In re Brown

• Decision Date: 04 June 2003
• Docket Number: No. GL 02-11640.,GL 02-11640.
• Parties: In re Lupe R. BROWN, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

293 B.R. 865

In re Lupe R. BROWN, Debtor.

No. GL 02-11640.

United States Bankruptcy Court, W.D. Michigan.

June 4, 2003.

Michael W. Puerner, Esq., Lansing, Michigan, Chapter 7 Trustee.

Lupe R. Brown, Oak Ridge, TN, in pro per.

OPINION REGARDING DEBTOR'S MOTION TO CONVERT CHAPTER 7 CASE TO CHAPTER 13

JAMES D. GREGG, Chief Judge.

I. ISSUE

Does section 706(a) of the Bankruptcy Code give a chapter 7 debtor an absolute right to convert his or her case to chapter 13?

II. JURISDICTION

The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) and L.R. 83.2(a) (W.D.Mich.). This matter is a core proceeding because it concerns the administration of the bankruptcy estate. 28 U.S.C. § 157(b)(2)(A). This opinion constitutes the court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

III. FACTS AND PROCEDURAL BACKGROUND

On October 17, 2002, the Debtor, Lupe R. Brown (hereinafter "Debtor"), filed his petition for relief under chapter 7 of the Bankruptcy Code.¹ Dkt. No. 1. Michael W. Puerner was appointed as chapter 7 trustee (hereinafter "Trustee").

On November 8, 2002, the Debtor filed his schedules and Statement of Financial Affairs with this court. Dkt. No. 13. Schedule A listed the Debtor's residence, located at 2161 Seminole Drive, Okemos, Michigan (hereinafter "the Okemos property"), as the Debtor's primary asset. On his schedules, the Debtor approximated the value of the Okemos property to be $95,400.² On Schedule I, the Debtor reported having no monthly income.³

The Debtor's first Section 341 meeting was scheduled for November 22, 2002. Dkt. No. 6. The Debtor failed to appear on that date. Dkt. No. 39. When the meeting was subsequently rescheduled for December 20, 2002, the Debtor again failed to appear. Dkt. Nos. 18 & 40.

On January 24, 2003, the United States Trustee filed his Motion for an Ex Parte Order Directing the Debtor to Attend Rescheduled 341 Meeting of Creditors, Show Cause Hearing, and Other Relief. Dkt. No. 46. In his motion, the U.S. Trustee requested that this court enter an order directing the Debtor to appear at the rescheduled 341 meeting on February 21, 2003, and requiring the debtor to appear before the court to show cause why he failed to attend the prior 341 meetings. The court entered the requested order on January 28, 2003.⁴ Dkt. No. 48. On February 21, 2003, the Debtor appeared at the scheduled 341 meeting, but refused to testify without the assistance of counsel.⁵

During the same time period, on January 27, 2003, the Trustee filed a Motion to Compel Debtor to Grant Access to Real Estate Located at 2161 Seminole Drive, Okemos, Michigan. Dkt. No. 47. The motion alleged that, despite several attempts by the Trustee's office and the court-appointed realtor,⁶ the Debtor had refused to grant access to the Okemos property. Consequently, this court entered an order compelling the Debtor to grant the Trustee and his realtor access to the Okemos property on February 20, 2003. Dkt. No. 57.

On March 14, 2003, the court entered an Order to Show Cause Why Case Should Not be Dismissed for Failure to Pay Filing Fee. Dkt. No. 61. The Debtor paid the filing fee prior to the April 29, 2003 show cause hearing, and the show cause order was eventually withdrawn by the court. Dkt. No. 76.

On March 18, 2003, this court held a hearing to consider the U.S. Trustee's request for a possible order to show cause regarding the Debtor's failure to attend the scheduled 341 meetings. The Debtor appeared at the hearing and accepted the court's offer for additional time to comply with the court's order to grant the Trustee access to the Okemos property, fulfill his obligation to appear and testify at a 341 meeting, and to hire an attorney. Transcript of March 18, 2003 Hearing at 7 (hereinafter "Tr. at ____"). The court explained the Debtor's obligation to attend the 341 meeting and cooperate with the Trustee in answering questions. Tr. at 13. The court also reiterated the Debtor's obligation to allow the Trustee access to the Okemos property. Tr. at 11. The Debtor indicated that he understood these requirements. Tr. at 12-13. The court warned that failure to comply with these duties could result in the Debtor being held in contempt or in the loss of the Debtor's chapter 7 discharge. Tr. at 13 & 15. As contemplated by the parties, on March 20, 2003, this court entered an order adjourning the show cause hearing and requiring the Debtor to attend and testify at the 341 meeting on March 21, 2003 and to grant the Trustee access to the Okemos property. Dkt. No. 62.

