Jacobsen v. Moser ( 2010 )

REVISED July 12, 2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 09-40023 FILED
June 16, 2010
Lyle W. Cayce
In the Matter of: ROBERT EDWIN JACOBSEN, Clerk
Debtor
ROBERT EDWIN JACOBSEN,
Appellant
v.
CHRISTOPHER MOSER, Chapter 7 Trustee; JOHN SRAMEK;
BERNADETTE SRAMEK; TIMOTHY E CARLSON, CPA, a professional
corporation,
Appellees
Appeal from the United States District Court
for the Eastern District of Texas
Before KING, BARKSDALE, and ELROD, Circuit Judges.
KING, Circuit Judge:
Robert Edwin Jacobsen filed a petition for relief under Chapter 13 of the
Bankruptcy Code. During Jacobsen’s bankruptcy case, the Chapter 13 Trustee
moved to convert the case to Chapter 7 for cause under 11 U.S.C. § 1307(c). In
No. 09-40023
response, Jacobsen moved to dismiss his case under 11 U.S.C. § 1307(b).
Following a hearing, the bankruptcy court found that Jacobsen had acted in bad
faith and abused the bankruptcy process, denied his motion to dismiss, and
converted the case to Chapter 7. Jacobsen appeals, asserting that he has an
absolute right to dismiss under § 1307(b) and, alternatively, that the finding of
bad faith was clearly erroneous. Although the plain language of 11 U.S.C.
§ 1307(b) can be read to confer an absolute right to dismiss, the Supreme Court’s
decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007),
compels us to hold that the right to dismiss under 11 U.S.C. § 1307(b) is subject
to a limited exception for bad-faith conduct or abuse of the bankruptcy process,
and we therefore affirm.
I. BACKGROUND
Robert Edwin Jacobsen is a licensed real estate broker in the State of
California. He married his wife, Alise Malikyar, in 1999. At the time this
appeal was filed, Malikyar worked as a hair stylist in California. Jacobsen filed
a petition for relief under Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 101et seq., on May 25, 2007, in the Bankruptcy Court for the Eastern District of
Texas. Although a pending lawsuit had been filed in California state court
against both Jacobsen and Malikyar by John and Bernadette Sramek
(collectively, the “Srameks”), Malikyar did not file a petition for bankruptcy
relief as a co-debtor.1
After obtaining an extension of time, Jacobsen filed his required
bankruptcy schedules and Statement of Financial Affairs on June 25, 2007. In
his schedules, Jacobsen disclosed his ownership of three mortgaged properties:
a residence in Frisco, Texas, in which he claimed a homestead exemption, and
1
The Srameks’ lawsuit alleged fraud and misrepresentation in connection with a real
estate transaction in California.
2
No. 09-40023
two leased residential properties in Plano, Texas.2 Jacobsen also claimed
ownership of various other items of personal property, including all the stock of
Humbolt Equities LLC, valued at $1,000, and a promissory note owed by REJ
Properties, Inc., with a face value of $1,000,000. Jacobsen listed eight secured
claims totaling $613,717.54, including two judgment liens: a $35,000 claim by
Cory Nichols and a $47,530 claim by Timothy E. Carlson, CPA, PC (“Carlson”).
Jacobsen did not identify any property to which the judgment liens attached.
Jacobsen also listed unsecured claims totaling $224,711.80 that were
noncontingent, liquidated, and undisputed. He listed the Srameks individually
as pursuing a civil lawsuit against him for $1,627,536.38; Jacobsen marked this
claim as contingent, unliquidated, and disputed.3
In his Statement of Financial Affairs, Jacobsen listed under the category
“Other transfers” the sale, on September 15, 2006, of the outstanding shares of
the British American Yacht Corporation (“British American”). He claimed that
the sale was for a total consideration of $5,000, of which his share was $2,500.
No other transactions were listed. Under “Prior address of debtor,” Jacobsen
listed the address 2324 Tice Valley Blvd., Walnut Creek, CA 94595 (the “Tice
Valley Property”). Jacobsen reported that he lived at the Tice Valley Property
from 1999 until the end of 2005, at which time he lived on a sailboat in the
Caribbean for approximately six months. In describing his business activities,
Jacobsen reported four business interests: (1) his self-employment as a real
estate investor and broker; (2) Humble [sic] Equities II, LLC, a real estate
business of which Jacobsen was the sole member; (3) REJ Properties, Inc., a real
estate business of which Jacobsen was the president and sole shareholder until
2
Jacobsen proposed to assume the unexpired leases of the two residences in Plano.
3
That claim was the subject of our decision in Jacobsen v. Sramek (In re Jacobsen), No.
09-40660, 2010 WL 271419 (5th Cir. Jan. 25, 2010) (per curiam), affirming the bankruptcy
court’s decision to overrule Jacobsen’s objections to the Srameks’ proof of claim.
3
No. 09-40023
the corporation’s sale in May 2005; and (4) British American, a yacht charter
business he ran with his wife. In the section for listing spouses and former
spouses, Jacobsen misspelled Malikyar’s name as “Malekyar”; this was the first
time her name appeared on any filings in the Chapter 13 case.
On July 20, 2007, Jacobsen, the Srameks, Carlson, and the Chapter 13
Trustee attended the meeting of creditors prescribed by 11 U.S.C. § 341. At this
meeting, it was revealed that there were numerous real properties in both Texas
and California titled in Malikyar’s name and that the Tice Valley Property was
proceeding to sale. The Chapter 13 Trustee responded by filing an adversary
proceeding to enjoin the sale (the “Adversary Proceeding”). At a hearing in the
Adversary Proceeding, Jacobsen disclosed that he had a nonexempt property
interest in the Tice Valley Property. The bankruptcy court subsequently entered
an order restraining the sale of the Tice Valley Property.
