By Ryan C. Wood
The short answer is yes. A recent Ninth Circuit Bankruptcy Appellate Panel case discussed the conversion of a chapter 13 reorganization to a chapter 7 liquidation case. That means if there are assets that cannot be exempted or protected, like your home, the home could be liquidated/sold for the equity to be disbursed to creditors. The exact thing the bankruptcy filer was trying to avoid by seeking relief under chapter 13 or chapter 11 to reorganize their debts while still keeping their assets. It gets more complicated than that but the main concern is the liquidation of assets in the chapter 7 case.
Voluntary Dismissal of a Chapter 13 or Chapter 11 Reorganization Bankruptcy Case
The right to dismiss a chapter 13 or chapter 11 is not an absolute right. A motion to dismiss the case filed by your bankruptcy attorney at the very least needs to be filed and served on creditors that appeared in the case and the trustee assigned to the case. Here in the Northern District of California we have Bankruptcy Local Rule 1017-2, Voluntary Dismissal of Chapter 13 Cases, to provide more specific procedures. BLR 1017-2 limits the notice period for a party to oppose the dismissal to seven days. There is no corresponding local rule regarding voluntary dismissal of chapter 11 cases. A creditor or the trustee assigned to the case could oppose the motion to voluntarily dismiss the case. Generally, if a bankruptcy filer, the debtor, requests the Court to voluntarily dismiss their chapter 13 or chapter 11 reorganization there is no opposition and the motion is granted.
Different Story When A Creditor of Trustee Requests Dismissal or Conversion
Why would the trustee assigned to the case or creditor seek dismissal or conversion of the chapter 13 or chapter 11 reorganization case? More or less because the debtor, and/or their bankruptcy attorney, did not moving the case along to obtain an approved plan of reorganization in a timely manner. If there are a bunch of problems and nothing is done to correct those problems even after time is given to correct those problems do not be surprised if a creditor or the trustee seek conversion of the case to chapter 7 and the Court grants the motion to convert.
9th Circuit BAP Case – In re Nichols BAP No. AZ-20-1032-TaLB
So in this published opinion by the Ninth Circuit Bankruptcy Appellate Panel the debtors and their chapter 13 case had a lot of problems from the very beginning. They failed to push the ball down the court and it seemed like they were just using the bankruptcy filing to stall; which is arguably an abuse of the Bankruptcy Code. The Nichols were unfortunately caught up in state court civil litigation and criminal allegations. The filing of their chapter 13 reorganization case (Debt Adjustment) provided them the automatic stay and safe haven. Unfortunately for them, as the Court provided, the justification for their “sloth” was not justified. The Nichols “dawdled” for seventeen months. That is almost a year and a half without confirming a chapter 13 plan or doing what was necessary to confirm a chapter 13 plan. That is an extremely generous amount of time for the chapter 13 trustee, creditors and the court to not seek dismissal or conversion. Also note that any at time during that seventeen months the Nichols could have voluntarily dismissed their case but did not. A big issue I have with this case is the Nichols had unfiled tax returns from 2014 – 2017 that still had not been filed for at least six months after the chapter 13 case was filed. That is a long time and Section 1308 requires these tax returns be filed. There were many other deficiencies cited by the Court in addition to the unfiled tax returns. The Nichols had creditors that were not your normal large multinational conglomerates like Wells Fargo Bank or JP Morgan Chase Bank. They had creditors that are real humans and those real humans decided enough was enough and filed a motion for conversion of the case to chapter 7 pursuant to Section 1307(c) and (e) of the Bankruptcy Code. The grounds for seeking conversion were undue delay, ineligibility for chapter 13 relief and bad faith conduct (there is no such things as bad faith but lack of good faith). The chapter 13 trustee also joined in support of the motion to convert the case to chapter 7. After additional legal wrangling the Nichols finally filed a motion to voluntarily dismiss their case pursuant to Section 1307(b).
The Court eventually held a joint hearing on the creditors motion to convert the case to chapter 7 and the Nichols motion to voluntarily dismiss their case. At the time of the hearing the Nichols had not amended their chapter 13 plan, submitted a proposed stipulation for order confirming their chapter 13 plan even though the Court delayed entry of a conversion order to chapter 7 to allow the Nichols more time, filed their delinquent tax returns, filed operating reports for their businesses, provided the trustee with her requested disclosure or filed outstanding transaction privilege tax or withholding returns for their businesses. Can you tell where this is going and why yet? Sometimes chapter 13 cases fall to the ground. Some cases it is just a straight drop to the ground and it is over. For the Nichols, they are going to hit every branch on the tree on the way down and to the ground. So it be it.
The Court denied the motion to voluntarily dismiss the chapter 13 case and converted the case to chapter 7 citing Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir. 2008) and finding that Nichols Section 1307(b) right to dismiss is not absolute and does not supersede the conversion options available under Section 1307(c) or (e). The Nichols appealed to the Ninth Circuit Appellate Panel and lost the appeal. The 9th Cir. BAP held the Court did not abuse its discretion in converting the case to chapter 7.
I don’t like it. The 9th Circuit BAP cites In re Rosson, 545 F.3d at 771, 774. The right to convert pursuant to Section 1307(b) is not absolute but a qualified right to prevent an abuse of the process pursuant to Bankruptcy Code Section 105(a). Section 105(a) provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.
Moral of the story is if you fly right you should be able to voluntarily dismiss your chapter 13 or chapter 11 reorganization case. If you piss everyone off and waste their time look out. Conversion to chapter 7 is heading your way.
