In re: Donald Hugh Nichols and Jane Ann Nichols

FILED
AUG 12 2020
ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT

In re: BAP No. AZ-20-1032-TaLB
DONALD HUGH NICHOLS and JANE
ANN NICHOLS, Bk. No. 4:18-bk-09638-BMW
Debtors.

DONALD HUGH NICHOLS; JANE ANN
NICHOLS,
Appellants,
v. OPINION
MARANA STOCKYARD & LIVESTOCK
MARKET, INC.; THE PARSONS
COMPANY; CLAY PARSONS; KAREN
PARSONS; ARIZONA DEPARTMENT OF
REVENUE; JILL H. FORD, Chapter 7
Trustee,
Appellees.

Appeal from the United States Bankruptcy Court
for the District of Arizona
Brenda Moody Whinery, Bankruptcy Judge, Presiding

APPEARANCES:
German Yusufov argued for appellants; D. Alexander Winkelman argued
for appellees Marana Stockyard & Livestock Market, Inc., The Parsons
Company, Clay Parsons, and Karen Parsons

Before: TAYLOR, LAFFERTY, and BRAND, Bankruptcy Judges.

TAYLOR, Bankruptcy Judge:
 INTRODUCTION

Chapter 131 debtors Donald Hugh Nichols and Jane Ann Nichols

appeal from the bankruptcy court’s order denying their § 1307(b) dismissal

motion and granting a § 1307(c) and (e) conversion motion. Debtors

contend that the bankruptcy court abused its discretion in doing so,

arguing that: (1) their right to dismiss is absolute; and (2) even if the right is

not absolute, there were no grounds for conversion. We disagree with their

arguments and perceive no abuse of discretion. We AFFIRM.

FACTS

Prepetition, Debtors’ son, Seth Nichols, pled guilty to bank fraud

under 18 U.S.C. § 1344. His victims, Marana Stockyard & Livestock Market,

Inc. (“Marana”) and its owners, Clay and Karen Parsons (the “Parsons”

and, together with Marana, “Creditors”), received an 18 U.S.C. § 3663A

restitution award. The plea agreement provides that Debtors would pay

partial restitution on behalf of their son through transfer or liquidation of

their home and other real property (“Properties”). Indeed, they transferred

title to the Properties to the Creditors almost six months before Seth

Nichols signed the plea agreement.

But Debtors were not signatories to the plea agreement; they alleged

that the Parsons fraudulently induced them to transfer their Properties.

1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532.

2
And the Creditors did not agree that Seth Nichols acted alone; they alleged

that Debtors were involved in their son’s criminal activity. The plea

agreement was not the end of litigation.

Marana and The Parsons Company filed a state court complaint

against Debtors and related entities seeking recovery based on fraud,

conversion, and aiding and abetting tortious acts related to the bank fraud

(“Civil Case”). Debtors then: (1) filed a third party complaint against the

Parsons in which they sought rescission for fraud in the inducement of the

transfers of the Properties; (2) filed a notice of lis pendens; and (3) recorded

the lis pendens against the Properties. The Parsons demanded its

immediate expungement.

Debtors did not meet the demand; instead they filed a chapter 13

petition and a chapter 13 plan (“Plan”). Having obtained the safe harbor

provided by a bankruptcy case and the automatic stay, they then dawdled

for over seventeen months. They took no steps towards plan confirmation

or Bankruptcy Code compliance. Their only affirmative steps engendered

delay in both the bankruptcy and Civil Case proceedings.2

Despite a Plan objection filed by the chapter 13 trustee raising several

impediments to confirmation, including: (1) Debtors’ failure to file tax

returns for 2014 through 2017; (2) Debtors’ failure to provide information

2
For example, they released the lis pendens only at the eleventh hour during an
evidentiary hearing on Creditors’ motion seeking its expungement.

3
regarding their business operations; (3) Debtors’ failure to file business

operating reports; and (4) the Plan’s failure to provide for priority claims

and to satisfy the liquidation analysis, feasibility, and projected disposable

income requirements of chapter 13, Debtors never amended their facially

non-confirmable Plan.

Debtors ultimately attempted to justify their sloth by reference to

federal criminal charges filed post-petition against Hugh Nichols for bank

fraud and conspiracy to commit bank fraud (“Criminal Case”)3 and alleged

advice of their criminal and bankruptcy counsel. And the Trustee did not

immediately press the point; she continued the § 341(a) meeting of

creditors numerous times. But the case went nowhere, and an even

potentially confirmable plan, one that paid creditors the minimum required

by the evidence in the Debtors’ schedules, was never proposed.

