Section 1307(b) of the Bankruptcy Code provides that “[o]n request of the debtor at anytime, if the case has not been converted under Sections 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.” Section 1307(c) states, in part:
* * * on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including
(1) unreasonable delay by the debtor that is prejudicial to creditors;
* * * *
(4) failure to commence making timely payments under Section 1326 of this title…
Authorities have split on the issue of whether debtor has an absolute right to dismiss under Section 1307(b), especially in light of an intervening motion to convert. In In re Johnson, 228 B.R. 663, 668 (Bankr. N.D.Ill. 1999), the court ruled that a debtor’s right to voluntary dismissal of a Chapter 13 petition under Section 1307(b) can be trumped under certain circumstances by motion to convert under Section 1307(c). However, a bad faith finding is required. Quoting from In re Vieweg, 80 B.R. 838, 841 (Bankr. E.D.Mich. 1987), the court harmonized Sections 1307(b) and 1307(c) as follows:
Clearly Congress contemplated that for some reasons, and it listed several but not all in §1307(c), “a party in interest” could request and receive an order of conversion upon presentation of proper proofs and under some burden of persuasion. To say Congress intended that a debtor could thwart a creditor’s opportunity even to present his proofs by filing a motion to dismiss, thus relegating the creditor to pursuit of his remedies in yet another forum, a state Court, defies reason. Congress included no expressly stated good faith requirement for filing a chapter 13 petition. With an unfettered ability to dismiss . . . a debtor could invoke the automatic stay to effectively and indefinitely prevent secured and unsecured creditors from collecting legitimate debts.
A similar conclusion was reached in In re Crowell, 292 B.R. 541 (Bankr. E.D.Tenn. 2002), where the court held that the right to dismiss under Section 1307(b) was limited by Section 1307(c). The court stated that when a creditor files a motion to convert a Chapter 13 case on the grounds of fraud prior to the debtor’s filing of a motion to dismiss under Section 1307(b):
The bankruptcy court must conduct a hearing on the merits of the two motions. In order to warrant conversion in the face of the debtor’s conflicting motion to dismiss, the creditor must prove that “cause” exists to warrant relief and that conversion is in the best interest of the creditors and the estate.
Id. (quoting In re Cobb, 2000 WL 17840 (E.D.La. January 11, 2000)). In summary, Crowell concluded that to permit a debtor to answer a motion to convert on grounds of fraud, whether it be actual fraud, or fraud on the court and creditors arising from falsified schedules or bad faith filings intended to delay litigation, through a motion to dismiss, would encourage abuses of the bankruptcy system by dishonest debtors and render nugatory Section 1307(c), an outcome that could not have been contemplated by Congress. Id. at 544; see also In re Cotton, 136 B.R. 888 (N.D.Ga. 1992) (holding that although a debtor had an absolute right to dismiss a bankruptcy filing at anytime, the Court was not required to act immediately upon the debtor’s request for voluntary dismissal and could delay its decision while considering other motions, i.e., a motion to convert); In re Molitor, 76 F.3d 218 (8th Cir.1996) (finding that a bad faith debtor does not have unfettered right to dismiss in the face of motion to convert.); In re Cowper, 266 B.R. 669, 671 (Bankr. W.D.Mich. 2001) (“when a motion to convert is filed prior to a debtor’s motion to dismiss, a hearing should be allowed to consider the merits of the conversion motion before ruling on the debtor’s motion to dismiss.”); and In re Rosson, 545 F.3d 764, 774 (9th Cir. 2008) (A debtor’s right of dismissal is not absolute, but qualified by the ability of a bankruptcy court to deny dismissal “to prevent an abuse of process,” under §105(a) more specifically, when a debtor has acted in bad faith.).
In In re Kotche, 457 B.R. 434 (Bankr. D.Md. 2011), the court stated that there was no indication that Section 1307(b) was intended to provide a dishonest debtor a right to misuse the protections of a bankruptcy case and then escape with impunity. Id. at 440. “Such a result would permit abusive practices and render null and void any judicial power to prevent or protect against such fraudulent practices.” Id. The court was further “not convinced that Congress [had] legislated such a draconian departure from accepted law”. Id.
