Tag Archives: Cause to Convert

What Is Cause To Convert A Chapter 11 Bankruptcy Case To Chapter 7 Bankruptcy Case

By Ryan C. Wood

The short answer is whatever the Bankruptcy Judge assigned to your case thinks “cause” is because what “cause” is, is within the Bankruptcy Judge’s broad “discretion.”  Woo doggy.  Scary stuff.  Of wait, your Bankruptcy Judge went through a rigorous confirmation process to find out they are impartial and will treat you fairly and never ever have any type of bias for favoritism towards any party.  You may get hosed for any number of reasons that have nothing to do with your case or the law.  It all comes down to Money Money Money and not always your money.  Sometimes the money issues go your way.  Sometimes they do not. 

Money Money Money

So, you want to force the conversion of a voluntary Chapter 11 reorganization petition filed to now seek relief voluntarily in Chapter 7 and liquidate all not protected assets of the bankruptcy filer.  That means instead of the debtor, the bankruptcy filer, being in possession of the debtor’s assets, and trying to reorganize those assets for the benefit of all parties, you now want the case to be voluntarily, at your request, converted to a Chapter 7 liquidation and whatever assets cannot be protected are sold off by the Chapter 7 Trustee assigned to the case for the benefit of all parties.  If all parties are not benefiting from the voluntary conversion what is the point?  Creditors are supposed to benefit from the bankruptcy filing.  So, will creditors get more in a Chapter 7 liquidation versus and Chapter 11 reorganization?  Many Chapter 11 reorganizations are nothing more than Chapter 7 liquidations.  A Chapter 11 Plan of liquidation is proposed and the Chapter 11 Plan not a Plan of Reorganization in which the debtor, company/corporation/LLC continues to do business. 

Why File A Chapter 11 Liquidation Plan Versus Filing A Chapter 7 Bankruptcy

There are all kinds of reasons.  One of the most common reasons is because the officers and directors of the insolvent debtor may have fraudulently transferred assets or money prior to the bankruptcy filing.  Or the corporation debtor or LLC debtor is a closely held corporation or LLC and commingling of assets took place raising questions about limited liability the shareholders/owners of the entity.  See these legal entities were created to allow humans to do things to other humans that humans are not allowed to do to other humans on an individualized basis.  The human gets put in jail.  No corporation or LLC can be put in jail.  They are fined money.  Money Money Money

So You Think You Will Get More In A Chapter 7 Liquidation Now

Okay, what does the Money Money Money look like?  As part of the Chapter 11 Plan there will be a liquidation analysis attached to the Chapter 11 Plan providing what the debtor, their bankruptcy attorneys, believe creditors will get in a hypothetical Chapter 7 liquidation of assets.   So, the Chapter 11 Plan liquidation analysis should always provide more Money Money Money for creditors in the Chapter 11 Plan or it would not be proposed to begin with. 

The Law and Voluntary Bankruptcy Case Conversion

Discretion and more discretion is the key to “cause” and voluntarily converting a bankruptcy case to another Chapter of the Bankruptcy Code.  More less “cause” can be anything then if a Bankruptcy Judge says so.

If the lower Bankruptcy Judge’s decision is appealed and challenged, the Ninth Circuit Bankruptcy Appellate Panel or Ninth Circuit Court of Appeals will apply the following standards.   The decision to convert a bankruptcy case to Chapter 7 is within the bankruptcy court’s discretion.  See Pioneer, 264 F.3d at 806.   An appellate court will reverse the bankruptcy court only if the lower Bankruptcy Judge’s decision was “based on an erroneous conclusion of law or when the record contains no evidence on which the Bankruptcy Court rationally could have based its decision.” See Pioneer at 806–07, quoting Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346, 351 (9th Cir. 1996)). The standard for converting a Chapter 11 bankruptcy case to Chapter 7 is set out in 11 U.S.C. § 1112. This statute provides that the bankruptcy court “shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause.” 11 U.S.C. § 1112(b)(1). However, even if cause is established, Section 1112(b)(2) prohibits a bankruptcy court from granting relief under Section 1112(b)(1) if the bankruptcy “court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes one of two enumerated circumstances].  What does this mean?  It means depending on the arguments advanced by the various parties in the bankruptcy case, there are three primary questions: (1) whether cause exists for granting relief under Section 1112(b)(1); (2) whether granting relief is in the creditors’ and the estate’s best interests; and (3) if so, which form of relief best serves the creditors’ and the estate’s interests.

