Court Opinion

ID: 9373922
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:32.128438+00
Date Added: 2024-06-11T17:16:49.747855
License: Public Domain

FILED
                                                                OCT 21 2022
                                                           SUSAN M. SPRAUL, CLERK
                                                              U.S. BKCY. APP. PANEL
                                                              OF THE NINTH CIRCUIT

                      ORDERED PUBLISHED

        UNITED STATES BANKRUPTCY APPELLATE PANEL
                  OF THE NINTH CIRCUIT

In re:                                     BAP No. NV-22-1014-FLB
JASON PHILIP POWELL,
              Debtor.                      Bk. No. 3:21-bk-50147-NMC

TICO CONSTRUCTION COMPANY
INC.,
                 Appellant,
v.                                  OPINION
WILLIAM ALBERT VAN METER,
Chapter 13 Trustee; MELISSA HOOVEN,
FKA Melissa Powell; JASON PHILIP
POWELL,
                 Appellees.

            Appeal from the United States Bankruptcy Court
                      for the District of Nevada
             Natalie M. Cox, Bankruptcy Judge, Presiding

                             APPEARANCES:
Patrick Sean O’Rourke of Humphrey Law PLLC argued on behalf of
appellant; Michael G. Millward of Millward Law, Ltd. argued on behalf of
appellee Jason Philip Powell

Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.
FARIS, Bankruptcy Judge:

                                INTRODUCTION

        Jason Philip Powell sought to dismiss his chapter 13 1 bankruptcy

case. Judgment creditor TICO Construction Company, Inc. (“TICO”)

objected, arguing that Mr. Powell did not have an absolute right to dismiss

his case because he was abusing the bankruptcy process and was not

eligible to be a chapter 13 debtor. TICO argued that the bankruptcy court

should instead convert the case to one under chapter 7. The bankruptcy

court disagreed with TICO’s analysis and dismissed the case.

        TICO appeals. We discern no error and AFFIRM.

        We publish to explain that ineligibility to be a chapter 13 debtor does

not deprive the debtor of the near-absolute right to dismiss the chapter 13

case.

                                       FACTS

A.      Prepetition events

        TICO previously employed Mr. Powell as a senior project manager.

In May 2000, it sued Mr. Powell and others in state court, alleging that he

breached non-compete and non-disclosure covenants in his employment

contract. According to TICO, Mr. Powell misappropriated trade secrets and

information belonging to TICO and shared that proprietary information

      Unless specified otherwise, all chapter and section references are to the
        1

Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                           2
with a new company that he had formed while working for TICO.

Following arbitration, the state court entered judgment against Mr. Powell

totaling $215,149.86, and TICO recorded the judgment against all of

Mr. Powell’s property in Washoe County, Nevada.

B.   Mr. Powell’s chapter 13 petition

     Mr. Powell filed a chapter 13 petition. He scheduled secured debt

totaling $789,501.44, including $215,629.86 owed to TICO (of which

$53,129.86 was unsecured). He scheduled $87,000 of priority unsecured

debt due to the IRS; he also included twelve additional creditors holding

nonpriority unsecured claims of “unknown” amounts. Later, Mr. Powell

filed amended schedules and increased his secured debt to $947,843.68,

including $364,066.51 owed to TICO. His unsecured debt remained

unchanged at $87,000, with numerous “unknown” amounts.

     TICO challenged Mr. Powell’s chapter 13 filing. TICO filed a proof of

claim based on the state court judgment debt. It also filed an adversary

complaint seeking to have its debt declared nondischargeable under

§§ 523(a)(4) and (6). Among other things, TICO alleged that Mr. Powell

attempted to shield his assets from creditors by transferring real property

prepetition to his ex-wife, Melissa Hooven, through a marital settlement

agreement.

     TICO objected to Mr. Powell’s homestead exemption for numerous

reasons. Mr. Powell opposed the objection. TICO also filed a motion to

value collateral, which Mr. Powell also opposed.

                                      3
C.    Mr. Powell’s motion to dismiss

      According to Mr. Powell, at this point, he claimed that he had had

enough of the bankruptcy litigation. He filed a Motion for Voluntary

Dismissal (“Motion to Dismiss”) pursuant to § 1307(b). He cited Nichols v.

Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th

Cir. 2021), for the proposition that a chapter 13 debtor has an absolute right

to dismiss his case under § 1307(b), even in the face of allegations of bad

faith or abuse of the bankruptcy process, so long as the case has not been

previously converted.

