District Court Affirms Chapter 13 Debtor’s Absolute Right to Dismiss Despite Bad Faith, Refuses to Extend Marrama

District Court Affirms Chapter 13 Debtor’s Absolute Right to Dismiss Despite Bad Faith, Refuses to Extend Marrama

Noting a split in authority, the District Court for the Northern District of New York found that a chapter 13 debtor has the absolute right to dismiss her bankruptcy.

On April 21, 2015, the Debtor filed a voluntary chapter 13 bankruptcy petition. She claimed as exempt an inherited Individual Retirement Account (“inherited IRA”) worth about $800,000. One of her creditors was Endurance American Insurance Company (“Endurance”). At Endurance’s request, the bankruptcy court entered an interim preservation order that limited debtor’s ability to withdraw funds from the inherited IRA.   On March 19, 2018, the Debtor filed a request for voluntary dismissal of her bankruptcy case pursuant to 11 U.S.C. § 1307(b). The bankruptcy granted the motion on the same day.

Thereafter, it was discovered that the Debtor had quietly depleted the funds in the inherited IRA and other accounts during the bankruptcy.

Endurance then filed a motion to reconsider or vacate the dismissal of Debtor’s bankruptcy, to convert the case to a chapter 7 proceeding, and to hold Debtor in contempt for violating the IRA preservation order.

After a two day hearing, the Bankruptcy Court found that Debtor had violated the interim preservation order but denied Endurance’s motion to reconsider or vacate the dismissal order relying upon a Second Circuit case, Barbieri v. RAJ Acquisition Corp., 199 F.3d 616 (2d Cir. 1999), which held that debtors, bad faith or no, enjoyed an absolute right to voluntarily dismiss a chapter 13 petition under § 1307(b).

Endurance raised the issue whether the Supreme Court’s decision in Marrama v. Citizens Bank, 549 U.S. 365 (2007) overruled the Barbieri decision. The Bankruptcy Court concluded that Barbieri remained good law after Marrama. The issue was then addressed on appeal by the district court.

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