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6th Cir. Holds Even ‘Bad Faith’ Chapter 13 Bankruptcy Must Be Dismissed on Request by Debtor

foreclosureThe U.S. Court of Appeals for the Sixth Circuit recently held that 11 U.S.C. § 1307(b) requires a bankruptcy court to dismiss a Chapter 13 bankruptcy petition upon a debtor’s request, even if the debtor filed his or her petition in bad faith.

A copy of the opinion in In re Ronald Smith is available at:  Link to Opinion.

In 2004, a debtor obtained a $528,500 loan to purchase a home.  About one year later, the debtor defaulted on the loan resulting in the mortgage holder scheduling the property’s foreclosure sale for Aug. 7, 2007. 

To prevent the foreclosure sale from going forward, the debtor filed for Chapter 13 bankruptcy thereby triggering the automatic stay provided by 11 U.S.C. § 362(a).  The debtor dismissed his Chapter 13 case after the Aug. 7, 2007 foreclosure sale date passed. 

In 2017, the mortgage holder again scheduled the property’s foreclosure sale, and the debtor once again filed a Chapter 13 bankruptcy petition. After the property’s foreclosure sale date passed, the debtor dismissed his Chapter 13 petition.

In early 2019, the appellee bank purchased the loan and subsequently set the property’s foreclosure sale for Feb. 19, 2019.  On the day before the foreclosure sale, the debtor filed a third Chapter 13 petition again obtaining 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) granted the bank’s motion to vacate the dismissal pursuant to Fed. R. Civ. P. 60(b); and (2) separately lifted the automatic stay that would have prevented the property’s foreclosure sale. 

The debtor appealed to the district court seeking a stay of the bankruptcy court’s reinstatement of his Chapter 13 petition.  The district court denied the debtor’s request for a stay but certified for interlocutory appeal “the question whether the reinstatement of [debtor’s Chapter 13 petition] was contrary to law.” 

The Sixth Circuit granted the debtor leave to file the instant appeal.

On appeal, the Sixth Circuit was tasked with determining “the legality of the bankruptcy court’s June 2019 order reinstating [debtor’s] Chapter 13 case.”  As you may recall, 11 U.S.C. § 1307(b) (“Section 1307”) provides that “[o]n request of 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 Section 1307, the Sixth Circuit noted that upon a debtor’s request for dismissal, “the court shall dismiss a Chapter 13 case.” 

In response, the bank argued that dictum from Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), allows a bankruptcy court to deny a debtor’s motion to dismiss a Chapter 13 case if the debtor filed his or her petition in bad faith.

However, the Sixth Circuit rejected the bank’s argument explaining that the Supreme Court of the United States rejected the Marrama dictum in Law v. Siegel, 571 U.S. 415 (2014), explaining 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.” Id. at 426. 

In finding that Section 1307 is “no mere procedural nicety,” the Sixth Circuit rejected the bank’s reliance on Marrama. 

Next, the bank argued that Fed. R. Civ. P. 60(b)(3) allows the bankruptcy court to vacate its dismissal of the debtor’s Chapter 13 petition.  However, the Sixth Circuit disagreed stating that Section 1307 mandates a bankruptcy court dismiss a Chapter 13 case upon a debtor’s request and “[Section 1307’s] command would be meaningless if a bankruptcy court could then vacate its dismissal under [Fed. R. Civ. P. 60(b)].”

Thus, the Court held that the district court abused its discretion in finding that the bankruptcy court could reinstate the debtor’s Chapter 13 case under Fed. R. Civ. P. 60(b).

Accordingly, the Sixth Circuit reversed the district court’s order denying the debtor’s motion for a stay and further remanded this matter with instructions that the bankruptcy court must dismiss the debtor’s Chapter 13 petition.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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