Unsecured Creditors Committee v. United States Bankruptcy Court for the District of New Mexico

PUBLISH
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
_________________________________
VICTOR P. KEARNEY, BAP No. NM-20-033
Debtor.
________________________________
VICTOR P. KEARNEY, Bankr. No. 17-12274
Chapter 11
Appellant,
v.
OPINION
UNSECURED CREDITORS
COMMITTEE, LOUIS ABRUZZO and
BENJAMIN ABRUZZO, Trustees of the
Mary Pat Abruzzo Kearney Testamentary
Trusts B and C, and KEVIN YEAROUT,
Appellees.
_________________________________
Appeal from the United States Bankruptcy Court
for the District of New Mexico
_________________________________
Debbie E. Green (Marcus A. Helt and Stacy Obenhaus with her on the brief) of Foley &
Lardner LLP, Dallas, Texas for Appellant.
Thomas D. Walker (Chris W. Pierce with him on the brief) of Walker Law PC,
Albuquerque, New Mexico for Appellee Unsecured Creditors Committee.
Paul M. Fish (Spencer L. Edelman with him on the brief) of Modrall, Sperling, Roehl,
Harris & Sisk, P.A., Albuquerque, New Mexico for Appellees Louis Abruzzo and
Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B
and C.
James A. Askew of Askew & White, LLC, Albuquerque, New Mexico for Appellee
Kevin Yearout.
_________________________________
Before ROMERO, Chief Judge, SOMERS, and PARKER, Bankruptcy Judges.
_________________________________
SOMERS, Bankruptcy Judge.
_________________________________
A debtor, understandably, wants to choose the chapter in which he proceeds under
the Bankruptcy Code. And sometimes things change, requiring a debtor to change his or
her initial choice. Debtors talk about an “absolute right to convert” giving them this
choice to convert, and generally, bankruptcy courts are happy to grant a debtor a
conversion. But are there limits? When is an “absolute right” to convert not absolute?
The Supreme Court answered the question when considering conversion from
chapter 7 to 13 under 11 U.S.C. § 706(a) 1 in Marrama v. Citizens Bank of
Massachusetts, 2 by relying on the statutory limit to conversion in § 706(d) that “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.” 3 Under a very similar statutory framework, we now
address a debtor’s attempted conversion from chapter 11 to chapter 7 under § 1112(a),
and conclude that under § 1112(f), the Bankruptcy Court in this case was correct to
consider whether Debtor Victor Kearney’s case would be immediately reconverted,
thereby adopting the procedural shortcut approved by the Supreme Court in Marrama.
1
All future references to “Bankruptcy Code,” “Code,” or “§,” refer to Title 11 of the
United States Code.
2
549 U.S. 365 (2007).
3
11 U.S.C. § 706(d).
2
We affirm the decision of the Bankruptcy Court denying Debtor’s motion to
convert his chapter 11 case to chapter 7. Section 1112(a) does not give debtors an
absolute right to convert. The right to convert granted by § 1112(a) is cabined by
§ 1112(f)’s reference to qualifying as a debtor under the chapter to which the debtor
seeks conversion. In this case, Debtor sought conversion to chapter 7, and the Bankruptcy
Court did not abuse its discretion when it concluded Debtor’s case would be immediately
reconverted under § 706(b) and Debtor could not, therefore, “be a debtor under such
chapter.” 4
I. Facts 5
Many years ago, Benjamin and Pat Abruzzo developed a ski complex and
tramway in the Sandia Mountains in New Mexico under the Alvarado Realty Company
4
11 U.S.C. § 1112(f).
5
The Bankruptcy Court made a few factual findings in its opinion on Debtor’s motion to
convert, but also extensively relied on its prior opinions issued throughout Debtor’s case for its
facts. Opinion at 1 n.1 (June 18, 2020 Opinion denying motion to convert, hereinafter “Opinion
on Conversion”), in Appellant’s App. at 154.
Many of those opinions are included on the record on appeal. See Memorandum Opinion
(September 14, 2018 Memorandum Opinion granting 2004 motion in part, hereinafter “Opinion
on 2004 Exam”), in Appellant’s App. at 2862; Memorandum Opinion (September 28, 2018
Memorandum Opinion denying Debtor’s emergency motion to stay pending appeal, hereinafter
“Opinion on Stay”), in Appellant’s App. at 2972; Opinion (October 11, 2018 Opinion granting
motion to abstain from hearing removed proceeding and remanding to state court), in Appellant’s
App. at 5049; Opinion (December 7, 2018 Opinion denying Debtor’s Application to Employ
counsel for the Nevada lawsuit, hereinafter Opinion on Nevada Counsel), in Appellant’s App. at
3352; Opinion (February 28, 2019 Opinion granting plan confirmation, hereinafter “Opinion on
Confirmation”), in Appellant’s App. at 3841; Opinion (October 24, 2019 Opinion denying
application to employ, hereinafter “Opinion on Employment”), in Appellant’s App. at 4313;
Opinion (May 13, 2020 Opinion denying motion to dismiss of ex-wife, hereinafter Opinion on
Dismissal), in Appellant’s App. at 4720; Opinion on Conversion, in Appellant’s App. at 154.
3
(ARCO). The elder Abruzzos died in 1985, and were survived by their four children:
Louis, Benny, Richard, and Mary. The children took over management of ARCO.
Debtor married Mary Pat Abruzzo Kearney in 1988. Shortly after her marriage,
Mary executed a will that placed her share of the stock in ARCO that she owned during
her life in two trusts (Trust B and Trust C). Mary then died in 1997. At her death, Mary
owned approximately 18.5 percent of the stock interest in ARCO, which is now managed
by Mary’s brothers Louis and Benjamin. 6
Mary’s will named Debtor as the life beneficiary of the two trusts at issue and
named Debtor and her brothers as trustees; 7 Mary’s brothers (or their children) are the
residual beneficiaries of the two trusts. Mary’s will contains a spendthrift clause
protecting its corpus from Debtor’s creditors, and Debtor’s interest in the trusts is not part
of the bankruptcy estate. Since Mary’s death in 1997, Debtor has received distributions of
about $16 million from the trusts, all generated by ARCO’s successful business
ventures. 8 Debtor has no income other than from these trusts.
6
Richard Abruzzo died in 2010.
7
Debtor has since resigned as co-trustee.
8
The trusts paid Debtor about $800,000 a year between 1998 and 2018. Mary’s will
directs the trustees to pay Debtor as follows: regarding Trust B, the trustees are directed to pay
“all of the net income” from the trust “in convenient installments” in an amount the trustees in
their “sole discretion shall determine primarily” for medical care, comfortable maintenance,
welfare, and education. Motion of Debtor Victor P. Kearney to Convert his Chapter 11 Case to
Chapter 7 (hereinafter “Motion to Convert”) at 2, in Appellant’s App. at 144. Regarding Trust C,
the trustees are directed to pay “all of the net income” from the trust “in convenient installments
but no less frequently than quarter-annually.” Id., in Appellant’s App. at 144. The trustees can
also exercise their discretion to pay sums from the principal of Trust C “as necessary or
advisable from time to time,” again for medical care, education, support, and “maintenance in
reasonable comfort.” Id., in Appellant’s App. at 144.
