Right to Voluntarily Dismiss

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The 9th Circuit Confirms that Chapter 13 Debtors Have an Absolute Right to Dismiss

In TICO Constr. Co. v. Van Meter (In re Powell), Case No. 22-60052 (9th Cir. October 1, 2024) the court considered whether a debtor has an absolute right to dismiss a Chapter 13 bankruptcy case under 11 U.S.C. § 1307(b), even if the debtor is potentially ineligible for Chapter 13 relief at the time of filing due to bad faith.

 Holding: 

The court held that a debtor has an absolute right to voluntarily dismiss their Chapter 13 bankruptcy case under 11 U.S.C. § 1307(b), regardless of bad faith allegations or ineligibility for Chapter 13 relief at the time of filing.

 Facts:

Powell, the debtor, filed for Chapter 13 bankruptcy.  TICO Construction Company, a creditor, challenged Powell’s eligibility for Chapter 13 relief, asserting that he should proceed under a different chapter of the Bankruptcy Code. Powell sought to dismiss his case under § 1307(b) voluntarily, and the bankruptcy court granted his request. The key issue was whether Powell could dismiss his Chapter 13 case despite his alleged ineligibility.

The case was decided based on a disputed interpretation of the law, particularly whether Powell’s eligibility for Chapter 13 impacted his right to voluntary dismissal under § 1307(b).

 Analysis:

The court focused on the plain language of 11 U.S.C. § 1307(b), which gives a debtor the right to dismiss their Chapter 13 case as long as they meet four requirements: they request dismissal, they are a debtor, the case is under Chapter 13, and the case has not been converted to another chapter under Title 11. The court held that Powell met these requirements, and thus had an absolute right to dismiss his case, regardless of his eligibility for Chapter 13 relief or whether he had filed the petition in bad faith.

The court relied on the precedent set in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), which similarly recognized the debtor’s right to dismissal under § 1307(b). The majority emphasized that a debtor’s certification of eligibility when filing under Chapter 13 is presumptively valid and that any challenge to eligibility does not negate the debtor’s right to voluntary dismissal.

In contrast, Judge Collins dissented, arguing that eligibility for Chapter 13 relief is a precondition for the rights and procedures afforded, including the right to voluntary dismissal. According to Collins, Powell’s ineligibility for Chapter 13 should have led the court to deny his request for dismissal and instead convert the case to a different chapter. However, the majority rejected this view, prioritizing the plain language of § 1307(b) over any concerns about eligibility or bad faith at the time of filing.

NCBRC submitted an amicus brief in support of the debtor/appellee.

In re Powell – 9th Circuit Opinion 10-1-24

NCBRCs Amicus Brief In Support of Appellee

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The 9th Circuit Considers Whether a Chapter 13 Debtor Has A Statutory Right to Dismiss

UPDATE: The Ninth Circuit has since decided this case. Click here to read our article discussing their ruling.

The Ninth Circuit is considering whether a chapter 13 debtor’s statutory right to dismiss his bankruptcy is precluded by bad faith or ineligibility under section 109(e). Judgment creditor TICO Construction Company, Inc. (“TICO”) objecte to the debtor’s motion to dismiss, arguing that Mr. Powell did not have an absolute right to dismiss his case because he was abusing the bankruptcy process and was not eligible to be a chapter 13 debtor. TICO argued that the bankruptcy court should instead convert the case to one under chapter 7. The bankruptcy court disagreed with TICO’s analysis and dismissed the case.  The Ninth Circuit Bankruptcy Appellate Panel affirmed in TICO Constr. Co. v. Van Meter (In re Powell), 644 B.R. 181 (B.A.P. 9th Cir. 2022).

TICO appealed the BAP to the Ninth Circuit Court of Appeals.

TICO Construction, a judgment creditor in the debtor’s chapter 13 case, opposed the debtor’s motion to voluntarily dismiss his bankruptcy under section 1307(b). TICO alleged both that the debtor’s unsecured debts exceeded the debt limit set forth in section 109(e), and that the debtor abused by the bankruptcy process by transferring non-exempt assets to his ex-wife in “sham” divorce proceedings. TICO requested that, instead of granting the debtor’s motion to dismiss, the court should convert the case to chapter 7 or 11.

The bankruptcy court found that with one statutory exception that was inapplicable, the debtor had an absolute right to dismiss his case and granted the debtor’s motion. TICO appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

The panel began with section 1307(b), which provides: “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.”

