Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols)

• Decision Date: 01 September 2021
• Docket Number: No. 20-60043,20-60043
• Citation: 10 F.4th 956
• Parties: IN RE Donald Hugh NICHOLS; Jane Ann Nichols, Debtors, Donald Hugh Nichols; Jane Ann Nichols, Appellants, v. Marana Stockyard & Livestock Market, Inc.; The Parsons Company ; Clay Parsons; Karen Parsons; Arizona Department of Revenue; Jill H. Ford, Chapter 7 Trustee, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

10 F.4th 956

IN RE Donald Hugh NICHOLS; Jane Ann Nichols, Debtors,

Donald Hugh Nichols; Jane Ann Nichols, Appellants,

v.Marana Stockyard & Livestock Market, Inc.; The Parsons Company ; Clay Parsons; Karen Parsons; Arizona Department of Revenue; Jill H. Ford, Chapter 7 Trustee, Appellees.

No. 20-60043

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 9, 2021 Portland, Oregon

Filed September 1, 2021

German Yusufov (argued), Yusufov Law Firm PLLC, Tucson, Arizona, for Appellants.

D. Alexander Winkelman (argued) and Frederick J. Petersen, Mesch Clark Rothschild, Tucson, Arizona, for Appellees.

Before: Diarmuid F. O'Scannlain, Richard A. Paez, and Mark J. Bennett, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether debtors in a Chapter 13 bankruptcy have the right to dismiss their case, regardless of the bankruptcy court's determination that they engaged in an abuse of the bankruptcy process.

I

A

Appellants Donald Hugh Nichols and his wife, Jane Ann Nichols (collectively, "the Nicholses"), filed a Chapter 13 bankruptcy petition seeking to restructure their debts. After filing the petition, the Nicholses were indicted on federal criminal charges for their alleged participation in a scheme to defraud Appellee Marana Stockyard and Livestock Market, Inc. ("Marana").

To avoid disclosure of information that might compromise their position in the criminal proceedings, the Nicholses declined to complete any of the steps required by the Bankruptcy Code to advance their case. They refused, inter alia , to hold a meeting with creditors, cf. 11 U.S.C. § 341 ; to file outstanding tax returns, cf. id. § 1308; or to propose an appropriate repayment plan, cf. id. § 1322. Their bankruptcy case thus languished for months without resolution.

Marana, which had filed a claim in the Nicholses’ bankruptcy case seeking to recover losses from the alleged fraud, moved pursuant to 11 U.S.C. § 1307(c) for the case to be converted to a liquidation under Chapter 7 of the Bankruptcy Code.¹ In response, the Nicholses requested a stay of the bankruptcy case during the pendency of the criminal proceedings.

The bankruptcy court denied the motion to stay. At the same time, the bankruptcy court determined that conversion of the case to a Chapter 7 liquidation was justified "for cause" under § 1307(c) due to the Nicholses’ delays, which the court deemed to be unwarranted. The bankruptcy court also determined that conversion to Chapter 7 would have been proper, in the alternative, under § 1307(e), insofar as the Nicholses had failed to file tax returns for several years.²

B

The Nicholses requested another opportunity to remain in Chapter 13, however. The bankruptcy court acceded to their request and postponed by 30 days the entry of an order converting the case to Chapter 7. The bankruptcy court required the Nicholses to file outstanding tax returns and to submit a confirmable repayment plan to the Chapter 13 trustee before expiration of the 30-day period.

The Nicholses did not comply with the bankruptcy court's requirements. Before the expiration of the 30-day period, the Nicholses moved to dismiss voluntarily their bankruptcy case pursuant to § 1307(b).³

C

Although § 1307(b) confers upon a Chapter 13 debtor the right to request dismissal of his case "at any time," the bankruptcy court denied the Nicholses’ motion to dismiss. Relying upon our decision in In re Rosson , 545 F.3d 764 (9th Cir. 2008), the bankruptcy court understood there to be an implied exception to § 1307(b) where the debtor has engaged in bad faith or abuse of the bankruptcy process. The bankruptcy court concluded that the Nicholses had "used Chapter 13 to hide from creditors during the pendency of the criminal proceedings" and that "[s]uch conduct constitutes an abuse of the bankruptcy process, justifying denial of the ... Motion to Dismiss." The bankruptcy court thereupon converted the case to a liquidation under Chapter 7.

The Nicholses timely appealed the bankruptcy court's order to the Ninth Circuit's Bankruptcy Appellate Panel ("BAP"). The BAP affirmed the bankruptcy court's order. The Nicholses then timely appealed the BAP's decision to this court.

II

The Nicholses now argue that the bankruptcy court erred by relying upon Rosson ’s implied "bad faith or abuse of process" exception to § 1307(b) to deny their request for voluntary dismissal. According to the Nicholses, Rosson has been effectively overruled by the Supreme Court's subsequent decision in Law v. Siegel , 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), which, they contend, must be understood to prohibit a bankruptcy court from invoking equitable considerations to contravene § 1307(b) ’s express language conferring upon a Chapter 13 debtor an absolute right to dismiss his case. The narrow question before us is whether Rosson has been implicitly abrogated by Law .

