Ineligibility to be a Chapter 13 Debtor Does Not Deprive The Debtor of the “Near Absolute Right” to Dismiss His Chapter 13 Case

SUMMARY

On October 21, 2022 the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) addressed the issue of whether or not a chapter 13 debtor had an absolute right to dismiss his chapter 13 case. It found that the debtor’s right to do so was nearly absolute.   

To review In re Powell, 2022 WL 12394079 (9th Cir. BAP October 21, 2022), click here.

FACTS

In 2021 Mr. Powell (the “Debtor”) filed a chapter 13 case many years after his former employer TICO Construction Company (“TICO”) obtained a state court judgment against the Debtor based on allegations that he had misappropriated trade secrets and information belonging to TICO and used that information in the Debtor’s new company that he had formed while working for TICO.  TICO recorded the judgment against all of the Debtor’s property in Washoe County, Nevada.

TICO then presented numerous challenges in the chapter 13 case, including: (1) filing a proof of claim based on the state court judgment debt; (2) objecting to the Debtor’s exemptions; (3) filing a motion to value collateral; and (4) filing an adversary complaint seeking to have its debt declared nondischargeable under Sections 523(a)(4) and (6). Among other things, TICO alleged that the Debtor attempted to shield his assets from creditors by transferring real property prepetition to his ex-wife through a marital settlement agreement.

Tired of litigating with TICO, the Debtor filed a motion to dismiss his Chapter 13 case under Section 1307(b), and TICO opposed it, requesting that the bankruptcy court either convert the case to chapter 7 or 11 rather than dismiss it, alleging the Debtor’s bad faith prevented dismissal.  The bankruptcy court granted the Debtor’s motion, dismissed the Chapter 13 case, and TICO timely appealed. 

REASONING

The BAP affirmed the bankruptcy court’s dismissal primarily on the basis that controlling Ninth Circuit authority supported dismissal.  The BAP found the case cited by the Debtor in support of his motion, Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), to be controlling.  In Nichols the Ninth Circuit specifically followed 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).”  Id. At 2-3.

The BAP noted that Section 1307(b) specifically provided that “[o]n 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.”  Using the reasoning of the Ninth Circuit in Nichols, the BAP noted that the use of the word “shall” in this section, coupled with the only qualifying language found in the statue itself  – if the case has not been converted under section 706, 1112, or 1208 of this title – compelled dismissal as the Ninth Circuit found in Nichols:

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.

Id. At 3.

The BAP considered TICO’s allegations of both the Debtor’s purported bad faith, as well allegations that the Debtor’s exceeded the unsecured debt limit and was not eligible to be a chapter 13 debtor, did not change the result.  Since “good faith” was not found to be a limiting factor specifically mentioned in Section 1307(b), a court could not use a debtor’s bad faith as a basis to deny a debtor’s motion to dismiss – even if true.

As to the eligibility argument, the BAP noted – again – that the application of Section 1307(b) was not limited to eligible debtors, and that to read the requirement of eligibility into that section would contravene the Supreme Court’s Law decision.  Id. At  4.  

AUTHOR’S COMMENTS

This appears to be the correct result based upon the facts of the case and the controlling law.  The BAP was fairly thorough in its review of authorities from other jurisdictions, even noting that there appeared to be a split of authority on the subject.  It even noted that the primary case relied on by TICO – Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 772 (9th Cir. 2008) [if the debtor’s debt exceeded the statutory limits, the court could convert the case rather than dismiss it] – was a pre-Law v. Siegel case and had been “effectively” overruled by the Ninth Circuit in Nichols.  In short, the BAP chose to stick to the “letter of the law” and followed binding precedent.  

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.).