Debtors also stalled the Civil Action. They opposed Creditors’ stay

relief motion requesting liquidation of claims in the Civil Case, and

Debtors’ co-defendants—most of which are entities Debtors own and

control—obtained a six-month stay from the state court.

So, nine months into the chapter 13 case, Debtors still had not filed

required tax returns or otherwise made a meaningful effort to confirm a

plan. Creditors, thus, sought conversion to chapter 7 (“Conversion

3
Theft of livestock, wire fraud, and witness retaliation charges under 18 U.S.C.
§§ 667, 1343, and 1513(e) were added five months later.

4
Motion”) under § 1307(c) and (e), alleging, inter alia, undue delay,

ineligibility for chapter 13 relief, and bad faith conduct.

The Trustee joined the Conversion Motion on the bases that:

(1) Debtors had not addressed most of the issues raised in her Plan

objection; (2) Debtors had not advanced the case; (3) Debtors had not

proposed a confirmable plan; (4) Debtors had not filed required tax returns;

(5) Debtors had not provided information needed to analyze the feasibility

or propriety of the Plan; (6) Debtors had not met their obligations to

creditors and the estate; and (7) creditors were being prejudiced by case

stagnation.

Debtors broadly opposed the Conversion Motion; the defenses to

their obvious inaction included the assertion that case delays were

attributable to their Criminal Case rather than bad faith conduct.

Concurrently, they filed a motion making the extraordinary request that

the bankruptcy court stay or abstain from all bankruptcy proceedings

pending the outcome of the Criminal Case (“Motion for Stay”). Creditors

filed an opposition.

The bankruptcy court held a hearing on the Motion for Stay and

Conversion Motion and denied the Motion for Stay. In addition, it

conditionally granted the Conversion Motion: (1) finding cause for

conversion under § 1307(c), including unreasonable delay that is

prejudicial to creditors; (2) finding that conversion was in the best interest

5
of creditors and was required under § 1307(e) given Debtors’ failure to file

tax returns; (3) at Debtors’ counsel’s request, giving Debtors thirty days to

submit tax returns and a stipulated order of confirmation (“SOC”) to avoid

conversion; and (4) authorizing the Trustee to upload an order converting

the case if Debtors failed to complete such tasks.

Debtors appealed the bankruptcy court’s denial of the Motion for

Stay to the United States District Court for the District of Arizona. While

the district court appeal was pending, Debtors filed a motion to dismiss

their chapter 13 case under § 1307(b) (“Dismissal Motion”) “as a matter of

precaution, to prevent any potential claim of waiver of the right to

dismiss.” But they did not request a hearing until after the district court

denied their motion for a stay pending appeal.4

Creditors and the Arizona Department of Revenue opposed the

Dismissal Motion and urged conversion. They argued that case dismissal

would cause a manifest injustice and substantial harm to creditors and that

Debtors had been acting in bad faith.

The bankruptcy court then held a joint hearing on the Conversion

Motion and Dismissal Motion. As of the hearing date, Debtors still had not:

(1) amended the Plan or submitted a proposed SOC to the Trustee, despite

the bankruptcy court delaying entry of a conversion order, at Debtors’

4
The district court later affirmed the bankruptcy court. Nichols v. Marana
Stockyard & Livestock Mkt. Inc. (In re Nichols), 615 B.R. 588 (D. Ariz. 2020).

6
counsel’s request, to allow them time to do so; (2) filed their delinquent tax

returns; (3) filed operating reports for their businesses; (4) provided the

Trustee with her requested disclosures; and (5) filed outstanding

Transaction Privilege Tax or withholding returns for their businesses.

Following the hearing, the bankruptcy court entered its order

denying the Dismissal Motion and granting the Conversion Motion

(“Order”). Citing Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir.

2008), the bankruptcy court found that Debtors’ § 1307(b) right to dismiss is

not absolute and does not supersede the conversion options available

under § 1307(c) or (e). Here, the bankruptcy court concluded, Debtors’

delays were not excused by the concurrently pending Criminal Case. While

fighting to stay in chapter 13, they did nothing more than inject delay in the

bankruptcy and Civil Case. Further, they failed to file numerous tax returns

by the § 1308(a) deadline. Thus, the bankruptcy court found that “[t]he

Debtors have essentially used Chapter 13 to hide from creditors during the

pendency of the criminal proceedings. Such conduct constitutes an abuse of

the bankruptcy process, justifying denial of the Debtors’ Motion to Dismiss

under § 1307(b).” It concluded that conversion was in the best interest of

creditors and appropriate under §§ 1307(c) and (e).

