Opinion ID: 150455
Heading Depth: 2
Heading Rank: 2

Heading: R. 541 (Bankr. E.D. Tex. 2002)).

Text: 13 In addition to In re Polly, we have identified five post-Marrama decisions that either hold or suggest that the right to dismiss is absolute. See In re Hamlin, No. 09-5272-8, 2010 WL 749809, at  (Bankr. E.D.N.C. Mar. 1, 2010); In re Sickel, No. 08-00309, 2008 WL 5076981, at  (Bankr. D.D.C. Sept. 26, 2008); In re Campbell, No. 07-457, 2007 WL 4553596, at  (Bankr. N.D. W. Va. Dec. 18, 2007); In re Hughes, No. 04-40725, 2007 WL 7025843, at  (Bankr. S.D. Ga. Nov. 30, 2007); In re Davis, No. 06-1005, 2007 WL 1468681, at  (Bankr. M.D. Fla. May 16, 2007). In addition to In re Jacobsen, we have located the following postMarrama lower court decisions holding that the right to dismiss is qualified by an exception for bad faith or abuse of process. See In re Caola, 422 B.R. 13, 20 (Bankr. D.N.J. 2010); In re Armstrong, 408 B.R. 559, 560 (Bankr. E.D.N.Y. 2009); In re Norsworthy, No. 05-15098, 2009 Bankr. LEXIS 1381, at –4 (Bankr. N.D. Ga. May 27, 2009); In re Chabot, 411 B.R. 685, 700 (Bankr. D. Mont. 2009); In re Letterese, 397 B.R. 507, 512 (Bankr. S.D. Fla. 2008); see also Sasso v. Boyajian (In re Sasso), 409 B.R. 251, 254 (B.A.P. 1st Cir. 2009) (dismissing as moot an appeal from the bankruptcy court’s order denying a Chapter 13 debtor’s request for dismissal where the debtor did not appeal the later order converting the case to Chapter 7); In re Brandford, 386 B.R. 742, 750 (Bankr. N.D. Ind. 2008) (“[Section] 1307(b) is a statement of a debtor’s absolute right to dismiss a Chapter 13 case, perhaps only subject to potential conversion of the case to a Chapter 7 in the event of commission of fraud during . . . the Chapter 13 case, an issue not . . . presented in this record.”). Many of the decisions in the latter category were informed by the Ninth Circuit’s decision in In re Rosson, which we discuss next. 15 No. 09-40023 After briefly surveying the legal landscape, the Ninth Circuit began its analysis with a discussion of the effect of Marrama on bankruptcy decisions within its boundaries. Id. at 771–72. The court noted that its BAP, in Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), had earlier considered the same issue decided in Marrama—whether § 706(a) provides an absolute right to convert to Chapter 13—and reached the opposite conclusion. Id. at 772–73. The BAP in In re Croston relied on its earlier decision in In re Beatty, which held that a Chapter 13 debtor’s right to dismiss under § 1307(b) is absolute, in concluding that the right to convert under § 706(a) was also absolute. See In re Croston, 313 B.R. at 451 (“Beatty compels us to conclude that the § 706(a) right to convert to chapter 13 is effectively absolute in the same manner as the corollary dismissal right under § 1307(b).”). The Ninth Circuit discussed the obvious effect the Marrama decision had on In re Croston: “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.” In re Rosson, 545 F.3d at 773 (citing Marrama, 549 U.S. at 368 n.2, 373–76). The In re Rosson court next considered whether Marrama also affected the BAP’s decision in In re Beatty. The court had little difficulty concluding that it did: [A]lthough 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). Therefore, in light of Marrama, we hold that the debtor’s right of voluntary dismissal under § 1307(b) is not 16 No. 09-40023 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. [at] 236 . . . (holding that right to voluntarily dismiss Chapter 13 case is “absolute” (distinguishing Marrama)). Id. at 773–74 (footnote omitted). The court rejected the suggested distinction between § 706(a) and § 1307(b)—the former stating that “[t]he debtor may convert” and the latter that “the court shall dismiss”—by noting that “the important point established by Marrama is 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.” Id. at 773 n.12. Subsequent to the decision in In re Rosson, the Bankruptcy Court for the Eastern District of New York considered the continued validity of the Second Circuit’s decision in In re Barbieri. See In re Armstrong, 408 B.R. 559. The court concluded that “in light of Marrama . . . , the Second Circuit’s decision in Barbieri has been abrogated[,] and a debtor does not have an absolute right to dismiss a chapter 13 case when there is a finding by the Court of bad faith conduct by the debtor during the bankruptcy case.” Id. at 560. The In re Armstrong court then undertook to “explain[ ] independently why the reasoning in Marrama should be extended to section 1307(b) dismissals.” Id. at 569. The court first considered § 105(a), which the Second Circuit had found could not apply in light of the text of § 1307(b), see In re Barbieri, 199 F.3d at 620–21, and concluded that the Marrama “Court took a much