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September 29, 2008

9th Circuit Rules that Chapter 13 Debtor does not have an Absolute Right to Dismiss the Case

Rosson v. Fitzgerald  (In re Rosson) ---- F. 3d ----, 2008 WL 4330558 (9th Cir. September, 2008)

Issue:   Does a chapter 13 debtor have an absolute right to dismiss his case?

Holding:   No, the court may refuse to dismiss if there is a showing that the debtor’s conduct is “atypical.”

appeal from District Court, Washington

Judge Paez
This chapter 13 advised the court over a period of a year that he was expecting to receive a few hundred thousand dollars from an arbitration and would use that money to fund his plan.  When he received the money, about $185,000, the court ordered him to turn it over to the chapter 13 trustee.  He did not do that and the court, at a hearing by his attorney to withdraw, gave the debtor one hour to turn the funds over.  The debtor then submitted a “Notice of Dismissal” of the case.  The court refused to sign the order and instead ordered the case converted to chapter 7.  The debtor had turned over $104,000 and spent the rest fixing up his residence (which he ultimately lost in foreclosure).  The debtor moved for reconsideration arguing that he had an absolute right to dismiss the chapter 13 per Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), and Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004).  He also argued there was inadequate notice and that there was no bad faith.  That motion was denied.  The district court affirmed the order.

The Court of Appeals also affirmed.  “11 U.S.C. § 1307(b)-(c). These two provisions—i.e., that the court ‘shall’ dismiss a case on request of the Chapter 13 debtor, but that the court also ‘may’ convert a Chapter 13 case to Chapter 7 ‘for cause’—can conflict.” Although the 9th Circuit BAP has previously ruled in Beatty and Croston that dismissal is mandatory when requested, the 9th Circuit here said “After Marrama, however, the ‘absolute right’ position is no longer viable.”  The Supreme Court said in Marrama “that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process.”  “Although the [Supreme] Court declined to decide ‘with precision what conduct qualifies as ‘bad faith’, the Court ‘emphasize[d] that the debtor’s conduct must, in fact, be atypical.’”  “Therefore, in light of Marrama, we hold that the debtor’s right of voluntary dismissal under § 1307(b) is not 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.’”  [citing 11 U.S.C. § 105(a).]

As to whether or not the debtor’s conduct was “bad faith,” the Court said, “his use of the money was still in defiance of the bankruptcy court’s specific order to deposit the money with the Chapter 13 Trustee.  Moreover, Rosson never—not even in his motion for reconsideration—provided the bankruptcy court with an explanation of what happened to the missing funds.”  “[T]he bankruptcy court did not clearly err in finding that Rosson’s failure to deliver to the Trustee $185,000 in estate assets (or, when given the chance, to explain the status of the money) amounted to atypical, bad faith debtor conduct.”

As to notice and an opportunity to be heard, the 9th Circuit agreed that the debtor “never received a meaningful hearing of his arguments against conversion.”  “The difficulty for Rosson, however, is that, even when given an opportunity, he has never actually provided a satisfactory explanation of why the funds were not delivered.  Rosson’s motion for reconsideration provided no argument of the facts and offered no excuse for his failure to produce the $185,000 as ordered by the court.  He did not make any of the kinds of arguments alluded to above.  Instead, Rosson rested on the (now) manifestly inadequate legal claim that he had an ‘absolute’ right to voluntarily dismiss his case.”  Therefore the debtor “was not prejudiced” by the procedural failure. 

September 29, 2008 in 9th Circuit Briefs | Permalink

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