634 B.R. 806
Bankr. D. Colo.2021Background:
- Debtors Donald and Linda Johnson filed a Chapter 7 petition (Sept. 4, 2020), received a Chapter 7 discharge, but later sought to convert the case to Chapter 13 to keep their residence.
- The Chapter 7 Trustee discovered potential equity in the residence (parties stipulate value $475,000; mortgage ≈ $299,008; homestead exemption $105,000), estimating roughly $48,500 net to the Chapter 7 estate if sold.
- Debtors moved to convert under 11 U.S.C. § 706(a); the Trustee objected, arguing §706(a) is not an absolute right post-Marrama, the Debtors are ineligible under §109(e), and the conversion was filed in bad faith.
- Parties submitted extensive stipulated facts and waived an evidentiary hearing; the court evaluated eligibility and bad-faith issues on that record.
- The court found the Debtors meet §109(e) (regular income and debt caps), that the Trustee failed to prove bad faith under the Gier totality-of-the-circumstances test, and granted conversion; it ordered the Debtors to file a Chapter 13 plan and the Trustee to account and turnover estate property.
Issues:
| Issue | Debtors' Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether §706(a) gives an absolute right to convert or is limited by Marrama (eligibility and §1307(c) cause) | §706(a) permits conversion “at any time” | Marrama requires §109(e) eligibility and permits denial for bad faith under §1307(c) | Marrama controls: conversion is allowed only if debtor is §109(e)-eligible and conversion would not be dismissed for cause; here conversion permitted |
| Whether Debtors meet §109(e) ("individual with regular income" and debt limits) | Income rose postpetition (Social Security, pension, wife’s nursing wages) and debts are below Chapter 13 caps | Trustee points to low disposable income on schedules and postpetition spending to question "regular income" | Court: Debtors have sufficiently stable regular income (~$8,786/mo) and debts under statutory caps; eligible under §109(e) |
| Whether the conversion motion was filed in bad faith under §1307(c) (Marrama/Gier factors) | Motive is to save the family home — legitimate Chapter 13 purpose | Timing (filed after Trustee sought sale), postpetition spending, and creditor delay indicate bad faith | Applying Gier factors, only timing and creditor impact weighed against Debtors; overall not atypical or extraordinary—Trustee failed to meet burden; no bad faith |
| What relief and procedural directives follow | Debtors seek conversion and direction to proceed in Chapter 13 | Trustee sought accounting, turnover, and preservation of estate rights | Court granted conversion; ordered Debtors to file a Chapter 13 plan by deadline, Trustee to file accounting and turnover records, and allowed fee applications |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (conversion may be denied for bad faith; debtor must meet Chapter 13 eligibility and not be subject to dismissal under §1307(c))
- Gier v. United States Trustee (In re Gier), 986 F.2d 1326 (10th Cir. 1993) (sets totality-of-the-circumstances factors for bad-faith inquiry under §1307(c))
- Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983) (enumerates factors for evaluating good faith in Chapter 13 contexts)
- Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314 (10th Cir. 2012) (post-BAPCPA guidance on good-faith inquiry and emphasis on ability-to-pay focus)
- Bullard v. Blue Hills Bank, 575 U.S. 496 (2015) (describes Chapter 13 as an opportunity for debtors with regular income to retain property)
- Hamilton v. Lanning, 560 U.S. 505 (2010) (addressing Chapter 13 plan payment calculations and debtor income considerations)
- Young v. United States (In re Young), 237 F.3d 1168 (10th Cir. 2001) (prior Chapter 7 discharge does not automatically bar conversion to Chapter 13)