Debtor Allowed to Convert from Chapter 12 to Chapter 11

On an issue where the courts are split, Bankruptcy Judge Robert L. Jones of Lubbock, Texas, ruled that a chapter 12 family farmer can convert the case to chapter 11.

The debtor was an elderly woman. The secured creditor had filed a motion to dismiss, contending that she was not eligible for chapter 12. The debtor responded by filing a motion for conversion to chapter 11.

The lender argued that the debtor could only dismiss the chapter 12 case, then refile under chapter 11, thus invoking Section 362(c)(3), which causes the automatic stay to terminate automatically in 30 days, at least in part.

Section 1208 deals with conversion or dismissal of a chapter 12 case. In part, it protects the debtor. For instance, a creditor cannot move for conversion to chapter 11, where creditors have more power. Likewise, a creditor may move for dismissal, but a creditors’ motion for conversion to chapter 7 must show fraud. Otherwise, the court must dismiss a chapter 12 case on motion by the debtor.

Section 1208 is silent about a debtor’s right to convert from chapter 12 to chapter 11. Or, as Judge Jones said in his October 3 opinion, the statute “does not explicitly authorize a debtor” to convert from chapter 12 to chapter 11.

Judge Jones decided that the court has discretion to allow conversion to chapter 11 “if the debtor is proceeding in good faith and conversion is not otherwise prejudicial to creditors or otherwise inequitable.”

Judge Jones saw “no benefit to any party by dismissing and forcing [the debtor] to refile her case” in chapter 11. The stop-and-start procedure, he said, “would be more expensive and less efficient for all concerned.”

Judge Jones dealt with Section 362(c)(3) by insinuating that he would have reinstated the automatic stay within the 30-day period as the statute permits, if the debtor were to have dismissed and refiled in chapter 11.