Debtor’s Post-Discharge Pre-Closure Motion to Convert Denied

Posted by NCBRC - December 16, 2020

The debtor was not permitted to convert from chapter 7 to chapter 13 post-discharge but prior to administrative closure of his case where the court found the attempted conversion to be an abuse of process and his conduct in his chapter 7 case to indicate bad faith. In re Chamoun, No. 20-5069 (C.D. Cal. Dec. 2, 2020).

In his chapter 7 petition, the debtor listed two real properties known as Blackhawk and Empty Saddle. He stated that he lived at the Blackhawk property but claimed a homestead exemption for the Empty Saddle property where his ex-wife lived and paid rent to him. On September 16, 2019, the chapter 7 trustee filed a motion to avoid fraudulent transfers to the debtor’s brother and to the debtor’s ex-wife. The former was based on a deed of trust the debtor issued to his brother for no consideration and which encumbered the Empty Saddle property. The latter was based on the rent he charged his ex-wife, which the trustee argued undervalued the property, as well as other aspects of their marital settlement agreement.

The debtor received a discharge on October 24, 2019. Efforts to settle the trustee’s complaint failed, and the trustee sought to sell the Empty Saddle property. On March 6, 2020, the debtor moved to convert his case from chapter 7 to chapter 13. Relying on Marrama v. Citizen’s Bank of Mass., 549 U. S. 365 (2007), the bankruptcy court denied the debtor’s motion. In Marrama, the Court held that a debtor does not have an absolute right of conversion from chapter 7 to chapter 13 under section 706(a). A court may deny a motion to convert when the debtor is not an eligible debtor under chapter 13, or when the debtor has forfeited his right of conversion by acting in bad faith. The bankruptcy court denied the motion on both bases. The debtor appealed to the district court.

On appeal, the court agreed the debtor was not entitled to convert because the conversion would be an “abuse of process,” making him ineligible for chapter 13. The court reasoned that permitting the debtor to convert after he received his discharge but while his chapter 7 case was still being administered would give him all the benefits of discharge without the burden of the continued administration of his estate. The court found that if the debtor were in chapter 13, he would be subject to dismissal or conversion to chapter 7 under section 1307(c) which authorizes the bankruptcy court to take either action “for cause.”

The district court also found no error in the bankruptcy court’s conclusion that the debtor acted in bad faith in his chapter 7 case. The court found bad faith in significant inconsistencies in the debtor’s bankruptcy filings including whether he had income and expenses and whether he lived on the property he claimed as his homestead. Further, the timing of the motion to convert suggested that it was intended to avoid the chapter 7 trustee’s sale of the Empty Saddle property.

The court went on to address the debtor’s remaining allegations of error, beginning with his contention that the bankruptcy court failed to consider his current financial status when denying his motion. The court found that the debtor’s financial status was irrelevant because the bankruptcy court denied his motion to convert for reasons of bad faith and abuse of process rather than inability to fund a chapter 13 plan.

The court rejected the debtor’s argument that he was wrongfully deprived of an evidentiary hearing before his motion was denied, noting that the debtor had not sought a hearing and the bankruptcy court was not otherwise obliged to hold one.

The court found that, contrary to the debtor’s argument, the bankruptcy court’s decision was not based on a finding that discharge in chapter 7 precluded conversion to chapter 13 in all cases.

The court found the reasons relied on by the bankruptcy court were sufficient and affirmed the court’s denial of conversion.

Chamoun CD Cal Dec 2020


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