4
In 2013, Debtor sued the Abruzzos in New Mexico state court for breach of
fiduciary duty in administering the trusts, and the Abruzzos filed counterclaims against
Debtor for breach of fiduciary duty. 9 After a jury trial on Debtor’s claims in 2015, a
directed verdict was entered against Debtor. 10 In 2017, the state court tried the
counterclaims against Debtor by the trustees. The Bankruptcy Court heavily discussed the
factual findings from the state court litigation in its opinions in this case and, as relevant
here, Debtor’s behavior therein. Examples include:
- In violation of a confidentiality order in the state court action, Debtor disclosed
confidential ARCO information. 11
- After giving direct testimony at trial, Debtor failed to appear for cross-
examination, and proffered a medical excuse that was never substantiated. 12
- The state court entered monetary sanctions against Debtor in April 2017, based
on findings that Debtor was an individual who “bears no allegiance to the truth,
but who will say whatever he thinks will achieve his goals,” Debtor had “little
or no credibility,” Debtor “repeatedly exhibited bad faith non-compliance with
his discovery obligations,” and Debtor’s conduct in the state court was “an
affront to this particular Court and to the entire judicial process.” 13
- Debtor repeatedly violated orders of the state court. 14
- Debtor did not participate in mediation at the state court in good faith. 15
9
Id. at 2-3, in Appellant’s App. at 144-45; Opinion on 2004 Exam at 2, in Appellant’s
App. at 2863 (summarizing allegations from Debtor’s October 2014 amended state court
complaint).
10
The Abruzzos asked for attorneys’ fees and costs, and were awarded about $666,000
by the state court for the same. Opinion on Confirmation at 3, in Appellant’s App. at 3843.
11
Opinion on 2004 Exam at 4, in Appellant’s App. at 2865.
12
Opinion on Stay at 3, in Appellant’s App. at 2974.
13
Opinion on 2004 Exam at 5-6, in Appellant’s App. at 2866-67.
14
Opinion on Stay at 3, in Appellant’s App. at 2974.
15
Id., in Appellant’s App. at 2974.
5
- During the trial on the merits of Debtor’s claims, the state court concluded
Debtor had “significant credibility issues.” 16
Damages were awarded by the state court against Debtor, and the additional
matter of the appointment of a successor trustee was to be determined at a separate
hearing on September 5, 2017. (By this point, Debtor had resigned as co-trustee.)
Before that September 5, 2017 state court hearing occurred, on September 1, 2017,
Debtor filed a chapter 11 bankruptcy petition. 17 An Unsecured Creditors Committee was
appointed by the U.S. Trustee to represent Debtor’s unsecured creditors. 18
Debtor battled with the Abruzzos and the Unsecured Creditors Committee early
and often, and little progress was made in his reorganization. 19 The Bankruptcy Court
ultimately denied Debtor’s request for a second extension of the exclusivity period to file
his own plan (and reconsideration thereof) in June 2018. 20 A proposed plan by the
Unsecured Creditors Committee (the “UCC plan”) required the Bankruptcy Court to
grant stay relief for a return to state court to allow that court to separate Debtor from
ARCO and the trusts. 21 The UCC plan provided that the Abruzzos would sell the trusts’
16
Opinion on 2004 Exam at 6, in Appellant’s App. at 2867.
17
Petition, in Appellant’s App. at 169.
18
Appointment of a Committee of Unsecured Creditors in a Chapter 11 Case, in
Appellant’s App. at 701.
19
For example, the Abruzzos objected to the nunc pro tunc employment of Debtor’s
bankruptcy counsel. In re Kearney, 581 B.R. 644 (Bankr. D.N.M. 2018). In addition, a mediation
was conducted in February 2018, Mediation Order, in Appellant’s App. at 742-46, but mediation
was not successful. Debtor also filed an adversary proceeding against the Abruzzos in their
capacity as trustees, to recover alleged preferential and improper transfers. Opinion on 2004
Exam at 7, in Appellant’s App. at 2868.
20
Order Denying Debtor’s Renewed Motion for Order Extending Exclusivity Period, in
Appellant’s App. at 1509.
21
Order Granting in Part the Abruzzo Trustees’ Motion for Relief from Automatic Stay,
in Appellant’s App. at 2809; Order Granting the Supplemental Motion for Relief from Automatic
6
ARCO stock back to ARCO for about $12 million, and would pay $3 million to the
bankruptcy estate in exchange for releases of claims against the trusts, the Abruzzos,
ARCO, and related parties. As a result, the state court had to approve trust modifications
necessary to complete these transactions. 22
The state court set a hearing for these issues on October 3, 2018. The day before
the hearing, Debtor did two things: (1) he removed the state court action to the United
States District Court for the District of New Mexico, claiming diversity jurisdiction, and
(2) he filed a new lawsuit against the trustees in the United States District Court for the
District of Nevada, again claiming diversity of citizenship, and alleging Debtor was a
citizen of Nevada. 23 Multiple courts concluded Debtor’s actions were “frivolous,” 24 a
“sham litigation tactic,” 25 and dubious. 26 The Bankruptcy Court expressly found that
Stay, in Appellant’s App. at 2966. Debtor appealed the decisions on stay relief, and sought stay
pending appeal, which was denied by the Bankruptcy Court and the appellate court. Opinion on
Stay at 1, in Appellant’s App. at 2972; see also Kearney v. Abruzzo, No. 18-888 JB/GJF, 2018
WL 5112909 (D.N.M. Oct. 19, 2018) (unpublished) (order denying emergency motion for stay
pending appeal).
22
Opinion on Conversion at 3, in Appellant’s App. at 156; Opinion on Stay at 4-5, in
Appellant’s App. at 2975-76 (detailing the plan’s proposed changes to the trusts).
23
Debtor sought approval for the employment of counsel in the Nevada suit, which was
denied. Debtor appealed the decision, and that appeal was dismissed for lack of prosecution. See
Kearney v. Official Comm. of Unsecured Creditors, No. 18-1223 MV/JFR, 2019 WL 3975387(D.N.M. Aug. 2, 2019) (unpublished) and Kearney v. Official Comm. of Unsecured Creditors,
No. 18-233 MV/JFR, 2019 WL 3975369 (D.N.M. Aug. 22, 2019) (unpublished).
24
Opinion on Nevada Counsel at 7, in Appellant’s App. at 3358.
25
Id. at 4, in Appellant’s App. at 3355. Debtor reported that he lived in a home in
Albuquerque, New Mexico at the filing of his bankruptcy petition, and used that address in his
monthly operating reports. Debtor did own real estate in Nevada and planned to sell the home
until the hearings on his alleged diversity of citizenship, at which time he reported he “might not
sell” the house and that he lived in the Nevada home. Id. at 2 n.2, in Appellant’s App. at 3353.
26
Id. at 6-7, in Appellant’s App. at 3357-58 (detailing why the Bankruptcy Court found
“Debtor’s new claim to Nevada citizenship” was “dubious”).
7
Debtor engaged in “questionable and fruitless attempts to remove the case” 27 from the
state court’s jurisdiction. The state court action was remanded to the state court after
being transferred to the Bankruptcy Court, 28 and the status of the Nevada action is not
apparent from the record.
Ultimately, the state court approved the trust modifications and the ARCO share
buyback on October 31, 2018. 29 After a two-day trial on the confirmability of the UCC
plan, the Bankruptcy Court confirmed the UCC plan on February 28, 2019. 30 The
Bankruptcy Court noted in its written opinion on confirmation of the UCC plan multiple
“questionable or improper” 31 actions by the Debtor, some of which have already been
mentioned herein, and additionally included:
- Debtor likely spearheading a plan to attempt to purchase the claims of
members of the Unsecured Creditors Committee. 32
- Falsely claiming Mary was a Nevada resident when she died. 33
27
Opinion on Conversion at 3, in Appellant’s App. at 156.
