Elliott v. Sutton (In re Elliott)

No. 12-30707 (5th Cir. Jan. 7, 2013)
Affirming the judgment of the District Court for the Western District of Louisiana (“the DC”), the Fifth Circuit held that a bankruptcy court may sua sponte convert a debtor’s Chapter 13 bankruptcy case to a case under Chapter 7 even when the debtor opposes conversion and moves to dismiss the case pursuant to § 1307(b). First, the Tenth Circuit held a debtor’s right to dismiss its bankruptcy case under § 1307(b) is not unqualified. The Fifth Circuit had previously “decline[d] to read § 1307(b) as an ‘escape hatch’ from which to escape a conversion motion filed under § 1307(c).” The debtor, George Elliott (“Elliot”), had filed his motion to dismiss only after the bankruptcy court threatened conversion. Second, the bankruptcy court (“the BC”) qualified as a “party” under section 1307(c) capable of seeking conversion because it entered an order to appear and show cause why the Elliot’s case should not be dismissed or converted. Additionally, precedent and § 105(a) established that the BC had the authority to invoke § 1307(c) to dismiss Elliot’s case sua sponte. Third, the BC did not commit clear error in finding that Elliot had acted in bad faith. Elliot’s testimony revealed that he had misrepresented his income, marital status, and household size. He also failed to disclose his business interests and that he had an accountant who kept his books and records. Given the breadth of these misrepresentations, the BC did not abuse its discretion in denying Elliot’s motion to dismiss and converting the case to chapter 7. Finally, while precedent suggests that a BC may only invoke the bad faith exception to a debtor’s right to dismiss its case under § 1307(b) when the bad faith is “atypical” or extraordinary,” the BC concluded that the level of Elliot’s deceit was “virtually unprecedented” and the BC even referred the case to the U.S. Attorney for investigation.
Procedural context:
Elliot appealed the judgment of the DC affirming the BC’s denial of his motion to dismiss his Chapter 13 bankruptcy case and subsequent conversion of his case to Chapter 7.
Elliot filed for Chapter 13 bankruptcy. At the confirmation hearing for Elliot’s bankruptcy plan, the BC heard testimony from Elliot and denied confirmation, citing numerous misrepresentations in the forms contained in his bankruptcy petition. The BC sua sponte entered an order to appear and show cause why the case should not be dismissed or converted to a chapter 7 case. Elliot filed a motion to dismiss his case under § 1307(b) which the BC denied. At the hearing on its order to show cause, the BC found that Elliot had filed his petition in bad faith and converted his case.
Higginbotham, Owen, and Southwick, Circuit Judges.

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