In Re Krishnaya
DECISION AND ORDER ON MOTION TO CONVERT CHAPTER 7 CASE TO CHAPTER IS
The Debtor has moved, pursuant to Section 706(a) of the Bankruptcy Code (the “Code”), to convert this chapter 7 case to a case under chapter 13 of the Code. Lak-ram Seebaran (“Seebaran”) — a creditor in the chapter 7 case, and the plaintiff in Seebaran v. Krishnaya, Case No. 01-2073, an adversary proceeding brought pursuant to Section 523(a) of the Code to determine the dischargeability of Seebaran’s claim in the chapter 7 case — opposes conversion. 1 Creditor Seebaran has suggested that a material reason — and perhaps the only reason — for the requested conversion is to evade, and/or moot, the now-pending adversary proceeding, and that confirmation of a chapter 13 plan is highly unlikely. The Debtor has not denied such motivation. She argues, however, that the right to convert from chapter 7 to 13 is absolute, and that while confirmation of a chapter 13 plan might be difficult, it is inappropriate to consider that issue now.
The motion presents issues of first impression in this District, though its underlying issues have been considered, in considerable part (albeit with divergent conclusions), elsewhere: (1) whether a debtor may convert his or her case from chapter 7 to 13 as a matter of absolute right and irrespective of motive or anything else, and (2) if there are any limits to the debtor’s right, whether either (a) a motivation to sidestep a pending dis-chargeability adversary proceeding or (b) substantial uncertainty of success in the proposed chapter 13 case provides a basis for disapproval of the proposed conversion.
For the reasons set forth below, the Court concludes that while there is a presumptive right to convert under section 706(a), that right is not absolute, and the matter remains within the discretion of the Court. The Court further concludes, however, that a motivation to sidestep dis-chargeability litigation is not, by itself, a basis for denial of the right to convert, nor is a probability of an eventual failure to confirm a plan once in chapter 13. In the absence, on the record here, of evidence of any other improper purpose or abuse, the Motion is accordingly granted.
Discussion
Section 706(a) of the Code provides:
The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
That provision is implemented procedurally through Fed. R. Bankr.P. 1017(f). The rule provides, in relevant part:
Conversion or dismissal under §§ 706(a), 1112(a), 1208(b), or 1307(b) shall be on motion filed and served as required by Rule 9013.
In that context, the Court considers the issues noted above in turn.
It is plain, from Rule 1017(f), that mere notice of conversion is insufficient, and that effecting conversion under section 706(a) requires a motion — suggesting, in turn, that the Court’s role in the motion determination process is more than a meaningless one. 2 However, Rule 1017(f) is still an exercise of the rulemaking power, and cannot deprive parties of statutory rights. See 28 U.S.C. § 2075. 3 The authorities are considerably less than uniform as to whether the right to convert to chapter 18 is wholly absolute by statute.
The legislative history with respect to section 706(a), upon which the Debtor understandably relies, does indeed support the Debtor’s position that the right to convert is absolute (at least where, as here, there has been no earlier conversion from chapter 11 or 18 to chapter 7). See H. Rept. No. 95-595, 95th Cong., 1st Sess., 380 (1977); S. Rept. No. 95-989, 95th Cong., 2nd Sess., 94 (1978). 4 However, a fair amount of the recent caselaw considering this issue, properly in this Court’s view, has focused on the actual text of section 706(a) — by itself and by comparison to other sections of the Code — and the courts that have done so have almost wholly uniformly come to a contrary result. 5 Other cases, though analyzing the Code’s statutory wording to a lesser degree, have come to a like conclusion. 6 There is other authority to the contrary. 7
very much at odds with the equitable considerations of eligibility, good faith and appropriateness which are inherent in a court’s review of the facts and circumstances in any request brought on by motion.
More importantly, however, she noted that the relevant statutory language has remained an important starting point for determining the scope of 706(a), id. at 80, and that “the language remains the key....” Id. at 79. In that connection, she noted that while section 706(a) states that a debtor “may” convert his case, it does not state that the court “shall” honor that request. Id. at 81-82.
