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Sixth Circuit Upholds Chapter 13 Debtor’s Right to Request and Receive Dismissal of Bankruptcy Case

Chapter 13 Bankruptcy Form with GavelA statute must be interpreted and enforced as written, regardless, according to the U.S. Court of Appeals for the Sixth Circuit, “of whether a court likes the results of that application in a particular case.” That legal maxim guided the Sixth Circuit’s reasoning in a recent decision[1] in a case involving a Chapter 13 debtor’s repeated filings and requests for dismissal of his bankruptcy cases in order to avoid foreclosure of his home.

In short, the Sixth Circuit held that if a Chapter 13 debtor moves to have his/her case dismissed, and no exception applies, a bankruptcy court must dismiss it.

The Underlying Facts

The case involves a Chapter 13 debtor, Ronald Smith, who obtained a loan to purchase a home. Smith defaulted on the loan, was sued by the mortgage holder and in 2007 a state court scheduled a foreclosure sale.

Four days before the sale, Smith filed for bankruptcy, resulting in the automatic stay of the sale. After the sale date passed, Smith filed a motion to dismiss the case, which the bankruptcy court granted. Smith did the same thing in 2017 when another foreclosure sale of his home was scheduled, and again the bankruptcy court dismissed his case after the foreclosure sale was cancelled.

In 2019, U.S. Bank purchased the mortgage for Smith’s home, and a foreclosure sale was scheduled. On the day the sale was scheduled to take place, Smith filed for bankruptcy, and six days later he filed a motion to dismiss the case, which the bankruptcy court granted.

Subsequently, U.S. Bank filed a motion under Federal Rule of Civil Procedure 60(b) (as incorporated by Bankruptcy Rule 9024) requesting that the bankruptcy court vacate its order dismissing the case. The bankruptcy granted the motion and also lifted the automatic stay in Smith’s case for a period of two years.

Smith appealed to the District Court and sought a stay of the bankruptcy court’s order reinstating his case. The District Court denied the motion but certified for interlocutory appeal the question of whether reinstatement of Smith’s case was contrary to the law. Smith then appealed to the Sixth Circuit. The specific issue appealed was whether the District Court abused its discretion when it held that the bankruptcy court could reinstate Smith’s Chapter 13 case.

The Sixth Circuit’s Decision

The case hinged on what the Sixth Circuit described as a “straightforward statutory rule,” the requirement (subject to one exception not applicable in this case) in 11 U.S.C. §1307(b) that if a debtor in a Chapter 13 case moves to dismiss their case, “the court shall dismiss” it.

The Sixth Circuit, in ruling in favor of the debtor, stated that, by its plain terms, the right to dismiss in 11 U.S.C. §1307(b) is mandatory. It explained that U.S. Bank failed to provide any support for its argument that §1307(b) is discretionary in cases where the debtor filed its bankruptcy petition in bad faith.

The Sixth Circuit rejected U.S. Bank’s argument that the U.S. Supreme Court case of Marrama v. Citizens Bank of Massachusetts provides grounds to uphold the District Court’s decision. In that case, the Supreme Court stated in dictum that a bankruptcy court, in considering whether to grant a debtor’s motion to convert a debtor’s Chapter 7 case to a case under Chapter 13, could have denied the motion by invoking 11 U.S.C. §105(a), which provides bankruptcy courts with the equitable power to take any action “that is necessary or appropriate to carry out the provisions of this title” or “to prevent an abuse of process.”

The Sixth Circuit noted that two other U.S. Court of Appeals Circuits have cited that dictum in holding that a bankruptcy court may deny a debtor’s motion to dismiss a Chapter 13 case if the debtor filed their petition in bad faith. However, the Sixth Circuit explained that the Supreme Court itself largely rejected that dictum in the case of Law v. Siegel, which was decided in 2014.

In Law v. Siegel, the Supreme Court stated that “[a]t most, Marrama’s dictum suggests that in some circumstances a bankruptcy court may be authorized to dispense with futile procedural niceties in order to reach more expeditiously an end result required by the Code.” Accordingly, the Sixth Circuit rejected U.S. Bank’s argument, finding that the command of 11 U.S.C. §1307(b) is “no mere procedural nicety.”

The Sixth Circuit also rejected U.S. Bank’s argument that Federal Rule of Civil Procedure 60(b)(3), which allows a court to “relieve a party” from a final order due to fraud, “misrepresentation or misconduct by an opposing party,” authorized the bankruptcy court to vacate its dismissal of Smith’s bankruptcy case.

However, as the Sixth Circuit explained, when there is a conflict between the Bankruptcy Code (in this case 11 U.S.C. §1307(b)) and the Bankruptcy Rules, such conflict must be settled in favor of the Bankruptcy Code. The Bankruptcy Code directs the Court to dismiss a Chapter 13 upon a debtor’s motion.

Therefore, the Sixth Circuit ruled in favor of the debtor and remanded the case with instructions for the bankruptcy court to dismiss Smith’s Chapter 13 bankruptcy case.

If you have any questions about this case, or bankruptcy issues in general, please contact Patricia Scott at 517.371.8132 or pscott@fosterswift.com.

[1] Ronald J. Smith v. U.S. Bank National Association, Case No. 20-3150 (6th Cir., June 9, 2021)

Categories: 6th Circuit Court of Appeals, Chapter 13

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