§ 146.1 — Standing, Procedure and Grounds for Conversion to Chapter 11

Revised: June 16, 2004

[1]

At any time before confirmation of a Chapter 13 plan, on request of a “party in interest or the United States trustee,” the court may convert a Chapter 13 case to a Chapter 11 case.1 Creditors in the Chapter 13 case have standing to seek conversion to Chapter 11,2 unless the debtor is a farmer. One bankruptcy court found authority in § 105(a) to convert a Chapter 13 case to Chapter 11 and appoint a trustee without a request from any party when a debtor in the fur storage business failed to confirm a plan and did not pay sales or payroll taxes for 15 months during the Chapter 13 case but the court found that the debtor had a sincere desire to continue in business.3

[2]

If the debtor is a farmer, conversion to Chapter 11 is possible only if requested by the debtor.4 Because the definitions of “farmer” and “family farmer” are not exactly the same,5 it is possible for a Chapter 13 debtor to satisfy the family farmer definition but not also be a farmer for purposes of the protection from conversion to Chapter 11 in § 1307(e). A creditor can prompt the involuntary conversion of a Chapter 13 case to a Chapter 11 case when the debtor is a family farmer but not when the debtor is a farmer.6

[3]

Bankruptcy Rule 1017(f) provides that conversion from Chapter 13 to Chapter 11 is governed by Bankruptcy Rule 9014. A request for conversion to Chapter 11 is by motion under Bankruptcy Rule 9013. Consistent with Rule 2002(a)(4),7 notice should be given to the debtor, the Chapter 13 trustee, the U.S. trustee and all creditors. Local rules will determine who is responsible for giving notice. An objection to conversion to Chapter 11 should be filed promptly in writing, else the motion may be deemed unopposed and granted without hearing. Upon objection, the motion for conversion becomes a contested matter under Bankruptcy Rule 9014.

[4]

Conversion from Chapter 13 to Chapter 11 is discretionary,8 even at the request of the debtor. The standards for allowing or disallowing conversion to Chapter 11 are not fixed by the Code and are not well developed by case law.

[5]

It has been held that ineligibility for Chapter 13 is one ground for conversion to Chapter 11.9 The view that eligibility for Chapter 13 was jurisdictional and thus an ineligible Chapter 13 debtor could not convert to Chapter 1110 has been discredited.11 However, when the Chapter 13 case was dismissed because the debtor was ineligible, a subsequent motion to convert to Chapter 11 cannot be granted because there is no bankruptcy case to convert.12

[6]

It has been held that conversion to Chapter 11 is allowable when the debtor has failed to propose a confirmable plan and the trustee has moved to dismiss the Chapter 13 case.13 One court used a standard of “prejudice to creditors” to deny a creditor’s motion to convert a business Chapter 13 case to Chapter 11, finding that the debtor’s continued operation of a restaurant was not unreasonably prejudicial to creditors.14 Another court held that substantial evidence of bad faith during the Chapter 13 case is an appropriate basis to deny conversion from Chapter 13 to Chapter 11.15 That the debtor failed in prior Chapter 11 cases and has property that could be liquidated to pay a substantial dividend in a Chapter 7 case supported denial of a debtor’s request to convert from Chapter 13 to Chapter 11.16 With the Supreme Court’s decision in Toibb v. Radloff,17 eligibility of a nonbusiness debtor for Chapter 11 relief is no longer an obstacle to conversion from Chapter 13.18

[7]

Because the trustee in a Chapter 13 case typically does not operate the debtor’s business,19 conversion to Chapter 11 on the motion of a creditor coupled with a request for appointment of a Chapter 11 trustee may be appropriate when there is evidence of mismanagement by a debtor engaged in business.20


 

1  11 U.S.C. § 1307(d) (emphasis added).

