580 B.R. 815
Bankr. S.D. Ind.2018Background
- Valentine Hill Farm LLC was formed and filed a Chapter 12 petition on August 2, 2017 the same day William Swanson and Maria Smietana quit-claimed their real property to the LLC; the petition initially included only a creditor matrix and verification.
- The Chapter 12 trustee moved to dismiss (asking for a 180-day bar to refiling), alleging the filing was made in bad faith to delay foreclosure and noting prior filings by Swanson and Smietana.
- The case was briefly dismissed for failure to file schedules, then reinstated; the debtor subsequently moved to dismiss voluntarily before the trustee’s motion was adjudicated.
- The trustee argued the filing was a sham: transferors had multiple prior bankruptcy filings (Chapter 12, 11, 7, and 13) involving the same property, relief from stay and abandonment had been granted previously, and the LLC likely did not meet Chapter 12 eligibility rules.
- The court took judicial notice of prior related filings and concluded the LLC’s Chapter 12 petition was filed in bad faith to hinder foreclosure and not to propose a legitimate reorganization.
- Ruling: the court granted the debtor’s motion to dismiss but, finding bad faith, imposed a 180-day bar to refiling under any chapter; the trustee’s motion was denied as moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a Chapter 12 debtor has an absolute right to dismiss under §1208(b) when the trustee seeks dismissal/ conversion for cause or fraud | Debtor: §1208(b) requires the court to grant dismissal on debtor request unless previously converted; no bad-faith exception applies | Trustee: Bad-faith or fraud exceptions (under §1208(c)/(d)) should prevent dismissal and permit conditioning or conversion; debtor filed to hinder creditors | The court did not decide the statutory split but granted debtor's dismissal and separately imposed conditions under §349(a) because dismissal with conditions is permissible for cause |
| Whether the court may impose a 180-day bar to refiling beyond the narrow situations in §109(g) | Debtor: §109(g) lists exclusive circumstances to bar refiling; dismissal with prejudice to refiling is limited to those conditions | Trustee: §349(a) permits the court, "for cause," to order otherwise and impose refiling bars where bad faith warrants it | Court held §349(a)’s "for cause" allows imposing a refiling bar (180 days) despite §109(g) not listing all possible situations |
| Whether the LLC filing was made in bad faith / whether fraud or ineligibility existed | Debtor: Filing was voluntary and proper; LLC had rights to dismiss | Trustee: Pattern of prior filings and transfers, lack of genuine reorganization intent, and questionable Chapter 12 eligibility (farm-asset threshold) show bad faith | Court found bad faith based on the prior filings, transfers, and motive to hinder foreclosure; eligibility concern supported the finding |
| Appropriate remedy and scope of bar | Debtor sought immediate dismissal without conditions | Trustee sought dismissal with a 180-day bar to refiling to prevent serial filings and delay of foreclosure | Court granted dismissal on debtor’s motion but, finding bad faith, imposed a 180-day bar to refiling under §349(a); trustee’s separate motion denied |
Key Cases Cited
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (debtor’s bad faith can forfeit rights to convert or proceed under another chapter)
- In re Smith, 286 F.3d 461 (7th Cir. 2002) (bad faith as cause to dismiss under §1307(c))
- In re Jacobsen, 609 F.3d 647 (5th Cir. 2010) (trustee’s motion to convert for bad faith can override debtor’s dismissal request under §1307(b))
- In re Rosson, 545 F.3d 764 (9th Cir. 2008) (bad-faith conversion/dismissal framework in chapter 13 context)
- In re Molitor, 76 F.3d 218 (8th Cir. 1996) (limits on debtor’s right to dismiss where bad faith exists)
- In re Graven, 936 F.2d 378 (8th Cir. 1991) (court may investigate alleged fraud despite debtor’s dismissal motion)
- In re Ross, 858 F.3d 779 (3rd Cir. 2017) (bankruptcy court may condition a debtor-requested dismissal under §349 to prevent abuse)