In re Rosson

Decision Date24 September 2008
Docket NumberNo. 06-35724.,06-35724.
Citation545 F.3d 764
PartiesIn the Matter of Jon G. ROSSON, Debtor, Jon G. Rosson, Appellant, v. K. Michael Fitzgerald, 13 Trustee; James Rigby; United States Internal Revenue Service; Thomas Stone, Jr.; 925 Pike Street Building Corp.; New Century Mortgage Corporation; Mundt MacGregor LLP, Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Rod McCarvel, Seattle, WA, for the debtor-appellant.

David A. Gebben (argued), McCarty & Gebben, Bellevue, WA; Bruce P. Kriegman, Bruce Kriegman Law Office, Seattle, WA, for the appellees.

Appeal from the United States District Court for the Western District of Washington; James L. Robart, District Judge, Presiding. D.C. No. CV-05-01842-JLR.

Before: B. FLETCHER and RICHARD A. PAEZ, Circuit Judges, and WILLIAM W. SCHWARZER,* District Judge.

OPINION

PAEZ, Circuit Judge:

Unable to pay his debts, appellant Jon G. Rosson filed a voluntary petition for protection under Chapter 13 of the Bankruptcy Code. For almost a year, Rosson assured the court and his creditors that he would soon be receiving several hundred thousand dollars in an arbitration award, and that he would use that money to fund his proposed Chapter 13 plan. When the money finally came in, however, Rosson failed to deliver it to the Chapter 13 Trustee as the bankruptcy court had ordered him to do. Upon discovering that the arbitration proceeds had not been delivered to the Trustee, the bankruptcy court found that Rosson was "rebelliously" "horsing around" with estate assets and, on its own motion, converted the Chapter 13 case to one under Chapter 7. Before the court filed the formal conversion order, Rosson invoked his right to voluntarily dismiss his Chapter 13 petition under 11 U.S.C. § 1307(b). The bankruptcy court denied the request for dismissal and converted the case.

Relying on a holding from the Bankruptcy Appellate Panel, see Beatty v. Traub (In re Beatty), 162 B.R. 853 (9th Cir.BAP 1994), Rosson brought this appeal asserting that § 1307(b) afforded him an "absolute" right to voluntarily dismiss his Chapter 13 case at any time prior to the filing of a conversion order, and that the bankruptcy court therefore abused its discretion by denying his request for dismissal. We write to clarify that, after Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), a debtor's right to voluntarily dismiss a Chapter 13 case under § 1307(b) is not absolute, but is qualified by an implied exception for bad-faith conduct or abuse of the bankruptcy process. The bankruptcy court did not clearly err in finding bad-faith conduct here. Moreover, although the bankruptcy court failed to provide Rosson with adequate notice and hearing before converting the case to Chapter 7, as required by 11 U.S.C. §§ 102(1) and 1307(c), Rosson cannot show prejudice from the bankruptcy court's deficient procedures. Therefore, we affirm.

BACKGROUND

Rosson filed his voluntary petition for bankruptcy protection under Chapter 13 on August 13, 2004. At that time, Rosson was involved in an arbitration concerning the breakup of an entity called Bleu, LLC. Over the next nine months, while attempting to confirm a Chapter 13 plan over objections from creditors and the United States Trustee, Rosson repeatedly assured the bankruptcy court that he would soon be receiving several hundred thousand dollars as the result of the arbitration proceeding, and that the funds would be used to pay his debts under the plan.1

On July 1, 2005, Rosson reported to the court that the arbitrator had awarded him approximately $185,000. On July 6, 2005, the court ordered Rosson to deposit the arbitration funds with the Chapter 13 Trustee. Rosson admits that he did not deposit the funds with the Trustee until early September, at which time he deposited only $104,000.2

Meanwhile, on August 11, 2005, Rosson's attorney, Harris, moved to withdraw as attorney of record, stating that there was a breakdown in communication with his client. A hearing on the motion to withdraw was set for August 17, 2005.

