facts that would have alerted her to the necessity of disclosing the claim. First, the debtor did not know the cause of her pain was due to the device; second she did not know her attorney had moved past the investigation stage and filed a claim on her behalf; and third, the debtor lacked the sophistication to untangle the conflicting information she had received from her personal injury lawyer. The court noted that the debtor’s personal injury case involved many plaintiffs and that the debtor did not have a relationship with her attorney, but dealt with him from a distance. The court concluded that the debtor acted in good faith.
With the final observation that the debtor’s ultimate recovery did not even meet her medical bills based on the injury, the court found the debtor was entitled to amend her schedules to claim the exemption.
Mortgage Statements Not Attempts to Collect a Debt
Where statements sent by the mortgage servicer listed the higher, pre-modification amount due, but specifically stated they were not an attempt to collect a debt and did not include an amount in potential late fees, the bankruptcy court erred in finding the statements were in violation of the automatic stay. Freedom Mortgage Corp. v. Dean, No. 22-1469 (M.D. Fla. Jan. 26, 2023).
The debtors had a mortgage with Roundpoint Mortgage Servicing obligating them to monthly payments of $2,102.32. They filed for chapter 13 bankruptcy after falling behind on the payments. Roundpoint and the debtors agreed on a trial mortgage modification which was approved by the court and which lowered their monthly payments to $1,927.15. Freedom Mortgage Corporation then took over the mortgage from Roundpoint. Freedom began sending the debtors monthly statements listing the amount due according to the pre-modification mortgage terms. With each statement, Freedom included a payment coupon. Despite notifications by the debtors’ counsel that the amount listed was incorrect, Freedom did not lower it to the modified amount until after the bankruptcy court permanently confirmed the modification. The court then ordered Freedom to show cause why it should not be sanctioned for violating the automatic stay.
In response, Freedom argued that it was obligated under the Truth in Lending Act to send out monthly statements and that the statements it sent conformed to the Consumer Financial Protection Bureau’s Form H-30(F) and were therefore moored in a “safe harbor.” The bankruptcy court rejected Freedom’s arguments and found its monthly statements were an attempt to collect a debt in violation of the stay. The court sanctioned Freedom in the amount of $15,060.00 representing the costs associated with the mortgage statements and the sanctions hearing.
Freedom appealed to the district court.
The district court rejected Freedom’s “Chevron defense” where it urged the court to adopt the CFPB’s interpretation of bankruptcy’s automatic stay. The court found that defense applies only to agencies interpreting laws which they are charged with administering. Here, the CFPB is not charged with administering the bankruptcy code. Therefore, Freedom’s use of the Form H-30(F) did not insulate it from the requirements of the automatic stay.
Nonetheless, the court found the statements were not an effort to collect on the debt. Though it found no direct precedent, the court analogized the Eleventh Circuit’s interpretation of what constitutes a collection activity under the FDCPA. In Daniels v. Select Portfolio Servicing, Inc., 34 F. 4th 1260 (11th Cir. 2022), the circuit court first noted that a statement’s compliance with TILA did not necessarily make it in compliance with bankruptcy’s section 362. The court went on to set forth four criteria for determining if a statement is an attempt to collect a debt: 1) if the statement contains language to the effect that it is collecting a debt, 2) if the statement requests payment by a certain date, 3) if there is a late fee listed in the statement terms, and 4) if there is history between the parties suggesting that the statement is intended to collect a debt.
Applying those criteria to the case before it, the court found the statements explicitly indicated that they were not intended to collect a debt. The statements instructed the debtors to make their monthly payments to the trustee if required by the bankruptcy plan. To the extent the inclusion of payment coupons with the statements could suggest an attempt to collect, the court found the language to the contrary in the body of the statement overrode that suggestion.
Though the statements included payment dates, they specifically listed $0 as the late fee throughout the entire bankruptcy proceeding.
As to the fourth element, the court found that because Freedom took over the mortgage after the debtors filed for bankruptcy, there was no history to create expectations. Therefore, the fourth element was neutral.
Based on these findings, the court found the statements were not an attempt to collect a debt in violation of the automatic stay. The court cautioned that had the statements included a late fee, that, in combination with the incorrect amount due, might have led to affirmation of the bankruptcy court’s finding.
The court reversed.
Extension of Stay Applies to Creditor Who Was Not Served with Motion
The bankruptcy court properly exercised its discretion to grant an extension of stay in the debtor’s second chapter 11 case where the case was filed in good faith as to the creditors to be stayed even though one of the creditors to which the stay applied was not served with the motion. FourWs, LLC. V. Miller, No. 21-1273 (E.D. Cal. Jan 30, 2023).
The debtor filed chapter 11 bankruptcy in 2019, but the case was dismissed two months later after his counsel missed deadlines and otherwise failed to represent him adequately. Less than one year later, he filed a new, pro se, chapter 11 case. Three days after filing the second case, the debtor moved for an extension of the automatic stay under section 362(c)(3)(B). He was unaware of FourWs as a potential creditor and did not serve them with the motion. The court held a hearing and granted the motion to extend the stay.
