In re Goines

• Citation: 397 B.R. 26
• Decision Date: 13 November 2007
• Docket Number: No. 07-50812.,07-50812.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re Valarie Mae GOINES, Debtor.

397 B.R. 26

In re Valarie Mae GOINES, Debtor.

No. 07-50812.

United States Bankruptcy Court, M.D. North Carolina, Winston-Salem.

November 13, 2007.

COPYRIGHT MATERIAL OMITTED

A. Carl Penney, Winston-Salem, NC, for Debtor.

Edwin H. Ferguson, Jr., Concord, NC, Trustee.

MEMORANDUM OPINION DENYING MOTION TO CONVERT CASE FROM CHAPTER 7 TO CHAPTER 13

THOMAS W. WALDREP JR., Bankruptcy Judge.

This matter came before the Court for hearing on October 17, 2007, after sufficient and proper notice, on the Motion to Convert Chapter 7 Case to Chapter 13 (the "Conversion Motion"), filed by the above-referenced debtor (the "Debtor") on September 24, 2007. At the hearing, Edwin H. Ferguson appeared in his capacity as Chapter 7 Trustee (the "Trustee"), Michael D. West appeared in his capacity as the Bankruptcy Administrator, and A. Carl Penney appeared on behalf of the Debtor. Based upon a review of the Conversion Motion, the evidence and arguments presented at the hearing, and a review of the entire official record, the Conversion Motion will be denied.

I. JURISDICTION

The Court has jurisdiction over this subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b).

II. FACTS

On May 29, 2007, the Debtor filed for Chapter 7 protection. Jeffrey P. Farran served as counsel for the Debtor.¹ The Debtor's original Schedules I and J showed that she had monthly net income of $3,321.00 and monthly expenses of $3,204.00, leaving net income of only $117.00. Schedule A described the Debtor's interest in real property located at 644 Nottinghill Drive, Winston-Salem, North Carolina (the "Property")² as a "tenant in common with 2 brothers (1/3 interest)." On June 22, 2007, the Debtor's Section 341 meeting was held, and the Debtor testified that she owned the Property jointly with her brothers for several years. The Debtor was also asked if she had transferred any property within the previous two years, and she replied in the negative. The Section 341 meeting was continued to July 6, 2007.

Prior to the continued Section 341 meeting, the Debtor produced a copy of a deed concerning the Property, which disclosed that the Property had been transferred on April 5, 2007, from the Debtor's sole ownership to joint ownership with her two brothers. At the continued Section 341 meeting on July 6, 2007, the Debtor admitted that she transferred the Property to herself and her two brothers just 54 days before she filed her Chapter 7 petition.

Based on these facts, on July 9, 2007, the Trustee filed an adversary proceeding (AP No. 07-06035) objecting to the discharge of the Debtor pursuant to Section 727(a) of the Bankruptcy Code (the "Discharge Adversary Proceeding"). Nine days later, on July 18, 2007, the Trustee filed another adversary proceeding (AP No. 07-06038), seeking recovery of the Property as a fraudulent conveyance pursuant to Section 548 of the Bankruptcy Code (the "Fraudulent Conveyance Adversary Proceeding").

The Debtor did not respond to the complaint in the Discharge Adversary Proceeding, and on August 22, 2007, the Trustee filed a motion for entry of default. The next day, an entry of default was entered. On September 17, 2007, the Trustee filed a motion for default judgment.

The Debtor did not respond to the complaint in the Fraudulent Conveyance Adversary Proceeding, and on August 23, 2007, the Trustee filed a motion for entry of default. The next day, an entry of default was entered. On September 17, 2007, the Trustee filed a motion for default judgment. On September 18, 2007, the Debtor filed an answer to the complaint.

On September 24, 2007, the Debtor filed the Conversion Motion and certain amendments to schedules I and J. The amended schedules show that the Debtor had an increase in net income of $964.00 per month. On October 9, 2007, the Trustee objected to the Conversion Motion.

III. DISCUSSION

A. The Statute

The Debtor in this case would like to convert her Chapter 7 case to a case under Chapter 13 pursuant to Section 706 of the Bankruptcy Code. The pertinent portions of Section 706 provide:

(a) 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.

(d) 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.

