496 B.R. 469
Bankr. E.D. Tenn.2013Background
- Tennessee State Bank and others filed involuntary Chapter 7 petitions against Gerald Miller (the Debtor) on Sept. 28, 2012; an order for relief was entered Jan. 9, 2013 and a Chapter 7 trustee (Mostoller) was appointed.
- The Debtor had separately filed a Chapter 11 petition in Florida before the involuntary case proceeded; he moved to convert his Chapter 7 case to Chapter 11 on April 5, 2013.
- Tennessee State Bank objected, alleging lack of good faith, failures to turnover records and property, omissions in schedules, unauthorized post-petition payments, and that any plan would be essentially liquidation (better suited to Chapter 7).
- The core legal question was whether Debtor is eligible under 11 U.S.C. § 706(d) and whether conversion may be denied for cause or bad faith under Marrama and § 1112(b) factors.
- Trial evidence showed: significant secured debt to Tennessee State Bank on 13 notes (interest accruing postpetition), some postpetition tax payments, turnover of certain assets to the trustee pursuant to a negotiated order, and testimony that Debtor largely relied on his wife for financial recordkeeping but intends a Chapter 11 plan combining liquidation and continued business operations.
- The court concluded the statutory eligibility elements were met and that Tennessee State Bank failed to prove cause or bad faith sufficient to deny conversion; the case was converted to Chapter 11.
Issues
| Issue | Plaintiff's Argument (Tennessee State Bank) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether Debtor may convert from Ch.7 to Ch.11 under §706/due to bad faith | Debtor acted in bad faith (delayed conversion, omissions, improper post-petition payments, unauthorized sale attempts), so Marrama allows denial | Debtor intended and filed Ch.11 in Florida, timely moved to convert once represented; no egregious fraud or concealment | Conversion allowed; Marrama-based denial not warranted—no egregious, atypical misconduct shown |
| Whether §1112(b)(4)(A) “substantial/continuing loss and lack of rehabilitation” bars conversion | Interest, taxes, attorneys’ fees accruing and lack of income to fund reorg show continuing diminution and no reasonable prospect of rehabilitation | Debtor has businesses and real property to market/sell, intends mixed liquidating/operational plan, trustee controls estate assets now, and decline alleged is mostly accrual of secured debt | §1112(b)(4)(A) not satisfied: Bank showed increase in secured debt but not continuing loss of estate assets nor impossibility of rehabilitation |
| Whether failure to file tax returns post-petition (§1112(b)(4)(I)) is cause to deny conversion | Debtor failed to file 2011 and 2012 returns; untimely tax conduct indicates cause | 2011–2012 returns relate to pre-petition liabilities; Debtor was preparing/filing them or had extensions | Not cause under §1112(b)(4)(I); statute targets post-order-for-relief returns/taxes and pre-petition failures were not dispositive |
| Whether specific acts (failure to turnover, unauthorized sale/listing, omissions in schedules) demonstrate bad faith | These acts evidence concealment/misconduct and attempt to shield assets or prejudice creditors | Trustee received documents, turnover occurred by agreement, omissions were corrected/amendable, and actions lacked intent to defraud; dealings largely due to Debtor’s reliance on his wife and counsel changes | Court found omissions and conduct problematic but not intentional/egregious; no bad faith sufficient to deny conversion |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (U.S. 2007) (court may deny conversion where debtor’s pre- or postpetition bad faith would amount to abuse of process)
- Trident Assocs. Ltd. P’ship v. Metro. Life Ins. Co., 52 F.3d 127 (6th Cir. 1995) (bad-faith factors for assessing debtor’s motives and petition legitimacy)
- Laguna Assocs. Ltd. P’ship v. Aetna Cas. & Sur. Co., 30 F.3d 734 (6th Cir. 1994) (totality-of-circumstances approach to good-faith bankruptcy filings)
- Soc’y Nat’l Bank v. Barrett (In re Barrett), 964 F.2d 588 (6th Cir. 1992) (factors relevant to bad-faith conversion analysis)