Opinion
CIVIL ACTION NO. 2:14-cv-23820
09-01-2017
IN RE: RICHARD EICHERT HARDISON & MARY HARDISON Debtors. RICHARD EICHERT HARDISON, Appellant, v. HELEN M. MORRIS, et al., Appellees.
MEMORANDUM OPINION
Pending before the court is the debtor's appeal of the Bankruptcy Court for the Southern District of West Virginia's ("the Bankruptcy Court") Order Denying Motion to Reconsider, or in the Alternative, Motion to Reconvert to Chapter 13. See Notice Appeal [ECF No. 1]. The matter has been fully briefed. For the following reasons, the court REVERSES the ruling of the Bankruptcy Court and REMANDS the case to the Bankruptcy Court for further proceedings.
BACKGROUND
On April 27, 2006, Richard Hardison, the debtor, initiated chapter 13 bankruptcy proceedings. R. Appeal, Ex. BK 1 [ECF No. 2-2]. Seven years passed, and the debtor failed to propose a confirmable chapter 13 plan. See Appellee's Br. 10 [ECF No. 15]. On December 13, 2011, the Bankruptcy Court entered an order converting the debtor's case to chapter 7. R. Appeal, Ex. BK 453 [ECF No. 9-17]. The debtor then filed a motion asking the Bankruptcy Court to reconsider its order converting the case to chapter 7 or, alternatively, to reconvert the case to chapter 13. Suppl. R. Appeal, Ex. BK 456 [ECF No. 20-3]. The Bankruptcy Court denied the debtor's order, stating that it was without legal or equitable authority to reconvert the debtor's case to chapter 13. R. Appeal, Ex. BK 460 [ECF No. 10].
The debtor raises several issues on appeal. The central issue, however, is whether or not the Bankruptcy Court erred when it held that it was without legal authority to reconvert the debtor's case to chapter 13.
STANDARD OF REVIEW
"On review of a Bankruptcy Court's order, a district court functions as an appellate court and may affirm, reverse, modify, or remand with instructions for further proceedings." Educ. Credit Mgmt. Corp. v. Graham, No. CIV.A. 2:05-CV-00589, 2006 WL 5473666, at *1 (S.D. W. Va. Feb. 24, 2006). "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." Id. The Supreme Court of the United States has held that "[a] finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948). Legal conclusions, however, are reviewed de novo. Educ. Credit Mgmt. Corp. v. Frushour, 433 F.3d 393, 398 (4th Cir. 2005).
DISCUSSION
The debtor presents four issues on appeal. Specifically, the appellant asks this court to review
I. Whether the Bankruptcy Court erred in finding that the court was without legal authority for reconverting the case to a chapter 13 proceeding;Appellant's/Debtor's Br. 1.
II. Whether the Bankruptcy Court erred in denying the debtors' motion to reconsider.
III. Whether the Bankruptcy Court erred in applying the sixty (60) month limit to an unconfirmed plan.
IV. Whether the Bankruptcy Court erred in finding that the plan was unconfirmable when the payment stream was based on royalty payment from substantial mineral interests which were in the process of being permitted.
The appellant argues that the Bankruptcy Court erred when it determined that it lacked legal authority to reconvert the appellant's case to chapter 13 bankruptcy because the appellant's case had previously been converted from chapter 13 bankruptcy to chapter 7 bankruptcy. In response, the appellees argue that once a debtor converts a case from chapter 13 to chapter 7, courts lack discretion to reconvert the case to chapter 13 under 11 U.S.C. § 1307. Because the issue raised by the appellant regards the Bankruptcy Court's conclusion of law, I review this issue de novo. After reviewing the relevant authority, I determine that the Bankruptcy Court erred when it determined that it lacked legal authority to reconvert the appellant's case.
Under 11 U.S.C. § 706, debtors may convert their bankruptcy cases to chapter 13 under certain circumstances. Specifically,
(a) The debtor may convert a [chapter 7] case . . . to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.11 U.S.C. § 706. The statute makes it clear that a debtor has a one-time right—a right that Congress referred to as a "one-time absolute right"—to convert a chapter 7 case to a case under chapter 11, 12, or 13 unless the case was previously converted to chapter 7 under 11 U.S.C. §§ 1112, 1208, or 1307. Id. at § 706(a); S. Rep. No. 95-989, at 94 (1978) as reprinted in U.S.C.C.A.N. 5787, 5880 (referring to a debtor's right to reconvert under § 706(a) as a "one-time absolute right").
