FILED AUG 12 2020 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. AZ-20-1032-TaLB DONALD HUGH NICHOLS and JANE ANN NICHOLS, Bk. No. 4:18-bk-09638-BMW Debtors.
DONALD HUGH NICHOLS; JANE ANN NICHOLS, Appellants, v. OPINION MARANA STOCKYARD & LIVESTOCK MARKET, INC.; THE PARSONS COMPANY; CLAY PARSONS; KAREN PARSONS; ARIZONA DEPARTMENT OF REVENUE; JILL H. FORD, Chapter 7 Trustee, Appellees.
Appeal from the United States Bankruptcy Court for the District of Arizona Brenda Moody Whinery, Bankruptcy Judge, Presiding
APPEARANCES: German Yusufov argued for appellants; D. Alexander Winkelman argued for appellees Marana Stockyard & Livestock Market, Inc., The Parsons Company, Clay Parsons, and Karen Parsons
Before: TAYLOR, LAFFERTY, and BRAND, Bankruptcy Judges.
TAYLOR, Bankruptcy Judge: INTRODUCTION
Chapter 131 debtors Donald Hugh Nichols and Jane Ann Nichols
appeal from the bankruptcy court’s order denying their § 1307(b) dismissal
motion and granting a § 1307(c) and (e) conversion motion. Debtors
contend that the bankruptcy court abused its discretion in doing so,
arguing that: (1) their right to dismiss is absolute; and (2) even if the right is
not absolute, there were no grounds for conversion. We disagree with their
arguments and perceive no abuse of discretion. We AFFIRM.
FACTS
Prepetition, Debtors’ son, Seth Nichols, pled guilty to bank fraud
under 18 U.S.C. § 1344. His victims, Marana Stockyard & Livestock Market,
Inc. (“Marana”) and its owners, Clay and Karen Parsons (the “Parsons”
and, together with Marana, “Creditors”), received an 18 U.S.C. § 3663A
restitution award. The plea agreement provides that Debtors would pay
partial restitution on behalf of their son through transfer or liquidation of
their home and other real property (“Properties”). Indeed, they transferred
title to the Properties to the Creditors almost six months before Seth
Nichols signed the plea agreement.
But Debtors were not signatories to the plea agreement; they alleged
that the Parsons fraudulently induced them to transfer their Properties.
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532.
2 And the Creditors did not agree that Seth Nichols acted alone; they alleged
that Debtors were involved in their son’s criminal activity. The plea
agreement was not the end of litigation.
Marana and The Parsons Company filed a state court complaint
against Debtors and related entities seeking recovery based on fraud,
conversion, and aiding and abetting tortious acts related to the bank fraud
(“Civil Case”). Debtors then: (1) filed a third party complaint against the
Parsons in which they sought rescission for fraud in the inducement of the
transfers of the Properties; (2) filed a notice of lis pendens; and (3) recorded
the lis pendens against the Properties. The Parsons demanded its
immediate expungement.
Debtors did not meet the demand; instead they filed a chapter 13
petition and a chapter 13 plan (“Plan”). Having obtained the safe harbor
provided by a bankruptcy case and the automatic stay, they then dawdled
for over seventeen months. They took no steps towards plan confirmation
or Bankruptcy Code compliance. Their only affirmative steps engendered
delay in both the bankruptcy and Civil Case proceedings.2
Despite a Plan objection filed by the chapter 13 trustee raising several
impediments to confirmation, including: (1) Debtors’ failure to file tax
returns for 2014 through 2017; (2) Debtors’ failure to provide information
2 For example, they released the lis pendens only at the eleventh hour during an evidentiary hearing on Creditors’ motion seeking its expungement.
3 regarding their business operations; (3) Debtors’ failure to file business
operating reports; and (4) the Plan’s failure to provide for priority claims
and to satisfy the liquidation analysis, feasibility, and projected disposable
income requirements of chapter 13, Debtors never amended their facially
non-confirmable Plan.
Debtors ultimately attempted to justify their sloth by reference to
federal criminal charges filed post-petition against Hugh Nichols for bank
fraud and conspiracy to commit bank fraud (“Criminal Case”)3 and alleged
advice of their criminal and bankruptcy counsel. And the Trustee did not
immediately press the point; she continued the § 341(a) meeting of
creditors numerous times. But the case went nowhere, and an even
potentially confirmable plan, one that paid creditors the minimum required
by the evidence in the Debtors’ schedules, was never proposed.
Debtors also stalled the Civil Action. They opposed Creditors’ stay
relief motion requesting liquidation of claims in the Civil Case, and
Debtors’ co-defendants—most of which are entities Debtors own and
control—obtained a six-month stay from the state court.