While the Adversary Proceeding was progressing, the Chapter 13 case
continued. On August 2, 2007, the Chapter 13 Trustee filed a motion to convert
the case from Chapter 13 to Chapter 7 for cause under § 1307(c); the Srameks
and Carlson joined in that motion. Later that day, Jacobsen responded by filing
a motion to dismiss the Chapter 13 case under § 1307(b). The bankruptcy court
held a hearing on the motions at which Jacobsen was the sole witness testifying.
During Jacobsen’s examination at the hearing, it became clear that
Jacobsen’s schedules and his Statement of Financial Affairs contained
inaccuracies and deficiencies. Regarding real property, Jacobsen testified that
in the weeks leading up to his petition, a home in Lafayette, California (the
“Bella Vista Property”) had been purchased and titled in Malikyar’s name. He
further testified that about two weeks before filing his petition, he had executed
a quitclaim deed, conveying any interest he had in the Bella Vista Property to
Malikyar. Neither the Bella Vista Property nor the quitclaim deed was
identified in Jacobsen’s schedules or his Statement of Financial Affairs. At the
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No. 09-40023
time of the hearing, Jacobsen was living with Malikyar at the Bella Vista
Property. In addition, the Tice Valley Property, although listed as a prior
address on the Statement of Financial Affairs, was not listed in Jacobsen’s
schedules. While Jacobsen included three Texas properties in his schedules, he
omitted six rental properties in Allen and Plano, Texas, that were titled in
Malikyar’s name.
Jacobsen explained in testimony that he neglected to include property held
in Malikyar’s name because he believed that, under a prenuptial agreement and
a postnuptial agreement the two had executed, those properties were separately
owned by Malikyar. These agreements, dated July 17, 1999, and September 11,
2001, respectively, purport to leave all property acquired before marriage as
separate property and to render property acquired during marriage the separate
property of the spouse in whose name it was acquired. Jacobsen acknowledged
in his testimony that these agreements were not recorded in the relevant
counties in California or Texas.4 He was also unable to explain why, at the
earlier hearing in the Adversary Proceeding regarding the sale of the Tice Valley
Property, neither he nor his attorney mentioned or produced either the
prenuptial or postnuptial agreement.
Jacobsen suggested that Malikyar was able to purchase the Bella Vista
Property using income derived from her hair styling business, but he then
testified that she had not been engaged in that business until after the date his
petition was filed. Jacobsen also testified that Malikyar, who is from
Afghanistan, speaks little English, and that he manages the properties titled in
her name. Jacobsen’s testimony also revealed that he was the beneficiary and
trustee of a trust called the Jacobsen Trust, but he did not believe that the trust
4
Both California and Texas require that marital property agreements be recorded to
be effective against third parties without notice. See CAL. FAM. CODE § 852(b) (West 2004);
TEX. FAM. CODE § 4.106(b) (Vernon 2006).
5
No. 09-40023
held any assets. Jacobsen testified that he had invested $75,000 in a business
venture with his cousin who lived in Oslo, Norway, to produce shea butter; his
investment money was derived from the proceeds from the sale of a
condominium he owned in Acapulco, Mexico. Neither of those interests was
listed on Jacobsen’s schedules. Jacobsen insisted that the misspelling of his
wife’s name was unintentional, as was the misspelling of Humbolt Equities on
his Statement of Financial Affairs.5 Despite the errors and omissions, Jacobsen
did not amend his schedules or his Statement of Financial Affairs.
Following the hearing, the bankruptcy court denied Jacobsen’s motion to
dismiss and granted the Chapter 13 Trustee’s motion to convert. In re Jacobsen,
378 B.R. 805, 811 (Bankr. E.D. Tex. 2007). The court found that Jacobsen’s right
to dismiss the Chapter 13 case was qualified by an exception for bad faith, id. at
810–11, that Jacobsen’s conduct established bad faith, id. at 811, and that
Jacobsen’s bad faith constituted cause for converting the case to Chapter 7, id.While the case was on appeal to the district court, the bankruptcy court entered
a judgment in the Adversary Proceeding, agreed to by Jacobsen and Malikyar,
declaring that the three properties listed in Jacobsen’s schedules and seven
properties held in Malikyar’s name were equal or joint management community
property and therefore property of Jacobsen’s bankruptcy estate. The district
court affirmed the judgment of the bankruptcy court converting Jacobsen’s case
to Chapter 7. Jacobsen timely appealed.6
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction under 28 U.S.C. § 158(d) over the appeal of an order
5
According to Jacobsen, the only assets held by Humbolt Equities are five unimproved
lots in Lake Tahoe, California, with a total value of approximately $1,000.
6
Subsequent to this appeal being taken, the bankruptcy court sanctioned Jacobsen for
his conduct throughout the case. See In re Jacobsen, No. 07-41092, 2009 WL 3245418, at *16
(Bankr. E.D. Tex. Sept. 30, 2009). That action does not influence our decision here.
6
No. 09-40023
converting a bankruptcy case from Chapter 13 to Chapter 7 for cause under
§ 1307(c). Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 770 (9th Cir. 2008);
Molitor v. Eidson (In re Molitor), 76 F.3d 218, 219 (8th Cir. 1996).
“When a court of appeals reviews the decision of a district court, sitting as
an appellate court, it applies the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district court.”
Kennedy v. Mindprint (In re ProEducation Int’l, Inc.), 587 F.3d 296, 299 (5th Cir.
2009) (alterations and internal quotation marks omitted). “Issues of statutory
interpretation are [questions of law] reviewed de novo.” Szwak v. Earwood (In
re Bodenheimer, Jones, Szwak, & Winchell L.L.P.), 592 F.3d 664, 668 (5th Cir.
2009). A bankruptcy court’s determination that a debtor has acted in bad faith
is a finding of fact reviewed for clear error. See Humble Place Joint Venture v.
Fory (In re Humble Place Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991) (citing
Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev.