28
Abruzzo v. Kearney, No. 18-cv-0922 JCH/SCY, 2018 WL 4854638 (D.N.M. Oct. 5,
2018) (unpublished).
29
Debtor appealed the state court ruling, and if a decision on the appeal has been issued,
it is not in the record.
30
Order Confirming Plan of Reorganization, in Appellant’s App. at 3865-67. The
Bankruptcy Court had planned to try both the UCC plan and Debtor’s proposed plan at the same
time, but Debtor amended his plan for the seventh time the day after exhibit and witness lists
were due for that trial date, forcing a continuance of the trial on Debtor’s plan. Order Resulting
from Hearing on Confirmability of the Debtor’s Plan at 1-6, in Appellant’s App. at 3543-48. The
Bankruptcy Court ruled that Debtor “chose to ignore” significant problems with his plan until the
last moment. Id. at 6, in Appellant’s App. at 3548.
31
Opinion on Confirmation at 12, in Appellant’s App. at 3852.
32
Id. at 11-12, in Appellant’s App. at 3851-52.
33
Id. at 12 n.16, in Appellant’s App. at 3852.
8
- Failing and refusing to pay professional fees incurred in the Bankruptcy Court,
and then responding to the Bankruptcy Court’s order to pay fees by emptying
his bank account. 34
- Failing to alter his “expensive lifestyle or spending habits” while a chapter 11
bankruptcy debtor. 35
- Paying his home mortgage in violation of the automatic stay. 36
- Changing his position about the value of his intellectual property. 37
The Bankruptcy Court also made specific findings about Debtor’s reorganization, and the
likely success thereof, finding that Debtor had a “mistaken belief that only he should be
allowed to control the reorganization process, whatever the cost, delay, or acceptability of
payment proposals.” 38 The Bankruptcy Court noted that Debtor’s most recently amended
plan received a majority of votes against it, while the UCC plan received a majority of
accepting votes. 39 The Bankruptcy Court viewed the UCC plan as the only way to
prevent continuous litigation, 40 and concluded that the UCC plan was the best deal
creditors could get to pay unsecured creditors as much as possible. 41 The Bankruptcy
Court also concluded that confirmation of the UCC plan would benefit Debtor’s domestic
34
Id., in Appellant’s App. at 3852.
35
Id., in Appellant’s App. at 3852.
36
Id., in Appellant’s App. at 3852.
37
Id., in Appellant’s App. at 3852.
38
Id. at 7, in Appellant’s App. at 3847.
39
Id. at 10, n.13, in Appellant’s App. at 3850.
40
Regarding the UCC plan’s settlement of Debtor and the estate’s claims against ARCO
and the Abruzzos, the Bankruptcy Court concluded Debtor had little chance of success, his
claims had been expensive to litigate, he was not a sympathetic plaintiff, and the evidence
supported the state court finding that neither ARCO nor the Abruzzos breached any duties to
him. Id. at 14, in Appellant’s App. at 3854.
41
Id. at 11, in Appellant’s App. at 3851. The Bankruptcy Court found that general
unsecured creditors and “several large creditors” supported the UCC plan. Id. at 14, in
Appellant’s App. at 3854.
9
support obligation creditor, “substantially increasing [Debtor’s] ability to pay alimony
and child support.” 42 And finally, the Bankruptcy Court concluded the UCC plan was in
Debtor’s best interest, because his debts of more than $8.6 million, including priority tax
claims, would be paid off. 43
The effective date of the confirmed plan is not until ten days after the confirmation
order becomes final and additional substantive steps are taken. 44 Debtor appealed the
Bankruptcy Court’s plan confirmation order to this Court, 45 where it was upheld, 46 and to
the Tenth Circuit Court of Appeals, where the decision was again affirmed, 47 but the
appeal time from that most recent decision has not run. Until the UCC plan is effectuated,
the Bankruptcy Court entered an order permitting the trusts to make estimated tax
payments on Debtor’s behalf directly to taxing authorities, noting that in the past in his
chapter 11 case, Debtor had failed to make payments as directed by the Court. 48
42
Id. at 16, in Appellant’s App. at 3856.
43
Id. at 17, in Appellant’s App. at 3857.
44
Second Amended Chapter 11 Plan of Reorganization of the Official Committee of
Unsecured Creditors at 15, in Appellant’s App. at 3053 (defining “Effective Date” as “the date
ten (10) business days after all of the following conditions have been satisfied: (i) the
Confirmation Order shall have been entered an shall be a Final Order; (ii) all documents, actions,
and agreements necessary to implement the Plan have been executed; (iii) closing on the ARCO
Stock Redemption shall have occurred; and (iv) receipt by the Creditor Trustee of the Trust
Payment.”).
45
Notice of Appeal, in Appellant’s App. at 3869.
46
In re Kearney, No. NM-19-010, 2019 WL 6523171 (10th Cir. BAP Dec. 4, 2019)
(unpublished), aff’d sub nom. Kearney v. Unsecured Creditors Comm., ___ F.3d ___,2021 WL
710850 (10th Cir. Feb. 2021). A more detailed summary of the terms of the UCC plan are
included in this opinion. Id. at *2.
47
Notice of Appeal to United States Court of Appeals for the Tenth Circuit, in
Appellant’s App. at 4381; Kearney v. Unsecured Creditors Comm., ___ F.3d ___, 2021 WL
710850 (10th Cir. 2021).
48
Order Regarding Tax Payments at 1-2, in Appellant’s App. at 4153-54.
10
On August 27, 2019, an indictment was filed against Debtor charging him with
conspiring to commit fraud on the Internal Revenue Service and making and subscribing
false income tax returns. 49 The state court referred Debtor to the IRS in 2017 based on
evidence from the trial there that showed Debtor had not “properly reported his income
for many years, had unilaterally altered tax forms issued to him by third parties, and had
not filed required tax returns in multiple years.” 50 The state court relied on an expert
witness in forensic accounting, who called Debtor’s tax situation a “tax abomination,” 51
and also concluded that Debtor lied under oath in testifying about his taxes. 52 The
Bankruptcy Court noted that it appeared Debtor fraudulently avoided tax liability on
about $7 million of income. 53 At his initial appearance on his criminal indictment on
September 12, 2019, Debtor entered a not guilty plea.
On September 16, 2019, Debtor signed an engagement letter with Attorney Amy
Sirignano. Debtor then filed in his bankruptcy case an application to employ Attorney
Sirignano as his criminal defense counsel, which the Bankruptcy Court ultimately denied
in October 2019. The Bankruptcy Court instructed Debtor that if he wished to pay for his
own attorney, then he “must use non-estate assets at his disposal, if any he has.” 54
Attorney Sirignano entered her appearance in Debtor’s criminal case on January 7, 2020.
49
Indictment, in Appellee’s Supp. App. at 5-10.
50
Opinion on Conversion at 3, in Appellant’s App. at 156.
51
Id. at 4, in Appellant’s App. at 157.
52
Id. at 3-4, in Appellant’s App. at 156-57.
53
Id. at 4, in Appellant’s App. at 157.
54
Opinion on Employment at 10, in Appellant’s App. at 4322.