At the August 17, 2005 hearing on Harris's motion to withdraw, the court was informed that Rosson had not yet complied with the order to deliver the $185,000 to the Trustee. The court gave Rosson less than one hour to deliver the money before the court, on its own motion, would convert Rosson's case to Chapter 7. Rosson did not deliver the money, and the bankruptcy court docket reflects that the case was converted to Chapter 7 on August 17, although a formal order was not filed or entered until later. As the district court later concluded, the bankruptcy court converted the case with "essentially no notice." The bankruptcy court explained that there was too much money involved to be "horsing around with" and "the Court [was] left with ... only one course of action, ... to convert the case so there's a [Chapter 7] trustee to go after the money." The same day (August 17) Rosson filed a "Notice of Dismissal" notifying the court that he was voluntarily dismissing his Chapter 13 case under 11 U.S.C. § 1307(b) and asked the court to enter an order dismissing the petition.3 On September 7, 2005, the court entered an order converting the case to a Chapter 7 proceeding and denying the request for dismissal.4 On September 8, 2005, Rosson appeared through new counsel and moved for reconsideration on the basis that his right to voluntary dismissal was "absolute." In an order entered September 16, 2005, the court denied the motion, stating that it would be a "gross miscarriage of justice to allow [Rosson] to dismiss this case and abscond with [estate] proceeds." In denying the motion for reconsideration, the court applied a local rule stating that such motions are "disfavored" and will be granted only upon a showing of "manifest error" or "new facts or legal authority which could not have been [raised] earlier with reasonable diligence." W.D. Wash. Local Civ. R. 7(h)(1); see also W.D. Wash. Local Bankr.R. 9013(h) (applying Local Civil Rule 7(h)(1) to bankruptcy cases).

Rosson appealed to the district court, which affirmed. He then timely appealed to this court, raising essentially the same arguments that he raised before the district court: (1) the right to dismiss a Chapter 13 case under 11 U.S.C. § 1307(b) is absolute; and (2) when the bankruptcy court converted his case to Chapter 7, it violated his right to notice and a meaningful hearing under 11 U.S.C. §§ 102(1) and 1307(c).

JURISDICTION

The district court had jurisdiction to review final bankruptcy court orders under 28 U.S.C. § 158(a), and we have jurisdiction, under 28 U.S.C. § 158(d), to review bankruptcy court orders originally reviewed under 28 U.S.C. § 158(a). We have not previously considered whether an order converting a bankruptcy case to Chapter 7 is final and appealable.5 But cf. Pioneer Liquidating Corp. v. United States Trustee (In re Consol. Pioneer Mortgage Entities), 264 F.3d 803, 804 (9th Cir.2001) (reviewing order converting case from Chapter 11 to Chapter 7 without addressing finality). We have no trouble, however, concluding that such an order is sufficiently final to permit review under 28 U.S.C. § 158(a) and (d).

"We have adopted a `pragmatic approach' to finality in bankruptcy ... [that] emphasizes the need for immediate review, rather than whether the order is technically interlocutory." Bonham v. Compton (In re Bonham), 229 F.3d 750, 761 (9th Cir.2000) (internal quotation marks omitted). "[A] bankruptcy court order is considered to be final and thus appealable where it 1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed." Id. (internal quotation marks omitted); see also Allen v. Old Nat'l Bank of Wash. (In re Allen), 896 F.2d 416, 418 (9th Cir.1990) (per curiam) ("Bankruptcy orders that determine and seriously affect substantial rights can cause irreparable harm if the losing party must wait until bankruptcy court proceedings terminate before appealing.").

An order converting a case under another chapter to one under Chapter 7 determines finally the discrete issue to which it is addressed, i.e., whether or not the case will be converted. See Vista Foods U.S.A., Inc. v. Unsecured Creditors' Comm. (In re Vista Foods U.S.A., Inc.), 202 B.R. 499, 500 (10th Cir.BAP 1996) (per curiam) ("Conversion ends the litigation regarding the discrete controversy of whether the case should proceed under chapter 11 or chapter 7."). Moreover, because a conversion to Chapter 7 takes control of the estate out of the hands of the debtor, it seriously affects substantive rights and may lead to irreparable harm to the debtor if immediate review is denied. See Mason v. Young (In re Young), 237 F.3d 1168, 1173 (10th Cir.2001) (explaining that "under Chapter 7, once the debtor's assets have been liquidated, it is virtually impossible to reassemble them, and therefore an order converting to Chapter 7 is necessarily more final in nature than an order converting to Chapter 13");6 see also In re Firstcent Shopping Ctr., Inc., 141 B.R. 546, 550 (S.D.N.Y.1992) (holding that "[c]onversion of a bankruptcy case [to Chapter 7] is final and ... appealable" and quoting In re Rebeor, 89 B.R. 314, 320-21 (Bankr.N.D.N.Y.1988) ("[I]mmediate review [i]s necessary to protect Debtor's substantive rights to reorganize in Chapter 13 and to prevent irreparable harm through the potential loss of his property sold to good faith purchasers.")). We therefore hold, in accordance with all other courts of which we are aware that have considered the issue,7 that a bankruptcy court order converting a case from one under another chapter of the Bankruptcy Code to one under Chapter 7 is a final and appealable order.

STANDARD OF REVIEW

"On appeal from a district court's affirmance of a bankruptcy court decision, we independently review the bankruptcy court's decision, without...

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