Opinion ID: 1196137
Heading Depth: 2
Heading Rank: 1

Heading: Denial of right to voluntarily dismiss a Chapter 13 case

Text: Sections 1307(b) and 1307(c) of the Bankruptcy Code provide as follows: (b) 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. (c) ... [O]n request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under [chapter 13] 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.... 11 U.S.C. § 1307(b)-(c). These two provisionsi.e., that the court shall dismiss a case on request of the Chapter 13 debtor, but that the court also may convert a Chapter 13 case to Chapter 7 for causecan conflict where, on the one hand, a debtor requests voluntary dismissal, while, on the other hand, a party in interest or the trustee moves to convert or the court, acting on its own, converts the case to Chapter 7. [8] The conflict between § 1307(b) and (c) has divided courts, including two of our sister circuits, with some courts holding that a debtor has an absolute right to dismiss under § 1307(b), notwithstanding pending motions to convert under § 1307(c), while other courts hold that a bankruptcy court retains the power to convert a case under § 1307(c), even in the face of a debtor's request for dismissal under § 1307(b). Compare, e.g., Barbieri v. RAJ Acquisition Corp. ( In re Barbieri ), 199 F.3d 616, 619 (2d Cir.1999) (holding that, at any time prior to an actual order of conversion, a debtor has an absolute right to dismiss a Chapter 13 petition under § 1307(b), subject only to the limitation explicitly stated in that provision), with, e.g., Molitor v. Eidson ( In re Molitor ), 76 F.3d 218, 220 (8th Cir.1996) (rejecting absolute right of dismissal under § 1307(b) in cases involving bad faith or abuse of process, because the purpose of the bankruptcy code is to afford the honest but unfortunate debtor a fresh start, not to shield those who abuse the bankruptcy process in order to avoid paying their debts). See generally In re Jacobsen, 378 B.R. 805, 809 (Bankr.E.D.Tex.2007) (collecting cases on both sides of the split). Although we have not weighed in on this question, [9] our circuit's Bankruptcy Appellate Panel (BAP) adopted the absolute right approach in Beatty. See Beatty, 162 B.R. at 857 (The better reasoned view is that a court must dismiss the case upon the debtor's request for dismissal under section 1307(b) if that request is made prior to the ... [formal] order converting the case to Chapter 7.); see also Croston, 313 B.R. at 451 (reaffirming and following Beatty ). In his opening brief, Rosson argues that we should follow and adopt Beatty and hold that the bankruptcy court abused its discretion by refusing to grant his request for dismissal, which was filed prior to the court's formal order converting the case to Chapter 7. [10] After Rosson filed his opening brief, however, the Supreme Court issued Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). In Marrama, the Court firmly rejected the analysis that the BAP applied in Croston the case that followed and reaffirmed Beatty and implicitly abrogated Beatty as well. Indeed, in his reply brief, Rosson acknowledges that the absolute right to dismissal under § 1307(b), as recognized in Beatty, is no longer viable after Marrama because that right must be qualified by the court's power to convert a case based on the debtor's bad-faith conduct or abuse of the bankruptcy process. Nevertheless, Rosson argues that he did not engage in any bad-faith conduct, and that he therefore had a right to dismiss his case. Below, we first briefly clarify the effect of Marrama on the rule announced in Beatty and then address Rosson's argument that he should prevail, even under the new rule.