more expansive view . . . and recognized the bankruptcy courts’ need to exercise their inherent authority and their authority under section 105(a) to prevent abuse of the bankruptcy process.” In re Armstrong, 408 B.R. at 570. The In re Armstrong court next considered the legislative history and the argument that Chapter 13 is a purely voluntary chapter. Id. The court noted 17 No. 09-40023 first that the Marrama Court “rejected the argument that a debtor has an ‘absolute right’ to convert from chapter 7 to chapter 13 under section 706(a), despite a Senate Committee Report stating that a debtor has ‘the one-time absolute right of conversion’ under section 706(a)” by finding the report “‘equivocal.’” Id. The court then quoted a report from the House Judiciary Committee stating that Chapter 13 was intended to be purely voluntary due to the Thirteenth Amendment’s prohibition on involuntary servitude and the difficulty of forcing an unwilling debtor to comply with a repayment plan. Id. The court agreed that the legislative history revealed “that a debtor cannot be placed into chapter 13 involuntarily [or] be compelled to remain in chapter 13 involuntarily,” but declined to extend those proscriptions “to support the notion that a chapter 13 debtor can abuse the bankruptcy process and not be held accountable.” Id. at 570–71. The court found that concerns of involuntary servitude were inapplicable where the debtor would not be forced to remain in Chapter 13 but would instead be placed into Chapter 7 “because in a chapter 7 a debtor does not commit post-petition wages to repay creditors.” Id. at 571. According to the In re Armstrong court, an exception to § 1307(b) for bad faith also drew support in the anti-waiver language present in §§ 706(a), 1307(b), and 1307(c), each of which provides that the waiver of the right provided under that subsection is unenforceable. Id. The Marrama Court found that “[a] statutory provision protecting a borrower from waiver is not a shield against forfeiture,” and determined that bankruptcy courts retained the authority under § 706 and § 1307(c) “to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor.” Marrama, 549 U.S. at 374–75. In construing this express reference to § 1307(c) and its anti-waiver provision, the In re Armstrong court concluded that the presence of “an anti-waiver provision which is generally intended to protect otherwise inviolable rights of a debtor does not 18 No. 09-40023 mean that those rights cannot be forfeited by the ‘atypical’ debtor who engages in fraudulent conduct during the bankruptcy case.” In re Armstrong, 408 B.R. at 571. The court thus found that by the reasoning of Marrama, the right to dismiss under § 1307(b) was also subject to forfeiture by atypical debtors who act in bad faith. Lastly, the In re Armstrong court considered two additional reasons why the Marrama decision supported an exception to § 1307(b) for bad-faith conduct or abuse of the bankruptcy process. Id. at 572. The first was the statutory language “at any time,” present in both § 706(a) and § 1307(b), that the In re Barbieri court had relied on in construing § 1307(b) as absolute, see 199 F.3d at 619, but which posed no obstacle to the Supreme Court’s construction of § 706(a) as qualified by a bad-faith exception, see Marrama, 549 U.S. at 371–74. As the In re Armstrong court reasoned, such language could no longer be used to support an absolute right to dismiss under § 1307(b). 408 B.R. at 572. Additionally, the In re Armstrong court discussed the fact that § 1307(b) is not the only mandatory provision in § 1307. Id. Section 1307(e) provides that when a debtor fails “to file a tax return . . . , the court shall dismiss a case or convert a case under this chapter to a case under chapter 7 of this title, whichever is in the best interest of the creditors and the estate.” 11 U.S.C. § 1307(e) (emphasis added). The court found that § 1307(b) was not necessarily absolute where a separate subsection itself spoke in absolute terms in the context of holding accountable debtors who fail to abide by the rules of bankruptcy. In re Armstrong, 408 B.R. at 572.14 14 The In re Armstrong decision deferred ruling on the request for dismissal pending an evidentiary hearing because the record was insufficient to make a determination as to bad faith and because no formal motion to convert to Chapter 7 had been filed. 