625 B.R. 83
10th Cir. BAP2021Background
- Debtor Victor P. Kearney received large distributions from trusts (≈$16M total) and sued the trustees (the Abruzzos) in state court; the state court found credibility problems and awarded damages against him.
- Kearney filed a voluntary Chapter 11 petition on September 1, 2017; an Unsecured Creditors Committee (UCC) proposed a plan that was confirmed on February 28, 2019, but the plan’s "Effective Date" remained delayed pending implementation steps and appeals.
- While the Chapter 11 case remained pending, Kearney was indicted (Sept. 2019) on tax-related criminal charges; he sought authorization to hire criminal counsel with estate funds, which the Bankruptcy Court denied.
- In February 2020 Kearney (already privately represented) moved to convert his Chapter 11 case to Chapter 7, claiming he needed non-estate funds to pay criminal counsel and asserting an "absolute right" to convert under 11 U.S.C. § 1112(a).
- Creditors and the UCC opposed conversion and moved for immediate reconversion if conversion were granted; the Bankruptcy Court denied conversion (June 18, 2020), finding Kearney acted in bad faith and that the case would be immediately reconverted under 11 U.S.C. § 706(b), making him ineligible under § 1112(f).
- On appeal the Bankruptcy Appellate Panel affirmed: § 1112(a) is not absolute; § 1112(f) requires courts to assess whether the debtor could be a debtor under the target chapter, and Marrama/Law guide denial where immediate reconversion or dismissal would follow.
Issues
| Issue | Kearney's Argument | Creditors/UCC Argument | Held |
|---|---|---|---|
| Whether §1112(a) gives an absolute right to convert Chapter 11 to Chapter 7 | §1112(a) grants an absolute right to convert a voluntarily commenced Chapter 11 case where debtor remains in possession | §1112(f) and other Code provisions limit conversion; right is not absolute | No absolute right; §1112(f) limits conversion and court may deny when debtor cannot be a debtor under target chapter |
| Whether a bankruptcy court may deny conversion based on debtor’s bad faith despite no explicit bad‑faith exception in §1112(a) (role of Law v. Siegel) | Law v. Siegel prevents courts from using equitable powers to override unambiguous Code text; absent explicit statutory bad‑faith bar, denial is improper | Marrama and §1112(f) allow denying conversion if target‑chapter standards (including dismissal/reconversion for cause) would immediately apply | Law does not bar application of §1112(f); courts must rely on express Code provisions (and may use procedural shortcuts when authorized by the Code) |
| Whether the court properly predicted immediate reconversion under §706(b) such that Kearney could not "be a debtor" under Chapter 7 | Conversion should be granted; any reconversion is speculative and conversion is debtor’s right | Bankruptcy court may exercise discretion under §706(b) to reconvert if inures to benefit of parties; if reconversion is inevitable, conversion is futile | Bankruptcy Court did not abuse discretion; it reasonably concluded reconversion under §706(b) would follow and denied conversion under §1112(f) |
| Whether a confirmed creditor plan bars post‑confirmation conversion | Kearney argued conversion should be allowed even after confirmation | Creditors argued confirmed creditor plan undermines conversion because it would frustrate creditors’ bargained‑for rights | A confirmed creditor plan is a significant factor against conversion; it can support denial though it is not an absolute bar |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (right to convert under §706(a) is conditioned by §706(d): debtor must be eligible under the target chapter; courts may deny conversion when immediate dismissal/reconversion would follow)
- Law v. Siegel, 571 U.S. 415 (2014) (bankruptcy courts may not use equitable powers to contravene explicit Code provisions; Marrama is limited to situations where the Code itself authorizes the end result)
- Matter of Texas Extrusion Corp., 844 F.2d 1142 (5th Cir. 1988) (reconversion decisions under §706(b) are within the bankruptcy court's discretion and should further the benefit of all parties in interest)
- In re Pero Brothers Farms, Inc., 91 B.R. 1000 (Bankr. S.D. Fla. 1988) (post‑confirmation conversion to Chapter 7 may be denied where conversion would deprive creditors of rights provided by a confirmed plan)
- Church of Scientology of California v. United States, 506 U.S. 9 (1992) (doctrine on constitutional mootness where events during appeal make effective relief impossible)