      TICO opposed the Motion to Dismiss. It argued that Mr. Powell

engaged in abusive practices, namely, a “sham” divorce from Ms. Hooven

orchestrated to transfer all non-exempt assets to her. TICO contended that

the bankruptcy court should not encourage further wrongdoing by

allowing him to dismiss his chapter 13 case. TICO also argued that

Mr. Powell had too much unsecured debt to be a chapter 13 debtor: it

calculated that Mr. Powell’s unsecured debt totaled $557,139.06 (exceeding

the limit of $419,275). 2 It cited Rosson v. Fitzgerald (In re Rosson), 545 F.3d

764, 772 (2008), for the proposition that, if the debtor’s debt exceeded the

      2
        On the petition date, § 109(e) provided that “[o]nly an individual with regular
income that owes, on the date of the filing of the petition, noncontingent, liquidated,
unsecured debts of less than $419,275 and noncontingent, liquidated, secured debts of
less than $1,257,850 . . . may be a debtor under chapter 13 of this title.” § 109(e).

                                            4
statutory limits, the court could convert the case rather than dismiss it.

      TICO took the position that Nichols was a “non-final” decision that

was inapplicable because it did not concern the issue of Mr. Powell’s

eligibility to be a chapter 13 debtor.

      TICO requested that the bankruptcy court convert the case to chapter

7 or 11, rather than dismiss it outright. It argued that conversion was in the

best interests of the estate and creditors, because Mr. Powell’s bad faith and

fraud demonstrated the necessity of a chapter 7 trustee to prevent

dissipation of estate assets. Alternatively, it requested that the court

sanction Mr. Powell for his “improperly maintained” bankruptcy case.

      Mr. Powell responded that, even if TICO could prove its claims of

bad faith, he was still entitled to dismiss his case as a matter of right under

Nichols. He also argued that it was not necessary for the court to determine

his eligibility under § 109(e); there was no authority supporting TICO’s

position that a chapter 13 debtor exceeding the debt limits loses his

absolute right to dismiss his case. Finally, he argued that he did not engage

in bad faith or otherwise abuse the bankruptcy process.3

      The bankruptcy court held a hearing and agreed with Mr. Powell,

holding that “[b]ad faith and debt limits are irrelevant” to the debtor’s right

to voluntarily dismiss his case. It granted the Motion to Dismiss and denied

TICO’s request for sanctions. In its written order, the bankruptcy court

      3
       Separately, Ms. Hooven disputed TICO’s allegations of a “sham divorce” and
fraudulent transfers.

                                         5
explained that it was bound by the Ninth Circuit’s Nichols decision and

concluded that Mr. Powell had an absolute right to dismiss his chapter 13

case.

        TICO timely appealed.

                                JURISDICTION

        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

        Whether the bankruptcy court erred in granting Mr. Powell’s motion

to voluntarily dismiss his chapter 13 case.

                          STANDARD OF REVIEW

        We review the bankruptcy court’s decision to dismiss a case for an

abuse of discretion. See Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223 (9th

Cir. 1999).

        To determine whether the bankruptcy court has abused its discretion,

we conduct a two-step inquiry: (1) we review de novo whether the

bankruptcy court “identified the correct legal rule to apply to the relief

requested” and (2) if it did, we consider whether the bankruptcy court’s

application of the legal standard was illogical, implausible, or without

support in inferences that may be drawn from the facts in the record.

United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).

                                 DISCUSSION

        TICO urges us to reverse the bankruptcy court’s decision allowing

                                        6
Mr. Powell to voluntarily dismiss his chapter 13 case, because he was never

properly a chapter 13 debtor. We disagree: Nichols makes clear that a

chapter 13 debtor’s absolute right to dismiss the case is subject only to the

limitation set forth in § 1307(b); the statute does not limit that right based

on chapter 13 eligibility.

A.    Section 1307(b) affords chapter 13 debtors an absolute right to
      dismiss their case, subject to a statutory exception.

      Mr. Powell sought to dismiss his case under § 1307(b). That section

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.” § 1307(b) (emphasis added).

      There is a split of authority over whether § 1307(b) confers on debtors

an absolute right to dismiss. Some courts have held that bad faith or an

abuse of the bankruptcy process can preclude voluntary dismissal. See

Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010) (“[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.”); Mitrano v. United States (In re Mitrano),

472 B.R. 706, 710 (E.D. Va. 2012) (“This Court agrees with those courts

holding that the right to dismissal upon request under § 1307(b) is limited

to good-faith debtors.”); In re Johnson, 228 B.R. 663, 668 (Bankr. N.D. Ill.

