Daughtrey v. Rivera

Case Type:
Case Status:
15-14544 (11th Circuit, Jul 24,2018) Published
A debtor's right to convert to chapter 11 from chapter 7 pursuant to Section 706(a) is limited by subsection (d). Thus, a debtor's right to convert is expressly conditioned on his ability to qualify as a debtor under the chapter to which he seeks to convert. If the proposed chapter 11 case should be dismissed or converted to chapter 7, the individual will not qualify as a debtor under chapter 11. Therefore, Section 706(d) provides adequate authority to deny a motion to convert to chapter 11 when cause exists under Section 1112(b)(4).
Procedural context:
Bankruptcy court's initial orders were appealed to district court by the debtors. District Court affirmed the bankruptcy court's rulings. Debtors then appealed the district court's affirmation of the bankruptcy court orders to the circuit court.
The debtors filed a chapter 7 bankruptcy case for the sole purpose of preventing a foreclosure sale of their farm property (approximately 2500 acres in Sarasota County). The foreclosure process of protracted with the debtors engaging 7 different law firms and ultimately resulted in the debtors failing to defend appear for trial and the state court granting foreclosure and setting a foreclosure sale for the property. One week prior to the sale, the debtors filed for relief under chapter 7 of the Bankruptcy Code. A chapter 7 trustee was appointed. During the early stages of the bankruptcy case, the secured creditor obtained relief from the stay in order to enforce its state court judgment of foreclosure. The debtors failed to attend 3 meetings of creditors. They finally appeared at a fourth meeting and testified that the value of the property was in excess of $70 million. Based on this information, the trustee moved the bankruptcy court for reconsideration of the stay relief order and the bankruptcy court reimposed the stay. The Trustee then researched the property and learned that the value was substantially less than what the debtors testified due in part because of its location and also because a substantial capital gains tax would have to be paid on the property when sold. Thereafter, the trustee engaged in negotiations with the secured creditor and ultimately reached a settlement whereby the secured creditor would pay $300,000 to the estate and the trustee would quitclaim all but 160 acres (the amount permitted for the debtors' homestead) to the secured creditor and the secured creditor would be permitted stay relief to complete its foreclosure as to the acres conveyed. The trustee presented this settlement to the bankruptcy court for approval and the debtors objected. The debtors indicated that if the 160 acre carve-out included a well that was on the property, the objection would likely be resolved. The bankruptcy court continued the hearing on the settlement to allow the trustee and secured creditor time to determine whether the request of the debtor as to the well could be accommodated. Thereafter, the settlement agreement was represented to the bankruptcy court with the 160 acre carve-out including the well. The debtors again objected. This second objection was ultimately another delay tactic of the debtors. They indicated that they had a "substantial investor" that was going to be able to come in and pay the secured creditor in full. The court again continued the settlement hearing and instructed debtors' counsel to communicate the offer with both the trustee and the secured creditor. At the next continued hearing, nothing had been communicated and it was discovered that there was no investor but instead an offer to purchase the property (with contingencies wholly beneficial to the purchaser) for an amount less than what was necessary to cover the trustee's expenses, the secured creditor's claim and the capital gains taxes. In addition to their objection, the debtors sought conversion of their case to chapter 11 under Section 706, arguing that they had an absolute right to convert the case. The trustee, U.S. Trustee, and the secured creditor all argued that this was another delay tactic by the debtors and that under the U.S. Supreme Court decision in Marrama v. Citizens Bank, a debtor does not have an absolute right to convert a chapter 7 case to one under chapter 11. The bankruptcy court agreed and denied the motion to convert finding that the debtors could not present a feasible chapter 11 plan and the case would end up back in chapter 7, overruled the objection of the debtors and approved the settlement finding that it was a "win win" to the debtors and the estate. The debtors thereafter appealed to the district court which affirmed the bankruptcy court decision. The debtors then appealed to the circuit court.
Tjoflat, Rosenbaum, and Sentelle

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