11
Four months after the denial of his motion to employ Attorney Sirignano, in
February 2020, Debtor moved to convert his chapter 11 case to chapter 7. 55 In that
motion, despite having somehow already employed Attorney Sirignano, Debtor argued
that he had no non-estate assets to pay a criminal attorney, and therefore had “no option
but to convert this Chapter 11 case to Chapter 7.” 56 Debtor argued he had an absolute
right to convert under § 1112(a). 57 Oppositions to the motion to convert, as well as
motions seeking immediate reconversion if the motion to convert were granted, were
filed by the Abruzzos, the Unsecured Creditors Committee, and one large creditor. 58
55
Also, in early 2020, Debtor’s second wife, whom he married in 2013 and divorced in
2015, filed a motion seeking to dismiss Debtor’s case. Opinion on Dismissal at 1-2, in
Appellant’s App. at 4720-21. In the opinion denying the motion to dismiss, the Bankruptcy
Court concluded that Debtor made payments to the ex-wife that were contrary to his prior
agreement with her on payments and stated a version of the agreement with the ex-wife in his
proposed plans that was “significantly different” than what the ex-wife stated in her pleadings.
Id. at 4, in Appellant’s App. at 4723. The Bankruptcy Court also pointed out that the timing of
the ex-wife’s motion was unusual, suggesting that she was attempting to aid Debtor in defeating
the UCC plan, not seeking to maximize her recovery. Id. at 9, in Appellant’s App. at 4728.
56
Motion to Convert at 5, in Appellant’s App. at 147.
57
Id. at 6, in Appellant’s App. at 148. Debtor moved to strike the opposition to his
motion filed by the Abruzzos, but the Bankruptcy Court denied that motion, Order Denying
Motion to Strike, in Appellant’s App. at 4611, and the decision was not appealed. The opinion
supporting the order denying the motion to strike was not included in the record on appeal, but is
available at In re Kearney, 615 B.R. 488 (Bankr. D.N.M. 2020). In that opinion, the Bankruptcy
Court called Debtor’s arguments “ludicrous” and said that they did “not pass the straight-face
test.” Id. at 493-94.
58
See Objection to Kearney’s Motion to Convert his Chapter 11 Case to Chapter 7 and
Motion to Reconvert to Chapter 11, in Appellant’s App. at 4523; Creditor Kevin Yearout’s
Joinder in Doc. No. 103[7], the Abruzzo Trustee[s] Objection to Kearney’s Motion to Convert
his Chapter 11 Case to Chapter 7, in Appellant’s App. at 4535; Unsecured Creditors
Committee’s Objection to “Motion of Debtor Victor P. Kearney to Convert this Chapter 11 Case
to Chapter 7”, in Appellant’s App. at 4536 (also stating within pleading that “[i]n the event that
the Court concludes that conversion is required, the UCC requests that the Court immediately re-
convert the case to Chapter 11”); Creditor Kevin Yearout’s Joinder in Doc. No. 1039, the
Unsecured Creditor Committee’s Objection to Kearney’s Motion to Convert his Chapter 11 Case
to Chapter 7, in Appellant’s App. at 4552.
12
The Bankruptcy Court entered an order denying Debtor’s motion to convert on
June 18, 2020. In its Opinion, the Bankruptcy Court made factual findings that Attorney
Sirignano had been actively defending Debtor in his criminal case since her appearance
therein, and though the court had no evidence as to how she had been paid to date, there
was no evidence she was “concerned about or unhappy with her compensation
arrangements” with Debtor. 59 The Bankruptcy Court found that Debtor’s “professed
reason for conversion [was] a pretext,” and that the real desire to convert was an effort to
“cancel” the confirmed UCC plan. 60
The Bankruptcy Court then made multiple, alternate, legal conclusions. First, the
Bankruptcy Court discussed the Supreme Court’s decision in Marrama . 61 The
Bankruptcy Court concluded Debtor was a bad faith debtor, and also would be subject to
immediate reconversion under § 706(b), and therefore was ineligible for chapter 7
relief. 62 The Bankruptcy Court also concluded that a confirmed chapter 11 creditor plan
Because of the multiple motions to reconvert Debtor’s case if his motion to convert was
granted, Debtor had reasonable notice of the issue, and his argument to the contrary is rejected.
See, e.g., Matter of Texas Extrusion Corp., 844 F.2d 1142, 1161 (5th Cir. 1988) (concluding that
even one-day’s notice for hearing on reconversion was reasonable when same lawyers had been
involved throughout and were knowledgeable of all facts). The first pleading seeking
reconversion to chapter 11 if Debtor’s motion to convert to chapter 7 was granted was served on
Debtor and all creditors fourteen days before the hearing on the motion to convert. Victor P.
Kearney’s Omnibus Response to the Objections to Debtor’s Motion to Convert Case from
Chapter 11 to Chapter 7, in Appellant’s App. at 4593.
59
Opinion on Conversion at 4, in Appellant’s App. at 157.
60
Id. at 9, in Appellant’s App. at 162.
61
549 U.S. 365 (2007).
62
Opinion on Conversion at 6-7, in Appellant’s App. at 159-60.
13
should impact a debtor’s right to conversion. 63 Finally, the Bankruptcy Court rejected
Debtor’s argument that his Sixth Amendment rights were impacted. 64
II. Jurisdiction and Standard of Review
Debtor appeals the denial of his motion to convert. An order denying a motion to
convert is generally an interlocutory order, 65 but this Court has jurisdiction to hear
appeals from interlocutory orders “with leave of the court.” 66 Leave to appeal was
granted by a prior panel of this Court. 67 Debtor then sought leave to file a direct appeal to
the Tenth Circuit Court of Appeals, but that request was denied. 68 The Court therefore
has jurisdiction over this appeal.
We will review the Bankruptcy Court’s interpretation of the Code de novo. 69
Under de novo review, we make an independent determination of each question of law. 70
We will review the Bankruptcy Court’s findings of fact for clear error, 71 and
63
Id. at 8, in Appellant’s App. at 161.
64
Id. at 8-9, in Appellant’s App. at 161-62.
65
In re Fox, 241 B.R. 224, 229 (10th Cir. BAP 1999) (“An order denying a motion to
convert or dismiss a bankruptcy proceeding is not a[] [final] order that impacts either the assets
of the bankruptcy estate or the priority of creditors.”).
66
28 U.S.C. § 158(a)(3).
67
BAP ECF No. 18.
68
BAP ECF No. 32. Debtor also filed a petition for a writ of mandamus in the Tenth
Circuit, requesting the Circuit Court vacate the BAP’s order denying the request for direct appeal
and consider the issue, and the Tenth Circuit denied Debtor’s petition. Order, No. 20-2127 (10th
Cir. Nov. 4, 2020).
69
In re Morreale, 959 F.3d 1002, 1005 (10th Cir. 2020) (quoting In re Woods, 743 F.3d
689, 693 (10th Cir. 2014)).
70
Nazar v. N. Am. Savings Bank FSB (In re Born), 357 B.R. 630, 632 (10th Cir. BAP
2006) (citing Salve Regina Coll. v. Russell, 499 U.S. 225, 268 (1991)).
71
See In re Young, 237 F.3d 1168, 1172 (10th Cir. 2001) (reviewing factual
determinations of bankruptcy court for clear error).