The Debtor appeared and testified at the 341 meeting on March 21, 2003, but apparently did not heed the court's order to grant the Trustee access to the Okemos property. Instead, on March 26, 2003, the Debtor filed a Motion to Prevent the Sale of Real Estate. Dkt. No. 65. The court denied the Debtor's motion in an order entered on April 2, 2003. Dkt. No. 68.

On April 7, 2003, the Trustee filed his Motion to Approve Sale of Real Estate Located at 2161 Seminole Drive, Okemos, Michigan (hereinafter "the Trustee's Sale Motion"). Dkt. No. 69. According to the Trustee's Sale Motion, the Trustee had received an offer to purchase the Okemos property for $136,500. The offer was contingent upon the purchaser being allowed to inspect the Okemos property prior to closing.

Despite repeated court orders and warnings, the Debtor allegedly continued to refuse to grant the Trustee access to the Okemos property. The Debtor's actions eventually prompted the Trustee to file a Motion for Contempt and Sanctions against the Debtor (hereinafter "the Trustee's Contempt Motion") on April 28, 2003. Dkt. No. 73. The Trustee's Contempt Motion details five occasions between March 19 and April 24, 2003, on which the Trustee's realtor had scheduled appointments⁷ to view the Okemos property. The Debtor provided the Trustee's realtor access to the Okemos property on only one of these occasions.⁸

At a hearing held on May 8, 2003, the court granted the Trustee's Sale Motion. Due to the Debtor's failure to permit the purchaser's inspection of the Okemos property, the ultimate purchase price was reduced to $131,500. The court entered an order approving the sale on May 27, 2003. Dkt. No. 82.

On May 12, 2003, the Debtor filed his request to convert his chapter 7 case to chapter 13. Dkt. No. 77. The Trustee filed a response to the Debtor's motion to convert on May 22, 2003. Dkt. No. 81. The Trustee's response alleged that the Debtor was ineligible for chapter 13 relief due to his lack of "regular income" and that the Debtor's request had been filed in bad faith. A hearing on the Debtor's motion to convert was held before this court on May 28, 2003. Although both the Debtor and the Trustee presented comprehensive argument at the hearing, neither party offered formal testimony. The foregoing factual findings have thus been gleaned from a thorough review of the court's file.⁹ At the conclusion of the hearing, the court took the matter under advisement pending this written opinion.

IV. DISCUSSION

Section 706(a) of the Bankruptcy Code states:

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.

11 U.S.C. § 706(a). Courts interpreting this statutory subsection have developed and implemented two distinct approaches. Some courts hold that a debtor's conversion rights under § 706(a) are "absolute" so long as the debtor's case has not previously been converted.¹⁰ See Matter of Martin, 87 B.R. 20 (E.D.La.1988), aff'd 880 F.2d 857 (5th Cir.1989) (characterizing the debtor's right to convert as "unfettered" and explaining that "[t]he Court has no discretion to deny the debtor's right to conversion"); In re Gibbons, 280 B.R. 833 (Bankr.N.D.Ohio 2002) (stating that the debtor's right to convert under § 706(a) is "automatic"); In re Widdicombe, 269 B.R. 803 (Bankr.W.D.Ark.2001). In reaching their conclusion, these courts rely heavily on what they deem the "plain language" of the statute, particularly the words "may" and "at any time." They also frequently cite the statute's legislative history in support of their conclusion.¹¹

Other courts have refused to apply § 706(a) in such a restrictive and rigid manner. See, e.g., In re Ponzini, 277 B.R. 399 (Bankr.E.D.Ark.2002); In re Pakuris, 262 B.R. 330 (Bankr.E.D.Pa.2001); In re Thornton, 203 B.R. 648 (Bankr.S.D.Ohio 1996). These courts acknowledge that a debtor's request to convert his or her chapter 7 case to a case under chapter 11 or 13 should be granted in all but the most egregious circumstances. See In re Ponzini, 277 B.R. at 406 ("`[t]he Court's power to deny conversion in any case should be exercised sparingly'") (quoting In re Young, 269 B.R. 816, 828-29 (Bankr.W.D.Mo.2001)). Still, these courts have found that the bankruptcy court can (and should) review the facts of a particular case when considering whether the debtor's motion to convert under § 706(a) should be granted. See In re Pakuris, 262 B.R. at 335 ("We hold that a review of the facts of the particular case is appropriate when considering an objection to a § 706(a) motion."). If, upon its review of the facts, the bankruptcy court finds that the debtor's request for conversion was made in bad faith or represents an attempt to abuse the bankruptcy process, the court may deny the requested conversion. See Kuntz v. Shambam (In re Kuntz), 233 B.R. 580, 585 (1st Cir. BAP 1999) (a chapter 7 debtor's right to convert may be denied in "`extreme circumstances' constituting bad faith"); In re Thornton, 203 B.R. at 652 ("[T]his court agrees with the courts which have held that a debtor may be...