Debtors timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction to determine the Conversion

7
Motion and Dismissal Motion under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and

(O). See Beatty v. Traub (In re Beatty), 162 B.R. 853, 857-58 (9th Cir. BAP 1994)

(holding conversion is not effective on oral ruling; rather it is effective and

operative on the date of entry on the docket), overruling recognized on other

grounds by In re Rosson, 545 F.3d 764. We have jurisdiction under 28 U.S.C.

§ 158.

ISSUE

Did the bankruptcy court abuse its discretion when it granted

Creditors’ Conversion Motion and denied Debtors’ Dismissal Motion?

STANDARDS OF REVIEW

We review the bankruptcy court’s decision to deny a § 1307(b)

request for dismissal of a chapter 13 case and to convert the case to

chapter 7 for an abuse of discretion. In re Rosson, 545 F.3d at 771. The

bankruptcy court abuses its discretion if it fails to identify or apply the

correct legal rule to the relief requested or if its application of the correct

legal standard was illogical, implausible, or without support in the record.

Father M v. Various Tort Claimants (In re Roman Catholic Archbishop of

Portland in Or.), 661 F.3d 417, 424 (9th Cir. 2011).

We review the bankruptcy court’s conclusions of law de novo and its

factual findings for clear error. In re Rosson, 545 F.3d at 771. Its findings of

fact are accorded considerable deference and are only clearly erroneous if

we are left with a definite and firm conviction a mistake has been

8
committed. Anderson v. Bessemer City, 470 U.S. 564, 573-75 (1985).

We may affirm on any basis supported by the record. Black v. Bonnie

Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 211 (9th Cir. BAP 2013).

DISCUSSION

Debtors argue for the first time on appeal that the bankruptcy court

lacked authority to order conversion to chapter 7 under § 1307(c) and (e) in

light of their § 1307(b) Dismissal Motion. They maintain that they have an

absolute right to dismissal, despite Creditors’ allegations of Debtors’ abuse

of process and failure to file the tax returns required under § 1308. In

advancing this argument, they submit that In re Rosson, 545 F.3d 764, in

which the Ninth Circuit held that a debtor’s § 1307(b) right to dismiss is not

absolute, must be deemed bad law as contradicted by preceding and

subsequent United States Supreme Court authority in Marrama v. Citizens

Bank of Mass., 549 U.S. 365 (2007) and Law v. Siegel, 571 U.S. 415 (2014). We

disagree. We also disagree with Debtors’ alternative arguments that the

bankruptcy court erred in determining conversion was warranted for

Debtors’ abuse of process and failure to file tax returns.

A. Debtors waived the argument that Rosson no longer controls, but we

exercise our discretion to consider the issue.

Creditors initially contend that Debtors waived the argument that

Rosson is no longer controlling law because they did not raise it below and,

in fact, affirmed the validity of Rosson. We agree.

9
 Debtors counter that they raised the issue in a footnote to their

Dismissal Motion: “[i]t is questionable whether the exception created by

[Rosson] is consistent with the statute.” That footnote is far too cryptic and

contrary to their subsequent arguments to have adequately raised the

issue. See Conservation Nw. v. Sherman, 715 F.3d 1181, 1188 (9th Cir. 2013)

(deeming appellant’s argument waived as it was buried in the middle of a

broader argument below such that the district court never ruled on it).

Indeed, in the bankruptcy court, Debtors acknowledged twice in briefing

and four times at a hearing that their right to a dismissal was limited by

Rosson. And, at no time did they argue that any case contradicted or

overruled Rosson.

And this failure is particularly troubling where the bankruptcy court

ordered conversion before Debtors sought dismissal. Debtors avoided

immediate conversion by asserting that they would file the required tax

returns and remedy the Plan’s serious defects. Instead, they did nothing

except request dismissal.

As a general rule of waiver, we will not reverse the bankruptcy court

“on the basis of a theory that was not raised below.” Alaska Airlines, Inc. v.

United Airlines, Inc., 948 F.2d 536, 546 n.15 (9th Cir. 1991). But waiver is a

discretionary determination, which allows us to reach issues not raised at

the trial level in certain circumstances, including “when the issue presented

is purely one of law and either does not depend on the factual record

10
developed below, or the pertinent record has been fully developed.” Bolker

v. Comm’r, 760 F.2d 1039, 1042 (9th Cir. 1985). Thus, though Debtors did not

adequately raise the issue below, we exercise our discretion to consider

whether Rosson is controlling law.

