Consumers are entitled to convert a chapter 7 case to chapter 13 even if the only reason is to prevent a trustee from selling their home, according to Chief Bankruptcy Judge Melvin S. Hoffman of Boston.
The chapter 7 trustee had arranged a sale of the debtors’ home. The purchase price would only cover the mortgage and a portion of the tax liens. Judge Hoffman said that the sale would only pay secured creditors, the trustee, and the trustee’s counsel, leaving nothing for the debtors or unsecured creditors.
To prevent a sale of their home, the debtors filed a motion for conversion of the chapter 7 case to chapter 13. The trustee and the Internal Revenue Service opposed the motion, claiming the debtors harbored an “improper motive of frustrating the trustee’s efforts to sell their home.”
Judge Hoffman allowed conversion in his Dec. 18 opinion. He first cited Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), for the proposition that the court can deny a conversion motion if the judge “finds the debtor engaged in bad-faith conduct.” He mentioned how other courts have denied conversion based on futility or abuse of process.
The trustee argued that the debtors had no intention of completing a chapter 13 plan because they lacked excess income to fund a plan. Judge Hoffman nonetheless found that a motion to convert, “even if motivated by the desire to prevent the trustee from selling their home, does not constitute bad faith under Marrama.”
Liquidating the home for the benefit of secured creditors and the trustee “does not demand much safe-guarding.” The secured creditors, he said, “are well equipped to defend their own interests.”
Sounding a chord similar to Jubber v. Bird (In re Bird), 16-039, 2017 BL 431229 (B.A.P. 10th Cir. Nov. 30, 2017), Judge Hoffman said that arranging a sale “to manufacture commissions or legal fees by selling fully encumbered property is not a trustee function that warrants preservation in the face of conversion.”
Judge Hoffman said he was not prepared to find that conversion was futile. The threat of losing their home, he said, might give the debtors motivation to confirm a chapter 13 plan by reducing their expenses or increasing their income.
In similar circumstances in Jubber, the Tenth Circuit Bankruptcy Appellate Panel ruled even more emphatically in favor of the debtors. The BAP held that a court may not approve a chapter 7 trustee’s sale unless the proceeds will pay the debtors’ homestead exemption in full.
The BAP inveighed against sales that would benefit only the trustee and secured creditors while producing nothing for unsecured creditors. To read ABI’s discussion of Jubber, click here.
Not all recent decisions are in favor of the debtor. Indeed, there is a brewing split of circuits because the Sixth Circuit in Brown v. Ellmann (In re Brown), 851 F.3d 619 (6th Cir. March 20, 2017), allowed a chapter 7 trustee to sell an overencumbered home over the debtor’s objection. To read ABI’s discussion of Brown, click here.