So, nine months into the chapter 13 case, Debtors still had not filed
required tax returns or otherwise made a meaningful effort to confirm a
plan. Creditors, thus, sought conversion to chapter 7 (“Conversion
3 Theft of livestock, wire fraud, and witness retaliation charges under 18 U.S.C. §§ 667, 1343, and 1513(e) were added five months later.
4 Motion”) under § 1307(c) and (e), alleging, inter alia, undue delay,
ineligibility for chapter 13 relief, and bad faith conduct.
The Trustee joined the Conversion Motion on the bases that:
(1) Debtors had not addressed most of the issues raised in her Plan
objection; (2) Debtors had not advanced the case; (3) Debtors had not
proposed a confirmable plan; (4) Debtors had not filed required tax returns;
(5) Debtors had not provided information needed to analyze the feasibility
or propriety of the Plan; (6) Debtors had not met their obligations to
creditors and the estate; and (7) creditors were being prejudiced by case
stagnation.
Debtors broadly opposed the Conversion Motion; the defenses to
their obvious inaction included the assertion that case delays were
attributable to their Criminal Case rather than bad faith conduct.
Concurrently, they filed a motion making the extraordinary request that
the bankruptcy court stay or abstain from all bankruptcy proceedings
pending the outcome of the Criminal Case (“Motion for Stay”). Creditors
filed an opposition.
The bankruptcy court held a hearing on the Motion for Stay and
Conversion Motion and denied the Motion for Stay. In addition, it
conditionally granted the Conversion Motion: (1) finding cause for
conversion under § 1307(c), including unreasonable delay that is
prejudicial to creditors; (2) finding that conversion was in the best interest
5 of creditors and was required under § 1307(e) given Debtors’ failure to file
tax returns; (3) at Debtors’ counsel’s request, giving Debtors thirty days to
submit tax returns and a stipulated order of confirmation (“SOC”) to avoid
conversion; and (4) authorizing the Trustee to upload an order converting
the case if Debtors failed to complete such tasks.
Debtors appealed the bankruptcy court’s denial of the Motion for
Stay to the United States District Court for the District of Arizona. While
the district court appeal was pending, Debtors filed a motion to dismiss
their chapter 13 case under § 1307(b) (“Dismissal Motion”) “as a matter of
precaution, to prevent any potential claim of waiver of the right to
dismiss.” But they did not request a hearing until after the district court
denied their motion for a stay pending appeal.4
Creditors and the Arizona Department of Revenue opposed the
Dismissal Motion and urged conversion. They argued that case dismissal
would cause a manifest injustice and substantial harm to creditors and that
Debtors had been acting in bad faith.
The bankruptcy court then held a joint hearing on the Conversion
Motion and Dismissal Motion. As of the hearing date, Debtors still had not:
(1) amended the Plan or submitted a proposed SOC to the Trustee, despite
the bankruptcy court delaying entry of a conversion order, at Debtors’
4 The district court later affirmed the bankruptcy court. Nichols v. Marana Stockyard & Livestock Mkt. Inc. (In re Nichols), 615 B.R. 588 (D. Ariz. 2020).
6 counsel’s request, to allow them time to do so; (2) filed their delinquent tax
returns; (3) filed operating reports for their businesses; (4) provided the
Trustee with her requested disclosures; and (5) filed outstanding
Transaction Privilege Tax or withholding returns for their businesses.
Following the hearing, the bankruptcy court entered its order
denying the Dismissal Motion and granting the Conversion Motion
(“Order”). Citing Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir.
2008), the bankruptcy court found that Debtors’ § 1307(b) right to dismiss is
not absolute and does not supersede the conversion options available
under § 1307(c) or (e). Here, the bankruptcy court concluded, Debtors’
delays were not excused by the concurrently pending Criminal Case. While
fighting to stay in chapter 13, they did nothing more than inject delay in the
bankruptcy and Civil Case. Further, they failed to file numerous tax returns
by the § 1308(a) deadline. Thus, the bankruptcy court found that “[t]he
Debtors have essentially used Chapter 13 to hide from creditors during the
pendency of the criminal proceedings. Such conduct constitutes an abuse of
the bankruptcy process, justifying denial of the Debtors’ Motion to Dismiss
under § 1307(b).” It concluded that conversion was in the best interest of
creditors and appropriate under §§ 1307(c) and (e).
