06/07/2023
What Happens If I Need To Get Out of My Chapter 13 Bankruptcy? Attorney Ben Lovell discusses voluntary dismissals and their limitations on the Narron Wenzel, P.A. website: https://narronwenzel.com/what-happens-if-i-need-to-get-out-of-my-chapter-13-bankruptcy/
One issue that has surfaced in Chapter 13 practice is the use of voluntary dismissals under section 1307(b), particularly in the face of a pending motion to convert the Chapter 13 case to Chapter 7. The issue typically comes up when a debtor falls behind in plan payments, but has equity in the estate sufficient to warrant conversion rather than dismissal. In such circumstances, it is not unusual for a debtor to see a motion to convert from the trustee or bankruptcy administrator rather than a motion to dismiss. From a trustee’s perspective, dismissal of the case would not be in the estate’s best interest, when conversion could yield liquidation of assets and payment of claims, including unsecured claims.
Because conversion of the case still provides a debtor with a bankruptcy discharge and a “fresh start”, a debtor faced with conversion might not oppose it if the property that will be liquidated in the Chapter 7 case is not meaningful or necessary for the debtor. However, the debtor is often faced with the prospect of liquidation of their residence if the case converts, as a debtor’s home is usually his or her biggest asset. Under such circumstances, the last thing a debtor would desire would be the conversion of their Chapter 13 case to Chapter 7.
The applicable statute, section 1307 (b), provides as follows:
“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.” 11 U.S.C. §1307(b).
A straightforward reading of this statute in isolation would suggest that a Chapter 13 debtor has an absolute right to dismiss his or her case at any time if the case has not been previously converted from another chapter. The use of the phrase “shall dismiss” supports the argument that a court has no discretion in whether to dismiss the case; dismissal is thus mandatory. In re Williams, 435 B.R. 552, 555 (Bankr. N.D. Ill. 2010). However, courts have been divided on the issue of whether a debtor has an absolute right to dismiss under section 1307(b).
Cases in Support of Absolute Right of Dismissal
There are a number of courts that have held that a debtor has an absolute right to dismiss his or her Chapter 13 case under 11 U.S.C. §1307(b). See In re Barbieri, 199 F.3d 616 (2d Cir. 1999); In re Williams, 435 B.R. 552 (Bankr. N.D. Ill. 2010); In re Procel, 467 B.R. 297 (S.D.N.Y. 2012); In re Hamlin, 2010 WL 749809 (Bankr. E.D.N.C. 2010); In re Sickel, 2008 WL 5076981 (Bankr. D.D.C. 2008); In re Polly, 392 B.R. 236 (Bankr. N.D. Tex. 2008); In re Hughes, 2007 WL 7025843 (Bankr. S.D. Ga. 2007), In re Davis, 2007 WL 1468681 (Bankr. M.D. Fla. 2007). Of these cases, the reasoning set forth by Judge Wedoff in In re Williams, 435 B.R. 552, is particularly useful in support of a debtor’s absolute right of dismissal.
In Williams, the debtor filed a Chapter 13 case and failed to list a medical malpractice lawsuit in her schedules. Williams at 554. At the trustee’s request, the debtor amended Schedule B and listed the malpractice claim but assessed its value at zero. Id. Despite requests from the trustee, the debtor failed to provide information such as the status of the lawsuit and chances for success. Id. The trustee filed a motion to convert the case to Chapter 7 under 11 U.S.C. §1307(c), alleging that the debtor had acted in bad faith and the case should be converted for cause to allow a Chapter 7 trustee the opportunity to investigate and potentially prosecute the malpractice claim. Id. In response to the trustee’s motion, the debtor requested that the case be voluntarily dismissed under 11 U.S.C. §1307(b). Id.
Judge Wedoff begins his analysis by considering whether the language of the statute, section 1307(b), is unambiguous. Williams at 554. He concludes that it is. Id. at 555 (stating that section 1307(b) states without equivocation that if the debtor requests dismissal of an unconverted Chapter 13 case, the court “shall” dismiss it). Given the unambiguity of the statute, there is then no discretion to deny a debtor’s request to dismiss an unconverted Chapter 13 case. Id.; see In re Barbieri, 199 F. 3d 616, 619 (2d Cir. 1999). He then considers the legislative history and case law surrounding the statute. Id. Notwithstanding the clear language of the statute, many courts have held that the right to dismissal is lost if the debtor acts in bad faith, such decisions being based on justifiable policy concerns that unlimited application of section 1307(b) would create an “escape hatch” that would open up the bankruptcy courts to a myriad of potential abuses. Id. at 556; see In re Molitor, 76 F. 3d 218 (8th Cir. 1996). To that concern, Judge Wedoff states that “a concern about abuse does not itself permit the courts to alter statutory provisions”. Id.
