Foster et al v. Holder

Filing 22

Memorandum Opinion and Order: The court ORDERS that the bankruptcy court's order of December 23, 2014, denying Debtor's motion for conversion be, and is hereby, affirmed. (Ordered by Judge John McBryde on 4/29/2015) (mem)

li.S. DISTRICT COURT
NORTHERN DISTRICT OF TEXAS

FILED
IN THE UNITED STATES DISTRICT
NORTHERN DISTRICT OF TEXA
FORT WORTH DIVISION
IN RE:

§

REGINA NACHAEL HOWELL FOSTER,
Debtor.

REGINA NACHAEL HOWELL FOSTER,

§
§
§
§
§
§
§

Bankruptcy Case No.
12-43804-RFN-7

§

Appellant,

vs.

§
§
§
§
§
§

AREYA HOLDER,
Appellee.

District Court Case
No. 4:14-CV-1060-A

§

MEMORANDUM OPINION
and
ORDER
The ultimate issue in this appeal by Debtor, Regina Nachael
Howell Foster, is whether the bankruptcy court's denial of her
motion to convert her Chapter 7 case to Chapter 11 was a proper
exercise of the bankruptcy court's authority under 11 U.S.C.
§

105(a) to take any action or make any determination necessary

or appropriate to prevent an abuse of process.

The court has

concluded that Debtor has failed to demonstrate that the denial
of her motion for conversion was beyond the power of the
bankruptcy court.

Therefore, Debtor's appeal is without merit,

and the bankruptcy court's order denying the motion for
conversion should be affirmed.

I.

Background
Debtor filed her Chapter 7 voluntary petition on July 2,
2012.

Appellee, Areya Holder, was designated as the Chapter 7

Trustee.

On October 28, 2014, Debtor filed her motion for

conversion of Chapter 7 to Chapter 11 pursuant to 11 U.S.C.
§

706(a).

R. at 33. 1

On November 6, 2014, Trustee filed her

objection to the motion for conversion, R. at 37-49.

Debtor

replied to Trustee's objection by a document filed November 13,
2014.

R. at 80.
The bankruptcy court held an evidentiary hearing on the

motion on December 15, 2014.

R. at 92.

The record on appeal

does not contain a transcript of the evidence adduced at the
hearing.

However, it does contain a transcript-excerpt of

findings and conclusions of the bankruptcy court that led to the
bankruptcy court's order denying the motion.

R. at 1940-48.

The

bankruptcy judge concluded, apparently with the assent of Debtor
and Trustee,

"that the Marrama case 2 is the controlling

authority," R. at 1940, and he read into the record what he
considered to be the pertinent parts of the Marrama opinion,

1

The "R. at_" references are to the page or pages in the eighteen-volume record on appeal that
appears as item 14, with a filing date of February 20,2015, on the district clerk's docket for the instant
action on appeal.
2

Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 nn. 11 & 12 (2007).
2

R. at 1940-41.

Then, the bankruptcy court expressed on the

record the following findings and conclusions:
{1)

Debtor filed a Chapter 7 case in a successful

attempt to prevent foreclosure under the mortgage on her
homestead property.
{2)

R. at 1941.

Her desire to convert the case to Chapter 11, so

far as the bankruptcy court could tell, was not to pay any
of the unsecured creditors listed on her schedule of
unsecured creditors or to pay her undischargeable school
debt, but was "for the purpose of essentially paying the
mortgage obligation and perhaps other living expenses."

R.

at 1941.
{3)

Debtor had taken inconsistent positions during the

pendency of her bankruptcy case relative to the status of
certain property, R. 1941-1942; and, the arguments she had
made from time to time did not seem to be arguments that
would be made in the capacity of a Chapter 11 Debtor who
owes a fiduciary duty to all creditor constituencies wanting
to come serve all those constituencies.

R. at 1943.

Rather, the positions taken by Debtor seem "to be an
argument in favor of ensuring that all those constituencies
are excluded from any recovery and making sure that anything
that could arguably be considered to be an asset of the
3

estate is marshaled towards paying off the mortgage and
Debtor's living expenses."
(4)

Id.

In her Chapter 7 case, Debtor "filed a proof of

claim for her children in which she .

. . accused herself of

a breach of fiduciary duty, which today on the stand she
admitted that she committed" and "[s]he acknowledges that
the claim that her children have against the estate is a
good claim, and presumably is one that would be paid in a
Chapter 11 case."
(5)

R. at 1943-44.

Debtor has no ability to fund a plan, and "she has

no real incentive to be objective when it comes to paying
claims other than the claims of the homestead and the claims
that are asserted by her children."