Use of a debtor’s bad faith in considering a motion to dismiss is also supported by the conclusion of the Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007). In this case a Chapter 7 debtor filed inaccurate schedules and statements, withholding information pertaining to assets of the estate that the debtor had shifted into a trust within the year prior to the date of filing his petition. To protect the asset from the Chapter 7 trustee, the debtor moved to convert his case from a Chapter 7 case to one under Chapter 13, to which the Chapter 7 trustee objected on the grounds of bad faith filing. The Supreme Court agreed with the trustee and denied conversion. The court stated that Section 706(d) of the Bankruptcy Code expressly conditioned a debtor’s right to convert his case on the debtor qualifying as a Chapter 13 debtor and the court held that the debtor’s bad faith conduct in the case made him ineligible for Chapter 13 status.
Kotche noted therefore, that the Supreme Court found that the statutory provision making unenforceable a debtor’s waiver of a right under Section 706(a) of the Bankruptcy Code was not a shield against a debtor’s forfeiture of the Section 706(a) right to convert by fraudulent conduct. “The same waiver provision is contained in Section 1307(b) as to a debtor’s right to dismiss and it must be concluded that it is also susceptible to forfeiture by fraudulent conduct by the debtor.” Id. at 440. In other words, Marrama expressly reiterates the inherent power of every federal court to sanction abusive litigation practices.
Other opinions have found that a debtor has an absolute right to dismissal prior to conversion. These cases predicate their analysis on the mandatory language of Section 1307(b) as compared to the permissive language of §1307(c) and the underlying voluntary nature of Chapter 13. In In re Barbieri, 199 F.3d 616 (2nd Cir. 1999), the court found an argument similar to Johnson’s “unpersuasive.” While noting that it was true that if a court grants a debtor’s motion to dismiss under Section 1307(b), the court will be deprived of the option, afforded by Section 1307(c), of converting the case for cause. But the court noted that this fact was no more significant than the fact that an order granting a creditor’s motion to convert under Section 1307(c) would foreclose dismissal under Section 1307(b). “In the event of competing motions filed under subsections (b) and (c), one subsection will inevitably prevail at the expense of the other.” Id. at 620. Until an Order converting a chapter 13 case to one under chapter 7 is actually entered into the docket, as required by Bankruptcy Rule 5003, the debtor under Section 1307(b) has an absolute right to dismiss his case. Id. at 622.
In In re Polly, 392 B.R. 236 (Bankr. N.D.Tex. 2008), the court stated the following:
The court does not find any ambiguity in the instruction given to it by Congress in section 1307(b). As the Supreme Court has state, “the mandatory ‘shall’ . . . normally creates an obligation impervious to judicial discretion. . . . . Black’s Law Dictionary defines “shall” to mean “[h]as a duty to; more broadly, is required to.” Black’s Law Dictionary, 1379 (7th ed.1999) Thus, the word “shall” is used in section 1307(b) to require action by the court, or in this case to mean that the court has a duty to dismiss a chapter 13 case upon the request of the Debtor.
The court similarly sees no ambiguity in the words “at any time.” There is no question that Congress knew how to regulate the timing of when a debtor or another party has a right to act.
Id. at 239. The court then stated that had Congress thought it appropriate for a bankruptcy court to consider an intervening motion to convert, it could have drafted language found in Bankruptcy Rule 3006 which provides that a creditor may withdraw a proof of claim as a matter of right unless the claim has been objected to, or the creditor has been subjected to an adversary complaint. “Analogously, had Congress wished to limit a debtor’s right to dismiss under section 1307(b) if a motion to convert intervened, it would have said so, condition the words “at any time” on no such motion having been filed.” Id. at 240.
Polly also indicated that legislative history supports the proposition that Congress intended a debtor to retain an absolute right to dismiss under Section 1307(b). As stated in the relevant House Report, “[s]ubsection (b) requires the court, on request of the Debtor, to dismiss the case if the case has not already been converted from Chapter 7 or 11” H.R.Rep.No.95-595, at 428 (1977), U.S.Code Cong.& Admin.News 1978, pp.5963, 6384. The Senate Report is the same; §1307(b) confirms “without qualification, the rights of a Chapter 13 debtor to * * * have the Chapter 13 case dismissed.” S.Rep.No.95-989, at 141 (1978), U.S.Code Cong.& Admin.News 1978, pp. 5787, 5927. See also: In re Looney, 90 B.R. 217 (Bankr. W.D.Va. 1988) (holding that allowing conversion over voluntary dismissal would contradict congressional policy allowing debtor unhampered ability to avoid Chapter 7 liquidation if elects to do so before conversion); and In re Harper-Elder, 184 B.R. 403, 405 (Bankr. D.D.C. 1995) (finding that it is right to dismissal under Section 1307(b) absolute on the plain language statute).
