9th Circuit Overrules Itself Restoring the Debtor’s Absolute Right to Dismiss their Chapter 13
The 9thCircuit had previously held in In re Rosson that a debtor’s absolute right to dismiss their chapter 13 case was limited and that the bad faith conduct of a debtor was grounds to deny a request for dismissal and instead convert the case to chapter 7. The Supreme Court’s subsequent ruling in Law v. Siegel, which held that a bankruptcy court could not surcharge exempt property under its equitable powers granted under section 105(a), made clear that a bankruptcy court did not have equitable power so great that it could contravene the explicit provisions of the bankruptcy code. The 9th Circuit overruled its own precedent in holding that the Rosson court’s reliance on the Supreme Court’s decision in Marrama v. Citizens Bank of Massachusetts, which held that a debtor did not have an absolute right to convert from chapter 7 to chapter 13 if the debtor would not qualify as a debtor under chapter 13 on bad faith grounds, which was based on the broad proposition that “even otherwise unqualified rights in the debtor are subject to limitations by the bankruptcy court’s power under section 105(a) to police bad faith and abuse of process” was now not supportable in light of Law v. Siegal. Thus, the Debtor’s absolute right to dismiss is once again absolute.
A practice pointer was also made clear in an unpublished companion case decided on the same day as Nichols: In In re Chapman-Shapiro, the court considered a pending motion to convert a chapter 13 case to chapter 7 under section 1307(c), and the Debtor did not file an opposition to the motion but had counsel appear at the hearing and request dismissal, the 9th Circuit upheld conversion to chapter 7 finding that the “most faithful reading of the transcript is that the debtor’s counsel requested that the Bankruptcy Court dismiss the case under section 1307(c), the section at issue at the hearing.” If a creditor or the trustee has filed a motion to dismiss or convert under section 1307(c), the best practice is for the Debtor to file its own request for dismissal under 1307(b) or at least make clear on an oral motion that the Debtor moves for dismissal under 1307(b).