Cite as: Keith M. Lundin, Lundin On Chapter 13, § 141.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Parties in interest and the U.S. trustee have standing to request conversion of a Chapter 13 case to a case under Chapter 7.1 Section 1307(c) of the Code provides: “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 7 of this title, or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including . . . .” There then follows a nonexclusive list of 10 examples of cause for conversion or dismissal.2
“Party in interest” in § 1307(c) undoubtedly includes creditors and the Chapter 13 trustee, although there is no provision of Chapter 13 defining the phrase as there is in Chapter 11.3 Only the U.S. trustee has standing to seek conversion or dismissal for the causes stated in subsections 1307(c)(9) and (c)(10).411 U.S.C. § 1307(c)(9) permits conversion (or dismissal) “only on request of the United States trustee” when the debtor fails to file “the information required by paragraph (1) of section 521.”5 11 U.S.C. § 521(1) requires the debtor to “file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and expenditures, and a statement of the debtor’s financial affairs.”6 In a Chapter 13 case, the debtor satisfies the duty in § 521(1) by filing Official Bankruptcy Forms 6 and 7.7 If the debtor fails to file the information required by § 521(1), § 1307(c)(9) authorizes only the U.S. trustee to move for conversion (or dismissal).
This is very odd. It is not obvious why Congress would restrict standing to seek conversion or dismissal to the U.S. trustee when the offense is the debtor’s failure to file the fundamental documents required by § 521(1). The standing Chapter 13 trustee is vitally interested in the debtor’s compliance with § 521(1) (and Bankruptcy Rule 1007). The standing trustee typically is responsible for preparing the notices to creditors that are based on the information in the documents the debtor is supposed to file under § 521(1). The standing trustee is best positioned to know whether a debtor has completed the necessary lists, statement and schedules. The restrictive wording of § 1307(c)(9) makes no sense.
If § 1307(c)(9) makes no sense, then § 1307(c)(10) is just plain goofy. 11 U.S.C. § 1307(c)(10) grants only the U.S. trustee standing to request conversion or dismissal of a Chapter 13 case if the debtor fails “to timely file the information required by paragraph (2) of section 521.”8 Section 521(2) requires a debtor, within 30 days after the filing of a Chapter 7 petition, to file “a statement of . . . intention” with respect to “the retention or surrender” of property subject to liens.9 Chapter 13 debtors do not file the statement of intention described in § 521(2). The cross-reference to § 521(2) in § 1307(c)(10) is nonsense. Books are written trying to decipher the words Congress chooses to describe the rights of real people in bankruptcy cases. It is unsettling to find whole sections of the Code that just miss the boat altogether.
Chapter 13 debtors who satisfy the definition of “farmer” in 11 U.S.C. § 101(20) have special protection from conversion to Chapter 7. 11 U.S.C. § 1307(e) provides that “the court may not convert a case under this chapter to a case under chapter 7, . . . if the debtor is a farmer, unless the debtor requests such conversion.” There will be situations in which a debtor is farming but does not technically meet the definition of farmer. It is also possible for a Chapter 13 debtor to satisfy the definition of “family farmer” in 11 U.S.C. § 101(18) for purposes of eligibility for Chapter 12 and yet not meet the definition of farmer for purposes of the protection from conversion to Chapter 7 in § 1307(e). A family farmer can be involuntarily converted from Chapter 13 to Chapter 7 even though a farmer cannot.
Neither the Code nor the Rules put any limits on the timing of a request for conversion. The request can be filed before or after confirmation and at any time before the case is closed. Theoretically, a creditor could move to convert to Chapter 7 after entry of the discharge in the Chapter 13 case. The holder of a claim that is not discharged in the Chapter 13 case10 might have grounds for conversion to Chapter 7 after discharge of other claims if management of the debtor’s nonexempt assets could best be accomplished in a Chapter 7 case.
