National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

§ 1307 – Conversion or dismissal

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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 Seventh Circuit Rules That a Chapter 13 Trustee May Not Take A Fee If the Case is Dismissed Pre-Confirmation

On May 3, 2024, the Seventh Circuit Court agreed with the Ninth and Tenth Circuits that the Bankruptcy Code requires the Chapter 13 trustee to return her fee when the debtor’s plan is not confirmed.  See Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023) and Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).

The debtor filed a Chapter 13 bankruptcy and made approximately $3,800 in payments.  The trustee distributed about $750 in pre-confirmation adequate protection payments.  The court never confirmed the debtor’s plan, and the case was dismissed.  The trustee charged her fee of about $260.  The debtor filed a motion to turn over all remaining funds including the trustee’s fee and the bankruptcy court agreed.  The bankruptcy court certified the case for a direct appeal to the Seventh Circuit.

The court held:

“If the plan is confirmed, the trustee must distribute the remaining payments in accordance with the plan. Id. § 1326(a)(2). But where, as here, a plan is not confirmed, “the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).” Id. This requires “the standing trustee [to] return all of the pre-confirmation payments [she] receives, without first deducting [her] fee.” In re Doll, 57 F.4th 1129, 1141 (10th Cir. 2023) (emphasis in original). While § 1326(a)(2) has two exceptions, neither covers the trustee’s fee. As to the first, “[t]he Chapter 13 trustee’s fee is not an administrative expense under Section 503(b),” In re Evans, 69 F.4th 1101, 1104 n.2 (9th Cir. 2023), and the trustee has not argued that it is. As for the second, the trustee’s fee is not a payment “previously paid”—because only certain adequate protection payments are permitted pre-confirmation—nor is it a payment “due and owing to creditors.” 11 U.S.C. § 1326(a)(2). Because neither exception applies to the Chapter 13 trustee’s fee, she must return her fee to the debtor.”

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *3-4 (7th Cir. May 3, 2024).  The court held that the trustee may not keep her fee under Section 1326(b) because that provision applies only to payments after a plan is confirmed.  Further, the trustee has no right to keep her fee under 28 U.S.C. § 586(e)(2). 

“And § 586(e)(2) is irrelevant, as it “only addresses the source of funds that may be accessed to pay standing trustee fees.” In re Doll, 57 F.4th at 1140; see also id. at 1144 (“‘[C]ollect’ in 28 U.S.C. § 586(e)(2) cannot mean … that the act of ‘collection’ of funds irrevocably constitutes a payment to the Trustee of his fees.”); In re Evans, 69 F.4th at 1108 (“Section 586 only provides that when a trustee does collect her fee pursuant to 1326(b), she does so by collecting her fee from all payments received under confirmed plans.”) (cleaned up). Rather, § 1326(a) governs “what happens to such [collected] payments if a Chapter 13 plan is not confirmed.” In re Doll, 57 F.4th at 1140. Section 1326(a)(2) mandates that the trustee return all payments, including her fee, to the debtor. Sections 1326(b) and 586(e)(2) do not compel a different result.”

Marshall v. Johnson, No. 23-2212, 2024 U.S. App. LEXIS 10852, at *5-6 (7th Cir. May 3, 2024).  

The Second Circuit is still considering this issue in the case of in In re Soussis, Case No. 22-155 (2nd Cir. 2023).

NACBA member Mike Miller from the Semrad Law Firm, LLC in Chicago, Illinois, successfully represented this debtor.

NACBA and NCBRC supported the debtor by filing an amicus brief in support and by providing Mr. Miller a moot court prior to oral argument.

In re Johnson – 7th Circuit Decision

NACBA-NCBRC File stamped brief

Trustee’s brief in Johnson appeal

In re Johnson – Appellee-Debtors brief

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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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Laches Forecloses Trustee’s Motion to Dismiss

Where the Trustee slept on her right to challenge the debtor’s method of calculating her plan payments until shortly before the debtor completed her plan, the doctrine of laches compelled denial of the trustee’s motion to dismiss. In re Melcher, No. 16-21536 (Bankr. E.D. Ky. Aug. 30, 2022).

The debtor and the chapter 13 Trustee negotiated a 60-month plan in which the debtor agreed to commit one third of her annual gross income over $120,000 to the plan (“excess income payments”). The debtor calculated her first excess income payment by taking the income from Box 1 of her W-2 form, subtracting $120,000 and multiplying the result by .33. After discussion with the Trustee and one of her creditors, the debtor’s payment was accepted as correct. The debtor used the same method of calculation for the following years’ excess income payments. [Read more…] about Laches Forecloses Trustee’s Motion to Dismiss

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SG Agrees 10th Erred But Opposes Cert

Despite agreeing that the Tenth Circuit got it wrong, the Solicitor General for the United States filed a brief opposing certiorari in the case of Kinney v. HSBC Bank USA, No. 21-599 (brief filed Aug. 30, 2022). The issue was a simple one: whether the debtor could receive a completion discharge under section 1328(a) when she missed the final three payments on her mortgage due to a car accident, but made up the payments shortly after her plan expired. [Read more…] about SG Agrees 10th Erred But Opposes Cert

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Debtor’s Post-Discharge Pre-Closure Motion to Convert Denied

The debtor was not permitted to convert from chapter 7 to chapter 13 post-discharge but prior to administrative closure of his case where the court found the attempted conversion to be an abuse of process and his conduct in his chapter 7 case to indicate bad faith. In re Chamoun, No. 20-5069 (C.D. Cal. Dec. 2, 2020). [Read more…] about Debtor’s Post-Discharge Pre-Closure Motion to Convert Denied