In re Keffer

• Decision Date: 16 April 2021
• Docket Number: CASE NO. 2:20-bk-20334
• Citation: 628 B.R. 897
• Court: U.S. Bankruptcy Court — Southern District of West Virginia
• Parties: IN RE: Scott Allen KEFFER, Debtor.

628 B.R. 897

IN RE: Scott Allen KEFFER, Debtor.

CASE NO. 2:20-bk-20334

United States Bankruptcy Court, S.D. West Virginia, In Charleston.

Signed April 16, 2021

Paul W. Roop, II, Beckley, WV, for Debtor.

MEMORANDUM OPINION AND ORDER

B. McKay Mignault, Chief Bankruptcy Judge

Pending are two motions filed by the Debtor: (1) the Motion to Convert Case From Chapter 13 Case to Chapter 11 SubChapter V (the "Motion to Convert") [dckt. 59]; and (2) the Motion to Extend Deadlines for Chapter 11 SubChapter V Filings Upon Conversion (the "Motion to Extend", and, together with the Motion to Convert, the "Motions") [dckt. 64]. The United States Trustee ("UST") filed a Limited Objection to the Motion to Convert (the "Limited Objection") [dckt. 61].

The Court held a hearing on the Motions on March 11, 2021 (the "Motions Hearing"). After hearing arguments from the parties, the Court continued the hearing for thirty days and stated that it anticipated issuing a ruling either in writing prior to the continued hearing or, if it required further briefing, would issue a briefing schedule.

The Court determined that no further briefing was required, and, thus, the matter is ripe for adjudication. This matter is a statutorily core proceeding under 28 U.S.C. §§ 157(b)(1) and (b)(2). The Court has constitutional authority to enter final orders in this matter.

I.

A. Factual and Procedural History

Mr. Keffer filed his Chapter 13 Petition on September 16, 2020. The Court entered the Order for Relief on the same day. In his schedules, he listed assets of $436,462.50 and liabilities of $793,780.42. In addition to his Petition and Schedules, Mr. Keffer also submitted his Chapter 13 Plan on September 16, 2020. Mr. Keffer diligently progressed through the Chapter 13 process; he objected to proofs of claim, worked with the West Virginia State Tax Department, and filed tax returns. However, the Chapter 13 Trustee continuously recommended that his Chapter 13 Plan not be confirmed, and she reported in her last recommendation (filed on January 8, 2021) that Mr. Keffer was delinquent in his plan payments and was behind $7,621.23 [dckt. 56]. In the meantime, on November 16, 2020, the Internal Revenue Service ("IRS") filed its Amended Proof of Claim No. 5-2, which states that the IRS's claim totals $681,609.92.

The above-captioned case came before the Court for a Chapter 13 Plan confirmation hearing on January 14, 2021. Mr. Keffer reported at that hearing that the IRS's claim had increased his total liabilities such that they exceeded the debt limits for Chapter 13 cases and that he was no longer eligible for Chapter 13 relief. At the January hearing, Mr. Keffer stated his intention to convert his case to one under Chapter 11, Subchapter V of the Bankruptcy Code ("SubChapter V"). The Motion to Convert was filed on February 1, 2021, and the Motion to Extend followed shortly thereafter on February 18, 2021.

At the Motions Hearing, Mr. Keffer largely stood on his filings and simply stated that his debts were over the Chapter 13 threshold and that he wished to convert to a SubChapter V case. The Chapter 13 Trustee confirmed that Mr. Keffer's debts made him ineligible for Chapter 13 relief. The UST stated that it had no objection to conversion, but noted that the situation was complicated by the very tight timelines of SubChapter V plans. Additionally, the UST explained that the situation at hand is one of first impression in the Southern District of West Virginia Bankruptcy Court.

B. The Parties’ Arguments

The parties herein are largely aligned; Mr. Keffer wishes to convert to SubChapter V, and the UST's concerns are linked only to the extension of the case timelines following conversion. In fact, the UST stated at the Motions Hearing that it had no objection to conversion in this particular case.

In Mr. Keffer's Motion to Convert, he cites no legal standard, nor does he point to any pertinent caselaw. He simply asserts that he is no longer eligible for Chapter 13 relief, and he files the Motion to Convert on a good faith basis.

In its Limited Objection, the UST describes the crux of the issue here: the deadlines for SubChapter V, established by governing law, had already passed in Mr. Keffer's case before he filed his Motion to Convert. The UST pointed to several courts which have considered this emerging issue and noted that there is indeed a split of authority. Regardless of the differing outcomes, an important facet of the courts’ analysis in all the cases is the debtors’ requests to extend the SubChapter V deadlines. At the time that the Limited Objection was filed, Mr. Keffer had not filed a Motion to Extend, and the UST expressed concern at that deficit It requested that the Court provide guidance not only as to Mr. Keffer's ability to convert, but also the necessity of separate motions to extend deadlines in situations such as these.

