Lafountaine v. Grobstein (In re Lafountaine)

In re: MARLOW CURTIS LAFOUNTAINE, Debtor.

MARLOW CURTIS LAFOUNTAINE, Appellant, v. HOWARD B. GROBSTEIN, Chapter 7 Trustee, Appellee.

BAP No. CC-15-1426-LKiTa

UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE NINTH CIRCUIT

Argued and Submitted: May 19, 2016

June 7, 2016

NOT FOR PUBLICATION

Bk. No. 6:14-bk-22000-SY

MEMORANDUM^*

Argued and Submitted On May 19, 2016 at Pasadena, California

Appeal from the United States Bankruptcy Court for the Central District of California

Honorable Scott H. Yun, Bankruptcy Judge, Presiding

Appearances: Krystina T. Tran of Law Offices of Tran & Iserhien, PC argued for Appellant Marlow Curtis LaFountaine; Michael R. Adele argued for Appellee Howard B. Grobstein, Chapter 7 Trustee.

Before: LANDIS,¹ KIRSCHER, and TAYLOR Bankruptcy Judges.

INTRODUCTION²

This appeal arises from debtor/appellant Marlow Curtis LaFountaine's unsuccessful attempts to convert his chapter 7 bankruptcy case to a chapter 11 proceeding. The bankruptcy court denied the Debtor's conversion motion. We AFFIRM.

STATEMENT OF FACTS

On September 25, 2014, Debtor/Appellant Marlow Curtis LaFountaine ("Debtor") filed a voluntary petition under chapter 13 of the Bankruptcy Code for the purpose of protecting his family home, located in Banning, California (the "Property").³ Thirty-nine (39) days later, on November 3, 2014, Debtor consented to conversion of his case to chapter 7.

Ninety-one days after agreeing to convert from chapter 13 to chapter 7, Debtor cited changed circumstances and sought conversion once again, this time to chapter 11. After a hearing on Debtor's motion to convert to chapter 11, the bankruptcy court entered an order denying Debtor's motion. Denial was due to alack of supporting evidence regarding Debtor's changed financial circumstances, in particular, the bankruptcy court noted that Debtor had not even filed an amended Schedule I or J to support his allegations.

Eight months later, Debtor filed another motion to convert his chapter 7 case to a chapter 11 proceeding (the "Motion"). The Motion again cited changed financial circumstances as the predicate for conversion to chapter 11. That same day, Debtor filed Amended Schedules I and J.

The Trustee filed a timely Opposition to Debtor's Motion, asserting that Debtor provided absolutely no evidence in support of the Motion. The Trustee specifically argued that neither the Motion nor Debtor's Amended Schedules provided any explanation of how Debtor would be able to cure the current deficiency on the loan payments regarding the Property or to make the monthly payments on the Property during the term of the proposed plan of reorganization.

The day before the hearing on the Motion, Debtor belatedly filed a Reply Brief to the Trustee's Opposition (the "Reply"). Attached to the Reply was Debtor's Declaration, a letter regarding Debtor's employment, a lease agreement regarding the Property, and an appraisal of the Property.⁴

At the commencement of the December 3, 2015 hearing on the Motion, the bankruptcy court noted that Debtor had filed his Reply late, that the court had therefore not read the Reply, andthat the court was going to disregard the Reply and the attached declaration and exhibits in rendering its decision on the Motion.⁵

The bankruptcy court referenced Debtor's earlier motion to convert to chapter 11, which it denied for lack of evidence of changed circumstances.⁶ During the course of the hearing, the court engaged Debtor's counsel in a dialog regarding Debtor's bankruptcy history, including his prior and unsuccessful chapter 13 bankruptcy case, Debtor's choice to convert his second chapter 13 case to chapter 7, Debtor's failure to support his previous motion to convert to chapter 11 with any evidence of changed circumstances, Debtor's delay in filing the pending and second Motion to convert to chapter 11, as well as the secured creditor's desire to move forward with a negotiated sale on the Property.

At the end of the hearing, the court sua sponte struck the Debtor's late-filed Reply. The court denied Debtor's motion to convert his case from chapter 7 to chapter 11; Debtor timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court commit reversible error when it denied the Debtor's Motion to convert this case from chapter 7 to chapter 11?

STANDARDS OF REVIEW

We review a bankruptcy court's order denying conversion to chapter 11 under Section 706(b) for abuse of discretion. In re Parvin, 2016 W.L. 1584068, *1 (W.D. Wash. 2016). A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or if its factual findings are illogical, implausible, or without support in inferences that may be drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)); Willis v. Rice (In re Willis), 345 B.R. 647, 654 (8th Cir. BAP 2006) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong.2d Sess. at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787).