B. Rosson’s holding, that the right to dismissal has limits, is controlling.

There is no question that Rosson bound the bankruptcy court in the

absence of a contrary decision of the Supreme Court. See Zuniga v. United

Can Co., 812 F.2d 443, 450 (9th Cir. 1987). And no one argues that the

Supreme Court directly overruled Rosson or decided the particular issue it

resolved. So, we must follow Rosson unless the Supreme Court has

otherwise undercut its theory or reasoning in a way that is clearly

irreconcilable with continued reliance on it. Miller v. Gammie, 335 F.3d 889,

900 (9th Cir. 2003) (en banc). As explained below, the Supreme Court has

not done so.

Section 1307 provides, in pertinent part, that

(b) On 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.
(c) . . . [O]n request of a party in interest . . . 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, including—

11
 (1) unreasonable delay by the debtor that is prejudicial to
creditors[.]
...
(e) Upon the failure of the debtor to file a tax return under
section 1308, on request of a party in interest . . . and after
notice and a hearing, 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.

§ 1307(b), (c)(1), and (e). Creditors rely on Rosson for the proposition that

these statutes exist in equipoise such that dismissal was not required upon

Debtors’ request and conversion remained an option. Debtors argue that

Rosson is inconsistent with Supreme Court cases in analogous situations,

that § 1307(b) is the controlling statutory mandate, and that dismissal was

the only appropriate option.

Debtors first focus on Marrama, where the Supreme Court interpreted

§ 706(a) rather than § 1307(b). But, as the Rosson Panel held, Marrama’s

reasoning for its interpretation of § 706(a) instructs how § 1307(b) should be

read.

In Marrama, a chapter 7 debtor attempted to hide a significant asset.

549 U.S. at 368. He filed a § 706(a) motion to convert his case to chapter 13,

only after the chapter 7 trustee discovered his deceit. The bankruptcy court

denied his motion due to his bad faith conduct. Id. at 369-70. The matter

then wound its way to the Supreme Court.

As the Supreme Court observed, § 706(a) allows a chapter 7 debtor to

12
convert the case to chapter 13 at any time subject to conditions not present

in the Marrama case. It further provides that “[a]ny waiver of the right to

convert a case under this subsection is unenforceable.” § 706(a). The

Supreme Court consulted legislative history that described the § 706(a)

right to convert as “absolute” but nevertheless held that the “reference to

an ‘absolute right’ of conversion [wa]s more equivocal than” this language

suggested. Marrama, 549 U.S. at 372. In particular, it identified the

requirement in § 706(d) that the debtor be eligible to proceed under the

chapter to which conversion was sought as an exception to the “absolute

right” of conversion. Id.

Turning to § 706(d), the Marrama Court then examined a potential

reason why the debtor would not qualify as a debtor under chapter 13: the

ability of the bankruptcy court to convert or dismiss a case for cause under

§ 1307(c). Id. at 373. It concluded that the debtor’s bad faith conduct was

“cause” because bad faith debtors do not belong to “the class of ‘honest but

unfortunate debtors’ that the bankruptcy laws were enacted to protect.” Id.

at 374 (alterations omitted) (quoting Grogan v. Garner, 498 U.S. 279, 287

(1991)). And it reasoned that a bad faith finding under § 1307(c) was

“tantamount to a ruling that the individual does not qualify as a debtor

under Chapter 13.” Id. at 373–74. Thus, it held that § 706(d)’s requirement

that a debtor be eligible under the chapter to which conversion was sought

allowed the bankruptcy court to deny conversion to chapter 13. Id. at 374.

13
 The Marrama Court also found that the bankruptcy court’s refusal to

convert the case was authorized under § 105(a) and might have been

authorized under its inherent powers to sanction abusive litigation

practices expeditiously. Id. at 375-76.

In Rosson, the Ninth Circuit Court of Appeals considered the effects

of Marrama in the context of a bankruptcy court’s sua sponte conversion of

a chapter 13 case to chapter 7 “for cause” despite a pending § 1307(b)

dismissal motion. The Rosson court held that after Marrama, “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.” In re Rosson, 545 F.3d at 767. Rosson

pointed out:

These two provisions [§ 1307(b) and(c)]—i.e., that the court
“shall” dismiss a case on request of the Chapter 13 debtor, but
that the court also “may” convert a Chapter 13 case to Chapter
7 “for cause”—can conflict where, on the one hand, a debtor
requests voluntary dismissal, while, on the other hand, a party
in interest or the trustee moves to convert—or the court, acting
on its own, converts—the case to Chapter 7.

