In re Carvalho, Case No. 15-00646

In re SHARRA NEVES CARVALHO, Debtor.

Case No. 15-00646

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

September 28, 2018

(Chapter 7)

MEMORANDUM DECISION AND ORDER DENYING MOTION TO CONVERT CHAPTER SEVEN TO CHAPTER ELEVEN

This addresses the Motion to Convert Chapter Seven to Chapter 11 (Dkt. No. 151) filed by a creditor, Teodora Aureliana Simu, seeking to convert this case to a case under Chapter 11 of the Bankruptcy Code (11 U.S.C.). The court held a trial on the Motion to Convert and, at the close of Simu's presentation of evidence, the debtor, Sharra Neves Carvalho, pursuant to Fed. R. Civ. P. 52(c), moved for the court to deny the Motion to Convert. As set forth in the following findings of fact and conclusions of law, the trial record, through the close of Simu's presentation of evidence, clearly establishes under the controlling law that conversion to Chapter 11 is not warranted in this case, and is barred by prior rulings of the court. Accordingly, pursuant to Rule 52(c), I will deny the Motion to Convert.

IPRELIMINARY REASONS FOR DENYING THE MOTION TO CONVERT

The Motion to Convert renewed arguments, previously rejected by the court, that Simu had advanced in pursuing an adversary proceeding against Carvalho, Adv. Pro. No. 16-10001, and in pursuing a Motion to Dismiss Bankruptcy Case for Bad Faith (Dkt. No. 113) ("Motion to Dismiss"). One month prior to the conclusion of the adversary proceeding, Simu filed in the bankruptcy case her Motion to Dismiss as well as a Motion to Remove Estate Trustee and a Motion for Leave to Sue Estate Trustee.

In the adversary proceeding, Simu requested that the court deny Carvalho a discharge and, in the alternative, declare Carvalho's debts to Simu nondischargeable. In an oral decision of May 10, 2017, in the adversary proceeding, the court found that Carvalho had not engaged in any misconduct warranting a denial of discharge and that her debts to Simu were dischargeable. On May 11, 2017, the court entered a judgment in favor of Carvalho, declaring that Carvalho was entitled to a discharge and that Carvalho's debts owed to Simu were dischargeable.¹ Pursuant to an oral decision of October 5, 2017, and an order (Dkt. No. 148) entered on October 10, 2017, thecourt, in the main case, denied Carvalho's Motion to Dismiss, finding that Carvalho had not engaged in bad faith acts or omissions that justified dismissal of her case.²

Within one week of entry of the order denying Simu's Motion to Dismiss, Simu filed her Motion to Convert, but presented no new evidence or claims in support of that motion. Instead, Simu relied upon the same evidence and arguments that she had presented in the adversary proceeding and in support of the Motion to Dismiss. Simu also relied on prior filings in the bankruptcy case (e.g., Carvalho's bankruptcy schedules) that similarly showed no evidence of bad faith.

There are two reasons why those renewed arguments can be rejected as a preliminary matter. First, as noted in In re Snyder, 509 B.R. 945, 955 (Bankr. D.N.M. 2014), when, as here, a motion to dismiss for bad faith has been denied and no additional reasons are advanced for converting the case, the court should deny the motion to convert. See also In re Quinn, 490 B.R. 607, 621-22 (Bankr. D.N.M. 2012) ("It is clear . . . that the United States Trustee's objective is to force the Debtors to repay their creditors, whether through dismissal and the re-filing of a Chapter 11 case or through conversion to Chapter 11 under 11 U.S.C. § 706(b). Under these circumstances, it is notappropriate to compel the same end result through conversion to Chapter 11 when it is not appropriate to dismiss the Chapter 7 case to compel a re-filing under Chapter 11 by necessity."). Simu's motion to convert is a rehash of the arguments and factual contentions contained in the Motion to Dismiss, with no new grounds for relief presented, and thus can be denied on that basis. Having found no bad faith warranting dismissal of the case, there similarly is no bad faith warranting conversion of the case to Chapter 11.

Second, in deciding whether to dismiss a Chapter 7 case or convert it to Chapter 11, a court ought not consider misconduct that is addressed more specifically by other Bankruptcy Code provisions such as 11 U.S.C. § 523(a) (dealing with debts excepted from discharge) and 11 U.S.C. § 727(a) (dealing with denial of discharge). See In re Snyder, 509 B.R. at 950. The misconduct of Carvalho that was alleged by Simu falls within the provisions of § 523(a) and § 727(a) and formed the basis of the adversary proceeding filed by Simu. Simu already raised her claims in the adversary proceeding and they should not again be addressed now by way of her Motion to Convert, which relies upon a more general Bankruptcy Code provision. Moreover, the court's findings in the adversary proceeding rejecting claims of misconduct by Carvalho necessarily bar Simu from raising those claims of misconduct anew in pursuing the Motion to Convert.

