In re Parvin

538 B.R. 96

In re: Dara Parvin, Debtor.

Case No. 15–12634–CMA

United States Bankruptcy Court, W.D. Washington, At Seattle .

Signed September 14, 2015

David Carl Hill, Law Office of David Carl Hill, Port Orchard, WA, for Debtor.

OPINION RE MOTION BY THE UNITED STATES TRUSTEE FOR ORDER CONVERTING CHAPTER 7 CASE TO CHAPTER 11

Chris M. Alston, U.S. Bankruptcy Judge

This matter came before the Court on the United States Trustee's motion for an order converting the Debtor's chapter 7 case to chapter 11 under 11 U.S.C. § 706(b) (“Motion to Convert”).¹ The United States Trustee (“UST”) sought to convert the Debtor's chapter 7 case to chapter 11 on the ground that the Debtor had sufficient disposable income to repay his unsecured creditors through a chapter 11 plan. The Debtor filed a response (“Opposition”) to the Motion to Convert, arguing that forcing him to repay his creditors through a chapter 11 plan was tantamount to forcing him to drudge for his creditors, which would constitute involuntary servitude in violation of the Thirteenth Amendment of the United States Constitution. The Debtor also contended that conversion of his chapter 7 case to chapter 11 would not be in the best interests of his creditors and, most particularly, himself. Shortly after the Debtor filed his Opposition, the UST filed a reply (“Reply”) countering the Debtor's arguments.

The Court held a hearing on August 19, 2015. After hearing argument from both parties, the Court took the matter under advisement.

The Court has reviewed the Motion to Convert, the Opposition, the Reply, the parties' supporting legal memoranda, their declarations, evidentiary submissions and other supporting documents.² The Court also has taken judicial notice of all relevant entries on the docket of the Debtor's chapter 7 case for the purpose of ascertaining facts not reasonably in dispute. Federal Rule of Evidence 201 ; In re Butts, 350 B.R. 12, 14 n. 1 (Bankr.E.D.Pa.2006).

Based on that consideration and review, the Court will grant the Motion to Convert. Following are its findings of fact and conclusions of law under Civil Rule 52(a), applicable with respect to this contested matter under Rules 1017(f)(1), 7052 and 9014.

I. FACTUAL BACKGROUND

The facts in this matter are not in dispute. The Debtor commenced this case under chapter 7 on April 29, 2015. He filed his schedules and statement of financial affairs (“SOFA”) on the same day. In his Schedule A, the Debtor indicates that he jointly owns a residence with the Parvin Family Trust. He discloses in his amended SOFA that, on January 6, 2015, he paid the Parvin Family Trust $60,443.20 “to increase share ownership [in the residence] ... from 20% to 38.72%.” He also reports that he is paying the Parvin Family Trust $1,500 per month for the residence. The Debtor values the residence at $322,000 (which also was the purchase price for the residence). He lists no liens against the residence and claims a $125,000 homestead exemption in it.

Among his scheduled personal property assets, the Debtor has $44,369.14 in a “checking and/or savings account” located at a bank, $21,203.63 held in the trust account of his bankruptcy counsel, accounts receivable from his former private practice clinic, the Oregon Coast Spine Institute, in the amount of $101,241.86, a $3,000 security deposit with his parents, three Seahawks season tickets, with a combined value of $2,738, and a Seahawks Super Bowl ring, miscellaneous Seahawks collectibles, and “Seahawks gifts for kids” with a total value of $2,602.77. The Debtor asserts the value of his nonexempt assets is approximately $209,438.³

The Debtor reports in his schedules and in a later-filed declaration that he is an orthopedic surgeon, specializing in spine surgery. According to his amended SOFA, he earned $219,396.92 in 2015 (as of April 24, 2015), $203,229 in 2014 and $402,056 in 2013. The Debtor explains in his declaration that spine surgery is not going to be financially sustainable in this region. Consequently, he took a position at a hospital in Dubuque, Iowa, where he earns $62,499.99 in monthly gross income. The Debtor has an employment contract with the hospital that has guaranteed this salary for four years, and there are more than three years left on the employment contract. After taking payroll deductions and monthly rental income into account, he has $51,433.32 in monthly net income.⁴

The Debtor is unmarried and has no dependents. He has $16,946 in monthly expenses, which include $1,248 in home ownership expenses for his residence in Washington, $1,500 in rent for his apartment in Iowa, $2,000 for transportation and $6,300 in child support. Based on his monthly net income and monthly expenses, the Debtor declares $34,487 in monthly net disposable income.

He lists $23,544 in secured debt and $1,094,648 in general unsecured debt.⁵ $480,000 of this general unsecured debt arises from a personal loan from his parents, Dariush and Ann Parvin.⁶ Aside from this debt, the bulk of the Debtor's general unsecured debt is business debt related to the Oregon Coast Spine Institute. He lists priority debt in an unknown amount owed for past and ongoing alimony and child support.