Debtors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction to determine the Conversion
7 Motion and Dismissal Motion under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and
(O). See Beatty v. Traub (In re Beatty), 162 B.R. 853, 857-58 (9th Cir. BAP 1994)
(holding conversion is not effective on oral ruling; rather it is effective and
operative on the date of entry on the docket), overruling recognized on other
grounds by In re Rosson, 545 F.3d 764. We have jurisdiction under 28 U.S.C.
§ 158.
ISSUE
Did the bankruptcy court abuse its discretion when it granted
Creditors’ Conversion Motion and denied Debtors’ Dismissal Motion?
STANDARDS OF REVIEW
We review the bankruptcy court’s decision to deny a § 1307(b)
request for dismissal of a chapter 13 case and to convert the case to
chapter 7 for an abuse of discretion. In re Rosson, 545 F.3d at 771. The
bankruptcy court abuses its discretion if it fails to identify or apply the
correct legal rule to the relief requested or if its application of the correct
legal standard was illogical, implausible, or without support in the record.
Father M v. Various Tort Claimants (In re Roman Catholic Archbishop of
Portland in Or.), 661 F.3d 417, 424 (9th Cir. 2011).
We review the bankruptcy court’s conclusions of law de novo and its
factual findings for clear error. In re Rosson, 545 F.3d at 771. Its findings of
fact are accorded considerable deference and are only clearly erroneous if
we are left with a definite and firm conviction a mistake has been
8 committed. Anderson v. Bessemer City, 470 U.S. 564, 573-75 (1985).
We may affirm on any basis supported by the record. Black v. Bonnie
Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 211 (9th Cir. BAP 2013).
DISCUSSION
Debtors argue for the first time on appeal that the bankruptcy court
lacked authority to order conversion to chapter 7 under § 1307(c) and (e) in
light of their § 1307(b) Dismissal Motion. They maintain that they have an
absolute right to dismissal, despite Creditors’ allegations of Debtors’ abuse
of process and failure to file the tax returns required under § 1308. In
advancing this argument, they submit that In re Rosson, 545 F.3d 764, in
which the Ninth Circuit held that a debtor’s § 1307(b) right to dismiss is not
absolute, must be deemed bad law as contradicted by preceding and
subsequent United States Supreme Court authority in Marrama v. Citizens
Bank of Mass., 549 U.S. 365 (2007) and Law v. Siegel, 571 U.S. 415 (2014). We
disagree. We also disagree with Debtors’ alternative arguments that the
bankruptcy court erred in determining conversion was warranted for
Debtors’ abuse of process and failure to file tax returns.
A. Debtors waived the argument that Rosson no longer controls, but we
exercise our discretion to consider the issue.
Creditors initially contend that Debtors waived the argument that
Rosson is no longer controlling law because they did not raise it below and,
in fact, affirmed the validity of Rosson. We agree.
9 Debtors counter that they raised the issue in a footnote to their
Dismissal Motion: “[i]t is questionable whether the exception created by
[Rosson] is consistent with the statute.” That footnote is far too cryptic and
contrary to their subsequent arguments to have adequately raised the
issue. See Conservation Nw. v. Sherman, 715 F.3d 1181, 1188 (9th Cir. 2013)
(deeming appellant’s argument waived as it was buried in the middle of a
broader argument below such that the district court never ruled on it).
Indeed, in the bankruptcy court, Debtors acknowledged twice in briefing
and four times at a hearing that their right to a dismissal was limited by
Rosson. And, at no time did they argue that any case contradicted or
overruled Rosson.
And this failure is particularly troubling where the bankruptcy court
ordered conversion before Debtors sought dismissal. Debtors avoided
immediate conversion by asserting that they would file the required tax
returns and remedy the Plan’s serious defects. Instead, they did nothing
except request dismissal.
As a general rule of waiver, we will not reverse the bankruptcy court
“on the basis of a theory that was not raised below.” Alaska Airlines, Inc. v.
United Airlines, Inc., 948 F.2d 536, 546 n.15 (9th Cir. 1991). But waiver is a
discretionary determination, which allows us to reach issues not raised at
the trial level in certain circumstances, including “when the issue presented
is purely one of law and either does not depend on the factual record
10 developed below, or the pertinent record has been fully developed.” Bolker
v. Comm’r, 760 F.2d 1039, 1042 (9th Cir. 1985). Thus, though Debtors did not
adequately raise the issue below, we exercise our discretion to consider
whether Rosson is controlling law.