Sidenote: Good Faith Bad Faith = No Faith In Chapter 7 Conversion to Chapter 13

What we are talking about here is Chapter 11 reorganization and filing a motion requesting the Bankruptcy Court to voluntarily convert the bankruptcy case to Chapter 7 liquidation.  As a sidenote let us briefly discuss voluntarily converting a Chapter 7 liquidation case to a Chapter 13 reorganization case.  The difference between Chapter 13 and Chapter 11 is a Chapter 13 reorganization is for individual humans and not corporations or limited liability companies.  I will cut to the chase here.  While the Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and legislative history all provide bankruptcy filers have the right to choose their destiny and voluntarily convert to Chapter 13 reorganization if they do not like how the Chapter 7 liquidation is progressing, humans not elected to Congress created an entirely new Bankruptcy Code through judicial interpretation of the Bankruptcy Code.  Your Supreme Court of the United States of America and the Ninth Circuit Court of Appeals repeatedly and consistently hold Section 105(a) of the Bankruptcy Code cannot be used to create new law that is exactly what has happened regarding converting from Chapter 7 to Chapter 13 reorganization. 

See the problem is some bankruptcy filers committed fraud when filing Chapter 7 and then when things fall apart of the Chapter 7 liquidation bankruptcy case the bankruptcy filer seeks a better deal by converting to Chapter 13 reorganization.  What the Bankruptcy Code does not address is the time and money spent by the Chapter 7 Trustee investigating the finances of the bankruptcy filer prior to seeking conversion.  How does the Chapter 7 Trustee get paid for their time for doing their job in a voluntarily filed Chapter 7 case?  They do not get paid if the case is converted to Chapter 13, normally.  So what did the human Chapter 7 Trustees do along with Bankruptcy Court’s throughout the United States of America?  They made their own law and created a bar to conversion if the debtor/bankruptcy filer acted to bad faith in the filing of their Chapter 7 petition, honesty in listing and valuing assets, or issues with anything the debtor/bankruptcy filer does.  So a debtor/bankruptcy filer amending their bankruptcy petition became bad faith as if a debtor does not have every right to amend their bankruptcy petition.  The law says yes and humans say no.  Any type of mistake is said to be “bad faith” and Chapter 7 Trustee’s and Bankruptcy Court’s decided we will punish humans for these alleged bad acts in filing the Chapter 7 bankruptcy petition.  Well, the problem is the words “bad faith” do not even exist in Chapter 7 of the Bankruptcy Code.  It is made up entirely.  One Chapter 7 Trustee went so far as to take away a bankruptcy filers right to protect the bankruptcy filers assets under state law.  A Chapter 7 Trustee nor Bankruptcy Court has a right to change any state law exemption to protect a bankruptcy filer’s assets.  The bankruptcy filers, if eligible, has a right to that state law exemption period.  The Supreme Court of the United States of America had to say no, this is wrong, no Chapter 7 Bankruptcy Trustee or Bankruptcy Court can create punishments for bankruptcy filers that do not exist in the Bankruptcy Code.

The problem is these professionals become biased or were always jaded against humans that seek protection under our Bankruptcy Code here in the United States of America.  It seems like many Americans  can no longer follow things that made and make the United States of America the greatest nation humans kind has ever known to date.  One is our insolvency laws and throwing yourself on the mercy of the Bankruptcy Code to orderly sift through the financial mess. 

But no one likes to work for free and no human should have to.  The remedy is changing the Bankruptcy Code and not creating law and procedures that do not exist pursuant to Section 105(a) of the Bankruptcy Code. 

Chapter 11 Conversion to Chapter 7

Back to the law and procedure regarding conversion and whether or not to grant conversion.  If the Chapter 11 reorganization is not working out or slowed down due to litigation it may make sense to seek conversion to Chapter 7.  Your bankruptcy attorney and you are more or less throwing in the towel and allowing a Chapter 7 Trustee to takeover all assets of the bankruptcy filer and sell or settlement regarding the assets for the benefit all creditors.  You originally filed a reorganization case so you would be in control of your assets or the assets of the business that filed for bankruptcy protection.  In theory cause exists for the conversion because conversion is in the best interest of all parties.