                                        7
1999) (“[T]he better reasoned authorities hold that a debtor’s right to

voluntary dismissal of a Chapter 13 petition under § 1307(b) can be

trumped under certain circumstances by a motion to convert under

§ 1307(c).”). Until recently, the Ninth Circuit adhered to this view. In re

Rosson, 545 F.3d at 773 n.12 (holding that, under Marrama v. Citizens Bank of

Massachusetts, 549 U.S. 365 (2007), “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”).

      But, as the bankruptcy court correctly held, the Ninth Circuit’s recent

Nichols decision overruled Rosson and made clear that chapter 13 debtors

have an absolute right to dismiss their case at any time, so long as the case

had not been previously converted. In Nichols, the bankruptcy court denied

the chapter 13 debtors’ motion to dismiss, ruling that the debtors had

abused the bankruptcy process by frustrating creditors during the

pendency of criminal proceedings. 10 F.4th at 959. Instead, the court

converted the case to chapter 7. We affirmed. Id.

      On further appeal, the Ninth Circuit concluded that Rosson’s implied

exception was no longer good law after the U.S. Supreme Court’s decision

in Law v. Siegel, 571 U.S. 415 (2014). It acknowledged Law’s holding that

§ 105 does not “allow the bankruptcy court to override explicit mandates of

other sections of the Bankruptcy Code[.]” In re Nichols, 10 F.4th at 961

(quoting Law, 571 U.S. at 421). It concluded that Law clearly rejected the

reasoning underpinning Rosson, so Rosson had been effectively overruled

                                       8
and is no longer binding precedent. Id. at 961-62.

      Accordingly, the Ninth Circuit held that “[s]ection 1307(b)’s text

plainly requires the bankruptcy court to dismiss the case upon the debtor’s

request. There is no textual indication that the bankruptcy court has any

discretion whatsoever.” Id. at 963. It 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.” Id. at 964.

B.    The bankruptcy court did not err in holding that Mr. Powell had an
      absolute right to dismiss his chapter 13 case.

      TICO argues that the bankruptcy court should not have allowed

Mr. Powell to voluntarily dismiss his chapter 13 case because he exceeded

the unsecured debt limit 4 and was not eligible to be a chapter 13 debtor

with the absolute right to dismiss his case. Rather, TICO contends that the

court should have treated Mr. Powell as a chapter 7 debtor and considered

the best interests of the estate and creditors before it dismissed his case.

      If accepted, TICO’s arguments would create a new limitation, not

found in § 1307(b), on the debtor’s absolute right to dismiss a chapter 13

case. This is exactly what Law forbids. Nothing in the text of § 1307(b) limits

voluntary dismissal to only “eligible” debtors. Rather, as discussed above,

      4
        TICO argues that it presented the bankruptcy court with calculations showing
that Mr. Powell’s unsecured debt exceeded the unsecured debt limit in § 109(e). For
purposes of this decision, we assume without deciding that Mr. Powell’s unsecured
debts exceeded the statutory debt limits.

                                          9
Nichols makes clear that, absent the single statutory exception, a chapter 13

debtor has an absolute right to dismiss his case. Because Mr. Powell’s case

had not been converted from another chapter, the bankruptcy court did not

err in allowing him to dismiss his case.

       TICO offers no authority that directly supports its argument. 5 It relies

on our decision in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir.

BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990). But Wenberg cuts against