Her decision was driven, in meaningful part, by the Second Circuit’s decision in
In re Barbieri,
She also agreed,
see
Much of the caselaw, as noted above, is consistent with the
Marcakis
analysis. In
Burma Jean Martin; supra,
the bankruptcy court (thereafter affirmed by both the district court and the Eighth Circuit) noted that “[w]hile the debtor asserted that she has an absolute right to convert to Chapter 13 under section 706(a), this is true only if she is otherwise eligible for Chapter 13.”
In
Virginia Martin, supra,
the Fifth Circuit characterized the Code as “unequivocal” in its statement of the right to convert,
The relevant caselaw, and the appropriate way for bankruptcy courts to consider motions of this character, was summarized in the very recent decision by Judge Carey of the Eastern District of Pennsylvania in Pakuris, supra. He there stated:
Although the courts are divided over whether § 706(a) gives a chapter 7 debt- or an absolute right to convert, most courts will not allow a contested conversion without some examination of the facts. Indeed, many of the courts holding that a debtor has a one-time absolute right to convert have either (i) recognized that conversion may not be proper in situations involving “extreme circumstances” (thereby requiring some analysis of facts) or (ii) engaged in some type of equitable analysis of the facts, either through a discussion of whether the case should be converted and then re-converted to chapter 7 or whether the debtor can propose or has proposed a confirmable plan. We hold that a review of the facts of the particular case is appropriate when considering an objection to a § 706(a) motion.
Some exercises of the Court’s power to consider motions to convert will hardly be surprising. Thus the Court plainly has the right, on consideration of the motion required under Rule 1017(f), to determine whether the debtor’s case has already been converted, under section 1112, 1208, or 1307, thereby disqualifying the debtor under section 706(a)’s express terms. Likewise, a court passing on a conversion motion has the right to determine whether
As noted above, the caselaw on this issue is not uniform. However, this Court is aware of no authority that has rejected or criticized the analysis set forth in Marcak-is and Starkey since those decisions laid out their reasoning, and their analysis will be followed here.
(2) Bases for Denial of Leave to Convert
Having concluded that a bankruptcy court has the power to deny conversion to chapter 13 in an appropriate case, the issue then before the Court is whether to exercise that power for either of the two grounds advanced by creditor Seebaran— the motivation to sidestep the pending dis-chargeability litigation (or, stating it more antiseptically, to discharge debts that would not be dischargeable under chapter 7), or by reason of a dim likelihood of confirming a plan in chapter 13. 11
While the caselaw cited above leads this Court to conclude that it has the power to deny conversion, that power, in the Court’s view, should be exercised sparingly. Harmonizing the language of the Code with the legislative history quoted above (and caselaw like Virginia Martin) requires that, while the Court should have the power to ensure qualification for chapter 13 and have the power to protect its jurisdiction from abuse, 12 it should regard the right to convert from chapter 7 to chapter 13 as presumptive, and should deny the right to convert only for lack of statutory qualification or extreme circumstances. 13
Measured against that standard, neither of the grounds advanced by creditor See-baran, at least under the facts presented here, presents the extreme circumstances this Court believes it would have to find in order to deny conversion. Helpful with respect to the first ground is
Cavaliere, supra.
In
Cavaliere,
as in this case, a creditor (there a bank, holding credit card debt) had brought an adversary proceeding against the debtor, asserting certain
Creditor Seebaran cites two cases in support of the objection to conversion, both of which follow the reasoning of cases like
Marcakis,
though in each of those cases the court ultimately concluded that conversion was appropriate under the facts.
See In re Kuntz, supra; In re Dews, supra.
In
Kuntz,
although the court recognized an exception to the debt- or’s absolute right to conversion in cases of “extreme circumstances” constituting bad faith, the court ultimately found that the circumstances did not rise to the level of egregiousness sufficient to deny the debt- or’s request.
Creditor Seebaran’s second point is that the Debtor’s chances for success in chapter 13 are slight, and that this Court, in the interests of economy, should deny leave to convert now to avoid unnecessary expense. This Court recognizes that Seebaran’s assertions with respect to the Debtor’s po
While this decision will permit the Debt- or to proceed in chapter 13, any and all decisions with respect to what is appropriate after that will be in the discretion of the Chapter 13 Judge. This opinion should not be deemed to be tying the hands of the Chapter 13 Judge in any such further proceedings — including, without limitation, any decisions as to whether confirmation is appropriate under Section 1325. This decision is without prejudice to the rights of creditor Seebaran in that regard.
