Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
Rosson v. Fitzgerald (In re Rosson), 9th Circuit Case No. 06-35724
Published 9/24/08
This brand-new Ninth Circuit opinion addresses the conflict between a Chapter 13 debtor's right to dismiss his case "at any time" and the bankruptcy court's power to convert the case to a Chapter 7 case "for cause" if it "is in the best interests of creditors and the estate," between § 1307(b) and § 1307(c) of the Bankruptcy Code. This Ninth Circuit Rosson opinion is very important because: 1) this specific question is one of first impression in this Circuit, 2) there is a conflict among other Circuits, 3) this opinion expressly overturned a long-standing Ninth Circuit BAP opinion, 4) the Court let stand the conversion in spite of the bankruptcy court's failure to provide the debtor the required notice and hearing on the matter, and 5) the Opinion provides a vague standard for determining when debtor's have a right to dismiss, but its very vagueness demands that it be understood in order to counsel clients on this issue.
The Usual Procedural Context
The way these conflicts--between the Chapter 13 debtor's right to dismiss and the court's power to convert to Chapter 7--tend to arise is that the court decides at some point to convert the case but the debtor then files a motion to dismiss before the conversion order is entered. In Rosson, the debtor had failed to pay to the trustee about $185,000 in proceeds from an arbitration. After about six weeks had passed since debtor had received these funds and been ordered to turn it over, at a hearing on, of all things, debtor's attorney's motion to withdraw as his attorney, the judge gave the debtor one hour to deliver the money or the case would be converted. The debtor instead filed a motion to dismiss the case, which the judge denied and he converted the case instead.
Overturned the 1994 Beatty BAP Opinion
The debtor in Rosson based his argument for the absolute right to dismiss on the well-known 9th Circuit BAP opinion, Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), which had clearly held that "[t]he better reasoned view is that a court must dismiss the case upon the debtor's request for dismissal under section 1307(b) if that request is made prior to the [formal] order converting the case to Chapter 7."
The Ninth Circuit's justification for overturning Beatty is a 2007 U.S. Supreme Court opinion, Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, although that opinion involved the right of a debtor to convert a Chapter 7 case to Chapter 13 under § 706(a). The Supreme Court held "that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process."
But the Ninth Circuit in Rosson glossed over (in a brief footnote) the differences in language between § 1307(b) at issue in Rosson, and § 706(a) at issue in Marrama, especially § 1307(b)'s use of the mandatory "shall" (as in "[u]pon request of the debtor . . . the court shall dismiss a case under [Chapter 13]") and § 706(a)'s use of the permissive "may." The Rosson Court simply said that "[h]ere, the different formulations are not dispositive," without saying why not. This Court ironically hinges its rationale that these two different provisions are analogous on a 9th Circuit BAP opinion, Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), which came after Beatty and which had EXTENDED the Beatty absolute right to dismiss a Chapter 13 under § 1307(b) to an absolute right to convert to Chapter 13 under § 706(a). In Rosson the Ninth Circuit reasoned that since Marrama had directly overturned Croston, and Croston had relied on Beatty, Marrama had logically invalidated Beatty as well. It held that "although Marrama did not address the exact issue decided in Beatty, it is clear that, after Marrama, Beatty . . . is no longer good law, insofar as it held that a Chapter 13 debtor has an absolute right to dismiss under § 1307(b)."
Denial of Notice and a Meaningful Hearing
The debtor in Rosson argued that §1307(c) requires "notice and a hearing" before "the court may convert a case" to Chapter 7. A hearing on a motion to convert was in fact already scheduled on the bankruptcy court's calendar for a few weeks later when the hearing on the debtor's attorney motion to withdraw occurred. At that hearing the judge learned about debtor's lack of compliance with his prior order to give the trustee the arbitration proceeds, he said he would convert the case if the debtor failed to turn over those proceeds within one hour. The debtor argued that he had no notice that the conversion issue would be heard at the hearing on his attorney's withdrawal, and no opportunity to present arguments or evidence on the issue.
The phrase "after notice and hearing" is defined in §102(1) of the Code, with the required notice and hearing needing only to be "as is appropriate in the peculiar circumstances."
In this Rosson case, as to the lack of effective notice that conversion would be raised at the earlier hearing, "the bankruptcy court was within its discretion to enter, with minimal or no notice, what it perceived as an emergency ruling to prevent dissipation of assets."
As to the lack of any meaningful opportunity to present legal arguments or evidence on the conversion, the Ninth Circuit acknowledged that the bankruptcy court should have scheduled a prompt hearing, to comply with §102(1) and §1307(c). But this was a "harmless error," with " no prejudice arising from the defective process" because at the subsequent hearing to reconsider debtor "offered nothing to counter the court's finding of bad faith."