14
discretionary decisions concerning conversion will be reviewed for abuse of discretion. 72
Under clear error review, “[a]finding is not clearly erroneous unless ‘it is without factual
support in the record or if, after reviewing all of the evidence, we are left with the definite
and firm conviction that a mistake has been made.’” 73 “Under the abuse of discretion
standard[,] ‘a trial court’s decision will not be disturbed unless the appellate court has a
definite and firm conviction that the lower court made a clear error of judgment or
exceeded the bounds of permissible choice in the circumstances.’” 74 As with the clearly
erroneous standard, when applying the abuse of discretion standard, deference is given to
the Bankruptcy Court “‘because of its first-hand ability to view the witness or evidence
and assess credibility and probative value.’” 75
III. Analysis
A. The So-Called “Absolute Right” to Convert
72
Courts considering conversion between chapter 7 and chapter 11 review a bankruptcy
court’s decision for abuse of discretion. In re Daughtrey, 896 F.3d 1255, 1273 (11th Cir. 2018)
(explaining the weight of authority suggests denial of a motion to convert is reviewed for abuse
of discretion); see also In re Takano, 771 F. App’x 805, 806 (9th Cir. 2019) (unpublished)
(reviewing denial of creditor’s motion to convert chapter 7 case to chapter 11 and stating that
court had “broad discretion to convert to a Chapter 11 case based on what will most inure to the
benefit of all parties in interest” (internal quotation omitted)); In re Schlehuber, 558 F. App’x
715, 716 (8th Cir. 2014) (unpublished) (reviewing grant of creditor’s motion to convert from
chapter 7 to chapter 11 for abuse of discretion); Matter of Texas Extrusion Corp., 844 F.2d 1142,
1161 (5th Cir. 1988) (reviewing bankruptcy court decision to grant conversion of case to chapter
11 after prior conversion from chapter 11 to chapter 7 and holding the decision whether to
reconvert a case back to chapter 11 after a prior conversion from chapter 11 to chapter 7 was
“within the discretionary powers of the bankruptcy court based on the court’s determination of
what will most inure to the benefit of all parties in interest”).
73
In re Ford, 492 F.3d 1148, 1153 (10th Cir. 2007) (quoting Connolly v. Harris Tr. Co.
of Ca. (In re Miniscribe Corp.), 309 F.3d 1234, 1240 (10th Cir. 2002)).
74
Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (quoting McEwen v. City of
Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991)).
75
Id. (quoting McEwen, 926 F.2d at 1553-54).
15
Conversion or dismissal of a chapter 11 case is governed by § 1112. That section
states, in pertinent part:
(a) The debtor may convert a case under this chapter to a case under chapter
7 of this title unless--
(1) the debtor is not a debtor in possession;
(2) the case originally was commenced as an involuntary case under
this chapter; or
(3) the case was converted to a case under this chapter other than on
the debtor’s request.
...
(f) Notwithstanding any other provision of this section, 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. 76
Despite arguing that he had an absolute right to convert his case, Debtor does
acknowledge that § 1112 places limits on that right. 77
First, the initial three limits on conversion are found in § 1112(a). A chapter 11
debtor seeking to convert the case to chapter 7 under § 1112 must be a “debtor in
possession.” 78 Upon filing a chapter 11 petition, a debtor is generally a debtor in
possession unless or until a case trustee is appointed, the debtor’s plan of reorganization
is confirmed, the case is dismissed, or the case is converted. 79 The confirmed plan in
76
11 U.S.C. § 1112.
77
Appellant’s Br. 10-11 (“Thus, under section 1112, there are four—and only four—
limitations on a chapter 11 debtor’s right to convert to chapter 7.”). The “absolute” argument
comes from legislative history that states “subsection (a) gives the debtor an absolute right to
convert a voluntarily commenced chapter 11 case in which the debtor remains in possession to a
liquidation case.” S. REP. 95-989, 117, as reprinted in 1978 U.S.C.C.A.N. 5787, 5903; H.R.
REP. 95-595 405, as reprinted in 1978 U.S.C.C.A.N. 5963, 6361.
78
11 U.S.C. § 1112(a)(1).
79
11 U.S.C. § 1101(1) (defining “debtor in possession” as a “debtor,” unless a qualified
trustee is serving); § 1107 (giving the debtor in possession the rights and powers to perform the
functions and duties as if a trustee); In re Schupbach Invs., L.L.C., 808 F.3d 1215, 1223 (10th
Cir. 2015) (“For purposes of Chapter 11 bankruptcies, a ‘debtor-in-possession’ is a debtor who
remains in possession of the pre-petition assets and administers them for the benefit of the
16
Debtor’s case contains language delaying its effective date until ten days after the
confirmation order becomes final, documents, actions, and agreements necessary to
implement the UCC plan have been executed, closing on the redemption of the ARCO
stock has occurred, and the trust payment has been received. 80 As noted above, Debtor
appealed the Bankruptcy Court’s plan confirmation order. 81 That decision was upheld on
appeal to this court, 82 and to the Tenth Circuit Court of Appeals. 83 The appeal time has
not run on a potential further appeal to the United States Supreme Court, and regardless,
the additional actions concerning execution of necessary documents, redemption of the
ARCO stock, and payment have not occurred.
As a result, Debtor remains the debtor in possession because the UCC plan’s
confirmation is not yet final. 84 Additionally under § 1112(a), a chapter 11 debtor seeking
creditor body pursuant to 11 U.S.C. § 1107. Once the Creditors’ Plan was confirmed, the Debtor
(which had been dissolved) no longer satisfied this description of a debtor-in-possession.”
(internal quotation and citation omitted)).
80
Second Amended Chapter 11 Plan of Reorganization of the Official Committee of
Unsecured Creditors at 15, in Appellant’s App. at 3053 (defining “Effective Date” as “the date
ten (10) business days after all of the following conditions have been satisfied: (i) the
Confirmation Order shall have been entered an shall be a Final Order; (ii) all documents, actions,
and agreements necessary to implement the Plan have been executed; (iii) closing on the ARCO
Stock Redemption shall have occurred; and (iv) receipt by the Creditor Trustee of the Trust
Payment.”).
81
Notice of Appeal, in Appellant’s App. at 3869.
82
In re Kearney, No. NM-19-010, 2019 WL 6523171 (10th Cir. BAP Dec. 4, 2019)
(unpublished), aff’d sub nom. Kearney v. Unsecured Creditors Comm., ___ F.3d ___, 2021 WL
710850 (10th Cir. 2021).
83
Kearney v. Unsecured Creditors Comm., ___ F.3d ___, 2021 WL 710850 (10th Cir.
2021).
84
The Bankruptcy Court also entered the parties’ stipulated order clarifying that Debtor
is a debtor in possession. Stipulated and Default Order Resolving Motion for Clarification at 3,
in Appellant’s App. at 4455 (“The Debtor is a Debtor-in-Possession until the Effective Date.”).
Obviously, at some point, Debtor’s appeal of the conversion order may become constitutionally
moot. See Church of Scientology of Ca. v. United States, 506 U.S. 9, 12 (1992) (stating that an
17
to convert to chapter 7 under § 1112 cannot be in chapter 11 because of an involuntary
petition and cannot have been converted to that chapter by other than the debtor’s
request. Debtor filed a voluntary petition to initiate his case, 85 satisfying both these limits
on conversion. 86
Second, and the matter at issue in this appeal, under the express dictate of
§ 1112(f), there is a final limit on conversion. Under § 1112(f), “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.” 87
Subsection (f) of § 1112 cannot be considered without a thorough understanding
of two Supreme Court decisions: Marrama v. Citizens Bank of Massachusetts 88 and Law
v. Siegel. 89 In Marrama, the debtor filed a voluntary chapter 7 petition, and thereafter
sough to convert to chapter 13 under § 706, arguing he had an absolute right to convert
over the objection of his creditors and the chapter 7 trustee, who argued the debtor had
engaged in bad faith. 90
Like § 1112, § 706 contains both an initial subsection granting a debtor the right to
convert, but also a subsection limiting that conversion. The two statutory sections are
compared here:
appeal is constitutionally moot if events have taken place during the pendency of the appeal that
make it impossible for the court to grant any effectual relief).