Id. at 771. But despite the mandatory versus permissive language of

§ 1307(b) and (c), respectively, Marrama requires that the debtor’s § 1307(b)

right to dismissal be qualified by the bankruptcy court’s power to convert a

case based on the debtor’s bad-faith conduct or abuse of the bankruptcy

process. Id. at 772, 774. It noted that the text of § 706(a) and § 1307(b) are

14
analytically indistinguishable. Id. at 773 (citing Croston v. Davis (In re

Croston), 313 B.R. 447, 451 (9th Cir. BAP 2004), abrogated on other grounds by

Marrama, 549 U.S. 365). Thus, it reasoned that because Marrama rejected an

“absolute” right theory as to § 706(a), the “absolute” right theory as to

§ 1307(b) must also be rejected. Id. at 773-74.

Rosson also cited to § 105(a) in discussing Marrama’s bad faith and

abuse of process exceptions to the rights conferred on debtors in §§ 706(a)

and 1307(b). 545 F.3d at 771 n.8, 773 n.12, 774. This analysis primarily

centered on a holistic statutory construction of § 1307(b) and (c) to conclude

that a debtor’s § 1307(b) dismissal right is fairly limited by alternative “for

cause” grounds of abuse of process or bad faith for conversion under

§ 1307(c).

In Law, the Supreme Court held that a trustee could not surcharge a

debtor’s exemption under its § 105(a) inherent equitable powers to

contravene § 522(k), which prohibits the use of exempt property to pay

administrative expenses. Law, 571 U.S. at 427-28. The Law Court

distinguished Marrama because § 706(d) expressly conditioned conversion

on a debtor’s qualifications for relief under chapter 13. A chapter 7 debtor’s

bad faith conduct could prevent her eligibility as a chapter 13 debtor

because § 1307(c) authorizes the bankruptcy court to dismiss or convert a

case for cause, which includes bad faith. See id. at 425-26; Marrama, 549 U.S.

at 372-75. Law characterized Marrama’s conclusion that a bankruptcy court

15
could deny dismissal pursuant to § 105(a) as “dictum.” Id. at 426. But Law

reinforced that § 105(a) could be used to avoid the “futile procedural

niceties in order to reach more expeditiously an end result required by the

Code,” such as denying conversion when it is clear that the bankruptcy

court would inevitably reconvert or dismiss the converted case for cause.

Id.

In Saris Realty, Inc. v. Bartlett (In re Bartlett), BAP No.

CC-17-1364-LsTaL, 2018 WL 3468832 (9th Cir. BAP July 18, 2018), we

observed that after Law, “the continued vitality of Rosson has its allies and

opponents.” Id. at *5. We then briefly discussed those allies and opponents.

See id. (comparing its post-Law allies, In re Brown, 547 B.R. 846 (Bankr. S.D.

Cal. 2016) and In re Pustejovsky, 577 B.R. 671 (Bankr. W.D. Tex. 2017), with

its post-Law opponents, Ross v. AmeriChoice Fed. Credit Union, 530 B.R. 277

(E.D. Penn. 2015), vacated and remanded sub nom. In re Ross, 858 F.3d 779 (3d

Cir. 2017), and In re Sinischo, 561 B.R. 176 (Bankr. D. Colo. 2016)). However,

we declined to consider the “continued sturdiness of Rosson,” Bartlett, 2018

WL 3468832 at *6, and disposed of the appeal on other grounds.

Here, we consider Rosson’s vitality; we agree with its allies—it is still

good law. As aptly articulated in Brown, “[r]ather than undercutting

Rosson’s analysis, Law actually confirms it.” In re Brown, 547 B.R. at 851.

Specifically, Marrama’s rejection of a chapter 7 debtor’s absolute right to

convert was based on a “holistic” interpretation of §§ 706(a), 706(d), and

16
1307(c) and the conclusion that § 706(a)’s seemingly absolute right to

convert was equivocal. In Law, the Supreme Court emphasized that

Marrama’s holding was not solely or primarily based on § 105(a). Law, 571

U.S. at 425-26. In fact, the Law Court labeled Marrama’s statements

regarding § 105(a) as mere “dictum.” Id. at 426. The Law Court explained:

The question [in Marrama] was whether a debtor’s bad-faith
conduct was a valid basis for a bankruptcy court to refuse to
convert the debtor’s bankruptcy from a liquidation under
Chapter 7 to a reorganization under Chapter 13. Although
§ 706(a) of the Code gave the debtor a right to convert the case,
§ 706(d) “expressly conditioned” that right on the debtor’s
“ability to qualify as a ‘debtor’ under Chapter 13.” And
§ 1307(c) provided that a proceeding under Chapter 13 could be
dismissed or converted to a Chapter 7 proceeding “for cause,”
which the Court interpreted to authorize dismissal or
conversion for bad-faith conduct. In light of § 1307(c), the Court
held that the debtor’s bad faith could stop him from qualifying
as a debtor under Chapter 13, thus preventing him from
satisfying § 706(d)’s express condition on conversion.

