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Fifth Circuit Finds Bad Faith Exception to Absolute Right to Dismiss Chapter 13 Case

By Stephen Sather

In a decision extending the reach of Marrama v. Citizens Bank of Massachusetts, the Fifth Circuit has concluded that a debtor's absolute right to dismiss a chapter 13 petition is subject to an exception for bad faith. Matter of Jacobsen, No. 09-40023 (5th Cir. 6/16/10).

The debtor in the Jacobsen case was a real estate broker who filed for chapter 13 relief after being sued for large amounts of money. His wife, who was born in Afghanistan and spoke little English,was not a party to the bankruptcy. After investigation by the Chapter 13 trustee determined that the non-filing spouse owned substantial properties acquired during marriage which were not listed on the debtor's schedules, he moved to convert the case to chapter 7. The debtor moved to dismiss. The Bankruptcy Court ruled that notwithstanding the absolute right to dismiss under Sec. 1307(b) that the court could deny the motion based on bad faith.

The Fifth Circuit was asked to decide whether the Marrama decision could be extended from its original context, the right to convert a chapter 7 case to chapter 13, to the right to dismiss a chapter 13 case. While Marrama seemed to establish a generally applicable principal, Texas Bankruptcy Courts had split on whether it applied to the right to dismiss a chapter 13 petition.

The Fifth Circuit held that:

Following the Supreme Court?s decision in Marrama, we hold that a bankruptcy court has the discretion to grant a pending motion to convert for cause under § 1307(c) where the debtor has acted in bad faith or abused the bankruptcy process and requested dismissal under § 1307(b) in response to the motion to convert. In doing so, we join the Ninth Circuit 15 in finding that Marrama?s ?rejection of the ?absolute right? theory as to § 706(a) applies equally to § 1307(b)? because ?there is no analytical distinction? between the two statutes. In re Rosson, 545 F.3d at 773. We thereby reject a construction of the statute that would afford an abusive debtor an escape hatch, and we sanction the limited exception that lower courts within our boundaries have accorded the statute for nearly two decades.

Opinion, at 20.

The only surprise here is that the Fifth Circuit followed the Ninth Circuit.

Full post as published by A Texas Bankruptcy Lawyer's Blog on June 18, 2010 (boomark / email).