85
Petition, in Appellant’s App. at 169.
86
Appellees acknowledge that Debtor meets these first three limits on conversion from
§ 1112(a). Appellee’s Br. 25 (“Kearney meets the threshold requirements in Section 1112(a)[.]”).
87
11 U.S.C. § 1112(f).
88
549 U.S. 365 (2007).
89
571 U.S. 415 (2014).
90
Marrama, 549 U.S. at 369-70.
18
Section 706: 91 Section 1112: 92
(a) The debtor may convert a case under (a) The debtor may convert a case under
this chapter to a case under chapter 11, 12, this chapter to a case under chapter 7 of
or 13 of this title at any time, if the case this title unless--
has not been converted under section (1) the debtor is not a debtor in
1112, 1208, or 1307 of this title. Any possession;
waiver of the right to convert a case under (2) the case originally was commenced as
this subsection is unenforceable. an involuntary case under this chapter; or
(3) the case was converted to a case under
this chapter other than on the debtor’s
request.
(d) Notwithstanding any other provision (f) Notwithstanding any other provision of
of this section, a case may not be this section, a case may not be converted
converted to a case under another chapter to a case under another chapter of this title
of this title unless the debtor may be a unless the debtor may be a debtor under
debtor under such chapter. such chapter.
The Supreme Court rejected the debtor’s argument that he had an absolute right to
convert, noting that the right to convert under subsection (a) of § 706 was expressly
limited by subsection (d). 93 The Supreme Court concluded there were “at least two” 94
possible limitations on a debtor’s ability to qualify as a debtor under another chapter as
required by subsection (d): § 109(e) (defining debt limits for individuals with regular
income who may be a debtor under chapter 13) and § 1307(c) (governing standards for
dismissal or conversion of a chapter 13 petition for cause). 95 Although none of the
specific examples given in § 1307(c) address dismissal of a chapter 13 case based on
91
11 U.S.C. § 706.
92
11 U.S.C. § 1112.
93
Marrama, 549 U.S. at 372 (“The words ‘unless the debtor may be a debtor under such
chapter’ expressly conditioned [the debtor’s] right to convert on his ability to qualify as a
‘debtor’ under Chapter 13.”).
94
Id. at 374.
95
Id.19
prepetition bad-faith conduct, the Supreme Court concluded that was “implicitly
authorized” by the use of a “for cause” standard in § 1307(c). 96 Requiring a bankruptcy
court to convert a chapter 7 case to chapter 13, only to thereafter dismiss the case or
immediately return it to chapter 7 would be “a procedural anomaly.” 97
Again, the statutory framework analyzed in Marrama is very similar to the
governing statutory sections herein. The debtor in Marrama sought to convert his case to
chapter 13, and the Supreme Court concluded he would be limited by the chapter 13
standards for dismissing or converting for cause. Debtor herein seeks to convert to
chapter 7, and like in chapter 13, there are statutory standards for conversion or dismissal
of chapter 7 cases (in § 706(b) and § 707, respectively).
We conclude that Marrama controls: there is no “absolute right to convert” 98 a
chapter 11 case to chapter 7, subsection (f) of § 1112 limits the right to convert found in
subsection (a) of § 1112, and if a bankruptcy court finds that it would immediately dsmiss
a chapter 7 case or reconvert it to chapter 11, it need not go through the “procedural
96
Id. at 373-74 (“[Section] 1307(c)[] provides that a Chapter 13 proceeding may be either
dismissed or converted to a Chapter 7 proceeding ‘for cause’ and includes a nonexclusive list of
10 causes justifying that relief. None of the specified causes mentions prepetition bad-faith
conduct . . . Bankruptcy courts nevertheless routinely treat dismissal for prepetition bad-faith
conduct as implicitly authorized by the words ‘for cause.’ In practical effect, a ruling that an
individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of
prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7
proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under
Chapter 13.”) (internal citations omitted).
97
Id. at 368.
98
Id. at 370.
20
anomaly” 99 of conversion before taking that step, but can instead deny conversion on that
basis.
Debtor argues that the subsequent Supreme Court case Law v. Siegel provides that
because § 1112 does not itself have language permitting denial of conversion for bad
faith, courts may not consider a debtor’s bad faith and limit the debtor’s conversion on
that basis. 100 In Law v. Seigel, the Supreme Court considered whether bankruptcy courts
could surcharge a debtor’s statutorily exempt assets, despite provisions of the Code
forbidding exemptions from being used as payment for administrative expenses. 101 The
Supreme Court answered this question emphatically in the negative: bankruptcy courts
should not violate the express terms of the Code by using their § 105(a) powers to
address bad faith. 102
Importantly, however, the Supreme Court in Law addressed its decision in
Marrama, and concluded it had no relevance to the situation in Law. 103 In Marrama, after
reaching its conclusion that § 706(d) provided “adequate authority” 104 for the denial of
the debtor’s motion to convert, the Supreme Court noted that both the broad authority
given bankruptcy judges in § 105(a) and the “inherent power of every federal court to
99
Id. at 368.
100
Appellant’s Br. at 28 (“As the plain language of section 1112(a) does not provide an
exception to conversion for bad faith, and Law provides that a bankruptcy court does not
otherwise have the authority to contravene unambiguous provisions of the Code on equitable
grounds—including bad faith—the bankruptcy court’s decision in the present case was
improper.”).
101
Law v. Siegel, 571 U.S. 415, 420 (2014).
102
Id. at 421-22.
103
Id. at 426.
104
Marrama, 549 U.S. at 374.
21
sanction ‘abusive litigation practices’” 105 might also provide an adequate justification for
denying a motion to convert a bad faith debtor from chapter 7 to chapter 13. But the
Supreme Court explained in Law that Marrama was really just saying that if an express
action is authorized by the Code (i.e., the dismissal or conversion of a debtor’s case), then
a bankruptcy court may be able to use its § 105(a) or inherent powers to reach that result
more expeditiously. 106 The express provisions of the Code must still be followed.
We know that § 1112(f) expressly requires courts to prohibit conversion to another
chapter when the debtor cannot be a debtor under that chapter. The question we should be
asking is whether there is an express provision of the Code that would permit the
bankruptcy court to dismiss or reconvert Debtor’s case immediately after granting a
conversion from chapter 11 to chapter 7, i.e., prohibiting Debtor from being a debtor
under chapter 7? If yes, then we need only ask whether that Code provision was applied
correctly.
We acknowledge that, presumably knowing an appeal would follow, the
Bankruptcy Court rested its denial of Debtor’s motion to convert on multiple independent
bases, namely, that (1) Debtor engaged in bad faith and was not entitled to be a debtor
under chapter 7, (2) Debtor’s case would immediately be reconverted under § 706(b) and
so Debtor could not be a debtor under chapter 7, and (3) because Debtor’s chapter 11
case already had a confirmed creditor plan, he was not entitled to convert under §
105
Id. at 375.