A

Rosson concerned a Chapter 13 debtor who was ordered by the bankruptcy court to deposit the proceeds of an expected arbitration award with the Chapter 13 trustee. 545 F.3d at 768. When the bankruptcy court was informed that the debtor had received the anticipated payment, but had not deposited it as instructed, the bankruptcy court determined sua sponte to convert the case to Chapter 7. Id. Before the conversion order could be entered, however, the debtor moved to dismiss under § 1307(b). Id. The bankruptcy court denied the motion to dismiss and converted the case, stating that it would be a "gross miscarriage of justice" to allow the debtor to "abscond" with assets of the estate. Id. at 769. The debtor appealed to the district court, which affirmed. Id.

On subsequent appeal to this court in Rosson , we acknowledged the existence of a circuit split regarding a debtor's right to dismiss under § 1307(b) while a motion to convert under § 1307(c) remains pending. Id. at 771–72 (comparing In re Barbieri , 199 F.3d 616 (2d Cir. 1999) ; with In re Molitor , 76 F.3d 218 (8th Cir. 1996) ). We further recognized that the Ninth Circuit's BAP had previously concluded that § 1307(b) confers upon a Chapter 13 debtor an absolute right to voluntary dismissal of his case. Id. at 772 (discussing In re Croston , 313 B.R. 447 (9th Cir. BAP 2004) ; and In re Beatty , 162 B.R. 853 (9th Cir. BAP 1994) ). We determined, however, that the BAP's interpretation of § 1307(b) was no longer tenable after the Supreme Court's decision in Marrama v. Citizens Bank of Massachusetts , 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), which concerned the scope of a debtor's right to convert from Chapter 7 to Chapter 13 pursuant to 11 U.S.C. § 706(a).⁴ Id. We understood Marrama to stand for the broad proposition 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.

Based on such interpretation of Marrama , we held that "the debtor's right of voluntary dismissal under § 1307(b) is not 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." Id. at 774 (quotation marks and citation omitted). Accordingly, we affirmed the bankruptcy court's order denying the debtor's motion to dismiss and converting the case to Chapter 7 because of the debtor's bad faith conduct. Id. at 774–75.

B

Law , which was decided six years later, concerned a Chapter 7 debtor who perpetrated a fraud on the bankruptcy court by falsely reporting that a lien existed on his primary residence. 571 U.S. at 418–19, 134 S.Ct. 1188. The trustee later determined that the alleged lien was a sham filed by the debtor to protect his interest in the home. Id. at 419, 134 S.Ct. 1188. Accordingly, the trustee initiated an adversary proceeding to have the lien removed, and, after he prevailed, he sought to have his attorney's fees paid from the debtor's exempt property. Id. at 419–20, 134 S.Ct. 1188.

Despite 11 U.S.C. § 522(k) ’s express prohibition on the use of a debtor's exempt property to cover expenses associated with administering the estate, the bankruptcy court granted the trustee's request.⁵ Id. at 420, 134 S.Ct. 1188. On appeal, the BAP affirmed the order as a permissible exercise of the bankruptcy court's equitable powers. Id . Upon subsequent appeal to this court, we also affirmed. Id. In an unpublished memorandum disposition, we concluded that the surcharge was proper because it was "calculated to compensate the estate for the actual monetary costs imposed by the debtor's misconduct, and was warranted to protect the integrity of the bankruptcy process." Id. (quoting In re Law , 435 F. App'x. 697, 698 (9th Cir. 2011) ).

The Supreme Court reversed. In so doing, the Court made clear that a bankruptcy court may not use its equitable powers under § 105(a) to contravene express provisions of the Bankruptcy Code. 571 U.S. at 422–23, 134 S.Ct. 1188. On behalf of a unanimous Court, Justice Scalia wrote that § 105(a) does not "allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code," including § 522(k) ’s express prohibition on charging a debtor's exempt property to pay the trustee's administrative expenses. Id. at 421, 134 S.Ct. 1188 (quoting 2 Collier on Bankruptcy ¶ 105.01[2] (16th ed. 2013)).

In doing so, the Supreme Court firmly rejected the argument—advanced by the Solicitor General in an amicus brief—that Marrama must be understood to establish that a bankruptcy court's § 105(a) powers to punish bad faith conduct implicitly qualify language contained elsewhere in the Bankruptcy Code. Id. at 425–26, 134 S.Ct. 1188. On the contrary, Law concluded that " Marrama most certainly did not endorse, even in dictum, the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code." Id. at 426, 134 S.Ct. 1188.

C

Although we are typically bound by the prior decision of another three-judge panel, we may depart...