B. Rosson’s holding, that the right to dismissal has limits, is controlling.
There is no question that Rosson bound the bankruptcy court in the
absence of a contrary decision of the Supreme Court. See Zuniga v. United
Can Co., 812 F.2d 443, 450 (9th Cir. 1987). And no one argues that the
Supreme Court directly overruled Rosson or decided the particular issue it
resolved. So, we must follow Rosson unless the Supreme Court has
otherwise undercut its theory or reasoning in a way that is clearly
irreconcilable with continued reliance on it. Miller v. Gammie, 335 F.3d 889,
900 (9th Cir. 2003) (en banc). As explained below, the Supreme Court has
not done so.
Section 1307 provides, in pertinent part, that
(b) On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. (c) . . . [O]n request of a party in interest . . . and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including—
11 (1) unreasonable delay by the debtor that is prejudicial to creditors[.] ... (e) Upon the failure of the debtor to file a tax return under section 1308, on request of a party in interest . . . and after notice and a hearing, the court shall dismiss a case or convert a case under this chapter to a case under chapter 7 of this title, whichever is in the best interest of the creditors and the estate.
§ 1307(b), (c)(1), and (e). Creditors rely on Rosson for the proposition that
these statutes exist in equipoise such that dismissal was not required upon
Debtors’ request and conversion remained an option. Debtors argue that
Rosson is inconsistent with Supreme Court cases in analogous situations,
that § 1307(b) is the controlling statutory mandate, and that dismissal was
the only appropriate option.
Debtors first focus on Marrama, where the Supreme Court interpreted
§ 706(a) rather than § 1307(b). But, as the Rosson Panel held, Marrama’s
reasoning for its interpretation of § 706(a) instructs how § 1307(b) should be
read.
In Marrama, a chapter 7 debtor attempted to hide a significant asset.
549 U.S. at 368. He filed a § 706(a) motion to convert his case to chapter 13,
only after the chapter 7 trustee discovered his deceit. The bankruptcy court
denied his motion due to his bad faith conduct. Id. at 369-70. The matter
then wound its way to the Supreme Court.
As the Supreme Court observed, § 706(a) allows a chapter 7 debtor to
12 convert the case to chapter 13 at any time subject to conditions not present
in the Marrama case. It further provides that “[a]ny waiver of the right to
convert a case under this subsection is unenforceable.” § 706(a). The
Supreme Court consulted legislative history that described the § 706(a)
right to convert as “absolute” but nevertheless held that the “reference to
an ‘absolute right’ of conversion [wa]s more equivocal than” this language
suggested. Marrama, 549 U.S. at 372. In particular, it identified the
requirement in § 706(d) that the debtor be eligible to proceed under the
chapter to which conversion was sought as an exception to the “absolute
right” of conversion. Id.
Turning to § 706(d), the Marrama Court then examined a potential
reason why the debtor would not qualify as a debtor under chapter 13: the
ability of the bankruptcy court to convert or dismiss a case for cause under
§ 1307(c). Id. at 373. It concluded that the debtor’s bad faith conduct was
“cause” because bad faith debtors do not belong to “the class of ‘honest but
unfortunate debtors’ that the bankruptcy laws were enacted to protect.” Id.
at 374 (alterations omitted) (quoting Grogan v. Garner, 498 U.S. 279, 287
(1991)). And it reasoned that a bad faith finding under § 1307(c) was
“tantamount to a ruling that the individual does not qualify as a debtor
under Chapter 13.” Id. at 373–74. Thus, it held that § 706(d)’s requirement
that a debtor be eligible under the chapter to which conversion was sought
allowed the bankruptcy court to deny conversion to chapter 13. Id. at 374.
13 The Marrama Court also found that the bankruptcy court’s refusal to
convert the case was authorized under § 105(a) and might have been
authorized under its inherent powers to sanction abusive litigation
practices expeditiously. Id. at 375-76.
In Rosson, the Ninth Circuit Court of Appeals considered the effects
of Marrama in the context of a bankruptcy court’s sua sponte conversion of
a chapter 13 case to chapter 7 “for cause” despite a pending § 1307(b)
dismissal motion. The Rosson court held that after Marrama, “a debtor’s
right to voluntarily dismiss a Chapter 13 case under § 1307(b) is not
absolute, but is qualified by an implied exception for bad-faith conduct or
abuse of the bankruptcy process.” In re Rosson, 545 F.3d at 767. Rosson
pointed out:
These two provisions [§ 1307(b) and(c)]—i.e., that the court “shall” dismiss a case on request of the Chapter 13 debtor, but that the court also “may” convert a Chapter 13 case to Chapter 7 “for cause”—can conflict where, on the one hand, a debtor requests voluntary dismissal, while, on the other hand, a party in interest or the trustee moves to convert—or the court, acting on its own, converts—the case to Chapter 7.