Co.), 779 F.2d 1068 (5th Cir. 1986)). The decision to convert a Chapter 13 case
to Chapter 7 under § 1307(c) is reviewed for abuse of discretion. In re McDonald,
118 F.3d 568, 569 (7th Cir. 1997).
III. DISCUSSION
Jacobsen argues on appeal that the bankruptcy court lacked the authority
to order conversion to Chapter 7 under § 1307(c) in light of his motion to dismiss
under § 1307(b). He contends in the alternative that the bankruptcy court’s
finding of bad faith was clearly erroneous and cannot support conversion under
§ 1307(c).
A. Section 1307
The question of whether there is an exception to a debtor’s right to dismiss
under § 1307(b) for bad-faith conduct or abuse of process is an issue of first
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No. 09-40023
impression in this circuit.7 Before we undertake an independent analysis, we
first survey the approaches taken by other courts, examine the Supreme Court’s
decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), and
evaluate how courts have changed their analysis in response to Marrama.
1. Statutory Framework
Section 1307(b) provides that “[o]n 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.” 11 U.S.C. § 1307(b). The next
subsection provides that:
Except as provided in subsection (e) of this section, on request of a
party in interest or the United States trustee 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 . . . .
Id. § 1307(c). Section 1307(c) then provides a nonexhaustive list of acts and
omissions that constitute “cause,” none of which is directly applicable here.
2. Circuit Split
For many years, the courts have been divided over whether a debtor’s right
to dismiss under § 1307(b) was absolute or was qualified by an exception for bad
faith or abuse of process. The Ninth Circuit initially suggested in dicta that the
right to dismiss was absolute, see Nash v. Kester (In re Nash), 765 F.2d 1410,
1413 (9th Cir. 1985) (noting, outside the context of bad faith, that the right to
dismiss under § 1307(b) is absolute); see also In re Rosson, 545 F.3d at 772 n.9
(suggesting that the language in In re Nash was “likely dicta”), and its
7
In an earlier case, the district court affirmed a bankruptcy court denial of a Chapter
12 debtor’s request for dismissal under 11 U.S.C. § 1208(b) and grant of a creditor’s motion to
convert the case to Chapter 7. Foster v. N. Tex. Prod. Credit Ass’n (In re Foster), 121 B.R. 961,
961 (N.D. Tex. 1990), aff’d without op., 945 F.2d 400 (5th Cir. 1991). Our affirmance under
Fifth Circuit Rule 47.6 is discussed below.
8
No. 09-40023
bankruptcy appellate panel (BAP) agreed, see Beatty v. Traub (In re Beatty), 162
B.R. 853, 857 (B.A.P. 9th Cir. 1994) (“[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 effective time of an order converting the case to Chapter 7.”). Other courts
took this view as well. See In re Harper–Elder, 184 B.R. 403, 404–05 (Bankr.
D.D.C. 1995) (citing cases on both sides of the division and concluding that the
right to dismiss under § 1307(b) is absolute). These courts reasoned that the
plain text of the statute did not permit a contrary conclusion, see, e.g., id. at
405–06, and that an exception should not be implied where the debtor was
merely forgoing the protections of the Bankruptcy Code, see, e.g., id. at 407.
These courts also considered the voluntary nature of Chapter 13 bankruptcy and
concluded that an absolute right to dismiss was consonant with the principle
that a debtor cannot be compelled to commit post-petition earnings to complete
a confirmed repayment plan. See, e.g., id. at 408; see also In re Armstrong, 408
B.R. 559, 571 (Bankr. E.D.N.Y. 2009) (discussing post-petition earnings and
voluntariness).
Other courts, however, disagreed and held that § 1307(b) is subject to an
exception where a Chapter 13 debtor acts in bad faith or abuses the bankruptcy
process. The most significant of these decisions was that of the Eighth Circuit
in Molitor v. Eidson (In re Molitor), 76 F.3d 218 (8th Cir. 1996). The court
considered its prior decision in Graven v. Fink (In re Graven), 936 F.2d 378 (8th
Cir. 1991), which held that the analogous provisions in Chapter 12—11 U.S.C.
§ 1208(b) and (d)—conferred a right to dismiss that was qualified by an
exception where the debtor committed fraud.8 The In re Graven court read
8
Section 1208 provides, in relevant part:
(b) On request of the debtor at any time, if the case has not been converted
under section 706 or 1112 of this title, the court shall dismiss a case under this
chapter. Any waiver of the right to dismiss under this subsection is
unenforceable.
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§ 1208(b) as providing a qualified right to dismiss so as not to render § 1208(d)
“useless” and because the broad purpose of the Bankruptcy Code was served by
an interpretation that permitted conversion even in the face of a request for
dismissal. 936 F.2d at 385. The In re Graven court also considered the district
court’s opinion in Foster v. North Texas Production Credit Association, 121 B.R.
961 (N.D. Tex. 1990), which concluded that the right to dismiss under § 1208(b)
is qualified by an exception for fraud.9 936 F.2d at 386. According to the In re
Molitor court, “th[e] same broad purpose as well as the principles of statutory
construction employed in Graven apply equally well to the nearly identical
provisions of Chapter 13 and the instant case.” 76 F.3d at 220. The court
....
(d) On request of a party in interest, and after notice and a hearing, the court
may dismiss a case under this chapter or convert a case under this chapter to
a case under chapter 7 of this title upon a showing that the debtor has
committed fraud in connection with the case.
11 U.S.C. § 1208(b) & (d). Section 1208(c) differs from § 1307(c) in that it permits dismissal
but not conversion upon a finding of cause, while § 1307(c) permits either upon a finding of
cause. Chapter 12 thus requires a finding of fraud to justify conversion to Chapter 7, while
Chapter 13 requires only a finding of cause.