R. at 1944.

That did

not sound to the bankruptcy judge "like the actions of a
person who wants to be placed in a fiduciary position to
represent the best interests of the estate at large." Id.
(6)

Debtor "can't purport to go into a Chapter 11 and

say that her interests come first and that all the other
creditors are just going to have to be set aside" because
"[t]hat's just not consistent with the fiduciary duties that
are imposed upon a debtor in possession."
(7)

R. at 1944-45.

If a Chapter 11 Trustee were to be appointed, the

work for that Trustee would duplicate what the Chapter 7

4

Trustee already has accomplished.

R. 1945.

The expense

that would be involved in a conversion to Chapter 11 could
be incredibly burdensome.
(8)

Id.

The notion that a Chapter 11 Trustee could solve

all of the ills of this particular case is misguided.
(9)

Id.

If there was a Chapter 11 Trustee, he would see

things exactly the same way the Chapter 7 Trustee has seen
them and would propose the same motions and compromises,
with the result that "we would have gone through all of this
for no additional reason, and [Debtor] would find herself in
exactly the same position that she finds herself in right
now -- that is, fighting that trustee instead of this
trustee."
(10)

R. at 1945-46.
"[T]his is the atypical case."

R. at 1946.

(11) With respect to approval of the plan that would be
proposed if there were a conversion to Chapter 11, the
bankruptcy judge said:
Just as in Chapter 13, under Section 1129, in
order to confirm a plan, the Debtor would have to
prove at least two things. Number one, that the
plan was proposed in good faith.
Given all that
I've said, I don't know how I could find that the
plan was proposed in good faith, the plan that the
Debtor mentions. And the Court would have to find
that the plan is feasible.
I have no way of
finding -- there's no way, based upon this record,

5

that I could ever determine that that plan was
feasible.

(12) Given all that has happened in the Chapter 7 case,
"all of these constant maneuvers on the part of the Debtor
do suggest that there's been an abuse of process in this
Court."

Id.

The court provided a summary of some of the

things that he referred to as the things that have happened
"in this particular case."

R. at 1946-47.

(13) The Debtor has used bankruptcy for improper
purposes.

R. at 1947.

For the reasons the bankruptcy judge put of record, he
denied the motion to convert the case to Chapter 11.

Id.

On

December 23, 2014, the bankruptcy court issued its order denying
Debtor's motion for conversion.

R. at 3.

This appeal was taken

from that ruling.

II.
Analysis
The bankruptcy court's conclusions of law are to be reviewed
de novo, its findings of fact are to be reviewed for clear error,
and mixed questions of fact and law are reviewed de novo.
National Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000).

6

In Re

At the outset, the court is considering the contention urged
by Debtor in her brief that the statements of the Supreme Court
in Marrama upon which the bankruptcy court relied as the
controlling authority are, in fact, not the controlling
authority.

The language in Marrama on which the bankruptcy court

relied was the following:
We have no occasion here to articulate with
precision what conduct qualifies as "bad faith"
sufficient to permit a bankruptcy judge to dismiss a
Chapter 13 case or to deny conversion from Chapter 7.
It suffices to emphasize that the debtor's conduct
must, in fact, be atypical.
Limiting dismissal or
denial of conversion to extraordinary cases is
particularly appropriate in light of the fact that lack
of good faith in proposing a Chapter 13 plan is an
express statutory ground for denying plan confirmation.

* * * * *
Title 11 U.S.C. § 105(a) provides:
"The court may issue any order, process, or
judgment that is necessary or appropriate to carry out
the provisions of this title. No provision of this
title providing for the raising of an issue by a party
in interest shall be construed to preclude the court
from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or
implement court orders or rules, or to prevent an abuse
of process.
Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 nn. 11 & 12
(2007); R. at 1940-41.
Though Debtor's scattergun approach in her appellate brief
tends to obscure the true issues on appeal, the court is

7

satisfied that the true issue, and the only one deserving
consideration and discussion, is her contention that the decision
of the Supreme Court in Law v. Siegel, 134 S. Ct. 1188 (2014),
prevails over the language in Marrama upon which the bankruptcy
court relied, and that the Law decision stands for the
proposition that 11

u.s.c.

§ 105(a) cannot be used to defeat an

otherwise absolute right to convert to Chapter 11.
at 17-20.

Debtor is partially right.

Appellant Br.

