598 B.R. 775
Bankr. M.D. Penn.2019Background
- Christopher and Abbey Campbell filed a Chapter 7 petition on February 27, 2018; they moved to convert to Chapter 13 on July 3, 2018. The Chapter 7 Trustee and secured creditor BB&T objected.
- BB&T holds multiple secured proofs of claim totaling $410,987.50 and had scheduled sheriff sales in late 2017 and February 2018. The Campbells had filed a prior Chapter 13 petition on November 20, 2017 (dismissed Jan. 2, 2018) one week before a scheduled sheriff sale.
- The Trustee and BB&T alleged the conversion motion was tactical and filed in bad faith to invoke the automatic stay. The Court found the timing of filings probative of motive.
- The Debtors amended Schedule I three days before the conversion hearing to show a >300% increase in monthly income (unsupported at hearing), and certain proffered income exhibits were excluded for lack of foundation.
- Debtors derive income mainly from a 34% interest in a family limited partnership (royalties) and farm/quarry operations; historical tax returns show declining income and discontinuation or uncertainty of key income streams.
- Court concluded Debtors failed to prove good faith and could not demonstrate a feasible, confirmable Chapter 13 plan; conversion was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debtor has an absolute right to convert Chapter 7 to Chapter 13 or whether conversion may be denied for bad faith | Debtors: § 706(a) permits conversion at any time; no waiver of right | Trustee/BB&T: conversion is subject to court discretion under Marrama; facts show bad faith/tactical filings | Court: No absolute right; conversion may be denied for bad faith and Debtors failed to show good faith — conversion denied |
| Whether Debtors can propose a confirmable, feasible Chapter 13 plan | Debtors: (implicitly) can propose a plan given amended income schedule | Trustee/BB&T: Debtors lack regular, stable income and evidence of plan feasibility | Court: Debtors cannot show reasonable likelihood of funding a plan; feasibility not demonstrated — weighs against conversion |
| Prejudice to creditors vs. hardship to debtors from denying conversion | Debtors: conversion would allow reorganization and avoid immediate loss | BB&T/Trustee: allowing conversion prejudices secured creditors who have not been paid since 2016 and face delay | Court: Denial causes little hardship (Chapter 7 discharge available); conversion would prejudice BB&T — favors denial |
| Whether Debtors were forthcoming with court and creditors (candor of disclosures) | Debtors: amended schedules reflect true information (no supporting evidence at hearing) | Trustee/BB&T: timing and unexplained large amendments suggest lack of candor and tactical manipulation | Court: Amendments, excluded exhibits, and filing timing undermine candor; burden shifted to Debtors not met — disfavors conversion |
Key Cases Cited
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (court may deny conversion for bad faith)
- In re Myers, 491 F.3d 120 (3d Cir.) (bad-faith analysis in Chapter 13 context relevant to conversion)
- In re 15375 Memorial Corp., 589 F.3d 605 (3d Cir.) (automatic stay is a consequential benefit; filing must have valid bankruptcy purpose)
- In re Allegheny International, Inc., 954 F.2d 167 (3d Cir.) (proofs of claim prima facie valid)
- Elcock v. Kmart Corp., 233 F.3d 734 (3d Cir.) (expert testimony requires sufficient factual foundation)