9
Subsequent to the court’s decision in In re Graven, we affirmed the district court’s
decision in In re Foster without opinion. In re Foster, 945 F.2d 400. That decision was made
pursuant to Fifth Circuit Rule 47.6, which provides:
Affirmance Without Opinion. The judgment or order may be affirmed or
enforced without opinion when the court determines that an opinion would have
no precedential value and that any one or more of the following circumstances
exists and is dispositive of a matter submitted for decision: (1) that a judgment
of the district court is based on findings of fact that are not clearly erroneous; (2)
that the evidence in support of a jury verdict is not insufficient; (3) that the
order of an administrative agency is supported by substantial evidence on the
record as a whole; (4) in the case of a summary judgment, that no genuine issue
of material fact has been properly raised by the appellant; and (5) no reversible
error of law appears. In such case, the court may, in its discretion, enter either
of the following orders: “AFFIRMED. See 5TH CIR. R. 47.6.” or “ENFORCED.
See 5TH CIR. R. 47.6.”
5TH CIR. R. 47.6. While our determination in In re Foster is without precedential value, we
remain mindful that Rule 47.6 decisions are reached only after all the issues are fully
considered and ruled on in a meaningful review process. United States v. Pajooh, 143 F.3d 203,
204 (5th Cir. 1998).
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No. 09-40023
refused to allow the debtor to use § 1307(b) as an “escape hatch” from the
charges of bad faith because doing so “would render section 1307(c) a dead letter
and open up the bankruptcy courts to a myriad of potential abuses.” Id.
After In re Molitor, the Second Circuit also had the occasion to determine
whether § 1307(b) was subject to an exception for bad-faith conduct or abuse of
process. In Barbieri v. RAJ Acquisition Corp. (In re Barbieri), 199 F.3d 616, 619
(2d Cir. 1999), the Second Circuit became the first court of appeals to hold that
no such exception existed. The court began by considering the plain text of
§ 1307(b), which uses the words “at any time” and “the court shall dismiss,” and
comparing them to the permissive language in § 1307(c), in which “the court may
convert . . . for cause.” Id. at 619–20. The court concluded that the mandatory
terms of § 1307(b) were reinforced by the principle that Chapter 13 bankruptcy
is intended to be purely voluntary. Id. at 620. The court stated that the debtor
could still be forced into a Chapter 7 liquidation if the requirements of
commencing an involuntary petition under 11 U.S.C. § 303 were met. Id. The
court rejected the Eighth Circuit’s concern that an interpretation affording
debtors an absolute right to dismiss would read § 1307(c) out of the statute. Id.
The court further determined that the equitable powers provided a bankruptcy
court under 11 U.S.C. § 105(a)10 could not be used to disregard the plain
language of the statute. Id. at 620–21. Lastly, the court explained that
dismissal would not result in abuse of the bankruptcy process because the
automatic stay would be lifted and creditors would be free to use state court
10
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. No provision of this title
providing for the raising of an issue by a party in interest shall be construed to
preclude the court from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or implement court orders or
rules, or to prevent an abuse of process.
11 U.S.C. § 105(a).
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processes. Id. at 621.11
3. Marrama v. Citizens Bank of Massachusetts
In 2007, the Supreme Court handed down its decision in Marrama v.
Citizens Bank of Massachusetts, 549 U.S. 365 (2007). Marrama, the Chapter 7
debtor in that case, had filed schedules that were “misleading” and
“inaccurate”—listing the value of a trust as zero when the trust actually held a
house of substantial value and denying that he had transferred the house to the
trust in the year prior to the date of his petition. Id. at 368. When the trustee
declared an intention to recover the house as an asset of the estate, Marrama
sought to convert his case to Chapter 13 pursuant to 11 U.S.C. § 706(a). Id. at
368–69. That provision states that “[t]he debtor may convert a case under this
chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case
has not been converted under section 1112, 1208, or 1307 of this title. Any
waiver of the right to convert a case under this subsection is unenforceable.” 11
U.S.C. § 706(a). That provision is subject to the limitation that “a case may not
be converted to a case under another chapter of this title unless the debtor may
be a debtor under such chapter.” Id. § 706(d).
In determining whether § 706(a) was subject to an exception for bad faith,
the Court first addressed the provision’s legislative history. The Senate Report
stated that
11
Following these decisions, commentators weighed in, with some offering opinions on
the proper interpretation and others simply summarizing the decisions courts had reached.
See 8 COLLIER ON BANKRUPTCY ¶ 1307.03[1] (15th ed. rev. 2007) (“Although some courts have
. . . granted motions to convert a case notwithstanding a debtor’s motion to dismiss in cases in
which the court has found abuse, such decisions fly in the face of the plain language of the
statute.” (footnote omitted)); 7 NORTON BANKRUPTCY LAW AND PRACTICE § 148:4 (3d ed. 2008)
(“Courts have been especially loath to grant a debtor’s motion to voluntarily dismiss a Chapter
13 case when the motion is filed in response to a creditor’s or the trustee’s motion to convert.”);
Christy McDonald, To Dismiss or not to Dismiss: The "Absolute" Question: Think Dismissing
a Chapter 13 Is an Absolute Right? Think Again, N.J.L.J., vol. CLXVII, No. 5, Feb. 4, 2002
(noting the conflicting textual and policy arguments for and against a bad-faith exception to
§ 1307(b)).
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[s]ubsection (a) of [§ 706] gives the debtor the one-time absolute
right of conversion of a liquidation case to a reorganization or
individual repayment plan case. If the case has already once been
converted from Chapter 11 or 13 to Chapter 7, then the debtor does
not have that right. The policy of the provision is that the debtor
should always be given the opportunity to repay his debts, and a
waiver of the right to convert a case is unenforceable.
S. REP. NO. 95-989, at 94 (1978). The Marrama Court, however, found that the
“reference to an ‘absolute right’ of conversion [wa]s more equivocal than”
suggested. 549 U.S. at 372. The Court identified two specific limitations to the
“absolute right” of conversion: (1) the proviso in § 706(a) that the right does not
survive a previous conversion to Chapter 7 and (2) the requirement in § 706(d)
that the debtor be eligible to proceed under the chapter to which conversion was
sought. Id. The Court then suggested that there were two potential reasons
why Marrama would not qualify as a debtor under Chapter 13. Id. The first
arose from the debt limitations imposed on Chapter 13 debtors by 11 U.S.C.