TICO’s position. It holds that § 109(e) eligibility is not jurisdictional, such

that the bankruptcy court need not immediately dismiss an ineligible

chapter 13 debtor’s case; rather, an ineligible debtor may move to convert

his case to chapter 7. Id. at 636-37. Wenberg does not limit a chapter 13

debtor’s ability to convert his case under § 1307(a), so we see no reason

why it would limit Mr. Powell’s absolute right to dismiss his case under

§ 1307(b). 6

       5
         At least one court has denied a debtor’s motion to dismiss based in part on his
inability to qualify as a chapter 13 debtor under § 109(e). In re Letterese, 397 B.R. 507
(Bankr. S.D. Fla. 2008). But that ruling was based on the premise that § 109(e) eligibility
goes to the question of bad faith. In that case, the bankruptcy court for the Southern
District of Florida denied the debtor’s motion to dismiss and granted the trustee’s
motion to convert because it determined in part that the debtor exceeded the statutory
debt limit and lacked a regular income, so he did not meet § 109(e)’s eligibility
requirements to be a chapter 13 debtor. Id. at 513. It held that “the Debtor was clearly
not eligible to be a debtor in chapter 13 at the time of filing. This fact alone is prima facie
evidence of bad faith.” Id. at 514.
      Unlike the Florida bankruptcy court, we are bound by Nichols and do not
consider a chapter 13 debtor’s alleged bad faith as a bar to voluntary dismissal.
       6
           TICO relies on In re Tatsis, 72 B.R. 908 (Bankr. W.D.N.C. 1987), which we cited
                                              10
       TICO also cites a Fifth Circuit case, Nikoloutsos v. Nikoloutsos (In re

Nikoloutsos), 199 F.3d 233 (5th Cir. 2000), for the proposition that the court

cannot allow a debtor to “invoke the provisions of Section 1307” if the

court is on notice that the debtor exceeded the unsecured debt limit.

However, Nikoloutsos does not concern voluntary dismissal of a chapter 13

case under § 1307(b), but rather conversion from chapter 7 to chapter 13. Id.

at 237. That decision has nothing to do with a chapter 13 debtor’s right to

voluntarily dismiss his case. 7

in Wenberg, for the proposition that a chapter 13 debtor’s right to dismiss his case ends
when a party files a motion to convert the case. But the Ninth Circuit’s Nichols decision
is binding on us, while Tatsis is not. Additionally, many courts reach the opposite
conclusion as Tatsis and hold that a chapter 13 debtor may voluntarily dismiss his case
at any time, even if a party has already moved to convert the case to chapter 7. See, e.g.,
In re Mills, 539 B.R. 879, 884 (Bankr. D. Kan. 2015) (granting the debtor’s motion to
dismiss because there is “no ‘implicit exception’ to the debtor’s unqualified right of
dismissal” and denying the trustee’s motion to convert as moot); In re Patton, 209 B.R.
98, 102 (Bankr. E.D. Tenn. 1997) (holding that “the court is confident that Congress
intended to provide Chapter 13 debtors with an absolute right to dismiss their case
notwithstanding a competing motion to convert. . . . [T]he court is satisfied that the
plain language of the statute, the legislative history, and the objectives and policies
underlying the Bankruptcy Code persuasively establish Congress’ intent that a debtor’s
right of dismissal trumps a creditor’s right to convert under such circumstances”); In re
Sanders, 100 B.R. 338, 341 (Bankr. S.D. Ohio 1989) (recognizing the debtor’s absolute
right to dismiss his case and holding he “has the right to dismiss his chapter 13 case
notwithstanding the trustee’s motion to convert”).
       7 Many of TICO’s cited cases similarly concern the effect of § 109(e)’s debt limits
on a debtor’s ability to convert to chapter 13, or to convert from chapter 13, but not a
chapter 13 debtor’s ability to dismiss his case. TICO repeatedly cites In re Kwiatkowski,
486 B.R. 409 (Bankr. E.D. Mich. 2013), but that case does not support its position. In that
case, the bankruptcy court determined that the debtor exceeded the debt eligibility
limits and denied confirmation of his chapter 13 plan. The court decided that it would
allow the debtor to choose between conversion to chapter 7 or dismissal with a one-year
                                            11
      Finally, we are not swayed by TICO’s argument that we must punish

Mr. Powell for bad faith and abuse of the bankruptcy process. Recognizing

that Nichols forecloses such an argument, TICO attempts to disclaim it;

nevertheless, it repeatedly accuses Mr. Powell of bad faith. Nichols dictates

that bad faith or abuse of the bankruptcy process does not deprive a

chapter 13 debtor of his right to voluntarily dismiss his case. Nichols also

recognizes that the bankruptcy court has other tools to address such abuse.

See In re Nichols, 10 F.4th at 964. For example, it could impose a bar on

refiling or other conditions under § 105.

                                   CONCLUSION

      The bankruptcy court did not err in granting Mr. Powell’s Motion to

Dismiss. We AFFIRM.

bar on refiling. Id. at 421 (“[T]he Court will not deny Debtor the opportunity to convert
this case to Chapter 7, if that is what Debtor decides he now wants to do. Nor will the
Court deny the Debtor the opportunity to dismiss this bankruptcy case, if that is
Debtor’s choice.”). The bankruptcy court was not considering a § 1307(b) voluntary
motion to dismiss and did not prevent the debtor from dismissing his case.

                                            12