Kimrow, Inc. v. Cohilas (In re Kimrow, Inc.)
534 B.R. 219
Bankr. M.D. Ga.2015Background
- Debtor filed Chapter 11 on September 23, 2014; this Court initially granted dismissal but later vacated that dismissal based on bankruptcy preemption of state sales-tax requirements.
- Debtor moved to convert the case from Chapter 11 to Chapter 7; Respondent (receiver Christopher Cohilas) objected, alleging extensive pre-conversion misconduct and bad faith.
- The parties disputed whether the Debtor has an absolute statutory right to convert under 11 U.S.C. § 1112(a) or whether a court may deny conversion for "extreme circumstances"/bad faith (drawing on Marrama).
- The parties agree the only potentially distributable asset is a 42 U.S.C. § 1983 claim against the Respondent; Respondent argues the claim has no value and that conversion would be improper.
- The Court assumed Respondent’s factual allegations true for purposes of deciding the legal issue and considered whether conversion would prejudice creditors or constitute abuse of process.
- The Court found (1) § 1112(a) contains no "extreme circumstances" exception on its face and (2) even if such an equitable exception exists, the Respondent’s alleged misconduct did not meet that standard and conversion would better serve creditors because a Chapter 7 trustee is the practical means to realize the § 1983 claim.
Issues
| Issue | Debtor's Argument | Respondent's Argument | Held |
|---|---|---|---|
| Whether § 1112(a) gives debtor an absolute right to convert Chapter 11 → 7 | § 1112(a) grants an unequivocal right to convert unless statutory exceptions apply; "may" addresses debtor, not court discretion | "May" permits court discretion; courts can deny conversion in extreme/bad-faith cases | Court: § 1112(a) gives a statutory right; "may" does not create a judicial exception |
| Whether § 1112(f)/§ 109 permit denying conversion when pre-conversion bad faith would lead to dismissal in Chapter 7 | Eligibility under § 1112(f) and § 109 do not import a bad-faith exception; Congress listed exclusive exceptions | Marrama and similar authority allow courts (via § 105 or inherent powers) to deny conversion on bad-faith grounds | Court: § 1112(f) does not plainly create an "extreme circumstances" exception; statutory text controls |
| Whether Marrama requires denying conversion here | Marrama concerns § 706(d)/Chapter 13 conversion and supports denial where conversion would facilitate fraud/prejudice creditors; Debtor argues Marrama doesn’t apply or is distinguishable | Respondent: Marrama authorizes denying conversion here under court’s equitable powers to prevent abuse | Court: Marrama does not automatically apply one-to-one; even if it did, Respondent’s facts do not meet Marrama’s extreme-prejudice standard |
| Whether Respondent's factual allegations (mismanagement, perjury, obstruction) justify denying conversion | Debtor: even if true, allegations do not prejudice creditors or prevent orderly Chapter 7 liquidation; conversion is the only practical way to realize the § 1983 claim | Respondent: alleged misconduct and bad faith justify denial of conversion as an abuse of process | Court: Allegations, taken as true, still would not prejudice creditors or make Chapter 7 administration abusive; overrules objection |
Key Cases Cited
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (Supreme Court permitting denial of conversion where conversion would enable fraud/abuse by invoking § 105 and eligibility analysis)
- Lamie v. United States Trustee, 540 U.S. 526 (2004) (plain statutory text governs when statute’s meaning is unambiguous)
- In re Adler, 329 B.R. 406 (Bankr. S.D.N.Y. 2005) (denying conversion where debtor liquidated assets in Chapter 11 and conversion would only delay creditor recovery)
- In re Piazza, 719 F.3d 1253 (11th Cir. 2013) (discussing bad-faith dismissal standards and Chapter 13 good-faith duties)