Id. at 771. But despite the mandatory versus permissive language of
§ 1307(b) and (c), respectively, Marrama requires that the debtor’s § 1307(b)
right to dismissal be qualified by the bankruptcy court’s power to convert a
case based on the debtor’s bad-faith conduct or abuse of the bankruptcy
process. Id. at 772, 774. It noted that the text of § 706(a) and § 1307(b) are
14 analytically indistinguishable. Id. at 773 (citing Croston v. Davis (In re
Croston), 313 B.R. 447, 451 (9th Cir. BAP 2004), abrogated on other grounds by
Marrama, 549 U.S. 365). Thus, it reasoned that because Marrama rejected an
“absolute” right theory as to § 706(a), the “absolute” right theory as to
§ 1307(b) must also be rejected. Id. at 773-74.
Rosson also cited to § 105(a) in discussing Marrama’s bad faith and
abuse of process exceptions to the rights conferred on debtors in §§ 706(a)
and 1307(b). 545 F.3d at 771 n.8, 773 n.12, 774. This analysis primarily
centered on a holistic statutory construction of § 1307(b) and (c) to conclude
that a debtor’s § 1307(b) dismissal right is fairly limited by alternative “for
cause” grounds of abuse of process or bad faith for conversion under
§ 1307(c).
In Law, the Supreme Court held that a trustee could not surcharge a
debtor’s exemption under its § 105(a) inherent equitable powers to
contravene § 522(k), which prohibits the use of exempt property to pay
administrative expenses. Law, 571 U.S. at 427-28. The Law Court
distinguished Marrama because § 706(d) expressly conditioned conversion
on a debtor’s qualifications for relief under chapter 13. A chapter 7 debtor’s
bad faith conduct could prevent her eligibility as a chapter 13 debtor
because § 1307(c) authorizes the bankruptcy court to dismiss or convert a
case for cause, which includes bad faith. See id. at 425-26; Marrama, 549 U.S.
at 372-75. Law characterized Marrama’s conclusion that a bankruptcy court
15 could deny dismissal pursuant to § 105(a) as “dictum.” Id. at 426. But Law
reinforced that § 105(a) could be used to avoid the “futile procedural
niceties in order to reach more expeditiously an end result required by the
Code,” such as denying conversion when it is clear that the bankruptcy
court would inevitably reconvert or dismiss the converted case for cause.
Id.
In Saris Realty, Inc. v. Bartlett (In re Bartlett), BAP No.
CC-17-1364-LsTaL, 2018 WL 3468832 (9th Cir. BAP July 18, 2018), we
observed that after Law, “the continued vitality of Rosson has its allies and
opponents.” Id. at *5. We then briefly discussed those allies and opponents.
See id. (comparing its post-Law allies, In re Brown, 547 B.R. 846 (Bankr. S.D.
Cal. 2016) and In re Pustejovsky, 577 B.R. 671 (Bankr. W.D. Tex. 2017), with
its post-Law opponents, Ross v. AmeriChoice Fed. Credit Union, 530 B.R. 277
(E.D. Penn. 2015), vacated and remanded sub nom. In re Ross, 858 F.3d 779 (3d
Cir. 2017), and In re Sinischo, 561 B.R. 176 (Bankr. D. Colo. 2016)). However,
we declined to consider the “continued sturdiness of Rosson,” Bartlett, 2018
WL 3468832 at *6, and disposed of the appeal on other grounds.
Here, we consider Rosson’s vitality; we agree with its allies—it is still
good law. As aptly articulated in Brown, “[r]ather than undercutting
Rosson’s analysis, Law actually confirms it.” In re Brown, 547 B.R. at 851.
Specifically, Marrama’s rejection of a chapter 7 debtor’s absolute right to
convert was based on a “holistic” interpretation of §§ 706(a), 706(d), and
16 1307(c) and the conclusion that § 706(a)’s seemingly absolute right to
convert was equivocal. In Law, the Supreme Court emphasized that
Marrama’s holding was not solely or primarily based on § 105(a). Law, 571
U.S. at 425-26. In fact, the Law Court labeled Marrama’s statements
regarding § 105(a) as mere “dictum.” Id. at 426. The Law Court explained:
The question [in Marrama] was whether a debtor’s bad-faith conduct was a valid basis for a bankruptcy court to refuse to convert the debtor’s bankruptcy from a liquidation under Chapter 7 to a reorganization under Chapter 13. Although § 706(a) of the Code gave the debtor a right to convert the case, § 706(d) “expressly conditioned” that right on the debtor’s “ability to qualify as a ‘debtor’ under Chapter 13.” And § 1307(c) provided that a proceeding under Chapter 13 could be dismissed or converted to a Chapter 7 proceeding “for cause,” which the Court interpreted to authorize dismissal or conversion for bad-faith conduct. In light of § 1307(c), the Court held that the debtor’s bad faith could stop him from qualifying as a debtor under Chapter 13, thus preventing him from satisfying § 706(d)’s express condition on conversion.