Nevertheless, I will revisit the arguments anew to demonstrate that they fail to establish that conversion to Chapter 11 is warranted.

II

CONVERSION OF THE CASE TO CHAPTER 11

NOT BARRED BY CARVALHO'S RECEIPT OF A DISCHARGE

One relatively unusual feature of Simu's Motion to Convert is that Simu filed it only after Carvalho had received a discharge of her debts. Upon denial of Simu's Motion to Dismiss on October 10, 2017, and pursuant to the earlier judgment of May 11, 2017, in the adversary proceeding dismissing Simu's objection to Carvalho's receiving a discharge, the court was required to enter a discharge in favor of the debtor.³ The clerk entered adischarge in the debtor's favor on November 13, 2017.⁴

Nevertheless, a motion under 11 U.S.C. § 706(b) to convert a case to Chapter 11 may be filed "at any time," and nothing in § 706(b) bars conversion of a Chapter 7 case to a Chapter 11 case after the debtor receives a discharge. See Mason v. Young (In re Young), 237 F.3d 1168, 1173 (10th Cir. 2001) (dealing with a debtor's right under 11 U.S.C. § 707(a) to convert a case to another chapter "at any time"); In re Mosby, 244 B.R. 79, 83 (Bankr. E.D. Va. 2000) ("The statutory language is straightforward and seemingly confers an absolute right to convert "at any time" so long as the case was not previously converted to chapter 7 from some other chapter. . . .").

The Bankruptcy Code makes no provision for revocation of the discharge based on the post-discharge conversion of a Chapter 7 case to another chapter. See 11 U.S.C. § 706. Accordingly,Carvalho's discharge would remain in place if the case were converted to Chapter 11.⁵

Claims discharged by way of a Chapter 7 discharge remain claims against the bankruptcy estate (but not against the debtor personally) once the case is converted to another chapter. See In re Mosby, 244 B.R. at 87. See also In re Carrow, 315 B.R. 8, 21 (Bankr. N.D.N.Y. 2004). Other decisions, without any meaningful discussion of the issue, take the contrary and erroneous view that the discharged debts no longer remain debts to be addressed in the case after the case is converted to another chapter. See In re Santos, 561 B.R. 825, 828 (Bankr. C.D. Cal. 2017) (citing In re Starling, 359 B.R. 901, 911 (Bankr. N.D. Ill. 2007); and In re Marcakis, 254 B.R. 77, 82 (Bankr. E.D.N.Y. 2000)). I will not deny the Motion to Convert based on that erroneous view. If the Motion to Convert were granted, Carvalho's discharged debts would remain claims enforceableagainst the bankruptcy estate to be addressed in the Chapter 11 case.

Nevertheless, Simu's Motion to Convert will be denied because the motion rests on the erroneous argument that a meaningful result could be achieved by converting this case to Chapter 11, and therefore the debtor necessarily proceeded in bad faith by filing a case under Chapter 7 rather than Chapter 11.

IIITHE ARGUMENT BASED ON CARVALHO'S ALLEGED ABILITYTO FUND A CHAPTER 11 PLAN FOR THE BENEFIT OF CREDITORS

Simu's Motion to Convert focuses on Carvalho's income from Elite Insurance & Consulting Services, LLC ("Elite"), and urges that such income enables Carvalho to pay her creditors. Simu argues that a debtor's ability to pay creditors is an important factor in deciding whether to convert a case from Chapter 7 to Chapter 11. See Dkt. No. 151, at 5 (citing In re Karlinger-Smith, 544 B.R. 126, 134 (Bankr. W.D. Tex. 2016)).⁶ This sameargument was advanced, and rejected, when Simu pursued her Motion to Dismiss, with the court finding that Carvalho had no meaningful ability to pay her creditors, and had not filed the case in bad faith. See Dkt. No. 203, at 43-45.

At the trial on Simu's Motion to Convert, by failing to present any new evidence, Simu did not carry her burden of showing that conversion to Chapter 11 is warranted based on Carvalho's income. In denying Simu's Motion to Dismiss, this court found that Carvalho had not engaged in bad faith in continuing to draw money from Elite's bank account as compensation for work performed because Carvalho withdrew such compensation for the purpose of supporting herself and was not living a lavish lifestyle.

Carvalho does not have a meaningful ability to pay her creditors in a Chapter 11 case, and her decision to file a case under Chapter 7 instead of a case under Chapter 11 was not made in bad faith. As the court explained in denying the Motion to Dismiss, Carvalho's annual adjusted gross income from operating Elite has never been more than $75,000. She has fairly modest living circumstances: she resides in a 554 square-foot cooperative housing unit she purchased with her mother in 1999 that also includes a single parking space. She owns a single vehicle, a 2008 Volkswagen Passat with mileage of approximately 90,000 miles. Nothing shows that she is living extravagantly.She made trips to Florida during the bankruptcy case but those were to visit her relatives and her ailing grandmother. Although she eats out several times a month, s...