 

2  See In re Melachrindoudis, 63 B.R. 698 (Bankr. E.D. Pa. 1986); In re Anderson, 51 B.R. 532 (Bankr. D.S.D. 1985).

 

3  In re Kaziz, 256 B.R. 242, 244–45 (Bankr. D. Mass. 2000) (“[N]o party, including the Chapter 13 Trustee, requested conversion of the case. . . . Section 105(a) . . . gives the Court discretion in the implementation of the meaning and spirit of the entire Bankruptcy Code, including Section 1307(d). . . . [T]he more the Court heard about the case at bar, the more convinced the Court became of the need for conversion so that the Debtor’s desire that his business continue to operate would be accommodated while the creditors would be protected, at least to some extent, by the watchful eye of a Chapter 11 Trustee.”).

 

4  11 U.S.C. § 1307(e).

 

5  Compare 11 U.S.C. § 101(18), with 11 U.S.C. § 101(20). See also §§ 7.1 [ Debtor Must Be an Individual ] § 10.1  Debtor Must Be an Individual; Spouses Allowed, 7.2 [ Sole Proprietorships Are Eligible ] § 10.2  Sole Proprietorships Are Eligible, 9.3 [ Farming, Crop and Land Set-Aside or Payment in Kind ] § 12.3  Farming, Crop and Land Set-Aside or Payment in Kind and 311.2 [ Conversion on Request of Creditor or Trustee ] § 141.2  Conversion on Request of Creditor or Trustee.

 

6  See § 147.1  Standing, Procedure and Strategic Considerations and § 147.2  Incentives to Convert to Chapter 12 after BAPCPA.

 

7  For no obvious good reason, Bankruptcy Rule 2002(a)(4) requires at least 20 days’ notice by mail of the conversion of a Chapter 7, Chapter 11 or Chapter 12 case to another chapter but omits to require notice of the hearing on conversion of a Chapter 13 case to Chapter 11 (or any other chapter). See §§ 311.1 [ Conversion by Debtor ] § 141.1  Conversion by Debtor and 311.2 [ Conversion on Request of Creditor or Trustee ] § 141.2  Conversion on Request of Creditor or Trustee.

 

8  Guyther v. Hebb, 53 B.R. 1003 (D. Md. 1985); In re Collins, 19 B.R. 209 (Bankr. S.D. Fla. 1982).

 

9  In re Hutchens, 69 B.R. 806 (Bankr. E.D. Tenn. 1987) (Debtors are ineligible for Chapter 13 relief, and the Chapter 13 case must be dismissed or converted to a case under another chapter. The debtors’ motion to convert to Chapter 11, conditioned upon a determination of ineligibility for Chapter 13, requires appropriate notice and a hearing.); In re Glazier, 69 B.R. 666 (Bankr. W.D. Okla. 1987) (Debtors are not eligible for Chapter 13 because scheduled debts exceed statutory limits and court is thus “without jurisdiction to hear the matter further”; however, debtors are granted 10 days to convert to Chapter 11 or Chapter 7.); In re Anderson, 51 B.R. 532 (Bankr. D.S.D. 1985) (Upon creditor’s motion, conversion from Chapter 13 to Chapter 11 is appropriate when schedules indicate debt in excess of § 109(e) eligibility limits.); In re Volpe, 48 B.R. 255 (Bankr. M.D. Fla. 1985) (Chapter 13 petitioner whose secured debt exceeds § 109(e) limitations is permitted to convert to Chapter 11.). But see In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998) (That the debtor is not eligible for Chapter 13 is one reason to deny the debtor’s oral motion for conversion to Chapter 11 and to grant the trustee’s written motion for conversion to Chapter 7. Facts included that the debtor committed prepetition fraudulent conveyances, made unauthorized bank deposits and made payments to attorneys during the Chapter 13 case. Court noted that it would be obligated to immediately appoint a trustee if the case were converted to Chapter 11.).