106
Law, 571 U.S. at 426 (“At most, Marrama’s dictum suggests that in some
circumstances a bankruptcy court may be authorized to dispense with futile procedural niceties
in order to reach more expeditiously an end result required by the Code.”).
22
1112(a). Has Debtor acted in bad faith? We would have no trouble affirming such a
factual finding on the record before this Court. 107
But that is not the question the Bankruptcy Court or this court should be asking.
We affirm the Bankruptcy Court’s denial of Debtor’s motion to convert because it also
followed the exact analysis required by Marrama and Law. It said that under § 1112(f), it
would not permit conversion to chapter 7 when Debtor could not remain a debtor under
that chapter. It then relied on § 706(b) to conclude that Debtor could not be a debtor
under chapter 7. This was a correct application of the law. The Bankruptcy Court
followed the directives of both Marrama and Law and hurried along what the Code
expressly permitted.
We also acknowledge that there are cases holding that a bankruptcy court may not
deny conversion under § 1112 because of pre-conversion misconduct, generally refusing
to extend Marrama because of differences between the bankruptcy chapters therein and
other bankruptcy chapters. 108 But we are not saying conversion to chapter 7 from an
107
Note, for example, the Tenth Circuit’s characterization of Debtor’s conduct
surrounding plan confirmation: “[T]he record is replete with evidence of Mr. Kearney’s
obnoxious conduct supporting that finding [that he is not a sympathetic plaintiff], including his
misconduct with respect to the Trusts, his credibility issues, his contempt for the courts and the
judicial process, and his appalling litigation habits.”). Kearney v. Unsecured Creditors Comm.,
___ F.3d ___, 2021 WL 710850, at *11 (10th Cir. 2021); see also id. (referring to Debtor’s
“wrongdoings”); Id. at *12 (referring to Debtor’s “unsavory conduct” and “his refusal to act
responsibly”); Id. (noting Debtor “has significant credibility issues and seems comfortable lying
under oath and otherwise”); Id. (noting that Debtor “has a well-established disdain for courts and
the judicial processes”); Id. at *13 (referring to Debtor’s “established contempt for the judicial
system and courts”); Id. at *15 (referring to Debtor’s “incessant lies, his mockery of the judicial
system, or his litigious approach”).
108
See, e.g., In re Kimrow, Inc., 534 B.R. 219, 225-26 (Bankr. M.D. Ga. 2015)
(questioning whether Marrama should be applied to conversions from corporate chapter 11
debtors to chapter 7, but concluding that even if there were “an extreme circumstances
23
individual chapter 11 is the same as conversion to chapter 13 from chapter 7. What we
are saying is that bankruptcy courts are directed by § 1112(f) to look at the standards for
debtors under the chapter to which the debtor is hoping to convert, and if that debtor
could not be a debtor under that chapter because the bankruptcy court would exercise its
discretion to immediately reconvert the case, then there is no reason to convert the
chapter 11 just to dismiss or re-convert thereafter. We do not think that is an extension of
Marrama.
We conclude that the Bankruptcy Court correctly applied the provisions of the
Code. Yes, the Bankruptcy Court found Debtor had engaged in significant bad faith, and
we are not saying that finding should not be considered at all. We conclude that as long
as a bankruptcy court correctly applies a Code provision limiting a debtor’s ability to
proceed under the chapter they seek to convert, then that Debtor is ineligible to be a
debtor under that chapter, and both Marrama and Law v. Siegel bless this course of
action.
exception” to a debtor’s right to convert under § 1112, it would not find it present upon the facts
of that case); but see In re Johnson, 546 B.R. 83, 169-70 (Bankr. S.D. Ohio 2016) (refusing to
conclude that a chapter 11 debtor had an absolute right to convert to chapter 7 when the debtor
had exhibited bad faith, because that debtor’s bad faith would subject his chapter 7 case to
immediate dismissal under § 707(a), meaning he could not be a debtor under that chapter); In re
Modern Metal Prods. Co., 422 B.R. 118, 122 (Bankr. N.D. Ill. 2009) (noting that if granting a
motion to convert from chapter 11 to chapter 7 “would serve no other purpose than to waste time
and resources, or that the Debtor’s only purpose in filing the motion was to delay, then under the
reasoning of Marrama, the Court could certainly deny the Debtor’s motion”); see also 7 Collier
on Bankruptcy ¶ 1112.02 (Lawrence P. King ed., 15th ed. rev. 2000) (“Although not contained in
the language of the statute, by extension of the conclusion in the United States Supreme Court’s
decision providing a bad faith conduct exception to a debtor’s right to convert a case from
chapter 7 to chapter 13, the right of a debtor under section 1112(a) to convert the case from
chapter 11 to chapter 7 similarly may be qualified.”).
24
B. Application of the Statutory Directive in this Case
As stated throughout, the Bankruptcy Court ruled that Debtor’s case would be
immediately reconverted under § 706(b). Under § 706(b), “[o]n request of a party in
interest and after notice and a hearing, the court may convert a case under this chapter to
a case under chapter 11 at any time.” 109 The Tenth Circuit has not addressed the question
of what standard should be applied when a bankruptcy court considers conversion, or
reconversion, under § 706(b). Other circuits have relied on the legislative history of §
706(b) that says:
Subsection (b) permits the court, on request of a party in interest and after
notice and a hearing, to convert the case to chapter 11 at any time. The
decision whether to convert is left in the sound discretion of the court, based
on what will most inure to the benefit of all parties in interest. 110
A bankruptcy court has broad discretion to make conversion decisions under § 706(b). 111
Taking this guidance, a bankruptcy court must ask what will most benefit “all
parties in interest.” 112 Not just a debtor, not just creditors, not just non-creditor parties.
109
11 U.S.C. § 706(b).
110
H.R. Rep. No. 95-595, at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963; S.
Rep. No. 95-989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787 (emphasis added).
111
See, e.g., In re Takano, 771 F. App’x 805, 806 (9th Cir. 2019) (unpublished)
(reviewing denial of creditor’s motion to convert chapter 7 case to chapter 11 and stating that
court had “broad discretion to convert to a Chapter 11 case based on what will most inure to the
benefit of all parties in interest” (internal quotation omitted)); In re Schlehuber, 558 F. App’x
715, 716 (8th Cir. 2014) (unpublished) (reviewing grant of creditor’s motion to convert from
chapter 7 to chapter 11 for abuse of discretion); Matter of Texas Extrusion Corp., 844 F.2d 1142,
1161 (5th Cir. 1988) (reviewing bankruptcy court decision to grant conversion of case to chapter
11 after prior conversion from chapter 11 to chapter 7 and holding the decision whether to
reconvert a case back to chapter 11 after a prior conversion from chapter 11 to chapter 7 was
“within the discretionary powers of the bankruptcy court based on the court’s determination of
what will most inure to the benefit of all parties in interest”).
112
H.R. Rep. No. 95-595, at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963; S.
