Taylor v. Danielson (In re Taylor),Case No. 5:11-cv-01879-GHK (USDC C.D. Cal, April 2012)
Issue: Is there an absolute right to convert a case filed under Chapter 13 to Chapter 7?
Holding: Yes, 11 U.S.C § 1307 provides an absolute right to convert a case filed under Chapter 13 to Chapter 7.
Judge George H. King
Debtors filed Chapter 13 on May 11, 2011. During the life of the Chapter 13 case, the Court pointed out issues of plan feasibility. The Court continued the Plan Confirmation Hearing to October 5, 2011. On October 4, 2011, the debtors filed their Notice of Conversion of Bankruptcy Case from Chapter 13 to Chapter 7 (“Notice of Conversion”). Despite their Notice of Conversion, the Bankruptcy Court dismissed the debtors’ case for failure to make payments and failure to file secured debt payment declarations.
The debtors appealed to the District Court raising the issue of whether section 1307 provides an absolute right to convert a case filed under Chapter 13 to Chapter 7. The debtors argued that under section 1307 the Debtors have an absolute right to convert their case from Chapter 13 to Chapter 7; and that the date of filing of the Notice of Conversion becomes the date of the conversion order.
The District Court reversed. The Court of Appeals held that a debtor’s right to convert under section 1307 is absolute, as there is no danger of the debtor escaping the consequences of bad faith conduct or for abuse of process.
The 9th Circuit has long held the right to convert from Chapter 13 to Chapter 7 is absolute. The Court distinguished In re Marrama, 549 U.S. 365 (2007) which held that conversion from Chapter 7 to Chapter 13 is not an absolute right, and can be forfeited for cause, which includes bad faith; and In re Rosson, 545 F. 3d 764 (9th Cir. 2008) which held there is no absolute right to dismissal of a Chapter 13 case. The scenarios in Marrama (conversion from Chapter 7 to Chpater 13) and Rosson (dismissal of Chapter 13) are different from the case at hand, as the Court maintains jurisdiction over the debtor and the debtor cannot escape the consequences of bad faith conduct or abuse of process when the debtor’s case is converted from Chapter 13 to Chapter 7. Instead, the Court agreed with the decision in In re DeFrantz, 454 B.R. 108 (9th Cir. BAP 2011) which held there is an absolute right to conversion from Chapter 13 to Chapter 7.
Finally, the Court held the absolute right is in conformity with Bankruptcy Rule 1307(a) which highlights the difference between conversion from Chapter 7 to Chapter 13 and vice versa, stating that a “Chapter 13 case shall be converted without court order when the debtor files a notice of conversion…” § 1307(a).
By Carolyn M. Afari, Esq.
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