VOLUNTARY DISMISSAL OF CHAPTER 13 IS NOT ABSOLUTE

11 U.S.C. SS1307(b) states “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.” A plain reading of this provision supports the argument that the debtor has an absolute right to have his chapter 13 case dismissed. However, the Court of Appeals for the 5th Circuit, and the Court of Appeals for the 6th Circuit have ruled that debtor’s right to have his Chapter 13 case is not absolute even though the plain language of 1307(b) can be read to confer an absolute right to dismiss.

 In Marrama v. Citizens Bank of Massachusetts, the Court of appeals said that the right to dismiss under 1307(b) is subject to a limited exception for bad faith conduct or abuse of the bankruptcy process. Marrama dealt with a debtor’s right to convert a case from Chapter 78 to Chapter 13 where the Court of Appeals for the 5th Circuit agreed with the 9th Circuit Court of Appeal’s statement in Re Rosson, that the “important point established by Marrama is that even otherwise unqualified rights in the debtor are subject to limitation by the bankruptcy court’s power under Section 105(a) to police bad faith and abuse of process.” In Jacobsen, the debtor asked the court to dismiss his case after the trustee moved to convert the case to Chapter 7.

The bankruptcy court found that the debtor acted in bad faith by failing to disclose all his assets. The debtor argued that many of the assets belonged to his wife, but the court noted that the debtor misspelled his wife’s name in his schedules. He said that was an accident, but it supported a finding that the debtor acted in bad faith. The court denied the debtor’s motion and granted the Chapter 13 trustee’s motion. The District Court affirmed, as did the 5th Circuit. On appeal, the debtor argued that 1307(b) gave him an absolute right to have his case dismissed, and that his motion trumped the trustee’s motion. The 5th Circuit found that there are no absolute rights in bankruptcy after Marrama.

“Following the Supreme Court’s decision in Marrama, we hold that a bankruptcy court has the discretion to grant a pending motion to convert for cause under Section 1307© where the debtor has acted in bad faith or abused the bankruptcy process and requested dismissal under Section 1307(b) in response to the motion to convert. In doing so, we join the 9th Circuit in finding that Marrama’s rejection of the absolute right theory as to Section 706(a) applies equally to Section 1307(b) because ‘there is no analytical distinction’ between the two statutes,” the court said. “We thereby reject a construction of the statute that would afford an abusive debtor an escape hatch, and we sanction the limited exception that the lower courts within our boundaries have accorded the statute for nearly two decades.”

In Cusano v. Klein, the 6th Circuit Bankruptcy Appellate Panel ruled that the bankruptcy court could bar the debtor from re-filing for two years and to limit the automatic stay’s effect in any case he should file after that time. The debtor Cusano was lead guitarist for the hard rock band KISS from 1982 to 1984. Debtor filed for Chapter 13 in 2007 after he was ordered to appear for a judgment debtor’s examination. This case was dismissed because he did not obtain prepetition credit counseling. Debtor re-filed for Chapter 13 two weeks after his first Chapter 13 case was dismissed. In May 2009, debtor filed his third Chapter 13 case. In June 2009, debtor fired his attorney and asked the court to dismiss his case. Creditors objected and asked the court to convert the case to Chapter 7 or dismiss it with re-filing restrictions. The court found that debtor acted in bad faith and there was ample cause to impose conditions on the dismissal.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.