SO ORDERED.
Notes
. There is also another pending adversary proceeding, Sukhram v. Krishnaya, Case No. 01-8017, brought pursuant to Section 523(a), to determine dischargeability of a debt. The plaintiff in that action received notice of the instant motion to convert and has not taken a position with respect to the motion.
. The Court feels that way even though Bankruptcy Rule 1017(f) provides that such a motion does not give rise to a contested matter governed by Bankruptcy Rule 9014. ("Rule 9014 governs a proceeding to dismiss or suspend a case, or to convert a case to another chapter, except under §§ 706(a), 1112(a), 1208(a) or (b), or 1307(a) or (b)'').
. That statute provides, in relevant part, with respect to the Supreme Court’s power to enact rules for practice and procedure in bankruptcy cases, that "[s]uch rules shall not abridge, enlarge, or modify any substantive right.”
See also
In re Spencer,
. See S.Rep. No. 989, 95th Cong., 2d Sess. 94, U.S.Code Cong. & Admin. News 1978, 5787 at 5880, 6336 (1977):
Subsection (a) of this section gives the debt- or the one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case
has already once been converted from chapter 11 or 13 to chapter 7, then the debtor does not have that right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable.
(Emphasis added).
.
See In re Marcakis,
.
See In re Pakuris,
. Other courts, whose statutory analysis is not, in this Court's view, as thorough and persuasive as the analysis in
Marcakis
and
Starkey,
and/or whose caselaw analysis is not as comprehensive as that of
Pakuris
(and which are outside the Second Circuit, where, as noted below, a contrary conclusion is required) have held that the court does not have the discretion to block the conversion.
See In re Young,
Another case, which does not itself decide whether the right to convert from chapter 7 to chapter 13 is absolute, notes that "[t]he case authority is divided on this issue.”
In re Little,
.
Marcakis
involved a conversion request made after the debtor had received his discharge under chapter 7. The court’s denial of conversion rested to a considerable extent on the ground that a discharge order had already-been entered in the chapter 7 case.
See also In re Schwartz,
. Significantly, perhaps, the Virginia Martin court acknowledged that there were cases that block the conversion, "but only in extreme circumstances,” id. at 859 n. 2, and in another place stated that the courts refuse to interfere with the right to convert "in the absence of extreme circumstances,” id. at 859, which were not alleged to be present there. Id. It is thus possible that the Fifth Circuit might be willing to find that extreme circumstances provide a basis for an exception; in any event, this Court so determines.
. That section provides:
Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.
. In the future, the Court would encourage litigants to address all of the factors considered by the court in Pakuris, which, while informed in part by Third Circuit law, nevertheless provides, in any judicial circuit, a useful framework for consideration of motions of this character. In our case, other factors considered in Pakuris do not appear to be present to any material degree, and in any event have not been argued to be applicable here.
. In this connection, the Court agrees that "all courts possess inherent power to protect their jurisdiction and process from abuse,”
In re Spencer, supra,
. One such extreme circumstance, as many courts have held, is that the debtor already has obtained a discharge in chapter 7. That ground has not been asserted here.
. Cavaliere involved an objection to confirmation of a chapter 13 plan — where good faith regarding the plan proposal is a requirement under Section 1325(a)(3); here, of course, we are faced with the motion to convert (which apparently was not contested in Cavaliere), which does not necessarily raise the same issues.
. It distinguished cases involving the filing of a chapter 13 case after the debtor had already secured a discharge under chapter 7. “Such instances are distinguishable, in that they can potentially represent an effort to derive conjunctively the benefits of both Chapter 13 and Chapter 7, and thereby to avoid the full impact of the burdens attributable to each of these respective chapters.” Id. at 249.
. The Court so holds notwithstanding language in Dews that provides Creditor Seebar-an with support in this regard. Dews states, among other things, that before permitting a conversion under section 706(a):
[C]ourts should make a preliminary inquiry as to the quality of any proposed chapter 13 plan, and whether it would meet confirmation requirements. It is this Court's view that it is a waste of the parties' and court's resources to simply convert cases to chapter 13 where there is a high likelihood that the plans cannot be confirmed.