Closer to home in the Eastern District of North Carolina, Judge Humrickhouse had occasion to address the issue of a debtor’s absolute right of dismissal, although in a different context than presented in Williams. In the case of In re Hamlin, 2010 WL 749809 (Bankr. E.D.N.C. 2010), the trustee was not seeking to convert the case to Chapter 7, but was rather asking the court to confirm the Chapter 13 case so distributions could be made, notwithstanding the debtor’s request for voluntary dismissal under section 1307(b). Id. at 1. The request for dismissal was made prior to confirmation of the case, so the debtor stood to gain a refund of $7,900.00 that had been paid into the plan. See 11 U.S.C. §1326(a)(2)(stating with regards to payments that “if a plan is not confirmed, the trustee shall return any such payments…to the debtor, after deducting any unpaid claim allowed under section 503(b)”).
In holding that the debtor had an absolute right to dismiss the case, the court reasoned that the language of §1307(b) seems plain and unambiguous. Hamlin at 2. The court found that the term “shall” leaves no room for the exercise of discretion by the trial court and that Chapter 13 was intended by Congress to be a voluntary chapter of bankruptcy. Id. She also recognized the distinction between the word “shall” used in section 1307(b) with the more permissive term “may” used in section 1307(c), noting that “it is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another.” Id. (quoting Barbieri at 619-20).
Cases that Find No Absolute Right of Dismissal
There is also significant authority for the position that a Chapter 13 debtor does not have an absolute right of voluntary dismissal under §1307(b), particularly in the face of bad faith conduct. In re Jacobsen, 609 F.3d 647 (5th Cir. 2010); In re Rosson, 545 F.3d 764 (9th Cir. 2008); In re Molitor, 76 F.3d 218 (8th Cir. 1996); In re Mattick, 496 B.R. 792 (Bankr. W.D.N.C. 2013); In re Kotche, 457 B.R. 434 (Bankr. D. Md. 2011); In re Caola, 422 B.R. 13 (Bankr. D.N.J. 2010); In re Armstrong, 408 B.R. 559 (Bankr. E.D.N.Y. 2009); In re Chabot, 411 B.R. 685 (Bankr. D. Mont. 2009); In re Fonke, 310 B.R. 809 (Bankr. S.D. Tex. 2004); In re Johnson, 228 B.R. 663 (Bankr. N.D. Ill. 1999); In re Powers, 48 B.R. 120 (Bankr. M.D. La. 1985); In re Tatsis, 72 B.R. 908 (Bankr. W.D.N.C. 1987).
The Eighth Circuit Court of Appeals had occasion to address the issue of whether a debtor has an absolute right of dismissal in In re Molitor, 76 F.3d 218 (8th Cir. 1996). The Molitor court determined that where there is evidence that a debtor has engaged in fraudulent conduct, or has acted with intent to abuse the bankruptcy process, providing such a debtor with the benefit of an absolute right to dismiss would defeat the overall purpose of the Bankruptcy Code, which 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.” Molitor at 220. The court posited “to allow [plaintiff] to respond to a motion to convert by voluntarily dismissing his case with impunity would render section 1307(c) a dead letter and open up bankruptcy courts to a myriad of potential abuses.” Id.
Several other courts have denied voluntary dismissal of a Chapter 13 case in the face of bad faith conduct by the debtor. In so doing, these courts generally hold that, after the Supreme Court’s decision in Marrama, a debtor’s right to dismiss a case under §1307(b) is not absolute but is qualified by an implied exception for bad faith conduct or abuse of the bankruptcy process. See In re Rosson, 545 F.3d 764, 767 (9th Cir. 2008). In situations where bad faith conduct is present, the Supreme Court’s rejection of the “absolute right” theory as to §706(a) applies equally to §1307(b). Id. at 773. Some courts have observed that §706(a) and §1307(b) have identical provisions concerning waiver, and the Court in Marrama, when addressing the waiver provision in §706(a), explained that the provision is not a shield against the debtor’s forfeiture of the right under §706(a) by fraudulent conduct. Kotche at 440; see In re Marrama, 549 U.S. at 374-75. Accordingly, the identical waiver provision in §1307(b) likewise may not protect a debtor from forfeiture of the right to dismiss a case, and §105(a) provides bankruptcy judges “broad authority” to take any action necessary to prevent an abuse of process. Jacobson at 658; Kotche at 440.
However, litigants relying on a bankruptcy court’s authority under §105 to prevent abuse of process should...
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