 

10  See § 6.1 [ Consequences of Ineligibility: Jurisdiction and the Automatic Stay ] § 9.5  Consequences of Ineligibility: Jurisdiction; Automatic Stay; Strike, Dismiss or Excuse?. See, e.g., In re Wulf, 62 B.R. 155 (Bankr. D. Neb. 1986); In re Koehler, 62 B.R. 70 (Bankr. D. Neb. 1986).

 

11  See In re Lybrook, 951 F.2d 136 (7th Cir. 1991) (Bankruptcy court acquired jurisdiction over Chapter 13 case notwithstanding that debtors had unsecured claims in excess of $100,000 at the time of filing. Debtors received a substantial inheritance more than 180 days after filing Chapter 13 petition and before conversion to Chapter 7. Debtors argued that bankruptcy court never acquired jurisdiction over their property and thus the Chapter 7 trustee had no entitlement to the inheritance because the original Chapter 13 petition was jurisdictionally defective. “[J]urisdiction is determined by good faith allegations rather than by what the evidence eventually shows.”); Rudd v. Laughlin, 866 F.2d 1040 (8th Cir. 1989) (The eligibility limitations in § 109(e) are not jurisdictional. Bankruptcy court had jurisdiction to convert debtors’ Chapter 13 case to Chapter 7, notwithstanding that debtors were ineligible for Chapter 13 relief.); Pomenade Nat’l Bank v. Phillips (In re Phillips), 844 F.2d 230 (5th Cir. 1988) (In a footnote, court states eligibility under § 109(g) does not raise an issue of subject matter jurisdiction. Subject matter jurisdiction comes from title 28; the eligibility requirements of § 109 determine whether the court must dismiss the case but are not jurisdictional.); Jones v. United States, 129 B.R. 1003 (Bankr. N.D. Ill. 1991) (Debt limitations in § 109(e) are not jurisdictional and must be raised prior to confirmation, or challenge to eligibility is barred by confirmation of the plan. The IRS’s failure to object to confirmation defeated its postconfirmation challenge to debtors’ eligibility, where the IRS asserted a claim for $650,000. Section 109(e) is not in title 28 and deals only with relief under a particular chapter. A bankruptcy petition “invokes all of the court’s powers under all the provisions of title 11, not merely the particular chapter named in the petition. Thus, when a debtor files a petition for bankruptcy relief, he or she commences a case under title 11, even if the debtor is not entitled to relief under a specific chapter.”); In re Brandon, 93 B.R. 1002 (Bankr. D. Idaho 1988) (Disapproving of In re Wulf, 62 B.R. 155 (Bankr. D. Neb. 1986), an ineligible Chapter 13 debtor is entitled to conversion.); In re Jarvis, 78 B.R. 288 (Bankr. D. Or. 1987) (Section 109 is not jurisdictional. Confirmation order is a “binding determination of the debtors’ eligibility” and is not subject to collateral attack three months after confirmation on a creditor’s motion to dismiss.); In re Tatsis, 72 B.R. 908 (Bankr. W.D.N.C. 1987) (Bankruptcy court is not without jurisdiction where the debtor files a petition but chooses a chapter for which the debtor is not qualified. Case can be converted to a chapter for which the debtor is eligible.); In re Hutchens, 69 B.R. 806 (Bankr. E.D. Tenn. 1987) (Ineligible debtor is entitled to a hearing on motion to convert.).

 

12  Shaw v. Ehrlich, 294 B.R. 260 (W.D. Va. 2003).

 

13  Guyther v. Hebb, 53 B.R. 1003 (D. Md. 1985). Accord In re Kaziz, 256 B.R. 242 (Bankr. D. Mass. 2000) (On Chapter 13 trustee’s motion to dismiss Chapter 13 case pending for 15 months without confirmation of a plan, bankruptcy court sua sponte converts to Chapter 11 and appoints a trustee.).

