Ninth Circuit BAP affirms chapter 13 debtor’s absolute right to dismiss case that had not been previously converted

An issue that arises occasionally in chapter 13 practice occurs when a debtor filed under chapter 13, but then changes their mind and wants out of bankruptcy, despite a request from another party to convert the case to chapter 7. The great majority of cases appear to support the debtor’s absolute right to dismiss the case, including a recent decision from the 9th Circuit B.A.P. In TICO Constr. Co. v. Van Meter (In re Powell), 2022 Bankr. LEXIS 3019, BAP No. NV-22-1014-FLB (21 October 2022).

Here TICO Construction sought to convert Mr. Powell’s chapter 13 case to chapter 7 asserting that the debtor was abusing the bankruptcy process, and was ineligible to be a debtor under chapter 13. TICO had filed an adversary under §§523(a)(4) and (6) to hold that their debt was nondischargeable, alleged that Powell transferred assets to his ex-wife prior to filing through a marital settlement agreement, and objected to the homestead exemption.

Asserting he was tired of the litigation, Mr. Powell submitted a motion to dismiss under 11 U.S.C. §1307(b). TICO opposed asserting abuse of the system including a sham divorce, and that Powell was over the unsecured debt limit for chapter 13. The bankruptcy court held that bad faith and debt limits are irrelevant to the debtor’s right to dismiss the chapter 13 case.

The 9th Circuit BAP initially examined the language of the statute. 11 U.S.C. 1307(b) provides that the court ‘shall’ dismiss a case upon request of the debtor unless the case was previously converted. While a few cases hold bad faith can preclude the voluntary dismissal1, the BAP found that Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) overruled cases finding that §105 allows the bankruptcy court to override explicit mandates of the Bankruptcy Code. Thus, §1307(b)’s plain text requiring the court do dismiss a chapter 13 that had not been previously converted upon request of a debtor.

The BAP found that the debt limit argument did not change the result. If TICO’s argument prevailed, it would create a new exception to §1307(b) not contained in the Bankruptcy Code. §1307(b) does not limit the right to dismiss to eligible debtors. The BAP went on to note that the §109(e) debt limits are not jurisdictional.2

1 See In re Jacobsen v. Moser (In e Jacobson), 609 F.3d 647, 660 (5th Cir. 2010) (asserting discretion to convert for cause under §1307(c) where debtor acted in bad faith or abused the system and filed a request to dismiss in response to the motion to convert); Mitrano v. United States (In re Mitrano), 472 B.R. 706, 710 (Bankr. E.D. Va. 2012) (right to dismiss limited to good faith debtors); In re Johnson, 228 B.R. 663, 668 (Bankr. N.D. Ill. 1999) (right to dismiss can be trumped in some circumstances by a motion to convert under §1307(c).↩

2 Note a decision from the Southern District of Florida to the contrary, finding that §109(e) eligibility goes to the question of bad faith, and denied a motion to dismiss and converted a case on the trustee’s motion for exceeding the debt limit and lacking regular income. In re Letterese, 397 B.R. 507 (Bankr. S.D. Fla. 2008).↩

Michael Barnett
Michael Barnett, PA
506 N Armenia Ave.
Tampa, FL 33609-1703
813 870-3100