In In re Williams, 435 B.R. 552 (Bankr. N.D.Ill. 2010), the court also held that a Chapter 13 debtor had an absolute right to dismiss his case, regardless of its finding that the debtor acted in bad faith. Again, the court focused on the language in Section 1307(b), arguing that the term “shall” does not accord the court any discretion in the debtor’s request to dismiss. The court further held that when requests under Sections 1307(b) and (c) were in conflict with one another, courts must choose only one provision. In the case of Section 1307, because subsection (b) is the more specific provision of the two, it trumps the more general language of subsection (c). Id. at 559. Finally, the court noted that the power of Section 105(a) of the Bankruptcy Code was not applicable in situations where it would conflict with another provision of the Code because “the power conferred by §105(a) is one to implement rather than override.” Id. at 560.
In In re Smith, 999 F.3d 452 (6th Cir. 2021), the court stated that by its plain terms, Section 1307(b) is mandatory: “upon the debtor’s request, subject to one exception not applicable here (namely that the case was not converted to Chapter 13 from another chapter), the court “shall dismiss” a Chapter 13 case.” Id at 455. It further noted that the debtor’s right to dismiss a Chapter 13 case “comports with §303(a), which makes clear that Chapter 13 is a ‘wholly voluntary alternative to Chapter 7[.]’” Id. quoting Harris v. Viegelahn, 575 U.S. 510, 514 (2015). The court further noted that nothing in Section 1307 that renders Section 1307(b) discretionary in cases where the debtor filed the bankruptcy petition in bad faith. Id.
In re Nichols, 10 F.4th 956 (9th Cir. 2021), also found that a debtor had an absolute right to dismiss under Section 1307(b), overruling an opposite conclusion it had reached in In re Rosson, 545 F.3d 764 (9th Cir.2008). This reversal of decision was largely based on the Supreme Court ruling in Law v. Siegel, 571 U.S. 415 (2014), which concerned a Chapter 7 debtor who perpetrated a fraud on the bankruptcy court by falsely reporting that a lien existed on his primary residence. The trustee in Law determined that the alleged lien was a sham filed by the debtor to protect his interest in the home. Accordingly, the trustee initiated an adversary proceeding to have the lien removed, and, after he prevailed, he sought to have his attorney’s fees paid from the debtor’s exempt property. Despite Section 522(k)’s express prohibition on the use of a debtor’s exempt property to cover expenses associated with administering the estate, the bankruptcy court granted the trustee’s request.
On appeal, the BAP affirmed the order as a permissible exercise of the bankruptcy court’s equitable powers. The Nineth Circuit affirmed, concluding that the surcharge was proper because it was “calculated to compensate the estate for the actual monetary costs imposed by the debtor’s misconduct, and was warranted to protect the integrity of the bankruptcy process.” The Supreme Court reversed. In so doing, the Court made clear that a bankruptcy court may not use its equitable powers under Section 105(a) to contravene express provisions of the Bankruptcy Code. On behalf of a unanimous Court, Justice Scalia wrote that Section 105(a) does not “allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code,” including Section 522(k)’s express prohibition on charging a debtor’s exempt property to pay the trustee’s administrative expenses.
Section 1307(b)’s text is also unambiguous. Nichols stated that The statute provides, in relevant part: “On request of the debtor at any time * * * the court shall dismiss a case under this chapter.” The term “shall” “normally creates an obligation impervious to judicial discretion.” Id. at 963. Thus, “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. Furthermore, the court noted that the statutory text does not provide any support for the view that any other subsection in Section 1307, such as Section 1307(c), limits the debtor’s right to dismiss under Section 1307(b).
Had it wished to provide for such an exception, Congress easily could have indicated the existence of one expressly. Indeed, §1307(b) does contain a single express exception to the debtor’s right to dismiss, which bars dismissal where the debtor has already exercised his right to convert the case to Chapter 13 from Chapters 7, 11, or 12. That Congress codified an express exception to §1307(b)’s right to dismiss demonstrates that Congress considered the issue of exceptions and chose not to prescribe additional ones.
Id. at 963-64.
Matthew T. Gensburg
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