Id. at 425-26 (citations omitted).5

5
Debtors attribute too much to Law’s relegation of Marrama’s § 105(a) analysis to
dictum. Specifically, they argue that because Marrama’s only reference to “abuse of
process” appears in its discussion of § 105(a), Rosson, even if not overruled by Law,
cannot be read to authorize a bankruptcy court to convert for cause under § 1307(c)
based on an abuse of process, absent a separate finding of bad faith, when there is a
pending § 1307(b) dismissal request.

Debtors ignore Marrama’s key holding that the bankruptcy court’s bad faith
(continued...)

17
 The Rosson court carried Marrama’s reasoning to its natural

conclusion in interpreting § 706(a)’s chapter 13 analog, § 1307(b). As did the

Supreme Court in Marrama, the Ninth Circuit read § 1307(b) and (c) to give

these different subsections of the same statute importance in the situations

to which they apply. When those situations converge with competing

conversion and dismissal motions, each subsection should be given its

proper significance. Section 1307(c) proffers a statutory basis to refuse to

honor a § 1307(b) dismissal request, just as §§ 706(d) and 1307(c), read

together, proffer a statutory basis to refuse to honor a § 706(a) conversion

request.

We note that the Ninth Circuit has not directly addressed the

continued vitality of Rosson. However, several post-Law cases have

favorably cited Rosson’s holding that a debtor’s § 1307(b) dismissal rights

are qualified by the bankruptcy court’s authority to deny dismissal for bad

5
(...continued)
finding was sufficient to deny conversion under § 706(a) because the finding would
constitute cause to dismiss or reconvert the case under § 1307(c). A finding of an abuse
of process similarly constitutes cause to dismiss or convert a case under § 1307(c); an
individual who abuses the bankruptcy process is as unworthy to be classified as an
“honest but unfortunate debtor[] that the bankruptcy laws were enacted to protect[,]”
Marrama, 549 U.S. at 374 (citation and internal quotation marks omitted), as an
individual who acts in bad faith during bankruptcy. Debtors provide no meaningful
basis to distinguish between such individuals. Neither individual should be immune
from the bankruptcy court’s power to convert a case for cause under § 1307(c). Rosson
thus appropriately held that either a bad faith or abuse of process finding of cause to
convert under § 1307(c) may defeat a § 1307(b) motion.

18
faith conduct or to prevent an abuse of process. See, e.g., Brown v. Billingslea

(In re Brown), BAP No. SC-14-1388-JuKlPa, 2015 WL 6470940, *11 (9th Cir.

BAP Oct. 26, 2015); Dietlein v. Dietlein (In re Dietlein), 592 B.R. 864, 868 (D.

Nev. 2018); In re Malek, No. 15-61179-13, 2018 WL 1750089, *3 (Bankr. D.

Mont. Apr. 10, 2018).

More importantly, after Law, the Ninth Circuit in Clark v. DeVries

(In re Clark), 652 F. App’x 543 (9th Cir. 2016) relied on Rosson in holding

that a chapter 12 debtor did not have an absolute right to dismissal under

§ 1307(b)’s chapter 12 analog, § 1208(b), because the district court had the

power to instead convert the case to chapter 7 pursuant to § 1208(d), which

provides that a court “may” dismiss or convert a case “upon a showing

that the debtor has committed fraud in connection with the case.”

For these reasons, we hold that Rosson remains good law; a debtor’s

§ 1307(b) right to dismissal is not absolute. In doing so, we acknowledge

the tensions in the analysis. But given that Law merely suggests, rather than

requires, consideration of a different result and given that the Ninth Circuit

relied on Rosson after Law, we determine that the decision binds us here.

We also observe that limiting a chapter 13 debtor’s § 1307(b) right

voluntarily to dismiss a case when there is bad faith conduct or abuse of

process warranting conversion is consistent with the objectives of the

Bankruptcy Code and is otherwise sound statutory construction.

Congress has explicitly stated its intent to prevent mandatory

19
chapter 13 proceedings:

As under [the Bankruptcy Act of 1898], chapter 13 is completely
voluntary. This Committee [on the Judiciary] firmly rejected the
idea of a mandatory or involuntary Chapter XIII in the 90th
Congress. The Thirteenth Amendment prohibits involuntary
servitude. Though it has never been tested in the wage earner
plan context, it has been suggested that a mandatory chapter
13, by forcing an individual to work for creditors, would violate
this prohibition. On policy grounds, it would be unwise to
allow creditors to force a debtor into a repayment plan. An
unwilling debtor is less likely to retain his job or to cooperate in
the repayment plan, and more often than not, the plan would
be preordained to fail.

