Thursday, September 25, 2008
Ninth Circuit Qualifies Right to Dismiss in Chapter 13 Bankruptcy
By STEVEN M. ELLIS, Staff Writer
Debtors in chapter 13 bankruptcy do not have an absolute right to voluntary dismissal, the Ninth U.S. Circuit Court of Appeals ruled yesterday, rejecting a contrary approach adopted by the circuit’s Bankruptcy Appellate Panel.
Explaining that a 2007 U.S. Supreme Court case abrogated the BAP’s analysis, Judge Richard A. Paez wrote that a debtor whose case was ordered converted to a liquidation under chapter 7 for bad-faith conduct could not dismiss the case voluntarily in the time between the bankruptcy court’s sua sponte decision and its entry of a formal order.
Jon Rosson filed a voluntary petition for bankruptcy protection under chapter 13 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Washington in 2004 while involved in an arbitration. Over the next nine months, he sought confirmation of his chapter 13 repayment play over the objections of creditors and the U.S. Trustee, repeatedly assuring the bankruptcy court that he would fund the plan with several hundred thousand dollars he expected to receive from the arbitration proceedings.
Rosson informed the bankruptcy court when he was awarded approximately $185,000 in July of 2005, but he failed to comply with the court’s subsequent order to deposit the funds with the chapter 13 trustee, instead depositing only $104,000 two months later in September.
In the meantime, Rosson’s attorney moved to withdraw, citing a breakdown in communications, and a hearing was set in August, at which the bankruptcy court was informed of Rosson’s noncompliance. The court gave Rosson less than one hour to deliver the money, and then converted the case to chapter 7 when Rosson failed to do so, reasoning that there was too much money involved to be “horsing around with.”
However, before the bankruptcy court filed the formal conversion order, Rosson invoked his right to voluntarily dismiss his petition under 11 U.S.C. § 1307(b).
The bankruptcy court denied the request in connection with its entry of a formal conversion order the following month, as well as Rosson’s motion for reconsideration, and U.S. District Judge James L. Robart of the Western District of Washington upheld the decision on appeal, despite concluding that the bankruptcy court had converted the case with “essentially no notice.”
Rosson then sought review by the Ninth Circuit, arguing that he had an absolute right to dismiss under the BAP’s decision in In re Beatty (1994) 162 B.R. 853. There, the panel—when presented with a conflict between Sec. 1307(b) and 1307(c), which respectively provide that a court “shall” dismiss a case on request of the chapter 13 debtor, but that it “may” convert” a chapter 13 case to chapter 7 “for cause”—ruled that the right to convert was absolute where the request is made prior to entry of the formal conversion order.
But Paez opined that the U.S. Supreme Court’s subsequent decision in Marrama v. Citizens Bank of Massachusetts (2007) 127 S. Ct. 1101, in which the Supreme Court rejected the BAP’s analysis in a case following and reaffirming Beatty, implicitly abrogated Beatty, and qualified a debtor’s right to dismiss on bad-faith conduct or abuse of the bankruptcy process.
Rejecting Rosson’s argument that he had acted in good faith because he merely pledged that the award be used in his case, and that he had not known that using a portion to make repairs to his residence was inconsistent with such use, Paez pointed out that “[Rosson’s] use of the money was still in defiance of the bankruptcy court’s specific order,” and that the debtor “never—not even in his motion for reconsideration—provided the bankruptcy court with an explanation of what happened to the missing funds.”
Under the circumstances, Paez commented, “it was hardly unreasonable for the bankruptcy court to conclude that Rosson sought to voluntarily dismiss his case in order to ‘abscond with [estate] proceeds’…[and] it is clear from the record that the bankruptcy court acted ‘to prevent’ what it reasonably perceived to be ‘an abuse of process.’”
Turning to Rosson’s contention that the bankruptcy court erred by converting his case without notice and a meaningful hearing, Paez agreed that Rosson was entitled to a subsequent opportunity to present arguments against conversion, and that the bankruptcy court’s decision on the motion for reconsideration—which gave “considerable deference” to the earlier ruling—had not afforded Rosson such an opportunity.
Nevertheless, he noted, Rosson offered nothing to counter the bankruptcy court’s finding of bad faith.
“[E]ven when given an opportunity, [Rosson] has never actually provided a satisfactory explanation of why the funds were not delivered…,” Paez wrote, concluding that “Rosson can show no prejudice arising from the defective process afforded him.”
Judge Betty B. Fletcher and Senior U.S. District Judge William W. Schwarzer of the Northern District of California, sitting by designation, joined Paez in his opinion.
The case is In re Rosson, 06-56319.
Copyright 2008, Metropolitan News Company