896 F.3d 1255
11th Cir.2018Background
- Cecil and Patricia Daughtrey owned ~2,500 acres in Sarasota County; a mortgage default led to a state-court foreclosure judgment in favor of 72 Partners for $4,267,436. Debtors filed Chapter 7 shortly before a scheduled foreclosure sale, triggering the automatic stay.
- The Chapter 7 trustee investigated values and tax consequences; concluded a market sale would incur significant capital gains tax and be impracticable, and negotiated a compromise: trustee would quitclaim ~2,340 acres to 72 Partners for $300,000 distribution to unsecured creditors, while Debtors kept a 160-acre homestead (including a well).
- Debtors objected and sought to convert the case to Chapter 11, asserting an absolute right to convert and claiming prospective buyers could pay substantially more; their counsel proffered inconsistent investor offers and withheld certain purchase agreements until late in the proceedings.
- The Bankruptcy Court denied conversion (finding lack of good faith, no feasible plan or binding financing, failure to amend schedules, and likely reconversion/dismissal under § 1112), approved the trustee’s compromise, and denied a subsequent reconsideration motion. The District Court affirmed. The Eleventh Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Debtors had an absolute right to convert Chapter 7 to Chapter 11 under §706(a) | Debtors: §706(a) grants an absolute right to convert; court must permit conversion absent a prima facie showing of bad faith | Trustee/Creditor: §706(d) conditions conversion on eligibility as a Chapter 11 debtor; Marrama allows denial where "cause" would require dismissal/reconversion under §1112 | Court: No absolute right; conversion properly denied where cause under §1112(b) (incl. lack of feasible plan, bad faith, failure to comply with orders) exists |
| Whether the Bankruptcy Court abused discretion in denying conversion | Debtors: denial was improper and based on case age, not lack of eligibility | Trustee/Creditor: denial was within discretion—Debtors had no binding financing, no feasible plan, undisclosed unsecured creditors, and acted in bad faith | Held: No abuse of discretion; substantial evidence supported denial (Marrama logic; multiple §1112(b) causes) |
| Whether the October 14 / late purchase agreements justified reconsideration and conversion | Debtors: newly presented agreements show buyer willing to pay enough to fund a Chapter 11 plan; supports conversion/reconsideration | Trustee/Creditor: agreements were either not newly discovered, were contingent/illusory, and would not cover secured claim, taxes, liens, or administrative costs | Held: Reconsideration denied; agreements were not persuasive/new enough and would not make conversion viable |
| Whether the trustee’s compromise (quitclaim of 2,340 acres to creditor for $300,000 and 160-acre homestead carveout) was an abuse of discretion to approve | Debtors: compromise undervalued estate and gave creditor a windfall compared to a foreclosure sale with third-party bidding | Trustee/Creditor: compromise was a reasonable, tax- and market-informed resolution that preserved Debtors’ homestead and avoided futile, costly sales/litigation | Held: Bankruptcy Court did not abuse discretion in approving compromise; it was a practical, better-for-all-parties resolution given tax, valuation, and lien complexities |
Key Cases Cited
- Marrama v. Citizens Bank, 549 U.S. 365 (2007) (court may deny conversion when cause exists that would permit dismissal or reconversion)
- Christo v. Padgett, 223 F.3d 1324 (11th Cir. 2000) (standard of review for bankruptcy court settlements: abuse of discretion)
- In re Optical Techs., Inc., 425 F.3d 1294 (11th Cir. 2005) (appellate review standards in bankruptcy appeals)
- Amlong & Amlong, P.A. v. Denny's, Inc., 500 F.3d 1230 (11th Cir. 2007) (abuse of discretion framework for reviewing discretionary rulings)
- In re Mandalay Shores Co-op. Housing Ass'n, Inc., 21 F.3d 380 (11th Cir. 1994) (abuse of discretion when court misapplies law or makes clearly erroneous factual findings)