In re Graham, Bankruptcy No. 81-04153.
| Decision Date | 25 June 1982 |
| Docket Number | Bankruptcy No. 81-04153. |
| Parties | In re Charles W. GRAHAM, aka C.W. Graham, aka Charles William Graham, aka C.W. Graham, M.D., fdba Charles W. Graham, M.D., Ltd., P.C., fdba Operated Farm, Debtor. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa |
A. Frank Baron, Sioux City, Iowa, for Ms. Smith.
Rodney P. Kubat, Des Moines, Iowa, for Dr. Graham.
Donald H. Molstad, Sioux City, Iowa, for trustee.
Edward F. Samore, Sioux City, Iowa, Trustee.
Findings of Fact, Conclusions of Law, and ORDER Denying Motion to Convert, with Memorandum
The motion of Patsy Jean Smith, formerly known as Patsy Jean Graham, to convert the Debtor's Chapter 7 proceedings to a case under Chapter 11 came before the Court for hearing. Testimony was received and argument was heard. The motion was taken under advisement in order to allow Ms. Smith and Dr. Graham an opportunity to submit briefs on the issue. The Court, being fully advised, now makes the following Findings of Fact, Conclusions of Law, and Order with Memorandum.
1. Charles W. Graham, debtor/respondent, is a fifty-nine year old radiologist. He works at three hospitals, earning approximately $200,500 per year. Because of the traveling involved and his age, Dr. Graham intends to cut down on the number of hospitals he serves in the near future.
2. On June 5, 1980, the Cherokee County District Court granted Dr. Graham and Mrs. Graham, creditor/movant, (herein referred to as Ms. Smith) a dissolution of marriage. In the dissolution, Ms. Smith received the couple's 360-acre farm. The Steele State Bank held two mortgages on this farm; Steele Farms, Inc., also held two mortgages on it; and the Doupe Estate held a contract on it. Ms. Smith assumed the obligation on the contract, and Dr. Graham assumed the obligations on the mortgages.
3. In the same dissolution decree, Dr. Graham received a 1980 Eldorado.
4. In October 1980, Dr. Graham purchased a $135,000 residence.
5. On April 24, 1981, Dr. Graham filed a Petition under Chapter 7 of the Bankruptcy Code. Dr. Graham listed the Internal Revenue Service as the holder of $124,884.46 in disputed priority claims. Dr. Graham listed the General Motors Acceptance Corporation (hereinafter referred to as GMAC) as the holder of a $10,889.21 secured claim; he listed the First Federal Savings & Loan Association of Ida Grove, Iowa, as the holder of a $81,513.00 secured claim. GMAC held a purchase-money security interest in Dr. Graham's 1980 Eldorado. First Federal Savings held the mortgage on his residence. After amending his Petition on May 14, 1981, Dr. Graham listed four relevant unsecured creditors: the Steele State Bank with an estimated $252,145.00 claim; Steele Farms, Inc., with an estimated $98,600.00 claim; the Doupe Estate with an estimated $182,000.00 claim; and Ms. Smith with an estimated $475,000.00 claim. Dr. Graham claimed that his nonexempt property was worth only $97,338.96.
6. Subsequently, Ms. Smith moved to convert Dr. Graham's case from a Chapter 7 proceeding to a Chapter 11 proceeding.
7. Dr. Graham opposes such conversion, not wishing to be compelled to submit to the terms of a Chapter 11 Reorganization Plan.
1. The decision whether to convert a case to Chapter 11 is left to the sound discretion of the Court, based on what will most inure to the benefit of all parties in interest.
2. The appropriateness of an 11 U.S.C. § 706(b) conversion depends upon the general concerns of Congress when it adopted the Bankruptcy Reform Act of 1978.
3. In adopting the Bankruptcy Reform Act of 1978, Congress did not intend that individual debtors be compelled to submit to the terms of a repayment plan. Such a forced submission to a repayment plan would be the effect — assuming confirmation of, and compliance with, a reorganization plan — of an 11 U.S.C. § 706(b) conversion from a Chapter 7 proceeding to a Chapter 11 proceeding.
ORDERIT IS THEREFORE ORDERED that the Motion of Patsy Jean Smith to Convert the Debtor's Bankruptcy proceedings, pursuant to 11 U.S.C. § 706(b), from a case under Chapter 7 of the Bankruptcy Code to a case under Chapter 11 of the Bankruptcy Code shall be, and the same is, denied and dismissed.
MEMORANDUMThe matter before the Court is the Motion of Ms. Smith to convert the debtor's bankruptcy proceedings from proceedings under Chapter 7 of the Bankruptcy Code to proceedings under Chapter 11 of the Bankruptcy Code. Ms. Smith's Motion is filed pursuant to 11 U.S.C. § 706(b). That section states:
On request of a party in interest and after notice and hearing, the court may convert a case under this chapter 7 to a case under chapter 11 of this title at any time.