§ 109(e), but the Court did not discuss that possibility in any detail. Id. at
372–73. Instead, the Court examined the second potential reason: the ability of
a bankruptcy court to dismiss or convert a case for cause under § 1307(c). Id. at
373.
In its discussion of § 1307(c), the Marrama Court noted that pre-petition
bad-faith conduct by debtors such as Marrama constituted “cause” for
bankruptcy courts to invoke § 1307(c). Id. Individuals engaged in such conduct,
the Court reasoned, did not belong to “the class of ‘honest but unfortunate
debtors’ that the bankruptcy laws were enacted to protect.” Id. at 364
(alterations omitted) (quoting Grogan v. Garner, 498 U.S. 279, 287 (1991)). The
Court considered a finding of bad-faith conduct sufficient to invoke § 1307(c)
“tantamount to a ruling that the individual does not qualify as a debtor under
Chapter 13.” Id. at 373–74. Accordingly, the Court found that § 706(d)—and its
requirement that a debtor be eligible under the chapter to which conversion was
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sought—justified the bankruptcy court in denying conversion to Chapter 13 in
the first instance. Id. at 374.
The Court next addressed the language rendering waiver of the statutory
rights unenforceable:
A statutory provision protecting a borrower from waiver is not a
shield against forfeiture. Nothing in the text of either § 706 or
§ 1307(c) (or the legislative history of either provision) limits the
authority of the court to take appropriate action in response to
fraudulent conduct by the atypical litigant who has demonstrated
that he is not entitled to the relief available to the typical debtor.
On the contrary, the broad authority granted to bankruptcy judges
to take any action that is necessary or appropriate “to prevent an
abuse of process” described in § 105(a) of the Code, is surely
adequate to authorize an immediate denial of a motion to convert
filed under § 706 in lieu of a conversion order that merely postpones
the allowance of equivalent relief and may provide a debtor with an
opportunity to take action prejudicial to creditors.
Id. at 374–75 (footnotes omitted). Finally, the Court noted that “the inherent
power of every federal court to sanction abusive litigation practices might well
provide an adequate justification for a prompt, rather than a delayed, ruling on
an unmeritorious attempt to qualify as a debtor under Chapter 13.” Id. at
375–76 (citation and internal quotations marks omitted).
4. Post-Marrama Decisions
The effect of the Marrama decision on § 1307(b) has been the focus of
numerous bankruptcy court opinions. Within our circuit, two post-Marrama
bankruptcy courts have arrived at opposite results regarding the existence of a
bad-faith exception to § 1307(b). Compare In re Polly, 392 B.R. 236, 246–48
(Bankr. N.D. Tex. 2008) (distinguishing Marrama and concluding that the
Chapter 13 debtor possessed an absolute right to dismiss) with In re Jacobsen,
378 B.R. at 810–11 (reaching the opposite conclusion).12 Beyond the borders of
12
As the In re Polly court noted, “courts in the Fifth Circuit have almost uniformly
adopted th[e] view” “that, in the face of a motion to convert under section 1307(c), the right of
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our circuit, the lower courts have been similarly divided.13
In addition to decisions by bankruptcy courts, the Ninth Circuit considered
the effects of Marrama in its 2008 decision in In re Rosson, 545 F.3d 764.
Rosson, the Chapter 13 debtor, had been ordered by the bankruptcy court to
deliver the proceeds from an arbitration award to the Chapter 13 Trustee. Id.
at 768. When Rosson failed to do so, the bankruptcy court chose to sua sponte
convert the case to Chapter 7. After that decision but before a formal conversion
order had been filed, Rosson sought to dismiss his case under § 1307(b). Id.
When the bankruptcy court denied Rosson’s request and converted to Chapter
7, Rosson appealed, citing In re Beatty, 162 B.R. 853, a decision by the BAP for
the Ninth Circuit holding that the right to dismiss under § 1307(b) is absolute.
Id. at 768–79.
a debtor to dismiss under section 1307(b) is not absolute.” 392 B.R. at 241 (citing In re Foster,
945 F.2d 400; In re Cobb, No. 99–3193, 2000 WL 17840 (E.D. La. Jan. 11, 2000); In re
Jacobsen, 378 B.R. 805; In re Fonke, 310 B.R. 809 (Bankr. S.D. Tex. 2004); In re Crowell, 292
B.R. 541 (Bankr. E.D. Tex. 2002)).
13
In addition to In re Polly, we have identified five post-Marrama decisions that either
hold or suggest that the right to dismiss is absolute. See In re Hamlin, No. 09-5272-8, 2010
WL 749809, at *4 (Bankr. E.D.N.C. Mar. 1, 2010); In re Sickel, No. 08-00309, 2008 WL
5076981, at *1 (Bankr. D.D.C. Sept. 26, 2008); In re Campbell, No. 07-457, 2007 WL 4553596,
at *4 (Bankr. N.D. W. Va. Dec. 18, 2007); In re Hughes, No. 04-40725, 2007 WL 7025843, at
*3 (Bankr. S.D. Ga. Nov. 30, 2007); In re Davis, No. 06-1005, 2007 WL 1468681, at *2 (Bankr.
