Closing a Bad Faith Filer’s “Escape”(1)

Bankruptcy Code² § 1307(b) has been called an “escape hatch”³ for “bad faith” Chapter 13 filers, facing creditors’ § 1307( c ) motions to convert their cases to Chapter 7. Those debtors assert § 1307(b)’s “absolute right”⁴ to voluntarily dismiss their case.

But, “how can a debtor assert § 1307(b) if they don’t qualify for Chapter 13 relief?”

Disqualified from Chapter 13

Access to Chapter 13 relief has specific requirements.⁵ Failure to satisfy any of these requirements denies debtors Chapter 13 relief.⁶

Dismissal vs. Conversion

A debtor’s § 1307(b) motion to dismiss may be a tactical response to a creditor’s motion to convert a bad faith case⁷. Courts are divided on whether dismissal is required,⁸ as opposed to conversion, due to bad faith.⁹

Thus, § 1307(b)’s reputation as an “escape hatch” which makes “section 1307(c) a dead letter and open up the bankruptcy courts to a myriad of potential abuses.”¹⁰

However, for debtors disqualified from Chapter 13, does § 1307(b) even apply?

§1307(b)’s Unique Right

Debtors’ absolute right to voluntarily dismiss bankruptcy cases is peculiar to §§ 1307(b) and 1208(b). § 1307(b)’s absolute right to voluntary dismissal is derived from the Thirteenth Amendment’s involuntary servitude prohibition.”¹¹

However, 13th Amendment involuntary servitude concerns are “out of place” in conversions to Chapter 7 liquidation cases.¹² There is no servitude.

You’ve Got to Earn § 1307(b)

Bankruptcy relief has rules and requirements.¹³ If you don’t do what’s required, you don’t get the benefits.¹⁴

Chapter 13 has other benefits, not available to non-Chapter 13 Debtors.¹⁵

It seems axiomatic that debtors who don’t qualify for Chapter 13 relief, don’t qualify for § 1307(b).

Eligibility for § 1307(b)

Recently, in In re Cenk,¹⁶ a debtor’s § 1307(b) motion to dismiss was granted due to unsubstantiated claims of “bad faith.” Still, considering that debtor’s access to § 1307(b) availability, the court opined:

If an ineligible debtor does not have an absolute right to dismiss under section 1307(b), Marrama’s¹⁷ reconversion under section 1307(c) would, in fact, be the “end result required by the Code.¹⁸

It then asked,

“. . . if a debtor’s bad faith preceded the chapter 13 petition or was concurrent with it, . . . is it possible that the debtor would not be “qualified” to be a chapter 13 debtor ab initio and therefore not have an absolute right to dismiss? Ultimately, these are questions for another day.”¹⁹

“Another day” may be now.

Conversion vs. Bankruptcy Limbo?

Not qualifying for Chapter 13 and rejecting chapter 11 leaves disqualified Chapter 13 debtors without a governing chapter. That does not mean bankruptcy limbo.

Chapter 7 apparently becomes the “default” chapter, if no others are available or desired.²⁰

What About the Good Guys?

Disqualification for Chapter 13 may render § 1307(b) inaccessible to all affected. However, innocent debtors can be protected. Where a debtor’s § 1307(b) right is challenged, the court can hold an evidentiary hearing to determine if disqualifying bad faith exists.²¹

Conclusion

It appears that debtors filing Chapter 13 cases in bad faith do not qualify for Chapter 13 relief. Disqualified for Chapter 13, its privileges, including § 1307(b)’s absolute right to dismissal are unavailable. If other chapters are not available or desired, the case being converted to Chapter 7 seems inevitable.

