9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

Ninth Circuit Bankruptcy Appellate Panel finds no “eligibility” exception to right to dismiss a Chapter 13 bankruptcy

Recent BAP ruling answers the question if debtor’s right to dismiss a Chapter 13 bankruptcy after Nichols is absolute, or if debt limit ineligibility restricts it.

In re Powell is a recent Chapter 13 bankruptcy where the debtor tried to dismiss his case, and judgment creditor TICO fought the dismissal. and instead wanted Debtor’s case converted to Chapter 7.  The Bankruptcy Court granted the motion to dismiss, citing the recent Nichols case.

Powell vs TICO Construction (In re Powell)
644 B.R. 181 (9th Circuit BAP, 2022)

ISSUE

Did the bankruptcy court err in granting Debtor’s motion to dismiss the Chapter 13?

RULING

No.

FACTS

This case tests the new “absolute right to dismiss” rule about Chapter 13 bankruptcies from the Ninth Circuit Court of Appeals Nichols case, and whether it applies even to people who could only file 7 and had no business in a Chapter 13 in the first place.

Here, there was a dispute between an employer (Creditor TICO Construction) and one of its former workers, Jason Powell (Debtor). Creditor claimed that when Debtor left its employ to form his own company, he took trade secrets, broke his non-compete clause, and misappropriated proprietary information. This seemed to cause all sorts of bad blood.

TICO then sued Debtor in state court, and got a judgment against Debtor for about $250,000, which it then recorded against all of Debtor’s property in Nevada.  What should have been the end was only the beginning of the litigation between the two.

Debtor filed for Chapter 13 bankruptcy relief. Creditor then filed a flurry of motions and complaints in the bankruptcy. Creditor challenged Debtor’s homestead exemption, asserted Debtor was over the unsecured debt limit and hence not eligible for Chapter 13. It also filed motions to value collateral. Creditor also filed adversary proceedings to have its debt found nondischargable under 523(a)(4) and 523(a)(6), alleging, among other things, hiding assets via transfers from Debtor to his ex-wife, who was really still his wife due to a sham divorce.

It’s safe to say that Creditor believed Debtor was a bad actor guilty of fraud and bad faith, the exact type of person it felt that was not entitled to dismissal of a Chapter 13 under some case law. And that’s exactly what Debtor tried to do at this point. Having reached his own limit of the litigation and headaches, Debtor filed a motion to dismiss. Creditor said Debtor could not dismiss a 13, since he was never eligible to be in one in the first place, and wanted the case converted to a Chapter 7 or 11. The bankruptcy court granted the motion to dismiss. Creditor appealed to the BAP.

RULING

The Bankruptcy Appellate Panel considered whether the absolute right to dismiss under 11 USC 1307(b) has an exception here, and concluded that it doesn’t.

Section 1307(b)

Section 1307(b) of the Bankruptcy Code says, “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.”

That seems fairly ironclad, with words like “shall” and “at any time,” and even stating it can’t be waived. But as the BAP pointed out, this statute has somehow caused a split in the jurisdictions as to whether that right to dismiss is absolute.

Review of Case Law

The BAP then reviewed the case law. Some courts have held that it is indeed an absolute right to dismiss, regardless of findings of bad faith. In re Williams, 435 BR 552 (Bankr. Court, ND Ill, 2010). On the other hand, the Fifth Circuit has exceptions to the right to dismiss for bad faith or abuse of process. Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir 2010).

Locally, the Ninth Circuit has been in the latter camp for a while, when the 9th Circuit Court of Appeals denied Debtor’s request to dismiss because of bad faith.   In re Rossom, 545 F.3d 764 (9th Cir, 2008), The Rossom ruling of no right to dismissal for bad faith cited the US Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 US 365, (Supreme Court, 2007), which denied the right to convert a case because of Debtor’s bad faith.

In 2021, the Ninth Circuit then determined that Rossom was no longer good law, in light of the subsequent Law v Siegel ruling from the Supreme Court.  In re Nichols, 10 F.4th 956 (9th Cir, 2021). No longer bound by Rossom, the Ninth Circuit in Nichols reviewed the Bankruptcy Code anew with a fresh eye. It found that “section 1307(b)’s text is unambiguous.” Id. at 963.

The 9th Circuit in Nichols then held, “We conclude 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.

Back to 2022, Powell, TICO, and the BAP.  After raising Marrama, the BAP quickly distinguished it, hinting that it doesn’t apply to the absolute 1307(b) right to dismissal by pointing to the Nichols case which overruled Rossom.  “[A]s 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. Powell at 185.

Creditor TICO raised the issue that because Powell was over the debt limit, he was never a Chapter 13 debtor, and thus, Nichols and 1307 didn’t apply.  The BAP wasn’t buying any of it, saying that there was nothing in 1307(b) which limits it to eligible Chapter 13 debtors, and to rule this way would be to create a new limitation not found in the statute.

In short, Nichols and 1307(b) even applies to people who had no business filing a Chapter 13. In the Ninth Circuit, the rule is clear: Marrama doesn’t apply to 1307(b), and after Law v Siegel, the statute’s plain text is unambiguous: it’s an absolute right by debtor that the court shall dismiss a case upon his request, if the case was not previously converted. Absolute really does actually mean absolute. Other circuits would do well to follow.