M.D. Fla. May 16, 2007). In addition to In re Jacobsen, we have located the following post-
Marrama lower court decisions holding that the right to dismiss is qualified by an exception
for bad faith or abuse of process. See In re Caola, 422 B.R. 13, 20 (Bankr. D.N.J. 2010); In re
Armstrong, 408 B.R. 559, 560 (Bankr. E.D.N.Y. 2009); In re Norsworthy, No. 05-15098, 2009
Bankr. LEXIS 1381, at *3–4 (Bankr. N.D. Ga. May 27, 2009); In re Chabot, 411 B.R. 685, 700
(Bankr. D. Mont. 2009); In re Letterese, 397 B.R. 507, 512 (Bankr. S.D. Fla. 2008); see also
Sasso v. Boyajian (In re Sasso), 409 B.R. 251, 254 (B.A.P. 1st Cir. 2009) (dismissing as moot
an appeal from the bankruptcy court’s order denying a Chapter 13 debtor’s request for
dismissal where the debtor did not appeal the later order converting the case to Chapter 7);
In re Brandford, 386 B.R. 742, 750 (Bankr. N.D. Ind. 2008) (“[Section] 1307(b) is a statement
of a debtor’s absolute right to dismiss a Chapter 13 case, perhaps only subject to potential
conversion of the case to a Chapter 7 in the event of commission of fraud during . . . the
Chapter 13 case, an issue not . . . presented in this record.”). Many of the decisions in the
latter category were informed by the Ninth Circuit’s decision in In re Rosson, which we discuss
next.
15
No. 09-40023
After briefly surveying the legal landscape, the Ninth Circuit began its
analysis with a discussion of the effect of Marrama on bankruptcy decisions
within its boundaries. Id. at 771–72. The court noted that its BAP, in Croston
v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), had earlier
considered the same issue decided in Marrama—whether § 706(a) provides an
absolute right to convert to Chapter 13—and reached the opposite conclusion.
Id. at 772–73. The BAP in In re Croston relied on its earlier decision in In re
Beatty, which held that a Chapter 13 debtor’s right to dismiss under § 1307(b)
is absolute, in concluding that the right to convert under § 706(a) was also
absolute. See In re Croston, 313 B.R. at 451 (“Beatty compels us to conclude that
the § 706(a) right to convert to chapter 13 is effectively absolute in the same
manner as the corollary dismissal right under § 1307(b).”). The Ninth Circuit
discussed the obvious effect the Marrama decision had on In re Croston: “There
is no doubt that after Marrama, Croston is no longer good law. Marrama
expressly cited Croston as one of the cases recognizing a debtor’s absolute right
to convert a Chapter 7 case to Chapter 13—an approach that the Court then
rejected.” In re Rosson, 545 F.3d at 773 (citing Marrama, 549 U.S. at 368 n.2,
373–76).
The In re Rosson court next considered whether Marrama also affected the
BAP’s decision in In re Beatty. The court had little difficulty concluding that it
did:
[A]lthough Marrama did not address the exact issue decided in
Beatty, it is clear that, after Marrama, Beatty too is no longer good
law, insofar as it holds that a Chapter 13 debtor has an absolute
right to dismiss under § 1307(b). As noted above, Croston was at
pains to explain that there was no analytical distinction between the
legal issue in that case and the issue in Beatty. See Croston, 313
B.R. at 451–52. We agree, and accordingly we conclude that the
Court’s rejection of the “absolute right” theory as to § 706(a) applies
equally to § 1307(b). Therefore, in light of Marrama, we hold that
the debtor’s right of voluntary dismissal under § 1307(b) is not
16
No. 09-40023
absolute, but is qualified by the authority of a bankruptcy court to
deny dismissal on grounds of bad-faith conduct or “to prevent an
abuse of process.” 11 U.S.C. § 105(a). See Jacobsen, 378 B.R. at 811(reaching same conclusion). But see In re Polly, 392 B.R. [at] 236 . . .
(holding that right to voluntarily dismiss Chapter 13 case is
“absolute” (distinguishing Marrama)).
Id. at 773–74 (footnote omitted). The court rejected the suggested distinction
between § 706(a) and § 1307(b)—the former stating that “[t]he debtor may
convert” and the latter that “the court shall dismiss”—by noting that “the
important point established by Marrama is that even otherwise unqualified
rights in the debtor are subject to limitation by the bankruptcy court’s power
under § 105(a) to police bad faith and abuse of process.” Id. at 773 n.12.
Subsequent to the decision in In re Rosson, the Bankruptcy Court for the
Eastern District of New York considered the continued validity of the Second
Circuit’s decision in In re Barbieri. See In re Armstrong, 408 B.R. 559. The court
concluded that “in light of Marrama . . . , the Second Circuit’s decision in
Barbieri has been abrogated[,] and a debtor does not have an absolute right to
dismiss a chapter 13 case when there is a finding by the Court of bad faith
conduct by the debtor during the bankruptcy case.” Id. at 560. The In re
Armstrong court then undertook to “explain[ ] independently why the reasoning
in Marrama should be extended to section 1307(b) dismissals.” Id. at 569. The
court first considered § 105(a), which the Second Circuit had found could not
apply in light of the text of § 1307(b), see In re Barbieri, 199 F.3d at 620–21, and
concluded that the Marrama “Court took a much more expansive view . . . and
recognized the bankruptcy courts’ need to exercise their inherent authority and
their authority under section 105(a) to prevent abuse of the bankruptcy process.”
In re Armstrong, 408 B.R. at 570.
The In re Armstrong court next considered the legislative history and the
argument that Chapter 13 is a purely voluntary chapter. Id. The court noted
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No. 09-40023
first that the Marrama Court “rejected the argument that a debtor has an
‘absolute right’ to convert from chapter 7 to chapter 13 under section 706(a),
despite a Senate Committee Report stating that a debtor has ‘the one-time
absolute right of conversion’ under section 706(a)” by finding the report
“‘equivocal.’” Id. The court then quoted a report from the House Judiciary
Committee stating that Chapter 13 was intended to be purely voluntary due to
the Thirteenth Amendment’s prohibition on involuntary servitude and the
difficulty of forcing an unwilling debtor to comply with a repayment plan. Id.The court agreed that the legislative history revealed “that a debtor cannot be
placed into chapter 13 involuntarily [or] be compelled to remain in chapter 13
involuntarily,” but declined to extend those proscriptions “to support the notion
that a chapter 13 debtor can abuse the bankruptcy process and not be held
accountable.” Id. at 570–71. The court found that concerns of involuntary
servitude were inapplicable where the debtor would not be forced to remain in
Chapter 13 but would instead be placed into Chapter 7 “because in a chapter 7
a debtor does not commit post-petition wages to repay creditors.” Id. at 571.
