Summary of a Recent
Judicial Development in
Bankruptcy

Court Cannot Convert Chapter 11 Case to Chapter 7
Without Farmer's Consent

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Berwick Black Cattle Co., Nos. 06.82166, 06-82165, 2009 WL 113417 (Bankr. C.D. Ill. Jan. 15, 2009), the United States Bankruptcy Court for the Central District of Illinois held that in the event that a Chapter 11 farmer-debtor is unable to confirm a plan and objects to conversion to Chapter 7, bankruptcy courts have no choice but to dismiss the case.

Background

Chapter 11 debtors who were unable to confirm a bankruptcy plan moved for dismissal of their case. Id. at *1-2. The United States trustee and the committee of unsecured creditors moved to convert the case to Chapter 7, and alternatively sought appointment of a Chapter 11 trustee, while the debtors' two principal creditors filed pleadings in support of dismissal. Id. at *2.

Arguments

The debtors argued that as farmers who opposed conversion to Chapter 7, conversion was not an available option under § 1112(c) of the Bankruptcy Code. Id. The trustee argued that appointment of a Chapter 11 trustee was permissible because it would be in the best interest of the creditors and the estate, and that "once appointed, a Chapter 11 trustee could authorize conversion to Chapter 7, even over the debtors' opposition." Id. He alternatively argued that § 1112(c) was not applicable because its main purpose is to prevent the involuntary liquidation of a farmer's assets, but the debtors' assets had already been liquidated in this case. Id.

Analysis and Holdings

Section 1112(c) of the Bankruptcy Code, which governs conversion or dismissal of a Chapter 11 case, states that "[t]he court may not convert a case under this chapter to a case under chapter 7 of this title if the debtor is a farmer or a corporation that is not a moneyed, business, or commercial corporation, unless the debtor requests such conversion." Id. The court concluded that under the plain language of the statute, the case could not be converted over the debtors' objection, adding that the statute did not include any exceptions for cases in which a debtor's assets had already been liquidated. Id. at *3. The court further noted that the appointment of a Chapter 11 trustee was extremely unusual, and explained that "the enumerated examples of cause for appointing a trustee include fraud, dishonesty, incompetence and gross mismanagement, each of which concerns acts or events that are intensely factual in nature and require an evidentiary hearing to determine." Id. at *4. However, none of those factors were present in this case. Id. The movants also argued that an appointment would be in the best interests of creditors and the estate, but the court ultimately declined to appoint a trustee because doing so "would amount to a de facto conversion, a ploy that has been criticized and rejected in similar cases." Id. at *5-6. The court therefore granted the debtors' motions and dismissed their cases. Id. at *6.

The case was decided on January 15, 2009.