The Law decision restricts

the scope of the Marrama language upon which the bankruptcy court
relied by providing the following explanation:
True, the Court in Marrama also opined that the
Bankruptcy Court's refusal to convert the case was
authorized under§ 105(a) and might have been
authorized under the court's inherent powers.
Id. at
375-376, 127 S. Ct. 1105. But even that dictum does
not support Siegel's position.
In Marrama, the Court
reasoned that if the case had been converted to
Chapter 13, § 1307(c) would have required it to be
either dismissed or reconverted to Chapter 7 in light
of the debtor's bad faith.
Therefore, the Court
suggested, even if the Bankruptcy Court's refusal to
convert the case had not been expressly authorized by
§ 706(d), that action could have been justified as a
way of providing a "prompt, rather than a delayed,
ruling on [the debtor's] unmeritorious attempt to
qualify" under§ 1307(c).
Id., at 376, 127 S. Ct.
1105. At most, Marrama's dictum suggests that in some
circumstances a bankruptcy court may be authorized to
dispense with futile procedural niceties in order to
reach more expeditiously an end result required by the
Code. Marrama most certainly did not endorse, even in
dictum, the view that equitable considerations permit a

8

bankruptcy court to contravene express provisions of
the Code.
134 S. Ct. at 1197 (emphasis added).
But that restrictive language does not affect the bankruptcy
court's denial of Debtor's motion.

In Law, the Court explained

that the question in Marrama "was whether a debtor's bad-faith
conduct was a valid basis for a bankruptcy court to refuse to
convert the debtor's bankruptcy from a liquidation under Chapter
7 to a reorganization under Chapter 13," id.; and, the Court went
on to say that although 11

u.s.c. § 706(a) gave the debtor a

right to convert the case, § 706(d) expressly conditioned that
right on the debtor's ability to qualify as a debtor under
Chapter 13.

Id.

In the Law opinion, the Court explained that in

Marrama "the Court held that the debtor's bad faith could stop
him from qualifying as a debtor under Chapter 13, thus preventing
him from satisfying§ 706(d) 's express condition on conversion." 3

3

11 U.S.C. § 706(a) and (d) read as follows:
§ 706. Conversion
(a) The debtor may convert a case under this chapter to a case under chapter 11, 12,
or 13 of this title at any time, if the case has not been converted under section 1112,
1208, or 1307 of this title. Any waiver of the right to convert a case under this
subsection is unenforceable.

*****

(d) Notwithstanding any other provision of this section, a case may not be converted
to a case under another chapter of this title unless the debtor may be a debtor under such
chapter.
9

In the instant action, the bankruptcy court's decision was
consistent with the rulings and statements made in Law.

Here,

the bankruptcy court denied a conversion that would have been
futile under the circumstances.

This essentially is the meaning

the Fifth Circuit gave to Marrama in In Re Jacobsen, 609 F.3d
647, 660-61 (5th Cir. 2010).
or similar conclusions.

Other courts have reached the same

See In Re Mitrano, 472 B.R. 706, 710

(E.D. Va. 2012); In Re FMO Assocs. II, LLC, 402 B.R. 546, 549-51
(Bkrtcy.E.D.N.Y. 2009); In Re George Love Farming, LC, 366 B.R.
170, 177-78 {Bkrtcy.D. Utah 2007); In Re Dan Thomason & Assocs.,
LLC, No. 3-10-CV-379-K, 2010 WL 3385025 at * 2 {N.D. Tex.
Aug. 25, 2010).
By denying the conversion sought by Debtor, the bankruptcy
court dispensed "with futile procedural niceties in order to
reach more expeditiously an end result required by the Code."
Law, 134 S. Ct. at 1197.

Therefore, the bankruptcy court had the

power to deny Debtor's motion for conversion.
The wording of Debtor's appellate brief is such that the
court cannot be certain whether Debtor is maintaining that the
findings and conclusions of the bankruptcy judge put on the
record at the end of the December 15, 2014 hearing lack support
in the evidence developed at the hearing.

If Debtor is taking

that position, she cannot succeed because she did not cause a
10

transcript of the evidence received at the hearing to be made a
part of the record on appeal.

In In Re Solomon, Nos. 96-11201,

96-11528, 96-11529, 1997 WL 680934 {5th Cir. 1997), the Fifth
Circuit stated what appears to be a well-accepted rule that when
an appellant fails to include in the record on appeal a
transcript of a hearing on a motion, the appellate court "must
presume the bankruptcy court's findings of fact are correct and
supported by the evidence." 1997 WL 680934 at *6. 4
Having concluded that Debtor has failed to demonstrate that
the denial of her motion for conversion was beyond the power of
the bankruptcy court, the court is affirming the bankruptcy
court's order of denial.
III.
Order
Consistent with the foregoing,
The court ORDERS that the bankruptcy court's order of
December 23, 2014, denying Debtor's motion for conversion be, and
is hereby, affirmed.
SIGNED April 29, 2015.

States

4

The court recognizes that In Re Solomo , as an unpublished decision of the Fifth Circuit;
however, it is mentioned in this opinion because it is instructive as to the position the Fifth Circuit takes
on the absence in the record on appeal of a transcript of a hearing.
11