References

¹© Wayne Greenwald 2020
² Bankruptcy Code provisions will be cited as “§ N” N being the
cited section’s number
³ In re Molitor, 76 F.3d 218, 220 (8th Cir. 1996).
⁴ See, In re Barbieri, 199 F.3d 616, 619-22 (2d Cir. 1999), Endurance Am. Ins. Co. v. Burbridge, 2019 WL 1535369, at *2-4 (N.D.N.Y.), In re Marinari, 610 B.R. 87, 92 (E.D. Pa. 2019), In re Cenk, 612 B.R. 323, 328-29 (Bankr. W.D. Pa. 2020), In re Bolling, 609 B.R. 454, 456 (Bankr. D. Conn. 2019)(Dismissal with prejudice)
⁵ Id., 549 U.S. 365, 373-75, 127 S. Ct. 1105, 1111-12,
⁶ Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 372, 373-75, 127 S. Ct. 1105, 1110-12, 166 L. Ed. 2d 956 (2007)(Not satisfying § 109(e)’s requirements and filing petitions in “bad faith” disqualifies debtors from Chapter 13 relief.), In re Wareham, 553 B.R. 875, 880 (Bankr. D. Utah 2016), Matter of Love, 957 F.2d 1350, 1354 (7th Cir. 1992)(“This court has indicated that lack of good faith is sufficient cause for dismissal under Chapter 13”), absence of good faith or presence of bad faith as grounds for dismissal, In re Demeza, 567 B.R. 473, 477 (Bankr. M.D. Pa.), aff’d sub nom. Hackerman v. Demeza, 576 B.R. 472 (M.D. Pa. 2017), In re Erickson, 2004 WL 758175, at *4 (Bankr. C.D. Ill., aff’d sub nom. In re Ericson, 175 F. App’x 58 (7th Cir. 2006)
⁷ § 1307( c ).
⁸ In re Bartlett, 2018 WL 3468832, at *5-6 (B.A.P. 9th Cir. July 18, 2018),
⁹ In re Rosson, 545 F.3d 764, 773-74 (9th Cir. 2008), In re: Donald Hugh Nichols & Jane Ann Nichols, 2020 WL 504745, at *4-5 (Bankr. D. Ariz. Jan. 30, 2020), In re Mattick, 496 B.R. 792, 803 (Bankr. W.D.N.C. 2013)(Not mentioning Marrama).
¹⁰ In re Molitor, 76 F.3d at 220.
¹¹ In re Spencer, 137 B.R. 506, 513 (Bankr. N.D. Okla. 1992), In re Gordon, 465 B.R. 683, 699 (Bankr. N.D. Ga. 2012)(Converting Chapter 11 to Chapter 7).
¹² In re Gordon, 465 B.R. 699-700 (Bankr. N.D. Ga. 2012)
¹³ In re Dixon, 2009 WL 151688, at *2 (Bankr. E.D. Pa.), aff’d, 2009 WL 1798819 (E.D. Pa.), In re Norley, 2010 WL 9449238, at *4 (Bankr. E.D. Pa.), In re Miller, 371 B.R. 509, 517 (Bankr. D. Utah 2007), rev’d, 383 B.R. 767 (B.A.P. 10th Cir. 2008)(Privilege of bankruptcy accompanied by duties), In re Pinnacle Land Grp., LLC, 2018 WL 4348051, at *10 (Bankr. W.D. Pa. Sept. 10, 2018).
¹⁴ In re Dixon, 2009 WL 151688, at *3, See also fn. 6, denying Chapter 13 relief to petitioners who do no qualify for Chapter 13.
¹⁵ See, Matter of Avis, 3 B.R. 205, 207 (Bankr. S.D. Ohio 1980)(Co-debtor stay), In re Maxton, 2018 WL 2246573, at *2 (Bankr. D. Mass. May 16, 2018)(§ 101[30]), In re Saric, 2013 WL 6536752, at *6 (Bankr. N.D.N.Y.) (Lien stripping), In re Mele, 501 B.R. 357, 368 (B.A.P. 9th Cir. 2013), In re Tollstrup, 2018 WL 1384378, at *3 (Bankr. D. Or.)(Enhanced disclosure) Mar. 16, 2018).
¹⁶ 612 B.R. 323, 329 (Bankr. W.D. Pa. 2020).
¹⁷ 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
¹⁸ Id., citing, Law v. Siegel, 571 U.S. 415, 426, 134 S. Ct. 1188, 1197, 188 L. Ed. 2d 146 (2014).
¹⁹ Id.
²⁰ The Chandler Act of 1938 and prior amendments to the Bankruptcy Act of 1898 (the “Act’) created separate bankruptcy chapters. The Act had only one form of debt relief. A debtor was adjudicated a “bankrupt,” Act §§ 1(2), 18(d), and a trustee was appointed at the first meeting of creditors, Act § 44, to administer the estate, Act § 22. Debtors could propose a “composition” (predecessor plans of reorganization) subject to creditor and court approval, to avoid being a bankrupt. Act § 12. Structurally and historically, an individual’s blind filing of a bankruptcy petition, absent Chapters 11, 12 and 13, is a liquidation: Chapter 7. Accordingly, disqualified Chapter 13 petitioners, lacking or rejecting access to dismissal or Chapters 11 and 12, become Chapter 7 cases.
²¹ 408 B.R. at 572.