DISCUSSION

Debtor raises a single argument in assigning error to the bankruptcy court's denial of his Motion. Specifically, Debtor argues that the Motion should have been granted because he was acting in good faith when it was filed. That argument lacks merit. The bankruptcy court should be affirmed.

A. Conversion pursuant to Section 706(b) is within the discretion of the bankruptcy court, based upon what will inure to the benefit of all interested parties, including the Debtor.

A motion to convert a chapter 7 case to a case under chapter 11 is governed by Section 706 of the Code. Under Section 706(a), a debtor may voluntarily convert a chapter 7 case to one under chapter 11 if the case has not previously been converted under Section 1307. Debtor originally filed this case under chapter 13 and then consented to having his case converted to chapter 7. Since Debtor could not convert his case to chapter 11 under Section 706(a), Debtor necessarily looked to Section 706(b) in seeking conversion to chapter 11.

Section 706(b) provides that "[o]n 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." Under Section 706(b) then, any party in interest, including a debtor, may request conversion of the case to chapter 11 at any time.

"The decision whether to convert [a case under Section 706(b)] is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest." H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong.2d Sess. at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787. In the course of the hearing on the Motion, the bankruptcy court determined that conversion of the Debtor's case to chapter 11 would not benefit all parties in interest.

Section 706(b) does not provide guidance regarding the factors a court should consider in resolving a conversion motion. Schlehuber v. Fremont Nat'l Bank & Trust Co. (In re Schlehuber), 489 B.R. 570, 573 (8th Cir. BAP 2013), aff'd, 558 Fed. App'x 715 (8th Cir. 2014) (footnote omitted). "Since there are no specific grounds for conversion, a court 'should consider anything relevant that would further the goals of the Bankruptcy Code.'" Proudfoot Consulting Co. v. Gordon (In re Gordon), 465 B.R. 683, 692 (Bankr. N.D. Ga. 2012) (quoting In re Lobera, 454 B.R. 824, 854 (Bankr. D. N.M. 2011)).

While Section 706(b) does not mandate a balancing of parties' interests as a predicate to conversion of a chapter 7 case to chapter 11, courts consistently consider several factors, including a debtor's ability to fund a chapter 11 plan, in exercising their discretion under Section 706(b). See In re Parvin, 538 B.R. 96, 102 (Bankr. W.D. Wash. 2015), aff'd, --- B.R. ---, 2016 W.L. 1584068 (W.D. Wash. March 22, 2016); In re Decker, 535 B.R. at 838 (citing In re Baker, 503 B.R. 751, 755 (Bankr. M.D. Fla. 2013)); In re Gordon, 465 B.R. at 692; In re Graham, 21 B.R. 235, 238 (Bankr. N.D. Iowa 1982).

A debtor's ability to pay typically is a starting point in the [§ 706(b)] 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 in a chapter 7.

In re Parvin, 538 B.R. at 102 (quoting In re Peterson, 524 B.R. at 815); see also In re Karlinger-Smith, 544 B.R. 126, 134 (Bankr. W.D. Tex. 2016) (quoting In re Decker, 535 B.R. 828, 839 (Bankr. D. Alaska 2015) ("[T]he U.S. Trustee's focus on the Debtors' ability to pay makes sense as 'an exceedingly relevant,if not necessary, factor and the obvious starting point for any analysis under section 706(b).'")); In re Gordon, 465 B.R. at 692-93 ("The cases considering conversion to Chapter 11 begin the analysis with the acknowledgment that the debtor can pay more in a Chapter 11 case than in a Chapter 7 case, which is a benefit to creditors."); In re Schlehuber, 489 B.R. at 574 ("The Debtor's ability to fund a Chapter 11 plan if he chooses to do so was certainly an important and relevant consideration.").

B. Debtor failed to carry his burden of proving that conversion would inure to the benefit of all parties.

The burden is on the moving party to establish that the case should be converted under Section 706(b). In re Parvin, 538 B.R. at 101. Debtor made no such showing in support of the Motion.

Debtor based his Motion to convert from chapter 7 to chapter 11 upon an assertion that his financial circumstances had changed. Debtor did file amendments to Schedule I, Debtor's Income, and Schedule J, Debtor's Expenses. These amended schedules were presumably filed to document changes in...