(b) On 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 of this title at any time.
(c) The court may not convert a case under this chapter to a case under chapter 12 or 13 of this title unless the debtor requests or consents to such conversion.
(d) 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.
Although § 706(a) cabins debtors' absolute right of conversion where a case has previously been converted, nothing in that provision limits the ability of courts to convert cases to chapter 13 even if they have previously converted. The absence of an express limitation leaves courts split on whether bankruptcy courts have the authority to reconvert a case to chapter 13.
Some courts hold that bankruptcy courts may not reconvert a case to chapter 13 after it has been converted from chapter 13 to chapter 7. See, e.g., In re Carter, 84 B.R. 744, 746-47 (D. Kan. 1988); In re Hardin, 301 B.R. 298, 300 (Bankr. C.D. Ill. 2003); In re Baker, 289 B.R. 764, 769-70 (Bankr. M.D. Ala. 2003). Many of these courts base their reasoning primarily on the plain language of the statute. See, e.g., In re Baker, 289 B.R. at 766-68. Specifically, such courts rely on the fact that § 706(a) does not enumerate a right to reconvert a case to chapter 13 and § 706(b) explicitly allows bankruptcy courts to convert a case to chapter 11—but not chapter 13—at any time. Id. These courts reason that if Congress intended to grant courts the authority to reconvert cases to chapter 13, it could have expressly done so, as it did with chapter 11. Id. at 268. As the court in In re Baker stated,
It is improper statutory construction to take the plain language of sub-section (b) which states that "On 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 of this title at any time," and to read it as if it states that "on 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, 12 or 13 of this title at any time."Id.
Other courts, however, determine that bankruptcy courts have discretion to reconvert a case to chapter 13. See, e.g., In re Masterson, 141 B.R. 84, 87-88 (Bankr. E.D. Pa. 1992); In re Hollar, 70 B.R. 337, 338 (Bankr. E.D. Tenn. 1987); In re Sensibaugh, 9 B.R. 45, 46 (Bankr. E.D. Va. 1981). These courts rely primarily on the statutory construction and legislative history of 11 U.S.C. § 706.
Courts relying on the statutory construction for authority to reconvert note that portions of the statute would be rendered inert if the court lacked discretion to reconvert. According to the court in In re Sensibaugh,
By reading said subsection (c) in conjunction with subsection (a) (which grants an absolute right under certain conditions) and subsection (b) which relates to conversion to a Chapter 11 when those certain conditions make subsection (a) inapplicable, we can sense the intent of the Congress to require the conditions set forth in subsection (b) to be equally applicable in subsection (c). It is implicit in subsection (c) that the debtor only has the right to convert on request and after notice and a hearing and for such cause shown to induce the court, in its sound discretion to grant the conversion. To determine otherwise would be to negate the provision of subsection (a) which grants the absolute right to convert if no prior conversion has taken place.
Id. at 46.
Additionally, courts relying on the legislative history note that Congress intended to give debtors an opportunity to pay their debts. See, e.g., in re Hollar, 70 B.R. at 338. Per Congress, "[t]he policy of the provision is that the debtor should always be given the opportunity to repay his debts." S. Rep. No. 95-989, at 94 (1978). These courts reason that giving bankruptcy courts the discretion to reconvert ensures that the debtors' right to repay is protected and generally promotes the public policy interest of debt repayment. See, e.g., in re Hollar, 70 B.R. at 338.