Id. at 425-26 (citations omitted).5
5 Debtors attribute too much to Law’s relegation of Marrama’s § 105(a) analysis to dictum. Specifically, they argue that because Marrama’s only reference to “abuse of process” appears in its discussion of § 105(a), Rosson, even if not overruled by Law, cannot be read to authorize a bankruptcy court to convert for cause under § 1307(c) based on an abuse of process, absent a separate finding of bad faith, when there is a pending § 1307(b) dismissal request.
Debtors ignore Marrama’s key holding that the bankruptcy court’s bad faith (continued...)
17 The Rosson court carried Marrama’s reasoning to its natural
conclusion in interpreting § 706(a)’s chapter 13 analog, § 1307(b). As did the
Supreme Court in Marrama, the Ninth Circuit read § 1307(b) and (c) to give
these different subsections of the same statute importance in the situations
to which they apply. When those situations converge with competing
conversion and dismissal motions, each subsection should be given its
proper significance. Section 1307(c) proffers a statutory basis to refuse to
honor a § 1307(b) dismissal request, just as §§ 706(d) and 1307(c), read
together, proffer a statutory basis to refuse to honor a § 706(a) conversion
request.
We note that the Ninth Circuit has not directly addressed the
continued vitality of Rosson. However, several post-Law cases have
favorably cited Rosson’s holding that a debtor’s § 1307(b) dismissal rights
are qualified by the bankruptcy court’s authority to deny dismissal for bad
5 (...continued) finding was sufficient to deny conversion under § 706(a) because the finding would constitute cause to dismiss or reconvert the case under § 1307(c). A finding of an abuse of process similarly constitutes cause to dismiss or convert a case under § 1307(c); an individual who abuses the bankruptcy process is as unworthy to be classified as an “honest but unfortunate debtor[] that the bankruptcy laws were enacted to protect[,]” Marrama, 549 U.S. at 374 (citation and internal quotation marks omitted), as an individual who acts in bad faith during bankruptcy. Debtors provide no meaningful basis to distinguish between such individuals. Neither individual should be immune from the bankruptcy court’s power to convert a case for cause under § 1307(c). Rosson thus appropriately held that either a bad faith or abuse of process finding of cause to convert under § 1307(c) may defeat a § 1307(b) motion.
18 faith conduct or to prevent an abuse of process. See, e.g., Brown v. Billingslea
(In re Brown), BAP No. SC-14-1388-JuKlPa, 2015 WL 6470940, *11 (9th Cir.
BAP Oct. 26, 2015); Dietlein v. Dietlein (In re Dietlein), 592 B.R. 864, 868 (D.
Nev. 2018); In re Malek, No. 15-61179-13, 2018 WL 1750089, *3 (Bankr. D.
Mont. Apr. 10, 2018).
More importantly, after Law, the Ninth Circuit in Clark v. DeVries
(In re Clark), 652 F. App’x 543 (9th Cir. 2016) relied on Rosson in holding
that a chapter 12 debtor did not have an absolute right to dismissal under
§ 1307(b)’s chapter 12 analog, § 1208(b), because the district court had the
power to instead convert the case to chapter 7 pursuant to § 1208(d), which
provides that a court “may” dismiss or convert a case “upon a showing
that the debtor has committed fraud in connection with the case.”
For these reasons, we hold that Rosson remains good law; a debtor’s
§ 1307(b) right to dismissal is not absolute. In doing so, we acknowledge
the tensions in the analysis. But given that Law merely suggests, rather than
requires, consideration of a different result and given that the Ninth Circuit
relied on Rosson after Law, we determine that the decision binds us here.
We also observe that limiting a chapter 13 debtor’s § 1307(b) right
voluntarily to dismiss a case when there is bad faith conduct or abuse of
process warranting conversion is consistent with the objectives of the
Bankruptcy Code and is otherwise sound statutory construction.
Congress has explicitly stated its intent to prevent mandatory
19 chapter 13 proceedings:
As under [the Bankruptcy Act of 1898], chapter 13 is completely voluntary. This Committee [on the Judiciary] firmly rejected the idea of a mandatory or involuntary Chapter XIII in the 90th Congress. The Thirteenth Amendment prohibits involuntary servitude. Though it has never been tested in the wage earner plan context, it has been suggested that a mandatory chapter 13, by forcing an individual to work for creditors, would violate this prohibition. On policy grounds, it would be unwise to allow creditors to force a debtor into a repayment plan. An unwilling debtor is less likely to retain his job or to cooperate in the repayment plan, and more often than not, the plan would be preordained to fail.
