6th Cir. Even Chapter 13 Bankruptcy Holds “Bad Faith” To Be Dismissed At Debtor’s Request
The United States Court of Appeals for the Sixth Circuit recently ruled that 11 USC § 1307 (b) requires a bankruptcy court to dismiss a Chapter 13 bankruptcy petition at the request of a debtor, even if the debtor lodged his complaint in bad faith.
A copy of the notice in In the case of Ronald Smith is available at: Link to Opinion.
In 2004, a debtor obtained a loan of $ 528,500 to buy a house. About a year later, the debtor defaulted on the loan, causing the mortgage holder to schedule the foreclosure sale of the property for August 7, 2007.
To prevent the foreclosure sale from going ahead, the debtor filed for Chapter 13 bankruptcy, thereby triggering the automatic stay provided by 11 USC § 362 (a). The debtor dismissed his Chapter 13 case after the August 7, 2007 foreclosure sale date passed.
In 2017, the mortgage holder rescheduled the foreclosure sale of the property and the debtor again filed for Chapter 13 bankruptcy. After the foreclosure sale date of the property past, the debtor rejected his Chapter 13 petition.
In early 2019, the respondent bank purchased the loan and then set the foreclosure sale of the property for February 19, 2019. The day before the foreclosure sale, the debtor filed a third Chapter 13 petition, obtaining again an automatic stay preventing the foreclosure sale from moving forward. The debtor dismissed his Chapter 13 petition six days later, which the bankruptcy court granted.
In June 2019, the bankruptcy court: (1) upheld the bank’s request to overturn the dismissal in accordance with the Fed. R.Civ. P. 60 (b); and (2) separately lifted the automatic stay that would have prevented the foreclosure sale of the property.
The debtor appealed to the district court requesting a stay of the bankruptcy court’s reinstatement of his Chapter 13 petition. The district court dismissed the debtor’s stay request but certified for interlocutory appeal “the whether the reinstatement of [debtor’s Chapter 13 petition] was against the law.
The Sixth Circuit granted the Debtor leave to file this appeal.
On appeal, the Sixth Circuit was responsible for determining “the legality of the bankruptcy court order of June 2019 restoring [debtor’s] Chapter 13 Case. As you may recall, 11 USC § 1307 (b) (“Section 1307”) provides that “[o]n request from the debtor at any time, if the case has not been converted [from a case under Chapter 7, 11, or 12], the court shall dismiss a case under this chapter.
In analyzing Article 1307, the Sixth Circuit noted that upon a request for a referral from a debtor, “the court will dismiss a Chapter 13 case”.
In response, the bank argued that the dictum of Marrama c. Citizens Bank of Massachusetts, 549 US 365 (2007), allows a bankruptcy court to dismiss a debtor’s petition to dismiss a Chapter 13 case if the debtor filed its petition in bad faith.
However, the Sixth Circuit rejected the bank’s argument that the United States Supreme Court had rejected the Marrama saying in Law v. Siegel, 571 US 415 (2014), explaining that “[a]t most, Marrama’s dictum suggests that in certain circumstances a bankruptcy court may be permitted to dispense with frivolous procedural niceties in order to more quickly achieve a final result required by the Code. Identifier. to 426.
By concluding that Article 1307 is “not a mere procedural subtlety”, the Sixth Circuit rejected the bank’s appeal to Marrama.
Then the bank argued that Fed. R.Civ. P. 60 (b) (3) allows the bankruptcy court to set aside its dismissal of the debtor’s Chapter 13 petition. However, the Sixth Circuit disagreed in stating that Section 1307 obliges a bankruptcy court to dismiss a Chapter 13 case at the request of a debtor and “[Section 1307’s] order would make no sense if a bankruptcy court could then set aside his revocation under [Fed. R. Civ. P. 60(b)]. “
Thus, the court ruled that the district court had abused its discretion in finding that the bankruptcy court could reinstate the debtor’s Chapter 13 case under the Fed. R.Civ. P. 60 (b).
As a result, the Sixth Circuit overturned the district court order dismissing the debtor’s stay petition and further remanded this case with directions that the bankruptcy court should dismiss the debtor’s Chapter 13 petition.