A party in interest seeks conversion under § 1307(c) by filing a motion under Bankruptcy Rule 1017(f)(1). The motion commences a contested matter governed by Bankruptcy Rule 9014.11 The motion should track the language of one or more of the subsections of § 1307(c), alleging cause for conversion. In a truly strange Chapter 13 case, the U.S. Court of Appeals for the Fourth Circuit held that a creditor’s motion to convert from Chapter 13 to Chapter 7 will not support a debtor’s complaint for malicious prosecution or abuse of process.12
A motion for conversion under § 1307(c) and Bankruptcy Rule 1017(f)(1) must be served in the same manner as a summons in an adversary proceeding under Bankruptcy Rules 9014 and 7004. Unfortunately, no Bankruptcy Rule tells us whom to serve, how much notice to give or who is responsible for giving notice of a motion to convert from Chapter 13 to Chapter 7. Bankruptcy Rule 2002(f) requires the clerk, or such other person as the court may direct, to give notice to the debtor and all creditors of the conversion of a Chapter 13 case to another chapter. The Rules do not tell us upon whom to serve notice of a motion for conversion under § 1307(c).
Conversion to Chapter 7 can have substantial effects on the rights of all creditors. The moving party is best advised to give notice of a motion to convert to everyone in sight—all creditors, the trustee, the U.S. trustee and the debtor. Bankruptcy Rule 2002(a)(4) requires 20 days’ notice to the debtor, the trustee and all creditors of a motion to convert a Chapter 7, 11 or 12 case.13 The same notice standard should be applied to conversion of a Chapter 13 case.
In some jurisdictions, a motion to convert is automatically set for hearing. In other jurisdictions, conversion is set for hearing only if contested by timely, written opposition from the debtor or other party in interest.
It will occasionally be in the interest of a creditor to oppose conversion of a Chapter 13 case to Chapter 7. For example, when the motion to convert is filed by a secured claim holder and the estate would be a no-asset Chapter 7 case, a dischargeable unsecured claim holder would typically prefer that the case remain in Chapter 13. There are no reported cases discussing the standing of a creditor to oppose another creditor’s motion to convert from Chapter 13 to Chapter 7, but there is certainly an economic interest present that would support standing. Strategically, the debtor’s opposition to a creditor’s (or trustee’s) motion to convert would be enhanced by opposition to conversion from other creditors.
Although Bankruptcy Rule 9014(a) does not require a response to a motion to convert, the debtor or a creditor opposing a motion to convert should never omit to file a written response. In the absence of written opposition, local rules in many jurisdictions will deem the motion uncontested, and an order of conversion may be entered by default and without a hearing.14 A written opposition should be served on the moving party, the trustee and the U.S. trustee.
Section 1307(c) states that conversion from Chapter 13 to Chapter 7 on the request of a party other than the debtor requires “notice and a hearing.”15 In addition to filing a written response, any debtor who contests conversion should take whatever steps are necessary under local practice to schedule an evidentiary hearing. Many Chapter 13 cases convert to Chapter 7 or are dismissed. In some districts, the sheer volume of motions to convert (or dismiss) has spawned streamlined procedures that will literally run over the unusual Chapter 13 debtor with evidence to contest “cause.”16 Failure to demand an evidentiary hearing and to present evidence in opposition to a motion to convert can land the debtor in Chapter 7 almost too quickly. This is what happened to the debtor in Cabral v. Shamban (In re Cabral).17
The debtor in Cabral started in Chapter 7. She disclosed a personal injury claim in the Chapter 7 schedules and testified at the meeting of creditors that she had suffered whiplash in a car accident and was treated by a chiropractor. She admitted to receiving a settlement offer in the $10,000 to $15,000 range.
The Chapter 7 trustee’s investigation revealed a settlement offer of $85,000 and that the debtor’s injuries were more substantial than she admitted at the meeting of creditors. As the Chapter 7 trustee moved in on the asset, the debtor converted to Chapter 13. The (former) Chapter 7 trustee immediately moved to convert back to Chapter 7. This is when things got a little squirrelly.
The bankruptcy court noticed and conducted a “nonevidentiary hearing” on the motion to reconvert to Chapter 7. After statements from the attorneys—no witnesses were called—the bankruptcy court found that the debtor gave misleading testimony at the meeting of creditors in an attempt to conceal the real value of the personal injury claim. The bankruptcy court reconverted the case to Chapter 7, and the debtor appealed.