Rep. No. 95-989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787
25
Appeals courts have blessed various considerations for this analysis, including the
viability of a chapter 11 plan, 113 ‘“anything relevant that would further the goals of the
Bankruptcy Code,’” 114 but especially a debtor’s ability to pay, 115 weighing of the benefit
to each of the parties, 116 and a movant’s “questionable” motives to “interfere with or
impede” a chapter 11 reorganization. 117
In this case, the Bankruptcy Court did not abuse its discretion in concluding it
would immediately reconvert Debtor’s case under § 706(b). The Bankruptcy Court
expressly found that “Debtor’s professed reason for conversion is a pretext,” 118 and that
Debtor’s true aim was to defeat the UCC plan. Note the timing: Debtor claimed he had
“no option but” 119 to convert to employ counsel in his criminal case, but the motion to
convert was not filed until four months after the Bankruptcy Court denied his motion to
employ counsel from estate funds and five months after Debtor actually engaged his
113
In re Bartmann, 310 B.R. 663, 2004 WL 1057662, at *6 (10th Cir. BAP May 10,
2004) (unpublished) (noting that debtors could seek conversion under § 706(b) if they could
propose a viable plan).
114
In re Schlehuber, 489 B.R. 570, 573 (8th Cir. BAP 2013) (quoting In re Gordon, 465
B.R. 683, 692 (Bankr. N.D. Ga. 2012)), aff’d 558 F. App’x 715 (8th Cir. 2014);
115
Id. (quoting In re Gordon, 465 B.R. 683, 692 (Bankr. N.D. Ga. 2012)), aff’d 558 F.
App’x 715 (8th Cir. 2014); see also In re LaFountaine, No. CC-15-1426-LKITa, 2016 WL
3344003, at *3 (9th Cir. BAP June 7, 2016) (unpublished) (“While Section 706(b) does not
mandate a balancing of parties’ interests as a predicate to conversion of a chapter 7 case to
chapter 11, courts consistently consider several factors, including a debtor's ability to fund a
chapter 11 plan, in exercising their discretion under Section 706(b).”).
116
In re Takano, 771 F. App’x at 806 (weighing of benefits to all parties includes
debtors’ interest in the “quick discharge of their debts and a fresh start”).
117
Matter of Texas Extrusion Corp., 844 F.2d at 1161; see also In re Willis, 345 B.R.
647, 655 (8th Cir. BAP 2006) (considering the debtor’s “fraudulent, evasive, and uncooperative
behavior” when affirming the denial of that debtor’s motion under § 706(b)).
118
Opinion on Conversion at 9, in Appellant’s App. at 162.
119
Motion to Convert at 5, in Appellant’s App. at 147.
26
chosen counsel, 120 the motion to convert was filed shortly after a panel of this Court
affirmed the Bankruptcy Court’s order confirming the UCC plan, 121 and the motion to
convert was filed nearly simultaneously with a motion to dismiss filed by Debtor’s ex-
wife, which the Bankruptcy Court found was itself likely an attempt to aid Debtor in
defeating the UCC plan. 122 The Bankruptcy Court also concluded that the UCC plan was
the best chance for creditors ever to be paid, noting that a chapter 7 trustee could not
obtain the infusion of cash from the Abruzzos that the confirmed chapter 11 plan would
provide. 123 The Bankruptcy Court concluded that conversion to chapter 7 would be “a
terrible and unjust result for creditors,” 124 that Debtor was acting in bad faith, solely in
his own interest, and ignoring the interest of creditors. The Bankruptcy Court found that
the UCC plan was a great deal for Debtor and creditors, that administrative expenses and
trustee fees in a chapter 7 would dilute any dividend to creditors, and that it was in the
best interest of Debtor, and all interested parties for Debtor to remain in a chapter 11. 125
The Bankruptcy Court concluded: “Debtor’s conduct in this case makes him ineligible to
be a chapter 7 debtor, so the motion to convert should be denied.” 126
120
Debtor’s engagement letter with counsel was signed September 16, 2019, the
Bankruptcy Court’s order denying Debtor’s application to employ counsel with estate funds was
entered October 24, 2019, and Debtor’s motion to convert was filed February 28, 2020.
121
The opinion of this Court affirming the Bankruptcy Court’s confirmation of the UCC
plan was entered December 4, 2019.
122
The motion to dismiss by Debtor’s ex-wife was filed March 3, 2020, two business
days after Debtor filed his motion to convert.
123
Opinion on Conversion at 10, in Appellant’s App. at 163.
124
Id., in Appellant’s App. at 163.
125
Id. at 12, in Appellant’s App. at 165.
126
Id. at 13, in Appellant’s App. at 166.
27
Debtor argues that the findings from the Bankruptcy Court rested on pure
litigation tactics, and should not have been considered. Again, we find no error in the
Bankruptcy Court’s judgment. We give deference to the Bankruptcy Court here, as we
should. It is the Bankruptcy Court that has had the first-hand experience with Debtor, the
creditors, and all parties in interest. The Bankruptcy Court did not consider each of
Debtor’s litigation tactics in a vacuum. Rather, it issued an inordinate number of opinions
in Debtor’s bankruptcy case, assessed Debtor and his motives, creditors and their
motives, the documentary evidence, the credibility of every witness, and so much more.
The Bankruptcy Court relied on the totality of the circumstances—the knowledge it
gained from the over thirty-three months this case had been on file when it issued its
opinion on Debtor’s motion to convert, not to mention the two-day trial on confirmation
of the UCC plan, and the countless other hearings in this case.
As noted above, the Bankruptcy Court alternately held that a chapter 11 debtor
with a confirmed creditor plan loses the right to convert, even if he remained a debtor in
possession, because allowing a debtor to convert after confirmation of a plan would
“severely undermine the potent creditor threat of a competing plan and tilt the playing
field unfairly in the debtor’s favor,” 127 citing In re Pero Brothers Farms, Inc., 128 and In
127
Opinion on Conversion at 8, in Appellant’s App. at 161.
128
91 B.R. 1000, 1001 (Bankr. S.D. Fla. 1988) (confirming a creditor’s liquidating plan
and denying a debtor’s motion to convert the case to chapter 7 even though a motion to
reconsider the confirmation order was still pending; recognizing that allowing a debtor in
possession to convert a case would “deprive creditors of their statutory right under § 1121(c) to
file a plan”).
28
re West Pointe Ltd. Partnership, 129 in support of this so-called “confirmed creditor plan
exception” to conversion. 130 We agree that a chapter 11 debtor with a confirmed creditor
plan is less likely able to convince a court that conversion will “most inure to the benefit
of all parties,” 131 but believe that a confirmed creditor plan should be just one factor
bankruptcy courts look at to determine what will benefit all parties in interest.
Finally, we reject Debtor’s argument that the Bankruptcy Court abused its
discretion on his motion to convert, by not reassessing the arguments Debtor previously
made as to his Sixth Amendment right to counsel for his criminal indictment. Debtor’s
arguments on the Sixth Amendment issue were decided by the Bankruptcy Court in a
thorough opinion rejecting his application to employ counsel with estate funds. 132 That
decision was not appealed and is final. Regardless, it was not an abuse of discretion to
reject these arguments in light of the other factors considered by the Bankruptcy Court in
this matter.
IV. Conclusion
For the foregoing reasons, we affirm the decision of the Bankruptcy Court.
129
270 B.R. 481, 484-85 (Bankr. E.D. Mo. 2001) (concluding that a court should
consider the interests of creditors when ruling on a postconfirmation motion to convert).
130
Opinion on Conversion at 7-8, in Appellant’s App. at 160-61.
131
Id. at 11, in Appellant’s App. at 164 (citing In re Schlehuber, 489 B.R. 570, 573 (8th
Cir. BAP 2013), aff’d 558 F. App’x 715 (8th Cir. 2014)).
132
Opinion on Employment at 7-10, in Appellant’s App. at 4319-22.
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