Edward J. Molitor v. Gary C. Eidson ( 1996 )

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No. 95-1180
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In re: Edward J. Molitor, *
*
Debtor. *
*
___________________________ *
*
Edward J. Molitor, * Appeal from the United States
* District Court for the District
Plaintiff-Appellant, * of Minnesota.
*
v. *
*
Gary C. Eidson; Jeffrey M. *
Schoenwetter, *
*
Defendants-Appellees. *
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Submitted: October 19, 1995
Filed: February 9, 1996
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Before MORRIS SHEPPARD ARNOLD, FLOYD R. GIBSON, and ROSS, Circuit
Judges.
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FLOYD R. GIBSON, Circuit Judge.
Appellant Edward Molitor appeals the district court's1
affirmance of the bankruptcy court's2 order converting his Chapter
13 case to a Chapter 7 case. We have jurisdiction pursuant to 28
U.S.C. § 158(d) (1988), and we affirm.
1
The Honorable David S. Doty, United States District Judge
for the District of Minnesota.
2
The Honorable Nancy C. Dreher, United States Bankruptcy
Judge for the District of Minnesota.
I. BACKGROUND
This appeal involves Molitor's manipulation of the bankruptcy
code in order to retain possession of a three-bedroom home
purchased originally from John and Patricia Galle under a contract
for deed. When Molitor failed to fulfill his obligations pursuant
to the terms of the contract, the Galles twice attempted to cancel
the contract and evict Molitor. Each time, Molitor responded by
seeking an injunction in Hennepin County District Court and then
filing a Chapter 13 bankruptcy petition in order to invoke the
bankruptcy code's automatic stay provision. Molitor's first
petition was dismissed when he and the Galles reached a compromise
agreement. Molitor's second petition was dismissed by the Chapter
13 Trustee when Molitor failed to propose a reorganization plan
within a reasonable period of time. This appeal concerns Molitor's
third Chapter 13 petition.
On January 5, 1993, the Galles granted Molitor a 90-day
purchase option expiring on April 5, 1993. After Molitor failed to
execute the purchase option, the Galles conveyed the property to
Appellees Gary Eidson and Jeffrey Schoenwetter (Appellees).
Molitor continued to occupy the property pursuant to the expired
agreement with the Galles, but paid no rent. When Molitor sought
protection in state court, Hennepin County District Judge Roberta
Levy determined that Molitor had no right, title, or interest in
the property and ordered him to vacate the property as of 11:59
p.m., June 30, 1993. The deadline came and went, but Molitor
failed to vacate the premises. Appellees then obtained a writ of
restitution and made arrangements with the Hennepin County Sheriff
to serve and execute the writ and evict Molitor.
Molitor filed his third Chapter 13 petition on July 12, 1993,
the day before the writ was scheduled to be served and executed.
On August 4, 1993, Appellees filed a motion for relief from the
automatic stay and a motion for dismissal or conversion. The
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motion for dismissal or conversion alleged that Molitor had filed
for bankruptcy in bad faith because he fraudulently misrepresented
his debts by failing to list state and federal income tax debts in
excess of $100,000.00. The motion also charged that Molitor was
ineligible for Chapter 13 bankruptcy because those tax liabilities
constituted over $100,000.00 in non-contingent liquidated unsecured
debt. The Trustee filed a response supporting Appellees' motion
for conversion.
On August 11, 1993, the day the motions were originally
scheduled to be argued, Molitor appeared without counsel and
requested additional time to prepare a defense. The bankruptcy
court continued the hearing until August 31, 1993. On August 31,
Molitor's counsel filed a voluntary dismissal of his Chapter 13
petition. Noting that Molitor was aware that there was a motion
for dismissal or conversion pending and that there were serious
allegations of multiple filings, bad faith, and improper listing of
liabilities on the schedules, the bankruptcy court refused to allow
the dismissal and subsequently granted Appellees' motion to convert
Molitor's Chapter 13 bankruptcy to a Chapter 7 proceeding.
Molitor appealed the bankruptcy court's order to the United
States District Court for the District of Minnesota. The district
court adopted the magistrate's report and recommendation affirming
the bankruptcy court's order. Molitor appeals again, alleging: (1)
that he is entitled to voluntary dismissal prior to conversion as
a matter of right under Chapter 13; and (2) that the bankruptcy
court erred in granting Appellees' motion for conversion in the
absence of a showing of fraud. We review the bankruptcy court's
legal conclusions de novo and its findings of fact for clear error.