408 B.R. at 572. Following that evidentiary hearing, the court found that the debtor’s conduct did not constitute bad faith sufficient to establish cause to order conversion. In re Armstrong, 409 B.R. 629, 634–35 (Bankr. E.D.N.Y. 2009). The court also held in the alternative that if cause had been established, conversion would not have been in the best interests of the creditors and the estate 19 No. 09-40023 5. Our Determination Following the Supreme Court’s decision in Marrama, we hold that a bankruptcy court has the discretion to grant a pending motion to convert for cause under § 1307(c) where the debtor has acted in bad faith or abused the bankruptcy process and requested dismissal under § 1307(b) in response to the motion to convert.15 In doing so, we join the Ninth Circuit in finding that Marrama’s “rejection of the ‘absolute right’ theory as to § 706(a) applies equally to § 1307(b)” because “there is no analytical distinction” between the two statutes. In re Rosson, 545 F.3d at 773. We thereby reject a construction of the statute that would afford an abusive debtor an escape hatch, and we sanction the limited exception that lower courts within our boundaries have accorded the statute for nearly two decades. We interpret § 1307 in accordance with the Supreme Court’s decision in Marrama. Although possessing slight variations in wording, both § 706(a) and § 1307(b) leave the decision to convert or dismiss, respectively, to the debtor. Compare 11 U.S.C. § 706(a) (“The debtor may convert . . . at any time . . . .”) with id. § 1307(b) (“On request of the debtor at any time, . . . the court shall dismiss . . . .”). The legislative history of each section reinforces the notion that the debtor’s right is absolute and unqualified. See S. REP. NO. 95-989, at 94 (1978) (“Subsection (a) of [§ 706] gives the debtor the one-time absolute right of conversion . . . .”); id. at 141 (“Subsection[] (b) [of § 1307] confirm[s], without qualification, the right[] of a Chapter 13 debtor . . . to have the Chapter 13 case dismissed.”). Yet notwithstanding the apparent absoluteness of a debtor’s right to dismiss under § 706(a), the Supreme Court held that the directive in the where the only two creditors failed to appear at the evidentiary hearing. Id. at 635. 15 This case does not call for us to determine whether a bankruptcy court possesses such discretion when the debtor’s request for dismissal precedes the motion to convert. We therefore leave that issue for a later case. 20 No. 09-40023 legislative history was “equivocal,” Marrama, 549 U.S. at 372, and that such a right was qualified by an exception for bad-faith conduct by the debtor. See id. at 374. The Court articulated two reasons why Marrama’s apparently unqualified and absolute right to convert his case to Chapter 7 was subject to an exception due to his bad-faith conduct. First, the Court found that doing so was appropriate to correct the “procedural anomaly” that would occur when a badfaith debtor exercised the right to convert under § 706(a) only to be subject to reconversion for cause under § 1307(c). Id. at 367–68, 373–74. The Court instead found it appropriate to avoid that two-step process that would have given Marrama control of his assets and possibly enabled action prejudicial to creditors. Id. at 375. Second, and more importantly, the Court spoke in clear terms that bankruptcy courts have “broad authority . . . to take any action that is necessary or appropriate ‘to prevent an abuse of process’ [under] § 105(a) of the Code,” id., and that they would have such power even in the absence of § 105(a) due to “the inherent power of every federal court to sanction ‘abusive litigation practices,’” id. at 375–76 (quoting Roadway Express, Inc. v. Piper, 447 U.S. 752, 765 (1980)). In the Court’s view, this power was sufficient to negate the apparently absolute nature of Marrama’s right to convert under § 706(a). Id. at 376. Proceeding from the propositions in Marrama that an apparently unqualified right is subject to an exception for bad faith and that bad faith justifies a bankruptcy court’s exercise of its powers under § 105(a), we conclude that § 1307(b) is subject to a similar exception, at least when the debtor’s request for dismissal is made in response to a motion to convert under § 1307(c). We therefore decline to read § 1307(b) as an “escape hatch,” In re Molitor, 76 F.3d at 220, from which to escape a conversion motion filed under § 1307(c). Our decision does not run afoul of the principle that a debtor cannot be 21 No. 09-40023 forced involuntarily to proceed under Chapter 13. See In re Harper–Elder, 184 B.R. at 408 (“Chapter 13 was intended to be [a] purely voluntary chapter . . . .”). We construe § 1307(b) and (c) to permit a bankruptcy court to convert a case to Chapter 7 in lieu of dismissing the case under circumstances where the debtor has acted in bad faith or abused the bankruptcy process. We do not here read those provisions in a way that allows bankruptcy courts to force debtors to remain in Chapter 13 against their wills. Because Chapter 7 does not compel a debtor to commit post-petition earnings toward a repayment plan, the concern of involuntary servitude does not compel an alternate interpretation of § 