As noted, courts have split on the question of the absolute nature of the right to dismissal of a Chapter 13 case under § 1307(b). After Marrama, however, the absolute right position is no longer viable. In Marrama, the Court took up the same question addressed by the BAP in Croston the right of a debtor, under 11 U.S.C. § 706(a), to convert his Chapter 7 case to Chapter 13. See Marrama, 127 S.Ct. at 1108 (identifying the issue as whether even a bad-faith debtor has an absolute right to convert at least one Chapter 7 proceeding into a Chapter 13 case). As the BAP recognized in Croston, this question is analytically indistinguishable from the question in Beatty (i.e., the absolute right of a debtor to voluntarily dismiss his Chapter 13 case). As Croston held, the text of § 706(a) [11] is indistinguishable from the parallel language of § 1307(b) ... [and] it follows that [ Beatty 's] analysis of the absolute nature of § 1307(b) applies to the same question under § 706(a). Croston, 313 B.R. at 451. Thus, in Croston, the BAP followed Beatty and held that a debtor had an absolute, one-time right to convert his case from Chapter 7 to Chapter 13, and that this was true notwithstanding a bankruptcy court's concern with perceived dysfunction or bad faith manipulation of the bankruptcy process. Id. at 451-52. In Marrama, however, a majority of the Court unequivocally rejected the Croston position, holding that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court's power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process. See id. at 1111-12 (noting that the Bankruptcy Code specifically grants bankruptcy judges broad authority ... to take any action necessary or appropriate `to prevent an abuse of process') (quoting 11 U.S.C. § 105(a)). Thus, the Court held that bankruptcy judges had the power to differentiate between the vast majority of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13 and the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. Id. at 1111. Although the Court declined to decide with precision what conduct qualifies as `bad faith', the Court emphasize[d] that the debtor's conduct must, in fact, be atypical. Id. at 1112 n.11. Applying the rule to the facts before it, the Court concluded that Marrama had made a number of statements about his principal asset [a house] ... that were misleading or inaccurate, id. at 1108, and that he had therefore forfeited his [purportedly absolute] right to proceed under Chapter 13. Id. at 1109. There is no doubt that after Marrama, Croston is no longer good law. Marrama expressly cited Croston as one of the cases recognizing a debtor's absolute right to convert a Chapter 7 case to Chapter 13 an approach that the Court then rejected. See id. at 1108 n. 2, 1111-12. Moreover, although Marrama did not address the exact issue decided in Beatty, it is clear that, after Marrama, Beatty too is no longer good law, insofar as it holds that a Chapter 13 debtor has an absolute right to dismiss under § 1307(b). As noted above, Croston was at pains to explain that there was no analytical distinction between the legal issue in that case and the issue in Beatty. See Croston, 313 B.R. at 451-52. We agree, and accordingly we conclude that the Court's rejection of the absolute right theory as to § 706(a) applies equally to § 1307(b). [12] Therefore, in light of Marrama, we hold that the debtor's right of voluntary dismissal under § 1307(b) is not absolute, but is qualified by the authority of a bankruptcy court to deny dismissal on grounds of bad-faith conduct or to prevent an abuse of process. 11 U.S.C. § 105(a). See Jacobsen, 378 B.R. at 811 (reaching same conclusion). But see In re Polly, 392 B.R. 236 (Bankr.N.D.Tex.2008) (holding that right to voluntarily dismiss Chapter 13 case is absolute (distinguishing Marrama )).
Rosson acknowledges in his reply brief that, after Marrama, bad-faith conduct can justify the bankruptcy court's denial of ... the right to voluntarily dismiss a [Chapter 13] petition, but he attempts to distinguish his case from Marrama on the facts, insisting that his conduct is nothing like that of the dishonest [debtor] described in Marrama.  Rosson states that  Marrama involved a debtor who consciously lied to the court, attempted to remove assets from the court's jurisdiction, and took efforts to conceal what he had done. Rosson argues that, by contrast, he merely pledged the arbitration proceeds for use in [his] Chapter 13 case, and that it is not at all obvious that [he] must have known that investing a portion of the arbitration award in repairs to the residencea valuable asset of the estatewas inconsistent with `using' the funds in his Chapter 13 case. Rosson's argument is not persuasive. Even conceding the doubtful proposition that Rosson decided in good faith that using the arbitration proceeds to remodel his home was consistent with his repeated pledges to apply that money to his Chapter 13 plan, his use of the money was still in defiance of the bankruptcy court's specific order to deposit the money with the Chapter 13 Trustee. Moreover, Rosson nevernot even in his motion for reconsiderationprovided the bankruptcy court with an explanation of what happened to the missing funds. He simply failed to deliver the funds as ordered and then, when taken to task for failing to do so, invoked his supposedly absolute right to withdraw from the bankruptcy process by requesting that his Chapter 13 petition be dismissed. Under these circumstances, it was hardly unreasonable for the bankruptcy court to conclude that Rosson sought to voluntarily dismiss his case in order to abscond with [estate] proceeds. Moreover, bad faith is a finding of fact reviewed for clear error. Leavitt, 171 F.3d at 1222-23; Eisen v. Curry ( In re Eisen ), 14 F.3d 469, 470 (9th Cir.1994) (per curiam). Even if Rosson's conduct was arguably less egregious than Marrama's, the bankruptcy court did not clearly err in finding that Rosson's failure to deliver to the Trustee $185,000 in estate assets (or, when given the chance, to explain the status of the money) amounted to atypical, bad faith debtor conduct. [13] In sum, it is clear from the record that the bankruptcy court acted to prevent what it reasonably perceived to be an abuse of process. 11 U.S.C. § 105(a). As this type of action was specifically approved by Marrama, we hold that the bankruptcy court did not abuse its discretion when it converted the case on its own motion and denied voluntary dismissal.