According to the In re Armstrong court, an exception to § 1307(b) for bad
faith also drew support in the anti-waiver language present in §§ 706(a), 1307(b),
and 1307(c), each of which provides that the waiver of the right provided under
that subsection is unenforceable. Id. The Marrama Court found that “[a]
statutory provision protecting a borrower from waiver is not a shield against
forfeiture,” and determined that bankruptcy courts retained the authority under
§ 706 and § 1307(c) “to take appropriate action in response to fraudulent conduct
by the atypical litigant who has demonstrated that he is not entitled to the relief
available to the typical debtor.” Marrama, 549 U.S. at 374–75. In construing
this express reference to § 1307(c) and its anti-waiver provision, the In re
Armstrong court concluded that the presence of “an anti-waiver provision which
is generally intended to protect otherwise inviolable rights of a debtor does not
18
No. 09-40023
mean that those rights cannot be forfeited by the ‘atypical’ debtor who engages
in fraudulent conduct during the bankruptcy case.” In re Armstrong, 408 B.R.
at 571. The court thus found that by the reasoning of Marrama, the right to
dismiss under § 1307(b) was also subject to forfeiture by atypical debtors who act
in bad faith.
Lastly, the In re Armstrong court considered two additional reasons why
the Marrama decision supported an exception to § 1307(b) for bad-faith conduct
or abuse of the bankruptcy process. Id. at 572. The first was the statutory
language “at any time,” present in both § 706(a) and § 1307(b), that the In re
Barbieri court had relied on in construing § 1307(b) as absolute, see 199 F.3d at
619, but which posed no obstacle to the Supreme Court’s construction of § 706(a)
as qualified by a bad-faith exception, see Marrama, 549 U.S. at 371–74. As the
In re Armstrong court reasoned, such language could no longer be used to
support an absolute right to dismiss under § 1307(b). 408 B.R. at 572.
Additionally, the In re Armstrong court discussed the fact that § 1307(b) is not
the only mandatory provision in § 1307. Id. Section 1307(e) provides that when
a debtor fails “to file a tax return . . . , 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.” 11 U.S.C. § 1307(e) (emphasis
added). The court found that § 1307(b) was not necessarily absolute where a
separate subsection itself spoke in absolute terms in the context of holding
accountable debtors who fail to abide by the rules of bankruptcy. In re
Armstrong, 408 B.R. at 572.14
14
The In re Armstrong decision deferred ruling on the request for dismissal pending an
evidentiary hearing because the record was insufficient to make a determination as to bad
faith and because no formal motion to convert to Chapter 7 had been filed. 408 B.R. at 572.
Following that evidentiary hearing, the court found that the debtor’s conduct did not constitute
bad faith sufficient to establish cause to order conversion. In re Armstrong, 409 B.R. 629,
634–35 (Bankr. E.D.N.Y. 2009). The court also held in the alternative that if cause had been
established, conversion would not have been in the best interests of the creditors and the estate
19
No. 09-40023
5. Our Determination
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.15 In doing so, we join the Ninth Circuit 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.
We interpret § 1307 in accordance with the Supreme Court’s decision in
Marrama. Although possessing slight variations in wording, both § 706(a) and
§ 1307(b) leave the decision to convert or dismiss, respectively, to the debtor.
Compare 11 U.S.C. § 706(a) (“The debtor may convert . . . at any time . . . .”) with
id. § 1307(b) (“On request of the debtor at any time, . . . the court shall dismiss
. . . .”). The legislative history of each section reinforces the notion that the
debtor’s right is absolute and unqualified. See S. REP. NO. 95-989, at 94 (1978)
(“Subsection (a) of [§ 706] gives the debtor the one-time absolute right of
conversion . . . .”); id. at 141 (“Subsection[] (b) [of § 1307] confirm[s], without
qualification, the right[] of a Chapter 13 debtor . . . to have the Chapter 13 case
dismissed.”). Yet notwithstanding the apparent absoluteness of a debtor’s right
to dismiss under § 706(a), the Supreme Court held that the directive in the
where the only two creditors failed to appear at the evidentiary hearing. Id. at 635.
15
This case does not call for us to determine whether a bankruptcy court possesses such
discretion when the debtor’s request for dismissal precedes the motion to convert. We therefore
leave that issue for a later case.
20
No. 09-40023
legislative history was “equivocal,” Marrama, 549 U.S. at 372, and that such a
right was qualified by an exception for bad-faith conduct by the debtor. See id.
at 374.
The Court articulated two reasons why Marrama’s apparently unqualified
and absolute right to convert his case to Chapter 7 was subject to an exception
due to his bad-faith conduct. First, the Court found that doing so was
appropriate to correct the “procedural anomaly” that would occur when a bad-
faith debtor exercised the right to convert under § 706(a) only to be subject to
reconversion for cause under § 1307(c). Id. at 367–68, 373–74. The Court
instead found it appropriate to avoid that two-step process that would have
given Marrama control of his assets and possibly enabled action prejudicial to
creditors. Id. at 375. Second, and more importantly, the Court spoke in clear
terms that bankruptcy courts have “broad authority . . . to take any action that
is necessary or appropriate ‘to prevent an abuse of process’ [under] § 105(a) of
the Code,” id., and that they would have such power even in the absence of
§ 105(a) due to “the inherent power of every federal court to sanction ‘abusive
litigation practices,’” id. at 375–76 (quoting Roadway Express, Inc. v. Piper, 447
U.S. 752, 765 (1980)). In the Court’s view, this power was sufficient to negate
the apparently absolute nature of Marrama’s right to convert under § 706(a). Id.
at 376.