1307(b) and (c). We also reject the contention that Marrama’s reasoning does not apply outside the context of § 706 because no provision comparable to § 706(d) limits § 1307(b).16 The Court’s decision in Marrama was clear that bankruptcy courts are vested with the authority to take appropriate action in response to an abuse of process. See 549 U.S. at 375. We remain cognizant of the directive that the “equitable powers [of] bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code,” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988), and that “Section 105(a) does not permit courts to act as roving commissions to do equity,” Wells Fargo Bank of Tex. N.A. v. Sommers (In re Amco Ins.), 444 F.3d 690, 695 (5th Cir. 2006) (alterations and internal quotation marks omitted). Nonetheless, we are persuaded that, under the Bankruptcy Code and Supreme Court precedent, a bankruptcy court has the power to grant an outstanding conversion motion and deny a bad-faith debtor’s request for dismissal made in response to that motion. B. Finding of Bad Faith Jacobsen also challenges the bankruptcy court’s factual finding that he 16 Section 706(d) “reinforces section 109 by prohibiting conversion to a chapter unless the debtor is eligible to be a debtor under that chapter.” S. REP. NO. 95-989, at 94. 22 No. 09-40023 acted in bad faith as clearly erroneous. “A finding of fact is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Becker v. Tidewater, Inc., 586 F.3d 358, 367 (5th Cir. 2009). Our role is not to weigh the evidence ourselves but merely to determine whether the lower court’s account “is plausible in light of the record viewed in its entirety.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). “Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” Id. “Clear error review is ‘especially rigorous’ when we review a lower court’s assessment of trial testimony, ‘because the trier of fact has seen and judged the witnesses.’” Valley Educ. Found., Inc. v. Eldercare Props. Ltd. (In re Eldercare Props. Ltd.), 568 F.3d 506, 515 (5th Cir. 2009) (quoting United States v. Casteneda, 951 F.2d 44, 48 (5th Cir. 1992)). After our review of the record, we are not left with a definite and firm conviction that an error has been committed. The bankruptcy court had ample evidence in the form of Jacobsen’s own testimony, discussed above, revealing that Jacobsen had interests in assets that were not disclosed on his schedules and that he had made transfers that were not disclosed in his Statement of Financial Affairs. In addition, it was permissible for the bankruptcy court to conclude that the misspelling of Malikyar’s name as “Malekyar” was an attempt by Jacobsen to conceal assets titled in his wife’s name. Although Jacobsen spends much of his brief contending that the real properties titled in Malikyar’s name were Malikyar’s separate property, both he and Malikyar agreed to entry of a judgment in the Adversary Proceeding that declared those properties to be equal management community property. Furthermore, Jacobsen admitted that he was the beneficiary of the Jacobsen Trust, that he had invested $75,000 in a shea butter business, and that he had executed a quitclaim deed to the Tice Valley Property in favor of Malikyar shortly before bankruptcy. Jacobsen 23 No. 09-40023 acknowledged that those interests and transactions were not disclosed on his schedules or his Statement of Financial Affairs. We also note that the bankruptcy court, sitting as the factfinder, had the ability to evaluate Jacobsen’s testimony and his credibility firsthand. We have little difficulty concluding that a finding of bad faith is plausible in light of the record viewed in its entirety. We further hold that the bankruptcy court did not abuse its discretion in ordering conversion under § 1307(c) as being in the best interest of creditors and Jacobsen’s bankruptcy estate. The Marrama Court, interpreting § 1307(c)’s dismissal provision, declined to “articulate with precision what conduct qualifies as ‘bad faith,’” instead noting that the debtor’s conduct must be “atypical” and that bad faith occurs only in “extraordinary cases.” Marrama, 549 U.S. at 375 n.11. The Court found that such an extraordinary and atypical case was before it where the debtor attempted to conceal an asset by filing “misleading or inaccurate” schedules. Id. at 368, 371. Because Jacobsen filed misleading and inaccurate schedules that attempted to conceal assets from creditors, he is clearly among the class of atypical debtors subject to the limited exception to § 1307(b). In light of Jacobsen’s bad faith and the pending motion to convert to Chapter 7, we conclude that it was within the bankruptcy court’s discretion to deny Jacobsen’s motion to dismiss his Chapter 13 case under § 1307(b) and to order conversion under § 1307(c) instead.