H.R. Rep. No. 595, 95th Cong., 1st Sess. 120 (1977), as reprinted in 1978

U.S.C.C.A.N. 6080 (footnotes omitted). Section 1307(b) is one of several

statutory safeguards Congress enacted to ensure that chapter 13 cases are

purely voluntary proceedings. See, e.g., §§ 303(a) (prohibiting the filing of

an involuntary chapter 13 case against a debtor); 706(c) (prohibiting

conversion of a chapter 7 case to chapter 13 without a debtor’s consent);

1112(d) (prohibiting conversion of a chapter 11 case to chapter 13 without a

debtor’s consent); 1307(a) (providing a chapter 13 debtor with the right to

convert to chapter 7 at any time); 1321 (providing a chapter 13 debtor with

the exclusive authority to propose a plan). Section 1307(b) prevents a

debtor from compelled chapter 13 servitude. Thus, the mandatory

language of § 1307(b) is best understood as providing a chapter 13 debtor

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with an absolute right to exit chapter 13.

But there is no indication in the legislative history that Congress

intended to grant debtors who have abused the bankruptcy process an

unqualified right to choose the means by which they exit chapter 13. After

all, “the purpose of the bankruptcy code is to afford the honest but

unfortunate debtor a fresh start, not to shield those who abuse the

bankruptcy process in order to avoid paying their debts.” Molitor v. Eidson

(In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996). Thus, § 1307(b) should not be

used “as an escape hatch” by a dishonest debtor to avoid the repercussions

of bad faith conduct or abuse of process once a § 1307(c) conversion motion

is filed. Id.

Congress’ involuntary servitude concern has no place in a chapter 7

case because a chapter 7 debtor is not compelled to pay future wages to a

creditor in violation of the Thirteenth Amendment’s involuntary servitude

prohibition. Cf. Toibb v. Radloff, 501 U.S. 157, 165-66 (1991) (citing H.R. Rep.

No. 95-595, at 120, as articulating Congress’ concern with involuntary

chapter 13 proceedings and holding chapter 11 proceedings do not involve

the same concern). In fact, § 303(a) expressly permits creditors to file an

involuntary chapter 7 against a person.

Thus, allowing the bankruptcy court to convert a chapter 13 case to

chapter 7 for bad faith conduct, abuse of process, or a failure to file tax

returns despite a debtor’s § 1307(b) dismissal motion honors Congress’

21
intention of keeping chapter 13 proceedings voluntary while preserving the

integrity of the bankruptcy system by allowing the bankruptcy court to

address abusive behavior.

And Debtors’ argument that § 1307(b) has preferred status based on

its position in the statute is not supported by any rule of statutory

construction. Instead, we are compelled to read the statute as a whole, to

give meaning to all its provisions, and to aim for a coherent construction

where facial differences exist. Food & Drug Admin. v. Brown & Williamson

Tobacco Corp., 529 U.S. 120, 133 (2000). And, given this analysis, the fact that

§ 1307(b) contains a mandatory “shall” while § 1307(c) utilizes a permissive

“may” does not compel a different result. Again, the only coherent way to

give import to the entirety of the statute is to acknowledge the debtor’s

absolute right to exit chapter 13 while also acknowledging that the rights of

creditors must be considered when the debtor acts in bad faith or abuses

process; in such a case an exit to a chapter 7 case remains an option.

Under this analysis, it becomes clear that Law in no way controls the

outcome here. This analysis does not require recourse to § 105 to avoid

application of a Bankruptcy Code mandate. Instead, the analysis requires

consideration of different subsections of the same statute and a reasoned

analysis that provides each with an appropriate place in the statutory

scheme.

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C. The bankruptcy court did not err in finding abuse of process

warranting conversion under § 1307(c).

The bankruptcy court’s finding that conversion would prevent an

abuse of process was not clearly erroneous. Debtors fought to remain in

chapter 13 for seventeen months, yet they took no material steps to

advance their case towards confirmation or to comply with the Bankruptcy

Code. The only affirmative actions they took were designed to delay

judicial proceedings. And when they missed the deadline to file tax

returns, they made no effort to correct their delinquencies. Rather, they

sought multiple stays of proceedings.