 

14  In re Melachrindoudis, 63 B.R. 698 (Bankr. E.D. Pa. 1986).

 

15  In re Funk, 146 B.R. 118 (D.N.J. 1992) (Conversion from Chapter 13 to Chapter 11 is discretionary. Bankruptcy court appropriately denied conversion based on substantial evidence of bad faith. Debtors failed to file a plan during the year that the Chapter 13 case was pending; statements and schedules were inaccurate and suggested that the debtors had nearly $7,000,000 in assets and barely $133,000 in debt. Debtors failed to reveal changes in their financial condition after the filing of the Chapter 13 case and demonstrated no obvious ability to propose or confirm a reorganization plan in Chapter 11. Chapter 13 case is appropriately dismissed rather than converted to Chapter 11.). Accord Anderson v. United States (In re Anderson), 165 B.R. 445, 448–49 (S.D. Ind. 1994) (Bankruptcy court appropriately denied motion to convert from Chapter 13 to Chapter 11 and dismissed the bankruptcy case where there was evidence of frequent and extended delays during the Chapter 13 case and the debtor had no demonstrated ability to effectuate a Chapter 11 plan. “In light of the lack of any specific standard in the text of § 1307(d), there is confusion over the scope of a court’s discretion to grant or deny a conversion pursuant to § 1307(d). . . . [T]his Court adopts the broad approach established . . . in In re Funk, 146 B.R. 118 (D.N.J. 1992). In Funk, the court suggested that courts consult the following bankruptcy law standards to determine whether a decision to grant or deny a conversion pursuant to § 1307(d) is within the court’s discretion: (1) 11 U.S.C. § 109(g), . . . (2) 11 U.S.C. § 707, . . . (3) 11 U.S.C. § 1112(b), . . . (4) 11 U.S.C. § 1307(c). . . . ‘[B]ad faith filing’ should also be considered.”); In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998) (Debtor’s oral motion for conversion to Chapter 11 is denied and trustee’s written motion for conversion to Chapter 7 is granted in part because debtor committed numerous prepetition fraudulent conveyances, debtor made unauthorized bank deposits and payments to attorneys during the Chapter 13 case and the court would be obligated to immediately appoint a trustee if the case were converted to Chapter 11.).

 

16  In re Lindsey, 183 B.R. 624, 630 (Bankr. D. Idaho 1995) (Debtor’s request to convert from Chapter 13 to Chapter 11 was denied and case converted to Chapter 7 where debtor has real property that could be liquidated to pay a substantial dividend, debtor has failed in two prior Chapter 11 cases and one prior Chapter 13 case, and “conversion to Chapter 11 would allow the debtor additional opportunities for delay.”).

 

17  501 U.S. 157, 111 S. Ct. 2197, 115 L. Ed. 2d 145 (1991).

 

18  See § 4.3 [ Debtor Not Eligible for Chapter 11 ] § 8.5  Other Chapters Too Expensive, Too Complicated or Unfriendly.

 

19  See § 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business.

 

20  See § 322.1 [ Strategic Considerations: Costs and Benefits of Conversion to Chapter 11 ] § 146.2  Strategic Considerations: Costs and Benefits of Conversion to Chapter 11. See, e.g., In re Kaziz, 256 B.R. 242, 244–45 (Bankr. D. Mass. 2000) (Court sua sponte converts Chapter 13 case to Chapter 11 and appoints a trustee. Debtor was in the fur sales and storage business. Chapter 13 case was pending from June 1999 to September 2000 without confirmation, and debtor did not pay sales or payroll taxes. On the Chapter 13 trustee’s motion to dismiss, court converts to Chapter 11: “no party, including the Chapter 13 Trustee, requested conversion of the case. . . . Section 105(a) . . . gives the Court discretion in the implementation of the meaning and spirit of the entire Bankruptcy Code, including Section 1307(d). . . . [T]he more the Court heard about the case at bar, the more convinced the Court became of the need for conversion so that the Debtor’s desire that his business continue to operate would be accommodated while the creditors would be protected, at least to some extent, by the watchful eye of a Chapter 11 Trustee.”).