620 B.R. 243
Bankr. W.D. Va.2020Background
- Debtor Jeffrey B. Wetter filed an individual Chapter 7 petition on July 31, 2019; he is a dentist and listed modest monthly disposable income on Schedule I.
- The primary asset at issue is Debtor’s membership interest in JBW Investments, LLC (JBW), holding four properties and valued by Debtor at roughly $1.85M (Debtor’s 50% share valued at ~$924,875).
- Debtor originally reported a tenants-by-the-entirety (TBE) transfer dated January 1, 2018; at a creditors’ meeting he later admitted signing an assignment dated September 25, 2018 and said he had been told to backdate the transfer.
- Trustee sued to avoid the transfer and the U.S. Trustee sought revocation of discharge after discovering inconsistent documentation; Debtor later produced signed assignments dated September 2016 (indicating he owned only 50% via a revocable trust).
- After discharge, Debtor moved to convert to Chapter 11 so he could elect Subchapter V (Subchapter V became effective Feb. 19, 2020); Trustee and Debtor’s two largest creditors objected, citing bad faith, concealment, and immediate statutory-deadline problems.
- The court found Debtor evasive and credibility issues, concluded the case meets the small-business test, and denied the motion to convert, citing immediate deadline/default and bad-faith concerns.
Issues
| Issue | Debtor's Argument | Trustee/Creditors' Argument | Held |
|---|---|---|---|
| Whether Debtor may convert Chapter 7 to Chapter 11 under § 706(a) given alleged prepetition concealment/backdating | Conversion should be permitted so Debtor can elect Subchapter V and reorganize | Debtor forfeited conversion right by bad-faith conduct (backdating, inconsistent statements, concealment) | Denied: conversion not allowed given bad-faith indicia and related consequences |
| Whether Marrama applies to conversion to Chapter 11 | Marrama (Chapter 7→13) is distinguishable | Marrama applies to Chapter 11 conversions where bad faith would cause immediate dismissal or reconversion | Court applied Marrama principles to Chapter 11 conversion requests |
| Whether Debtor can convert and then elect Subchapter V despite missed statutory deadlines (§§1188/1189) | Subchapter V election should be permitted; court can extend deadlines; delayed elections have been allowed in other cases | Election is untimely; extension is unwarranted here because Debtor’s conduct caused the delay | Denied extension under §1189(b) due to Debtor’s conduct; conversion would thus trigger immediate deadline defaults |
| Whether conversion would create immediate grounds for dismissal under §1112(b)(4)(J) or otherwise fail best-interests/good-faith tests | Debtor can propose a Subchapter V plan and meet requirements (projects increased income) | Conversion would place Debtor in immediate default of small-business filing deadlines and raises serious best-interests and good-faith concerns given alleged concealment and sizable exempt asset | Court held conversion would immediately run afoul of §1112(b)(4)(J) and had serious doubts Debtor could satisfy best-interests/good-faith; denied conversion |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (a debtor may forfeit conversion rights by bad-faith or fraudulent conduct)
- Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) (standard for dismissal of Chapter 11 case for cause in Fourth Circuit)
- In re Trepetin, 617 B.R. 841 (Bankr. D. Md. 2020) (permitted extension/relief for delayed Subchapter V election under certain circumstances)
- In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020) (declined to excuse untimely Subchapter V election where debtor created the delay)
- In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017) (trustee’s avoiding powers can affect the Chapter 11 best-interests-of-creditors analysis)