The decision whether a Chapter 7 proceeding should be converted, pursuant to this section, to a Chapter 11 proceeding is in the discretion of the court. A court's discretion is to be governed by what "will most inure to the benefit of all parties in interest." H.R.Rep.No.595, 95th Cong., 1st Sess. 380 (1977); S.Rep.No.989, 95th Cong., 2d Sess. 94 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5880, 6336.
The best interests of the debtor's creditors, especially the interest of his non-priority, unsecured creditors, would be served by granting Ms. Smith's Motion.1 The debtor is a highly skilled professional who earns over $200,000 a year in gross income. He suffers no known physical or mental impairment, and, although he is certainly not a young man, he has several years of peak earning power left before retirement. The Debtor, however, discounts such consideration entirely. He argues that his debts to the Internal Revenue Service, his normal business expenses, and his ordinary living expenses are such that very little of his gross income would remain after the payment of those debts to fund a reorganization plan that would provide any type of meaningful dividend to non-priority unsecured creditors and that, consequently, a workable plan that would provide a significant repayment of creditors' claims could not be formulated.2 The question of the feasibility of any proposed reorganization plan, however, is better left to the confirmation process to decide. Furthermore, the Debtor's non-priority unsecured creditors, instead of contending themselves with a Chapter 7 liquidation where they stand to receive nothing in the way of a dividend, would still be better off in going through the confirmation procedure and attempting to get a plan of their own confirmed in the hopes of receiving some type of dividend on their claims.
The Debtor further argues that, even if a workable plan could be confirmed, he is considering cutting down the extent of his practice over the next several years, and, thus, there would be even less money to fund a plan. The short response to this contention is twofold. First, if the cutback of his workload is a genuine product of his increasing years, the Debtor's plan could be modified accordingly. See 11 U.S.C. § 1127(b). Second, if such a cutback is simply a product of a desire not to follow the dictates of the plan, the debtor's petition can be dismissed and the debtor consequently denied the opportunity to receive a discharge. See 11 U.S.C. § 1112(b). The debtor does not suggest that he has a constitutional right to a discharge. His rights are statutory. If he does not wish to comply with the terms of the Bankruptcy Code, he can be left to nonbankruptcy methods of dealing with his financial difficulties.
The best interest of the Debtor, however, would be served by denying Ms. Smith's Motion. By receiving a bankruptcy discharge immediately, Dr. Graham would be free from the burden of substantial debt and would be able to obtain a fresh start immediately. See H.R.Rep.No.595, 95th Cong., 1st Sess. 125 (1977). He does not want to spend the last years before his retirement working to pay back his pre-petition creditors, especially Ms. Smith, who is his ex-spouse. Rather, he prefers to be free from such pre-petition financial burdens, obligated only upon the unpaid balance of the claim of the IRS, see 11 U.S.C. § 523(a)(1), and that portion of his debt to Ms. Smith that is nondischargeable pursuant to 11 U.S.C. § 523(a)(5).
Not surprisingly, therefore, the best interests of the debtor's creditors and of the debtor conflict. In determining what inures most to the benefit of all parties, the Court is left to consider legislative intent on the question whether individual debtors should be forced into repayment plans against their will. This policy consideration dictates that the Court deny Ms. Smith's Motion.
An order converting Dr. Graham's bankruptcy proceedings from Chapter 7 to Chapter 11 would have the effect, assuming a reorganization plan were subsequently confirmed and complied with, of diverting some of the fruits of Dr. Graham's future labors from himself to his pre-petition creditors. In essence, an 11 U.S.C. § 706(b) conversion might amount to an order to Dr. Graham to work for his pre-petition creditors and would thus be like a mandatory Chapter 13 proceeding. On the subject of mandatory Chapter 13 proceedings, Congress has stated:
As under the Bankruptcy Act of 1898, Chapter 13 is completely voluntary. The Committee on the Judiciary firmly rejected the idea of a mandatory or involuntary Chapter XIII in the 90th Congress. The thirteenth amendment prohibits involuntary servitude. Though it has never been tested in the wage earner context, it has been suggested that a mandatory chapter 13, by forcing an individual to work for creditors, would violate this prohibition. On policy grounds, it would be unwise to allow creditors to force a debtor into a repayment plan. An unwilling debtor is less likely to retain his job or to cooperate in the repayment plan, and more often than not, the plan would be preordained to fail.
H.R.Rep.No.595, 95th Cong., 1st Sess. 120 (1977) U.S.Code Cong. & Admin.News 1978, p. 6080 (...
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