Debtors assert that their delays were excusable because they were

allegedly unable to produce information required to move the bankruptcy

case forward or to otherwise take affirmative actions without their criminal

counsel first evaluating the ramifications of, and recommending, such

actions. And, they argue, consistent with the advice of criminal counsel,

they sought a stay of the bankruptcy proceedings. Debtors’ arguments are

not well-taken.

While a debtor may assert his Fifth Amendment privilege in a

bankruptcy proceeding, McCarthy v. Arndstein, 266 U.S. 34, 41 (1924), he

cannot assert it in a blanket fashion to “impede the basic bankruptcy

administration of his case” without consequence, McCormick v. Banc One

Leasing Corp. (In re McCormick), 49 F.3d 1524, 1527 (11th Cir. 1995); see also

23
In re Vaughan, 429 B.R. 14 (Bankr. D.N.M. 2010) (converting chapter 11 case

to chapter 7 under § 1112(b)(4)(H) where debtor refused to testify at a § 341

meeting of creditors after invoking his Fifth Amendment privilege and

thereby failed to provide information reasonably requested by the United

States Trustee). Further, we agree with the bankruptcy court that Debtors’

requested stay would allow them to “use the Fifth Amendment as a shield,

while impermissibly using the Bankruptcy Code as a sword with which to

take unfair advantage of creditors.” Phillips v. First Nat. Ins. Co. of Am., Civ.

No. H-10-3632, Adv. No. 10-03075, 2011 WL 2447954, at *2 (S.D. Tex. June

15, 2011); see also In re Connelly, 59 B.R. 421, 448 (Bankr. N.D. Ill. 1986).

During all of Debtors’ stalling efforts, creditors have suffered as

Debtors have not met their obligations to pay creditors or to propose even a

facially confirmable plan. These facts provide ample support for the

bankruptcy court’s determination that conversion would prevent an abuse

of process and be in the best interest of creditors.6 Therefore, we perceive

no error in the bankruptcy court’s denial of Debtors’ Dismissal Motion and

grant of Creditors’ Conversion Motion under § 1307(c).

6
Debtors point out that the bankruptcy court did not hold an evidentiary hearing
on whether they were abusing the bankruptcy process. To the extent they are
suggesting error in the bankruptcy court’s determination that there was sufficient
evidence in the record to find an abuse of process without holding an evidentiary
hearing, they waived any such argument by failing to request an evidentiary hearing
when the bankruptcy court questioned whether one was necessary.

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D. The bankruptcy court did not err in finding grounds for conversion

under § 1307(e).

Even assuming, arguendo, that Debtors correctly argue that § 1307(c)

must be of secondary import to § 1307(b) given the “may” and “shall”

language in them, respectively, their argument fails to negate the

alternative basis for conversion under § 1307(e).7

Section 1307(e) unambiguously provides that a bankruptcy court

“shall” dismiss the case or convert the case to chapter 7 “whichever is in

the best interest of the creditors and the estate” if the debtor fails to comply

with § 1308 and a party in interest requests dismissal or conversion. Here

the bankruptcy court also converted the case based on this statutory

mandate.

Under the Debtors’ reasoning, such a contest of “shalls” places a

bankruptcy court between Scylla and Charybdis—whichever choice it

makes risks ruin. Only the holistic approach that allows discretion to the

bankruptcy court allows successful navigation between the hazards. In

short, even if one concludes that the bankruptcy court’s discretion is

curtailed in the § 1307(c) context because that subsection utilizes more

permissive language than § 1307(b), the same is not true in a situation

7
In fact, Debtors waived any challenge to the bankruptcy court’s conversion
under § 1307(e) by failing to address it in their opening brief. Kim v. Kang, 154 F.3d 996,
1000 (9th Cir. 1998) (Appellate courts will not ordinarily consider matters that are not
specifically and distinctly argued in an appellant's opening brief).

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where § 1307(e) mandates consideration of the interests of creditors.

Here, Debtors inexcusably failed to file multiple tax returns within

the time constraints of § 1308(a). While we acknowledge that the Criminal

Case required caution and created tensions involving the Fifth Amendment

privilege against self-incrimination, the privilege “does not justify a

complete failure to file a [tax] return[.]” United States v. Leidendeker, 779 F.2d

1417, 1418 (9th Cir. 1986).

Given the mandatory language of § 1307(e), the bankruptcy court

was required to consider the interests of creditors. It thoughtfully did so

and determined that conversion, and not dismissal, would best serve their

interests. And while this deprived Debtors of their late hour attempt to

compel dismissal, it gave them, in substance, what the mandatory language

of § 1307(b) requires, an immediate exit from chapter 13.

CONCLUSION

Based on the foregoing, we AFFIRM.

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