489 B.R. 570
8th Cir. BAP2013Background
- Debtor James C. Schlehuber and his wife filed a joint Chapter 7 petition in Jan 2012 for debts largely business-related.
- Schedules initially showed substantial annual income and a large monthly surplus.
- unsecured creditor Fremont National Bank moved to convert under §706(b) to Chapter 11.
- After the motion, the Debtor and wife amended schedules, separating households and reducing reported income, claiming no monthly disposable income.
- A hearing in Oct 2012 featured arguments that conversion would promote rehabilitation and that the Debtor could fund a Chapter 11 plan; the Debtor contested this, citing income variability and lack of assets.
- The bankruptcy court granted conversion to Chapter 11, and this appeal challenges that discretionary decision under §706(b).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court abused its discretion in converting under §706(b) without debtor consent | Schlehuber contends conversion was improper given his interest and lack of disposable income | Bank argues §706(b) grants conversion discretion to further Chapter 11 goals based on ability to pay | Affirmed the conversion as within the court's discretion |
| Whether ability to pay was a proper central factor under §706(b) given non-consumer debt | Schlehuber argues ability to pay should not drive conversion for a primarily non-consumer debtor | Bank relies on ability to pay as a key consideration for Chapter 11 feasibility | Court properly considered ability to pay as a core factor and affirmed use of §706(b) conversion |
Key Cases Cited
- Willis v. Rice (In re Willis), 345 B.R. 647 (8th Cir. BAP 2006) (establishes abuse-of-discretion review under §706(b))
- In re Gordon, 465 B.R. 683 (Bankr.N.D.Ga.2012) (recognizes flexible, purpose-driven factors for §706(b) conversion)
- In re Lobera, 454 B.R. 824 (Bankr.D.N.M.2011) (illustrates consideration of broader Bankruptcy Code goals in §706(b))
- Ryan, 267 B.R. 635 (Bankr.N.D.Iowa 2001) (discusses limits of §706(b) and standing; distinguished here)
- Toibb v. Radloff, 501 U.S. 157 (1991) (no ongoing business requirement for Chapter 11 reorganization)
- Texas Extrusion Corp. v. Lockheed Corp., 844 F.2d 1142 (5th Cir. 1988) (upholds conversion where preservation of reorganization is goal)