H.R. Rep. No. 595, 95th Cong., 1st Sess. 120 (1977), as reprinted in 1978
U.S.C.C.A.N. 6080 (footnotes omitted). Section 1307(b) is one of several
statutory safeguards Congress enacted to ensure that chapter 13 cases are
purely voluntary proceedings. See, e.g., §§ 303(a) (prohibiting the filing of
an involuntary chapter 13 case against a debtor); 706(c) (prohibiting
conversion of a chapter 7 case to chapter 13 without a debtor’s consent);
1112(d) (prohibiting conversion of a chapter 11 case to chapter 13 without a
debtor’s consent); 1307(a) (providing a chapter 13 debtor with the right to
convert to chapter 7 at any time); 1321 (providing a chapter 13 debtor with
the exclusive authority to propose a plan). Section 1307(b) prevents a
debtor from compelled chapter 13 servitude. Thus, the mandatory
language of § 1307(b) is best understood as providing a chapter 13 debtor
20 with an absolute right to exit chapter 13.
But there is no indication in the legislative history that Congress
intended to grant debtors who have abused the bankruptcy process an
unqualified right to choose the means by which they exit chapter 13. After
all, “the purpose of the bankruptcy code is to afford the honest but
unfortunate debtor a fresh start, not to shield those who abuse the
bankruptcy process in order to avoid paying their debts.” Molitor v. Eidson
(In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996). Thus, § 1307(b) should not be
used “as an escape hatch” by a dishonest debtor to avoid the repercussions
of bad faith conduct or abuse of process once a § 1307(c) conversion motion
is filed. Id.
Congress’ involuntary servitude concern has no place in a chapter 7
case because a chapter 7 debtor is not compelled to pay future wages to a
creditor in violation of the Thirteenth Amendment’s involuntary servitude
prohibition. Cf. Toibb v. Radloff, 501 U.S. 157, 165-66 (1991) (citing H.R. Rep.
No. 95-595, at 120, as articulating Congress’ concern with involuntary
chapter 13 proceedings and holding chapter 11 proceedings do not involve
the same concern). In fact, § 303(a) expressly permits creditors to file an
involuntary chapter 7 against a person.
Thus, allowing the bankruptcy court to convert a chapter 13 case to
chapter 7 for bad faith conduct, abuse of process, or a failure to file tax
returns despite a debtor’s § 1307(b) dismissal motion honors Congress’
21 intention of keeping chapter 13 proceedings voluntary while preserving the
integrity of the bankruptcy system by allowing the bankruptcy court to
address abusive behavior.
And Debtors’ argument that § 1307(b) has preferred status based on
its position in the statute is not supported by any rule of statutory
construction. Instead, we are compelled to read the statute as a whole, to
give meaning to all its provisions, and to aim for a coherent construction
where facial differences exist. Food & Drug Admin. v. Brown & Williamson
Tobacco Corp., 529 U.S. 120, 133 (2000). And, given this analysis, the fact that
§ 1307(b) contains a mandatory “shall” while § 1307(c) utilizes a permissive
“may” does not compel a different result. Again, the only coherent way to
give import to the entirety of the statute is to acknowledge the debtor’s
absolute right to exit chapter 13 while also acknowledging that the rights of
creditors must be considered when the debtor acts in bad faith or abuses
process; in such a case an exit to a chapter 7 case remains an option.
Under this analysis, it becomes clear that Law in no way controls the
outcome here. This analysis does not require recourse to § 105 to avoid
application of a Bankruptcy Code mandate. Instead, the analysis requires
consideration of different subsections of the same statute and a reasoned
analysis that provides each with an appropriate place in the statutory
scheme.
22 C. The bankruptcy court did not err in finding abuse of process
warranting conversion under § 1307(c).
The bankruptcy court’s finding that conversion would prevent an
abuse of process was not clearly erroneous. Debtors fought to remain in
chapter 13 for seventeen months, yet they took no material steps to
advance their case towards confirmation or to comply with the Bankruptcy
Code. The only affirmative actions they took were designed to delay
judicial proceedings. And when they missed the deadline to file tax
returns, they made no effort to correct their delinquencies. Rather, they
sought multiple stays of proceedings.