After considering all sources, I am convinced that bankruptcy courts have the discretion to reconvert a case to chapter 13 after it has been converted chapter 7. First, despite the contention of courts relying on the plain language of § 706 to find that courts lack the authority to reconvert, I find that § 706(a) forecloses the absolute right of debtors to convert—not the discretion of courts to reconvert nor the right of debtors to request reconversion—after a case has been converted from chapter 13 to chapter 7. See Matter of Johnson, 116 B.R. 224, 226 (Bankr. D. Idaho 1990) ("Section 706(a) deals with the right of the debtor, as opposed to the Court, to convert a Chapter 7 case. Subsections (b) and (c) prescribe when the Court may order a Chapter 7 case converted."). Nothing in that provision forecloses courts from later reconverting the case to chapter 13. Because nothing in the plain language of § 706 prohibits courts from reconverting a case to chapter 13, I will not read that limitation into the statute by judicial fiat.
Indeed, § 706 appears to contemplate the right of a debtor to request conversion to chapter 13. Under § 706(c), courts may not convert unless the debtor requests or consents to the conversion.
Furthermore, were I to rule that bankruptcy courts lacked discretion to reconvert cases to chapter 13, I would render portions of 11 U.S.C. § 706 superfluous. As noted in Collier on Bankruptcy,
[H]ad Congress meant to bar such reconversions completely, it would not have used the language it used. Unlike section 706(a), which speaks of the debtor converting a case when the debtor has a right to convert,
subsection 706(c), like subsection 706(b), speaks of the court converting the case. Both sections 706(b) and 706(c) refer to a decision of the court, in its discretion, to permit conversion at the request of a party. Section 706(c) serves simply to limit who may request conversion to chapter 12 or chapter 13, permitting only the debtor to make such a request. If the court were not authorized to convert a case to chapter 13 in the first place, there would be no need for section 706(c). Therefore, the power of the court to convert a case to chapter 13 is implicit in section 706(c), which limits that power.6 Collier on Bankruptcy para. 706.04 (16th ed. 2017) (emphasis added); see also in re Sensibaugh, 45 B.R. at 46 (noting that limiting courts' discretion to reconvert cases to chapter 13 renders portions of § 706 meaningless). Put simply, § 706(a) gives debtors a one-time absolute right to convert. If the only way to convert a case to chapter 13 was via the debtor's one-time absolute right, then § 706(c), the provision limiting when a court can convert a case to chapter 13, would be unnecessary. To ensure that every clause of § 706 is given meaning, I must read § 706(c) in a manner that gives bankruptcy courts the discretion to reconvert cases to chapter 13. See United States v. Menasche, 348 U.S. 528, 538-39 (1955) ("It is our duty 'to give effect, if possible, to every clause and word of a statute . . . .'" (citation omitted)).
Similarly, if a debtor's one-time absolute right to convert was the only way to convert a case to chapter 13, the use of the words "request" and "consent" in § 706(c) would be nonsensical. A debtor would have no need to request or consent to conversion if they alone held the right to convert a case to chapter 13. --------
Finally, it makes little sense to curtail debtors' chances to repay their debts, especially since Congress clearly intended to give debtors that opportunity. See S. Rep. No. 95-989, at 94 (1978). Although some courts worry that debtors' repeated attempts to convert will stymy the bankruptcy process, see In re Carter, 84 B.R. at 747, I trust that bankruptcy courts will be able to properly manage their dockets and combat dilatory tactics. Based on the foregoing reasons, I FIND that the Bankruptcy Court erred when it ruled that it lacked legal authority to reconvert the debtor's case to chapter 13.
The creditors suggest that even if a right to reconvert exists, the facts indicate that this case should not be reconverted. However, given the Bankruptcy Court's limited opinion on the matter, I REMAND this case to the Bankruptcy Court for further proceedings on whether reconversion to chapter 13 is appropriate in this case.
Furthermore, because I reverse and remand based on the court's legal error that § 706 precludes reconversion, I need not reach the appellant's remaining issues at this time.
CONCLUSION
For the foregoing reasons, I REVERSE the Bankruptcy Court's Order Denying Motion to Reconsider, or in the Alternative, Motion to Reconvert to Chapter 13 and REMAND for further proceedings regarding whether reconversion to chapter 13 is appropriate in this case.
The court DIRECTS the Clerk to send a copy of this Order to counsel of record and any unrepresented party.
ENTER: September 1, 2017
/s/_________
JOSEPH R. GOODWIN
UNITED STATES DISTRICT JUDGE