The Vague Standard
So if the debtor's right to dismiss a Chapter 13 case is not absolute, what kind of "bad-faith conduct or abuse of the bankruptcy process" prevents dismissal? The debtor in Rosson argued unsuccessfully that his behavior was not the sort of "bad-faith conduct or abuse of the bankruptcy process" as in Marrama, which "involved a debtor who consciously lied to the court, attempted to remove assets from the court’s jurisdiction, and took efforts to conceal what he had done.” The Rosson Court quoted Marrama in laying out the unsatisfying standard: "the [Supreme] Court held that bankruptcy judges had the power to differentiate between 'the vast majority' 'of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13' (and by analogy, an absolute right to dismiss their Chapter 13's) and 'the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor' ." So, THE BOTTOM LINE: Just ask your client if she is typical or atypical, and then you'll be able to advise her whether she still has an absolute right to dismiss her Chapter 13 case!
The Usual Procedural Context
The way these conflicts--between the Chapter 13 debtor's right to dismiss and the court's power to convert to Chapter 7--tend to arise is that the court decides at some point to convert the case but the debtor then files a motion to dismiss before the conversion order is entered. In Rosson, the debtor had failed to pay to the trustee about $185,000 in proceeds from an arbitration. After about six weeks had passed since debtor had received these funds and been ordered to turn it over, at a hearing on, of all things, debtor's attorney's motion to withdraw as his attorney, the judge gave the debtor one hour to deliver the money or the case would be converted. The debtor instead filed a motion to dismiss the case, which the judge denied and he converted the case instead.
Overturned the 1994 Beatty BAP Opinion
The debtor in Rosson based his argument for the absolute right to dismiss on the well-known 9th Circuit BAP opinion, Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), which had clearly held that "[t]he better reasoned view is that a court must dismiss the case upon the debtor's request for dismissal under section 1307(b) if that request is made prior to the [formal] order converting the case to Chapter 7."
The Ninth Circuit's justification for overturning Beatty is a 2007 U.S. Supreme Court opinion, Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, although that opinion involved the right of a debtor to convert a Chapter 7 case to Chapter 13 under § 706(a). The Supreme Court held "that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process."
But the Ninth Circuit in Rosson glossed over (in a brief footnote) the differences in language between § 1307(b) at issue in Rosson, and § 706(a) at issue in Marrama, especially § 1307(b)'s use of the mandatory "shall" (as in "[u]pon request of the debtor . . . the court shall dismiss a case under [Chapter 13]") and § 706(a)'s use of the permissive "may." The Rosson Court simply said that "[h]ere, the different formulations are not dispositive," without saying why not. This Court ironically hinges its rationale that these two different provisions are analogous on a 9th Circuit BAP opinion, Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), which came after Beatty and which had EXTENDED the Beatty absolute right to dismiss a Chapter 13 under § 1307(b) to an absolute right to convert to Chapter 13 under § 706(a). In Rosson the Ninth Circuit reasoned that since Marrama had directly overturned Croston, and Croston had relied on Beatty, Marrama had logically invalidated Beatty as well. It held that "although Marrama did not address the exact issue decided in Beatty, it is clear that, after Marrama, Beatty . . . is no longer good law, insofar as it held that a Chapter 13 debtor has an absolute right to dismiss under § 1307(b)."
Denial of Notice and a Meaningful Hearing
The debtor in Rosson argued that §1307(c) requires "notice and a hearing" before "the court may convert a case" to Chapter 7. A hearing on a motion to convert was in fact already scheduled on the bankruptcy court's calendar for a few weeks later when the hearing on the debtor's attorney motion to withdraw occurred. At that hearing the judge learned about debtor's lack of compliance with his prior order to give the trustee the arbitration proceeds, he said he would convert the case if the debtor failed to turn over those proceeds within one hour. The debtor argued that he had no notice that the conversion issue would be heard at the hearing on his attorney's withdrawal, and no opportunity to present arguments or evidence on the issue.
The phrase "after notice and hearing" is defined in §102(1) of the Code, with the required notice and hearing needing only to be "as is appropriate in the peculiar circumstances."
In this Rosson case, as to the lack of effective notice that conversion would be raised at the earlier hearing, "the bankruptcy court was within its discretion to enter, with minimal or no notice, what it perceived as an emergency ruling to prevent dissipation of assets."
As to the lack of any meaningful opportunity to present legal arguments or evidence on the conversion, the Ninth Circuit acknowledged that the bankruptcy court should have scheduled a prompt hearing, to comply with §102(1) and §1307(c). But this was a "harmless error," with " no prejudice arising from the defective process" because at the subsequent hearing to reconsider debtor "offered nothing to counter the court's finding of bad faith."
The Vague Standard
So if the debtor's right to dismiss a Chapter 13 case is not absolute, what kind of "bad-faith conduct or abuse of the bankruptcy process" prevents dismissal? The debtor in Rosson argued unsuccessfully that his behavior was not the sort of "bad-faith conduct or abuse of the bankruptcy process" as in Marrama, which "involved a debtor who consciously lied to the court, attempted to remove assets from the court’s jurisdiction, and took efforts to conceal what he had done.” The Rosson Court quoted Marrama in laying out the unsatisfying standard: "the [Supreme] Court held that bankruptcy judges had the power to differentiate between 'the vast majority' 'of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13' (and by analogy, an absolute right to dismiss their Chapter 13's) and 'the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor' ." So, THE BOTTOM LINE: Just ask your client if she is typical or atypical, and then you'll be able to advise her whether she still has an absolute right to dismiss her Chapter 13 case!
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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