Proceeding from the propositions in Marrama that an apparently
unqualified right is subject to an exception for bad faith and that bad faith
justifies a bankruptcy court’s exercise of its powers under § 105(a), we conclude
that § 1307(b) is subject to a similar exception, at least when the debtor’s request
for dismissal is made in response to a motion to convert under § 1307(c). We
therefore decline to read § 1307(b) as an “escape hatch,” In re Molitor, 76 F.3d
at 220, from which to escape a conversion motion filed under § 1307(c).
Our decision does not run afoul of the principle that a debtor cannot be
21
No. 09-40023
forced involuntarily to proceed under Chapter 13. See In re Harper–Elder, 184
B.R. at 408 (“Chapter 13 was intended to be [a] purely voluntary chapter . . . .”).
We construe § 1307(b) and (c) to permit a bankruptcy court to convert a case to
Chapter 7 in lieu of dismissing the case under circumstances where the debtor
has acted in bad faith or abused the bankruptcy process. We do not here read
those provisions in a way that allows bankruptcy courts to force debtors to
remain in Chapter 13 against their wills. Because Chapter 7 does not compel a
debtor to commit post-petition earnings toward a repayment plan, the concern
of involuntary servitude does not compel an alternate interpretation of § 1307(b)
and (c).
We also reject the contention that Marrama’s reasoning does not apply
outside the context of § 706 because no provision comparable to § 706(d) limits
§ 1307(b).16 The Court’s decision in Marrama was clear that bankruptcy courts
are vested with the authority to take appropriate action in response to an abuse
of process. See 549 U.S. at 375. We remain cognizant of the directive that the
“equitable powers [of] bankruptcy courts must and can only be exercised within
the confines of the Bankruptcy Code,” Norwest Bank Worthington v. Ahlers, 485
U.S. 197, 206 (1988), and that “Section 105(a) does not permit courts to act as
roving commissions to do equity,” Wells Fargo Bank of Tex. N.A. v. Sommers (In
re Amco Ins.), 444 F.3d 690, 695 (5th Cir. 2006) (alterations and internal
quotation marks omitted). Nonetheless, we are persuaded that, under the
Bankruptcy Code and Supreme Court precedent, a bankruptcy court has the
power to grant an outstanding conversion motion and deny a bad-faith debtor’s
request for dismissal made in response to that motion.
B. Finding of Bad Faith
Jacobsen also challenges the bankruptcy court’s factual finding that he
16
Section 706(d) “reinforces section 109 by prohibiting conversion to a chapter unless
the debtor is eligible to be a debtor under that chapter.” S. REP. NO. 95-989, at 94.
22
No. 09-40023
acted in bad faith as clearly erroneous. “A finding of fact is ‘clearly erroneous’
when although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been
committed.” Becker v. Tidewater, Inc., 586 F.3d 358, 367 (5th Cir. 2009). Our
role is not to weigh the evidence ourselves but merely to determine whether the
lower court’s account “is plausible in light of the record viewed in its entirety.”
Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). “Where there are
two permissible views of the evidence, the factfinder’s choice between them
cannot be clearly erroneous.” Id. “Clear error review is ‘especially rigorous’
when we review a lower court’s assessment of trial testimony, ‘because the trier
of fact has seen and judged the witnesses.’” Valley Educ. Found., Inc. v.
Eldercare Props. Ltd. (In re Eldercare Props. Ltd.), 568 F.3d 506, 515 (5th Cir.
2009) (quoting United States v. Casteneda, 951 F.2d 44, 48 (5th Cir. 1992)).
After our review of the record, we are not left with a definite and firm
conviction that an error has been committed. The bankruptcy court had ample
evidence in the form of Jacobsen’s own testimony, discussed above, revealing
that Jacobsen had interests in assets that were not disclosed on his schedules
and that he had made transfers that were not disclosed in his Statement of
Financial Affairs. In addition, it was permissible for the bankruptcy court to
conclude that the misspelling of Malikyar’s name as “Malekyar” was an attempt
by Jacobsen to conceal assets titled in his wife’s name. Although Jacobsen
spends much of his brief contending that the real properties titled in Malikyar’s
name were Malikyar’s separate property, both he and Malikyar agreed to entry
of a judgment in the Adversary Proceeding that declared those properties to be
equal management community property. Furthermore, Jacobsen admitted that
he was the beneficiary of the Jacobsen Trust, that he had invested $75,000 in a
shea butter business, and that he had executed a quitclaim deed to the Tice
Valley Property in favor of Malikyar shortly before bankruptcy. Jacobsen
23
No. 09-40023
acknowledged that those interests and transactions were not disclosed on his
schedules or his Statement of Financial Affairs. We also note that the
bankruptcy court, sitting as the factfinder, had the ability to evaluate Jacobsen’s
testimony and his credibility firsthand. We have little difficulty concluding that
a finding of bad faith is plausible in light of the record viewed in its entirety.
We further hold that the bankruptcy court did not abuse its discretion in
ordering conversion under § 1307(c) as being in the best interest of creditors and
Jacobsen’s bankruptcy estate. The Marrama Court, interpreting § 1307(c)’s
dismissal provision, declined to “articulate with precision what conduct qualifies
as ‘bad faith,’” instead noting that the debtor’s conduct must be “atypical” and
that bad faith occurs only in “extraordinary cases.” Marrama, 549 U.S. at 375
n.11. The Court found that such an extraordinary and atypical case was before
it where the debtor attempted to conceal an asset by filing “misleading or
inaccurate” schedules. Id. at 368, 371. Because Jacobsen filed misleading and
inaccurate schedules that attempted to conceal assets from creditors, he is
clearly among the class of atypical debtors subject to the limited exception to
§ 1307(b). In light of Jacobsen’s bad faith and the pending motion to convert to
Chapter 7, we conclude that it was within the bankruptcy court’s discretion to
deny Jacobsen’s motion to dismiss his Chapter 13 case under § 1307(b) and to
order conversion under § 1307(c) instead.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the judgments of the bankruptcy
and district courts.
AFFIRMED.
24