In re Starling
| Decision Date | 11 January 2007 |
| Docket Number | No. 05 B 53919.,05 B 53919. |
| Citation | 359 B.R. 901 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re Edward STARLING and Karen Starling, Debtor. |
David T. Lin, Robert J. Semrad And Associates, Chicago, IL, for Debtors.
Philip D. Levey, Chicago, IL, Chapter 7 Trustee.
Tom Vaughn, Chicago, IL, Chapter 13 Trustee.
William T. Neary, Office of the U.S. Trustee, Region 11, Chicago, IL.
Debtors' Edward and Karen Starling (the "Debtors") filed their combined motion to convert this Chapter 7 case to Chapter 13 and vacate the discharge entered in the Chapter 7 case. Chapter 7 Trustee Philip Levey (the "Trustee") opposed that motion, and in the alternative moved that Debtors' case be reconverted to Chapter 7 should conversion from Chapter 7 to Chapter 13 be permitted. The Trustee wants to sell their home which is found to have equity not reflected in an appraisal that Debtors obtained before filing their case.
By order entered December 7, 2006, over the Trustee, objection to the Debtors' motion to vacate their discharge order and convert to a Chapter 13 case was allowed, and the Trustee's Motion to Reconvert was denied. This Opinion sets forth the grounds for those rulings.
Apart from a dispute over value of the home which was resolved by evidence hearing; the relevant facts are not in dispute:
With the assistance of counsel, the Debtors filed a petition for Chapter 7 bankruptcy relief on October 14, 2005. Their Schedule D listed secured claims totaling $104,729.53. Total general unsecured claims were listed on Schedule F at $49,160.63.
Included among their assets, and listed accordingly on Schedule A, is real property .used as the Debtors' homestead and commonly known as 8030 S. Woodlawn, Chicago, IL. Based on an appraisal obtained from a real estate brokerage firm pre-bankruptcy and dated October 11, 2005, the Debtors listed "$104,000" as the real estate's then current market value on Schedule A. The Debtors' schedules further reflect that the property was secured by a $93,000 mortgage note, thus apparently leaving the Debtors with $11,000 of equity in the property. As allowed under Illinois law applicable when the bankruptcy was filed, 735 ILCS 5/12-901, the Debtors claimed their homestead exemptions then totaling $15,000. Therefore, initially there appeared no possibility that the real estate could be used to satisfy unsecured claims of creditors.
Chapter 7 Trustee Phillip Levey ("Trustee") was assigned to the Debtors' case by the United States Trustee for this region. The first meeting of creditors was scheduled to be held on February 1, 2006. Without objection to discharge or other litigation issues being raised by Trustee or other creditors and without any effort being made by the Trustee for several months to sell the home, Debtors were granted a discharge under § 727 of the Bankruptcy Code on April 10, 2006.
At some point prior to June 2006, but apparently after the discharge had entered, the Trustee had the Debtors' real property appraised for an approximate market value of $225,000 to $235,000. Pursuant to an application filed by the Trustee, an order was entered June 8, 2006 authorizing him to employ a real estate brokerage firm to market the property for sale. Notice of that motion was the first information received by Debtors of Trustee's contention that their home was worth much more than they had known or believed, since they had relied on the pre-bankruptcy appraisal.
The foregoing sequence of events is quite unusual in Chapter 7 cases because the Chapter 7 Trustees will usually proceed against the homestead real estate of debtors before the discharge issues. The usual response of Chapter 7 debtors who want to keep their home is to seek conversion to a Chapter 13 in an effort to save the home, or they sometimes obtain funds from family or lenders to buy out the trustee's interest in recovering equity for the creditors. Mr. Levey is among the most diligent of Chapter 7 panel trustees, and his delay in proceeding against the home until the discharge had entered was likely due his heavy work load. Whatever the reason, this circumstance has resulted in a situation where Debtors are now struggling to overcome several hurdles before they can save their home through a Chapter 13 Plan.