FourWs then learned of the bankruptcy and filed a proof of claim. It also sued the debtor in state court on the promissory note. A month later, the trustee moved to dismiss the debtor’s case as having been filed in bad faith. The bankruptcy court granted the trustee’s motion. The state court dismissed FourWs motion, and FourWs moved to reopen the bankruptcy case seeking a ruling that the automatic stay expired as to them 30 days after the debtor filed his bankruptcy petition. The bankruptcy court denied the motion, and FourWs appealed to the district court.
Section 362(c)(3)(B) provides that on a motion by a party in interest, and “upon notice and a hearing,” the bankruptcy court has broad discretion to extend the stay so long as “the filing of the later case is in good faith as to the creditors to be stayed.” The debtor must move for the extension and the hearing must be held within 30 days of the bankruptcy petition. In Morris v. Peralta (In re Peralta), 317 B.R. 381, 389 (B.A.P. 9th Cir. 2004), the Peralta panel emphasized that, once granted, the extension applies to unknown creditors regardless of notice.
The district court here found that, under section 102(1) the “notice and hearing” requirement means notice and hearing that are “appropriate in the particular circumstances.” Because of the 30-day time limit for dealing with motions to extend stay, the bankruptcy court must act quickly. The court observed that “Miller gave two weeks’ notice to creditors of the hearing, filed proof of service within three days of filing his petition, and appeared to be acting in good faith.” It found that the bankruptcy court reasonably concluded that the notice and hearing were appropriate.
The court found two cases cited by FourWs were distinguishable on their facts. In In re Bronson, No. 09-46592, 2010 WL 9485976, at *1 (Bankr. E.D. Cal. Jan. 4, 2010), the debtor noticed creditors by regular mail only a few days before the hearing, and in In re Collins, 334 B.R. 655, 656 (Bankr. D. Minn. 2005), the debtor served notice on the interim trustee but did not serve the creditors. The court here found that the bankruptcy court gave appropriate consideration to the due process rights of the creditors. Finally, the court noted that FourWs had the option to move for relief from stay under section 362(d) or (f) if there was a reason the stay should not be applied to them.
The court affirmed.
Right to Dismiss Despite Bad Faith or 109(e) Ineligibility
A chapter 13 debtor’s statutory right to dismiss his bankruptcy is not precluded by bad faith or ineligibility under section 109(e). Powell v. TICO Construction Co. Inc., No. 22-1014 (B.A.P. 9th Cir. Oct. 21, 2022).
TICO Construction, a judgment creditor in the debtor’s chapter 13 case, opposed the debtor’s motion to voluntarily dismiss his bankruptcy under section 1307(b). TICO alleged both that the debtor’s unsecured debts exceeded the debt limit set forth in section 109(e), and that the debtor abused by the bankruptcy process by transferring non-exempt assets to his ex-wife in “sham” divorce proceedings. TICO requested that, instead of granting the debtor’s motion to dismiss, the court should convert the case to chapter 7 or 11.
The bankruptcy court found that with one statutory exception that was inapplicable, the debtor had an absolute right to dismiss his case and granted the debtor’s motion. TICO appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.
The panel began with section 1307(b), which provides: “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”
The question before the panel was whether the debtor’s right to dismiss his chapter 13 bankruptcy was circumscribed either by bad faith or by his ineligibility to be in chapter 13. In Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010), the court held that a debtor’s bad faith precludes voluntary dismissal of his chapter 13 case. While the Ninth Circuit at one time agreed with that conclusion, it changed its view in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), where it found the debtor’s right to dismiss was subject only to the exception included in the statute itself. The panel noted that Nichols was based on the decision in Law v. Siegel, 571 U.S. 415 (2014), where the Court held that the bankruptcy court could not override explicit mandates of the Code.
Because bad faith was not included in the statutory exceptions to the debtor’s right to dismiss, the panel found the bankruptcy court did not err in that finding.
TICO next argued that the debtor exceeded the debt limit for chapter 13 and therefore his case should have been treated as if it were chapter 7 with the court considering his motion to dismiss in terms of the best interests of creditors. The panel disagreed, finding that if it did as TICO requested it would create a new exception to the debtor’s right to dismiss under section 1307(b) and that would go directly against the holding in Law.
The panel noted that in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir. BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990), it held that the debt limit in section 109(e) is not jurisdictional, and a bankruptcy court is not required to dismiss a chapter 13 case when the debtor is found ineligible under section 109(e), but may allow the debtor to convert to chapter 7. The court reasoned that if an ineligible chapter 13 debtor retains his right to convert, his right to dismiss also remains intact.
In response to TICO’s argument that the debtor should not be allowed to get away with his bad faith conduct, the panel pointed to other methods for addressing bad faith including denying the debtor’s right to refile, or to apply other sanctions under section 105(b).
The case is currently on appeal to the Ninth Circuit, Case No. 22-60052.