In re Howell Enters., Inc., 934 F.2d 969, 971 (8th Cir. 1991).
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II. DISCUSSION
11 U.S.C. § 1307(b) (1988) provides that "[o]n request of
the debtor at any time, if the case has not been converted under
section 706, 1112, or 1208 of this title, the court shall dismiss
a case under this chapter." The next subsection, however, provides
that:
[O]n 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 interests of creditors
and the estate, for cause . . . .
11 U.S.C. § 1307(c). Molitor argues that section 1307(b) confers
upon the debtor an absolute right to withdraw his Chapter 13
petition prior to conversion. As such, he argues that the
bankruptcy court erred in converting his case to a Chapter 7
proceeding. Conversely, the Appellees argue that subsection (c)
necessarily limits a debtor's ability to voluntarily withdraw under
the previous subsection.
Neither viewpoint is without support. Several courts have
adopted Molitor's position, holding that the Chapter 13 debtor's
pre-conversion right to voluntary dismissal under section 1307(b)
is absolute. E.g., In re Looney, 90 B.R. 217 (Bankr. W.D. Va.
1988). Other courts have held that section 1307(c) curtails a
Chapter 13 debtor's right to voluntary dismissal. E.g., In re
Gaudet, 132 B.R. 670, 675-76 (D.R.I. 1991). We are guided by our
prior decision in In re Graven, 936 F.2d 378 (8th Cir. 1991). In
that case, this Court concluded that analogous provisions of
Chapter 12, § 1208(b) and (d), did not afford the Chapter 12 debtor
an unlimited right to voluntary dismissal. "We conclude that the
broad purpose of the bankruptcy code, including Chapter 12, is best
served by interpreting section 1208(d) to allow a court to convert
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a case to Chapter 7 upon a showing of fraud even though the debtor
has moved for dismissal under subsection (b)." Id. at 385.
We believe that same broad purpose as well as the principles
of statutory construction employed in Graven apply equally well to
the nearly identical provisions of Chapter 13 and the instant case.
As in Graven, we are mindful that the purpose of the bankruptcy
code is to afford the honest but unfortunate debtor a fresh start,
not to shield those who abuse the bankruptcy process in order to
avoid paying their debts. Id. As in Graven, we also look to the
overall purpose and design of the statute as a whole rather than
viewing one subsection in isolation. Id. In this case, Molitor
failed to offer any defense whatsoever to the Appellees'
allegations of bad faith. Instead, he chose to use section 1307(b)
as an escape hatch once the Appellees called his bluff. To allow
Molitor to respond to a motion to convert by voluntarily dismissing
his case with impunity would render section 1307(c) a dead letter
and open up the bankruptcy courts to a myriad of potential abuses.
We decline to do so.
Molitor argues alternatively that the bankruptcy court erred
in granting Appellees' motion to convert in the absence of a
showing of fraud. No such showing is required to convert a case
under Chapter 13, however. While Chapter 12 provides for
conversion only "upon a showing that the debtor has committed fraud
in connection with the case," 11 U.S.C. § 1208(d), a Chapter 13
petition filed in bad faith may be dismissed or converted "for
cause" under 11 U.S.C. § 1307(c). In re Eisen, 14 F.3d 469, 470
(9th Cir. 1994) (per curiam). Such cause includes filing a
bankruptcy petition in bad faith. See, e.g., Matter of Smith, 848
F.2d 813, 816 n.3 (7th Cir. 1988). The bad faith determination
focuses on the totality of the circumstances, specifically: (1)
whether the debtor has stated his debts and expenses accurately;
(2) whether he has made any fraudulent representation to mislead
the bankruptcy court; or (3) whether he has unfairly manipulated
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the bankruptcy code. In re LeMaire, 898 F.2d 1346, 1349 (8th Cir.
1990).
The bankruptcy court found that there was no justification for
Molitor's multiple filings. It also noted that Molitor's most
recent filing took place on the eve of eviction, leading it to
characterize Molitor's multiple filings as inappropriate "delay
tactics." As the bankruptcy court observed, "Once may be O.K., but
three times is too many." Molitor's actions constitute a clear
abuse of the legal process set forth in the Bankruptcy Act to aid
and assist honest debtors. It was also undisputed at the motion
hearing that Molitor misrepresented both his tax liabilities and
his monthly rent expenses on his schedules. We do not find the
bankruptcy court's findings to be clearly erroneous.
III. CONCLUSION
For the above reasons, we affirm the decision of the district
court affirming the decision of the bankruptcy court.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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