Debtors assert that their delays were excusable because they were
allegedly unable to produce information required to move the bankruptcy
case forward or to otherwise take affirmative actions without their criminal
counsel first evaluating the ramifications of, and recommending, such
actions. And, they argue, consistent with the advice of criminal counsel,
they sought a stay of the bankruptcy proceedings. Debtors’ arguments are
not well-taken.
While a debtor may assert his Fifth Amendment privilege in a
bankruptcy proceeding, McCarthy v. Arndstein, 266 U.S. 34, 41 (1924), he
cannot assert it in a blanket fashion to “impede the basic bankruptcy
administration of his case” without consequence, McCormick v. Banc One
Leasing Corp. (In re McCormick), 49 F.3d 1524, 1527 (11th Cir. 1995); see also
23 In re Vaughan, 429 B.R. 14 (Bankr. D.N.M. 2010) (converting chapter 11 case
to chapter 7 under § 1112(b)(4)(H) where debtor refused to testify at a § 341
meeting of creditors after invoking his Fifth Amendment privilege and
thereby failed to provide information reasonably requested by the United
States Trustee). Further, we agree with the bankruptcy court that Debtors’
requested stay would allow them to “use the Fifth Amendment as a shield,
while impermissibly using the Bankruptcy Code as a sword with which to
take unfair advantage of creditors.” Phillips v. First Nat. Ins. Co. of Am., Civ.
No. H-10-3632, Adv. No. 10-03075, 2011 WL 2447954, at *2 (S.D. Tex. June
15, 2011); see also In re Connelly, 59 B.R. 421, 448 (Bankr. N.D. Ill. 1986).
During all of Debtors’ stalling efforts, creditors have suffered as
Debtors have not met their obligations to pay creditors or to propose even a
facially confirmable plan. These facts provide ample support for the
bankruptcy court’s determination that conversion would prevent an abuse
of process and be in the best interest of creditors.6 Therefore, we perceive
no error in the bankruptcy court’s denial of Debtors’ Dismissal Motion and
grant of Creditors’ Conversion Motion under § 1307(c).
6 Debtors point out that the bankruptcy court did not hold an evidentiary hearing on whether they were abusing the bankruptcy process. To the extent they are suggesting error in the bankruptcy court’s determination that there was sufficient evidence in the record to find an abuse of process without holding an evidentiary hearing, they waived any such argument by failing to request an evidentiary hearing when the bankruptcy court questioned whether one was necessary.
24 D. The bankruptcy court did not err in finding grounds for conversion
under § 1307(e).
Even assuming, arguendo, that Debtors correctly argue that § 1307(c)
must be of secondary import to § 1307(b) given the “may” and “shall”
language in them, respectively, their argument fails to negate the
alternative basis for conversion under § 1307(e).7
Section 1307(e) unambiguously provides that a bankruptcy court
“shall” dismiss the case or convert the case to chapter 7 “whichever is in
the best interest of the creditors and the estate” if the debtor fails to comply
with § 1308 and a party in interest requests dismissal or conversion. Here
the bankruptcy court also converted the case based on this statutory
mandate.
Under the Debtors’ reasoning, such a contest of “shalls” places a
bankruptcy court between Scylla and Charybdis—whichever choice it
makes risks ruin. Only the holistic approach that allows discretion to the
bankruptcy court allows successful navigation between the hazards. In
short, even if one concludes that the bankruptcy court’s discretion is
curtailed in the § 1307(c) context because that subsection utilizes more
permissive language than § 1307(b), the same is not true in a situation
7 In fact, Debtors waived any challenge to the bankruptcy court’s conversion under § 1307(e) by failing to address it in their opening brief. Kim v. Kang, 154 F.3d 996, 1000 (9th Cir. 1998) (Appellate courts will not ordinarily consider matters that are not specifically and distinctly argued in an appellant's opening brief).
25 where § 1307(e) mandates consideration of the interests of creditors.
Here, Debtors inexcusably failed to file multiple tax returns within
the time constraints of § 1308(a). While we acknowledge that the Criminal
Case required caution and created tensions involving the Fifth Amendment
privilege against self-incrimination, the privilege “does not justify a
complete failure to file a [tax] return[.]” United States v. Leidendeker, 779 F.2d
1417, 1418 (9th Cir. 1986).
Given the mandatory language of § 1307(e), the bankruptcy court
was required to consider the interests of creditors. It thoughtfully did so
and determined that conversion, and not dismissal, would best serve their
interests. And while this deprived Debtors of their late hour attempt to
compel dismissal, it gave them, in substance, what the mandatory language
of § 1307(b) requires, an immediate exit from chapter 13.
CONCLUSION
Based on the foregoing, we AFFIRM.