580 B.R. 291
Bankr. M.D. Ga.2018Background
- Debtor John M. C. Woodruff filed Chapter 7 on Jan. 23, 2017; Trustee Walter W. Kelley was appointed.
- After Trustee initially reported no distributable assets, Debtor disclosed an inheritance (Southern Company stock ~ $120,000 plus small personal items), prompting Trustee to investigate estate assets.
- Trustee sought control of probate distributions; adversary to compel distribution was dismissed on probate-exception grounds, but the probate personal representative was ordered to deliver property devised to the Debtor to the Trustee as determined by Probate Court.
- Debtor (pro se) moved to convert the Chapter 7 to Chapter 11 to act as debtor-in-possession and propose a liquidating plan to pay creditors; his proposed plan was vague and relied principally on liquidating the inherited stock.
- Trustee opposed conversion, citing Debtor’s threats, abusive discovery responses, failure to file tax returns, inability to insure the estate, lack of reliable income, and risk of diminution of the sole significant asset through Chapter 11 administrative costs.
- Court heard arguments, admitted only Trustee’s evidence (Debtor attended by phone), and denied conversion, concluding conversion would be futile and abusive and would create immediate grounds for dismissal or reconversion.
Issues
| Issue | Debtor's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Right to convert under 11 U.S.C. § 706(a) | §706(a) gives a Chapter 7 debtor the broad right to convert absent bad faith | Conversion here is abusive and would prejudice creditors; Marrama permits denying conversion when conversion would lead to dismissal/reconversion | Denied — §706(a) is not absolute; conversion may be denied where immediate grounds for dismissal would arise |
| Whether conversion would cause diminution/no likelihood of rehabilitation (§1112(b)(4)(A)) | Debtor can fund a plan (reduce expenses; use exempt assets) and liquidate stock to pay creditors | Debtor lacks stable income; administrative costs and U.S. Trustee fees would consume assets, diminishing estate; plan is liquidation not rehabilitation | Held: conversion would cause substantial diminution and there is no reasonable likelihood of rehabilitation; supports denial |
| Debtor misconduct / bad faith | Debtor did not conceal assets; asserts right to control estate to maximize value | Debtor made threatening, abusive communications, evaded discovery, and attempted to intimidate Trustee — conduct shows bad faith to gain control | Held: debtor’s abusive and evasive conduct supports denial as bad-faith factor under totality of circumstances |
| Compliance with statutory/administrative obligations (taxes, insurance) | Debtor argued he could meet requirements if converted | Debtor had not filed 2016 tax return and could not provide bonded/insured protections like a trustee; conversion would increase uninsured administrative risk | Held: failure to file tax returns and inability to insure the estate are additional grounds to deny conversion |
Key Cases Cited
- Marrama v. Citizens Bank, 549 U.S. 365 (2007) (court may deny conversion where conversion would create immediate grounds for dismissal or reconversion; §706(d) and §105(a) permit denying abusive conversions)
- Loop Corp. v. U.S. Tr., 379 F.3d 511 (8th Cir. 2004) (§1112(b)(4)(A) prevents debtor-in-possession from gambling on enterprise at creditors’ expense where assets are diminishing)
- In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir. 1984) (filing Chapter 11 without realistic possibility of effective reorganization may be bad faith and grounds to dismiss)
- In re Gaslight Club, Inc., 782 F.2d 767 (7th Cir. 1986) (§105(a) may justify replacing debtor management to prevent abuse and protect estate)
- In re Boughton, 243 B.R. 830 (Bankr. M.D. Fla. 2000) (debtor’s concealment of assets and refusal to comply with discovery constitute bad faith supporting dismissal)