The question before the panel was whether the debtor’s right to dismiss his chapter 13 bankruptcy was circumscribed either by bad faith or by his ineligibility to be in chapter 13. In Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010), the court held that a debtor’s bad faith precludes voluntary dismissal of his chapter 13 case. While the Ninth Circuit at one time agreed with that conclusion, it changed its view in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), where it found the debtor’s right to dismiss was subject only to the exception included in the statute itself. The panel noted that Nichols was based on the decision in Law v. Siegel, 571 U.S. 415 (2014), where the Court held that the bankruptcy court could not override explicit mandates of the Code.

Because bad faith was not included in the statutory exceptions to the debtor’s right to dismiss, the panel found the bankruptcy court did not err in that finding.

TICO next argued that the debtor exceeded the debt limit for chapter 13 and therefore his case should have been treated as if it were chapter 7 with the court considering his motion to dismiss in terms of the best interests of creditors. The panel disagreed, finding that if it did as TICO requested it would create a new exception to the debtor’s right to dismiss under section 1307(b) and that would go directly against the holding in Law.

The panel noted that in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir. BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990), it held that the debt limit in section 109(e) is not jurisdictional, and a bankruptcy court is not required to dismiss a chapter 13 case when the debtor is found ineligible under section 109(e), but may allow the debtor to convert to chapter 7. The court reasoned that if an ineligible chapter 13 debtor retains his right to convert, his right to dismiss also remains intact.

In response to TICO’s argument that the debtor should not be allowed to get away with his bad faith conduct, the panel pointed to other methods for addressing bad faith including denying the debtor’s right to refile, or to apply other sanctions under section 105(b).

No oral argument date has yet been set by the court.

Appellant TICOs Brief

Appellee Powells Brief

NCBRCs Amicus Brief In Support of Appellee

Appellant TICOs Reply Brief

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The 9th Circuit Adopts NCBRC and NACBA’s Amici Argument and Holds A Chapter 13 Trustee May Not Collect Her Percentage Fee If The Chapter 13 Is Dismissed Prior To Confirmation

On June 12, 2023 the Ninth Circuit Court of Appeals held that 11 U.S.C. § 1326(b) requires a chapter 13 trustee to turnover all plan payments to the Debtor upon dismissal before confirmation, without deducting her statutory fee. See Steedman v. McCallister (In re Evans), No. 22-35216, 2023 U.S. App. LEXIS 14571 (9th Cir. June 12, 2023).

The court agreed with the interpretation of the law submitted by the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.

“The better approach, as proposed by amicus National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys (NCBRC), is to read 28 U.S.C. § 586 and 11 U.S.C. § 1326 together. … We generally agree with NCBRC’s construction of the relevant statutes, which renders harmonious an otherwise fragmented scheme.”

Joining the Tenth Circuit, the Ninth Circuit held that the trustee was not entitled to a percentage fee of plan payments as compensation for her work in the Chapter 13 case. 28 U.S.C. § 586(e)(2) provides that the trustee shall “collect” the percentage fee from “payments . . . under plans” that she receives. 11 U.S.C. § 1326(a)(1) provides for the debtor to make payments in the amount “proposed by the plan to the trustee.” Section 1326(a)(2) provides that the trustee shall retain these payments “until confirmation or denial of confirmation.” This section further provides that if a plan is not confirmed, the trustee shall return to the debtor any payments not previously paid to creditors and not yet due and owing to them. Section 1326(b) provides that, before or at the time of each payment to creditors under the plan, the trustee shall be paid the percentage fee under § 586(e)(2).

The court held that, reading these statutes together, “payments . . . under plans” in § 586 refers only to payments under confirmed plans. Prior to confirmation a trustee does not “collect” or “collect and hold” fees under § 586, but instead “retains” payments “proposed by the plan” pursuant to § 1326(a)(2). If a plan is not confirmed, then § 1326(a)(2) requires return to the debtor of payments “proposed by the plan.” If a plan is confirmed, then § 1326(b) provides for payment of the percentage fee to the trustee. Thus, under the plain meaning of the statutory text, a trustee is not paid her percentage fee if a plan is not confirmed. The court concluded that statutory canons of construction, such as the rule against superfluities, and the provisions’ amendment history confirmed its reading of the statutes. And policy arguments made by the trustee were not enough to overcome the plain language and context of the relevant statutory provisions.

The Second Circuit has this issue under consideration in Soussis v. Macco, Case No. 22-155 (2nd Circuit).  Also, the 7th Circuit has been asked to take up this issue on a direct appeal from In re Johnson, Case No. 22-04449 (Bankr. N.D. IL, May 12, 2023).

In re Evans – 9th CircuitEvans 

9th Cir NCBRC amicus July 2022