11 U.S.C. § 706.

The statutory language "at any time" appears to confer an absolute right to convert so long as the case was not previously converted to a Chapter 11, 12, or 13 case. The Debtor's case has not previously been converted. Prior to the Supreme Court's 2007 ruling in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, ___, 127 S.Ct. 1105, 1110, 166 L.Ed.2d 956 (2007), several courts of appeals were split as to whether the right to convert was absolute for all debtors. Some circuits, including the Fourth Circuit, held that only the most egregious circumstances could justify denial of what is otherwise a clear statutory right. In re Copper, 426 F.3d 810, 814 (6th Cir.2005)(disallowing Chapter 7 debtor conversion due to bad faith); Finney v. Smith (In re Finney), 992 F.2d 43, 44-45 (4th Cir.1993)("[C]ongress intended § 706(a) to confer `the one-time absolute right' to convert from liquidation to reorganization, because `the debtor should always be given the opportunity to repay his debts.'"); Kuntz v. Shambam (In re Kuntz), 233 B.R. 580, 585 (1st Cir. BAP 1999) (debtor's one-time right to conversion may be denied in "extreme circumstances" constituting bad faith). Other circuits allowed conversion in spite of the debtor's bad faith conduct. In the Matter of Martin, 880 F.2d 857, 859 (5th Cir.1989)(conversion allowed after debtor received Chapter 7 discharge and the debtor engaged in pre-petition bad-faith conduct); In re Croston, 313 B.R. 447, 451 (9th Cir. BAP 2004)(debtor may convert if the statutory prerequisites are met, regardless of a debtor's bad faith); Miller v. U.S. Trustee (In re Miller), 303 B.R. 471, 473 (10th Cir.BAP2003) (debtor had absolute right to convert even though there was substantial evidence of abuse of the system); In re Street, 55 B.R. 763, 765 (9th Cir.BAP1985)(conversion must be allowed if not previously converted, even if debtor received judgment of nondischargeability in Chapter 7 case).

In 2007, the Supreme Court, in a 5 to 4 decision, abrogated the Martin, Croston, and Miller decisions by holding that a Chapter 7 debtor forfeited her right to convert to Chapter 13 by engaging in pre-petition bad faith conduct. Marrama, 127 S.Ct. at 1110. The bad faith conduct by the debtor established "cause" that would have warranted dismissal or reconversion of her Chapter 13 case, rendering her unqualified to be a debtor under Chapter 13. Id. Such a result is consistent with the Supreme Court's view that the purpose of bankruptcy law is to give "the honest but unfortunate debtor ... a new opportunity in life and a clear field for future effort." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); see Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

B. The Determination of Bad Faith

Marrama does not define "bad-faith conduct" but merely notes that the conduct of the debtor must be "atypical" and limited to "extraordinary cases."³ So how should a court determine bad faith in this context? There are two standards from which to choose: a plain meaning approach or an absence of good faith approach. Under the plain meaning approach, the common meaning of the term "bad faith" is used. See In re Computer Dynamics, Inc., 252 B.R. 50 (Bankr. E.D.Va.1997)("bad faith" under F.R.B.P. 9011 has a plain meaning). The term "bad faith" is defined as "dishonesty of belief or purpose." Black's Law Dictionary 145 (8th ed.2004).⁴ Therefore a debtor who is dishonest in belief or purpose loses her absolute right to convert from a Chapter 7 case to a Chapter 13 case.⁵

Alternatively, a court could use a different standard, that of an absence of good faith. Many courts, pre-Marrama, wrestled with what constituted actions sufficient to surrender the right to convert. Post-Marrama, the Bankruptcy Court for the Eastern District of Pennsylvania used an absence of good faith approach by applying a "totality of circumstances" test that courts in the Third Circuit created and applied pre-Marrama to determine whether a motion to convert has been filed in good faith. In re Piccoli, No. 06-2142, 2007 WL 2822001 at *3-4 (E.D.Pa. Sept. 27, 2007)(2007 WL 2822001)(citing In re Pakuris, 262 B.R. 330, 335-36 (Bankr. E.D.Pa.2001)); see also In re Murray, 377 B.R. 464, 467 (Bankr.D.Del.2007). In evaluating the totality of the circumstances, the Piccoli court considered whether (1) the motion was filed in good faith, (2) the Chapter 13 plan was confirmable, (3) there was unfair prejudice to creditors (4) conversion was efficient in administration, and (5) conversion would further an abuse of the bankruptcy process. Id. at *4.

This Court concludes that the plain meaning approach better follows the Marrama decision. The plain meaning approach is more suited to protecting the rights and interests of the "honest debtor." The absence of good faith approach makes a determination based in part on feasability, efficiency, and the best interests of creditors.⁶ These determinations are not at the heart of the doctrine. Moreover, the plain meaning approach protects the honest debtor by requiring a showing of dishonesty by the objecting party, rather than a showing of honesty by the debtor.

C. The Burden of...