They initially thrashed about in efforts to prevent sale of their home or even to permit it to be shown by the Trustee's broker. Pursuant to a motion filed by the Trustee, an order was entered June 22, 2006 requiring the Debtors to cooperate with the Trustee and his agents in marketing and selling the real estate. The order further even authorized the Trustee to change the locks on the premises in the event the Debtors failed to cooperate. The Debtors continued with some efforts to slow Trustee and the broker's efforts to sell the property. An additional order was entered October 10, 2006 compelling the Debtors' particularized cooperation.
On August 20, 2006, a motion to substitute the Debtors' original counsel with their present counsel was filed and allowed by order entered September 15, 2006. Under the guidance of new counsel, the Debtors tried to use the law to solve the problem. They moved on August 21, 2006, to convert their case from a Chapter 7 case to a Chapter 13 case and to have the Chapter 7 discharge vacated.
On October 5, 2006, an evidence hearing concerning the property's value was held. After considering evidence presented by the Parties, a ruling was issued from the bench that the subject real estate has a value of $200,000. (Trial Tr., 14, Oct. 27, 2006.) The Trustee obtained evidence that the unpaid balance of the mortgage held against the property was about $89,000 as of October 3, 2006. It thereby became apparent that Debtors' have significant net equity in their home, in the range of $84,000 ($200,000 less broker's fee of $12,000, mortgage of $89,000, and homestead exemptions of $15,000).
Following further hearing on the pending motions and remaining issues, a decision was announced from the bench on December 7, 2006, that for reasons to be set forth in this opinion, the Debtors' discharge would be vacated, their request to convert from Chapter 7 to Chapter 13 would be granted, and Trustee's motion to reconvert would be denied. However this relief was to be conditioned upon the Debtors compensating the Trustee for services he rendered in trying to market and sell the property. The Trustee was granted leave to submit a fee application based on his efforts to market and sell the property.
The Trustee filed an application for compensation and reimbursement for expenses, requesting $8,937.50 for 27.5 hours of services performed while acting in the capacity of legal counsel for himself as Trustee and reimbursement of $24.60 for actual expenses. Although the Debtors raised objections to the application, the Parties stated during a hearing held on November 30, 2006 that agreement had been reached whereby the Trustee's fee application would be granted in full and paid as a cost of administration following conversion. The agreement additionally provided that the Trustee shall not be entitled to receive any fees for additional services rendered as the Chapter 7 trustee unless the Debtors case is re-converted from a Chapter 13 to a Chapter 7. If the case is reconverted, the Trustee will be entitled to seek and receive whatever fees and costs are prescribed under § 330 of the Bankruptcy Code. An agreed order reflecting this agreement was entered on December 8, 2006.
Any further facts set forth below in the Conclusions of Law are to be regarded as additional Findings of Fact.
Subject matter jurisdiction lies under 28 U.S.C. § 1334. This matter is before the bench pursuant to 28 U.S.C. § 157(b)(2)(A) and (O) and District Court Internal Operating Procedure 15(a). Venue is proper under 28 U.S.C. § 1409(a).
In support of their request to convert their case from a Chapter 7 to a Chapter 13, the Debtors rely on § 706(a) of the Bankruptcy Code. While the Debtors argued that revocation of their discharge is not necessary to facilitate the conversion, they additionally moved to have the discharge vacated.
The Trustee raised several points in response. First, he argues that a Chapter 7 case cannot be converted to a Chapter 13 case once a discharge has been entered. The Trustee reasons that absent a debtor's liability on the discharged claims, there is nothing to repay under a Chapter 13 plan. On the question of whether the Debtors can move to vacate the discharge, the Trustee argues that the Debtors lack standing under § 727(d) of the Code to move for such relief. The Trustee additionally contends that a bankruptcy court cannot rely on whatever equitable powers it may possess to override the specific designations of § 727(d) as to who may move to revoke a discharge, and therefore cannot grant the Debtors' request to vacate the Chapter 7 discharge. However if the case is converted, the. Trustee alternatively moved to have the case reconverted to a Chapter 7.
A decision as to whether the Debtors have a statutory right to convert their Chapter 7 case into a Chapter 13 case is guided, in part, by § 706 of the Bankruptcy Code. Debtors may convert a Chapter 7 case "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." 11 U.S.C. § 706(a). However, "[n]otwithstanding any other provision of [Section 706], 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(d).
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