Mr. Keffer filed the Motion to Extend in response to the UST's worries. He requested that the Court extend the applicable SubChapter V deadlines so that his case could be properly converted. Mr. Keffer also noted that no creditors would be prejudiced if the Court granted his Motions.

II.

A. Applicable Law

Conversion from Chapter 13 to Chapter 11 is governed by 11 U.S.C. § 1307(d), which states that, "at any time before the confirmation of a plan under section 1325 of this title, on request of a party in interest or the United States Trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 or 12 of this title." 11 U.S.C. § 1307(d). Courts have discretion when deciding whether to convert cases from Chapter 13 to Chapter 11, and conversion is not an absolute right. In re Lester , 409 B.R. 364, 370 (Bankr. W.D. Va. 2009). Although caselaw on the subject is "sparse," there are certain factors that courts have considered when evaluating conversions from Chapter 13 to Chapter 11. Lester , 409 B.R. at 370. That list includes

willful failure of the debtor to abide by orders of the court, unreasonable delay by the debtor that is prejudicial to the creditors, inability to effectuate a plan, failure to timely file a plan, bad faith, and, in the case of debtors whose debts are primarily consumer debts, whether the granting of relief would be a substantial abuse.

Lester , 409 B.R. at 371 (quoting Anderson v. United States (In re Anderson) , 165 B.R. 445, 448-49 (S.D. Ind. 1994) ) (internal quotation marks omitted). Importantly, " § 1307(d) contemplates some balancing between the competing interests of creditors and debtors." Lester , 409 B.R. at 372 (emphasis in original). However, one unambiguous requirement for conversion under § 1307(d) is that it must be accomplished prior to confirmation of a Chapter 13 Plan. In re Krandell , 311 B.R. 438, 439 (Bankr. D. Md. 2004).

Dismissal of Chapter 11 cases is governed by 11 U.S.C. § 1112 and is appropriate when "cause" is shown. 11 U.S.C. § 1112(b)(1). In the list of situations constituting "cause" contained in § 11 U S.C. § 1112(b)(4), a Chapter 11 case may be dismissed for "failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court...." 11 U.S.C. § 1112(b)(4)(J). However, there exists a "safe harbor" provision in § 1112(b)(2) : conversion or dismissal may not be granted if the court finds unusual circumstances establishing that conversion or dismissal is not in the best interests of creditors and that there is a reasonable likelihood that a plan will be confirmed within the timeframes in § 1121(e) and § 1129(e). 11 U.S.C. § 1112(b)(2).

These two sections are important because "[t]he right to convert a case ... is not absolute," and "a debtor should not be able to convert his case when conversion would result in immediate dismissal or reconversion." In re Wetter , 620 B.R. 243, 249-50 (Bankr. W.D. Va. 2020) (citing Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) ). Thus, Chapter 13 debtors are only able to convert to cases in which they are eligible to be debtors. 11 U.S.C. § 1307(g). As a result of the Marrama decision, in this situation, a debtor "must qualify under Chapter 11 of the Bankruptcy Code." Wetter , 620 B.R. at 250. "Chapter 11 debtors are subject to having their cases dismissed for ‘cause,’ and bad faith can be a basis for dismissal for ‘cause’ ...." Wetter , 620 B.R. at 250. It follows, then, that any conversion from Chapter 13 to SubChapter V, after meeting the requirements of § 1307, must also survive § 1112(b) ’s dismissal provisions: "[i]n line with Marrama , conversion should not be permitted where grounds for conversion or dismissal would be triggered immediately." Wetter , 620 B.R. at 251.

SubChapter V was added to Chapter 11 of the Bankruptcy Code through enactment of the Small Business Reorganization Act of 2019 (the "SBRA"), which became effective on February 19, 2020. SubChapter V is an "elective Chapter for small business debtors for whom the existing provisions of chapter 11 were not providing relief." In re Tibbens , No. 19-80964, 2021 WL 1087260, *1 (Bankr. M.D.N.C. Mar. 19, 2021) (Kahn, J.); see also In re Trepetin , 617 B.R. 841, 843 (Bankr. D. Md. 2020) (Harner, J.). It is, "by its very nature [ ] intended to be an expedited process" and "provides qualifying debtors with some powerful and cost-saving restructuring tools not otherwise available to Chapter 11 debtors." In re Wetter , 620 B.R. 243, 251 (Bankr. W.D. Va. 2020) (Black, J.) (quoting In re Seven Stars on the Hudson Corp. , 618 B.R. 333, 346 (Bankr. S.D. Fla. 2020) ). The benefits of SubChapter V include:

(1) elimination of the absolute priority rule, which allows equity holders to retain their ownership interests without paying all creditors in full;

(2) no mandatory appointment of a creditors committee;

(3) no mandatory requirement to file a disclosure statement;

(4) appointment of a Subchapter V trustee to assist in developing a consensual

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