The Bankruptcy Appellate Panel for the First Circuit sustained the outcome and the procedure used by the bankruptcy court:
The concept of “notice and a hearing” is a flexible one. . . . [C]ourts in various circuits have held that evidentiary hearings are not always required when a bankruptcy court dismisses or converts a bankruptcy case. . . . [A]lthough the Trustee did not submit any affidavits to support his allegations, it is clear from a review of the record that the Debtor failed to raise any disputed facts, and, even more importantly, failed to request an evidentiary hearing. . . . [T]he parties had an opportunity to present relevant facts and arguments to the Bankruptcy Court, and the Debtor cannot now complain about the lack of an evidentiary hearing. The Debtor’s acquiescence to the Trustee’s presentation under the unambiguous circumstances of a nonevidentiary hearing was a waiver which resulted in the admission of the Trustee’s factual representation as evidence. The Bankruptcy Court was justified in relying upon her silence as an admission of fact.18
Cabral is a bit scary in its endorsement of a nonevidentiary hearing leading to findings of fact that whisked the debtor out of Chapter 13 and back into Chapter 7. “Bad faith” and other misconduct by the debtor is often the ground alleged in a motion to convert or dismiss a Chapter 13 case.19 If “silence” at a “nonevidentiary hearing” is an admission of bad doings, Chapter 13 debtors and their counsel must be unusually diligent in opposition to any motion to convert or dismiss.
1 11 U.S.C. § 1307(c). But see In re Danio, 114 B.R. 737 (Bankr. D. Colo. 1990) (Creditor who acquired claims against a Chapter 13 debtor through a straw man for the purpose of harassing the debtor and getting even with the debtor for a failed business deal lacks standing to seek conversion to Chapter 7.).
3 Compare 11 U.S.C. § 1109(b):
A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.
5 11 U.S.C. § 1307(c)(9).
6 11 U.S.C. § 521(1). See Fed. R. Bankr. P. 1007.
7 See § 41.1 Duty to File Statements and Schedules. See also discussion beginning at § 42.1 Filing Requirements and Other Duties: A List.
8 11 U.S.C. § 1307(c)(10).
9 11 U.S.C. § 521(2).
11 Fed. R. Bankr. P. 1017(f)(1).
12 Tibbetts v. Yale Corp. (In re Tibbetts), No. 01-1863, 2002 WL 31123873, at *3 (4th Cir. Sept. 26, 2002) (unpublished) (Affirms dismissal of former Chapter 13 debtor’s complaint for malicious prosecution and other torts in connection with Yale University’s motion to reconvert to Chapter 7. “It is an open question whether the filing of a motion to reconvert constitutes process. We need not decide this issue, however, because we find that Tibbetts’ Complaint cannot satisfy the other elements of a prima facie case for malicious prosecution or abuse of process.”).
13 For reasons unexplained by the drafters, Bankruptcy Rule 2002(a)(4) does not apply to conversion of a Chapter 13 case.
14 See, e.g., In re Crowell, 292 B.R. 541, 544–45 (Bankr. E.D. Tex. 2002) (Debtor’s failure to respond to creditor’s motion for conversion to Chapter 7 results in conversion by default notwithstanding competing motion by the debtor to voluntarily dismiss under § 1307(b). “In this case, the creditor filed its motion to convert, appropriate notice was given . . . the Debtor chose not to respond or object to the motion to convert . . . . [T]he motion to convert was fully adjudicated by default. . . . The Debtor chose not to litigate conversion directly, but instead to ‘dodge the bullet’ via dismissal. . . . Crowell lost her right of dismissal ‘upon request’ under § 1307(b) when the case converted to a Chapter 7 case.”).
15 11 U.S.C. § 1307(c).
16 See § 141.3 Cause for Conversion and § 141.4 Cause for Conversion Added or Changed by BAPCPA for a discussion of cause for conversion.
17 285 B.R. 563 (B.A.P. 1st Cir. 2002).
18 285 B.R. at 575–78.
19 See § 141.3 Cause for Conversion and § 141.4 Cause for Conversion Added or Changed by BAPCPA. See also § 152.4 Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings for a discussion of bad faith as cause for dismissal.