II. JURISDICTION

This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A). The Court has jurisdiction over this matter under 28 U.S.C. §§ 157 and 1334.

III. ANALYSIS

A. Applicable law

The Bankruptcy Code provides 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. 11 U.S.C. § 706(b). The burden is on the movant to show that the case should be converted. In re Hardigan, 490 B.R. 437, 445 (Bankr.S.D.Ga.2013), aff'd, 517 B.R. 379 (S.D.Ga.2014) (citing In re Ryan, 267 B.R. 635, 639 (Bankr.N.D.Iowa 2001) ).

The Court has discretion to convert based on its determination of what will most inure to the benefit of all parties in interest. Tex. Extrusion Corp. v. Lockheed Corp., (In re Tex. Extrusion Corp.), 844 F.2d 1142, 1161 (5th Cir.1988) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977), reprinted in 1978 U.S.Code Cong. & Admin. News at 6336), cert. denied, 488 U.S. 926, 109 S.Ct. 311, 102 L.Ed.2d 330 (1988) ; In re Schlehuber, 489 B.R. 570, 573 (8th Cir. BAP 2013), aff'd, 558 Fed.Appx. 715 (8th Cir.2014) (citing In re Willis, 345 B.R. 647, 654 (8th Cir. BAP 2006) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977)). “Section 706(b) does not provide guidance regarding the factors a court should consider. Since there are no specific grounds for conversion, a court should consider anything relevant that would further the goals of the Bankruptcy Code.” Schlehuber, 489 B.R. at 573, quoting In re Gordon, 465 B.R. 683, 692 (Bankr.N.D.Ga.2012) (internal citation and quotation marks omitted).

Courts have considered a variety of factors in deciding whether to convert a case from chapter 7 to chapter 11 under § 706(b). Gordon, 465 B.R. at 693. “Among the factors considered are whether the debtor can propose a confirmable plan, whether the primary purpose of the chapter 11 is to liquidate or reorganize, and whether conversion benefits all parties in the case.” In re Peterson, 524 B.R. 808, 815 (Bankr.S.D.Ind.2015), citing Gordon, 465 B.R. at 691–92. “A debtor's ability to pay typically is a starting point in the analysis, however, since the whole reason for asking [for] a case to be converted is the assumption that creditors would receive more in a chapter 11 than a chapter 7.” Peterson, 524 B.R. at 815, citing Gordon, 465 B.R. at 693.

B. The Parties' Arguments

In its Motion to Convert, the UST urges the Court to convert the Debtor's chapter 7 case to chapter 11 because the Debtor has sufficient disposable income to fund a chapter 11 plan. Using his $34,387 monthly net disposable income to fund the chapter 11 plan, the Debtor can pay all of his general unsecured creditors in full in less than three years.

The UST further contends that conversion will not only benefit the Debtor's general unsecured creditors, but it will benefit the Debtor himself. The Debtor owes past due and ongoing alimony and child support in an unknown amount. Should his case be converted from chapter 7 to chapter 11, “the debtor will be able to satisfy all of his outstanding domestic support obligations [based on his current income] and emerge from bankruptcy with a complete fresh start.” Motion to Convert at 8. However, if he continues in chapter 7, the Debtor will not be able to obtain a “fresh start,” as he cannot except these domestic support obligations from discharge under § 523(a)(5) and (15).

In his Opposition, the Debtor advances two main arguments, one challenging the constitutionality of conversion, the other focusing on the disadvantages of the conversion to his creditors and, primarily, to himself. The Court addresses the Debtor's contentions below.

1. The Debtor's Constitutional Arguments Are Premature

The Debtor opposes the UST's proposed conversion, arguing that forcing him to repay his creditors through a chapter 11 plan is the same as forcing him to enter peonage,⁷ which violates the Thirteenth Amendment's prohibition against involuntary servitude.⁸

The Debtor's arguments are premature. Federal courts are limited to deciding cases and controversies under Article III of the Constitution. Bova v. City of Medford, 564 F.3d 1093, 1095 (9th Cir.2009). “Two components of the Article III case and controversy requirement are standing and ripeness,” which are closely related. Id. at 1095–06, citing and quoting Colwell v. Dep't of Health & Human Servs., 558 F.3d 1112, 1121, 1123 (9th Cir.2009). The Debtor has neither constitutional nor prudential standing to challenge the constitutionality of the proposed conversion. The ripeness doctrine also precludes the Debtor's constitutional challenge to conversion.

a) The Debtor Lacks Standing

“Standing is a threshold question in every case before a federal court.” McMichael v. Napa...