Summary of a Recent
Judicial Development in
Bankruptcy

Farmer-Debtor Allowed to Convert
to Chapter 7

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Croston, 313 B.R. 447 (9th Cir. 2004), the United States Circuit Court of Appeals for the Ninth Circuit reversed and remanded a bankruptcy court's decision to deny Chapter 7 debtors' motion to convert to Chapter 13.

Background

On January 27, 2003, Debtors Michael Croston and Rosa Marie Martinez filed a Chapter 7 bankruptcy petition. See id. On September 8, 2003 the debtors filed a change of address in accordance with applicable rules. See id. On January 9, 2004, the debtors filed a motion under 11 U.S.C. § 706(a) to have their Chapter 7 case converted to a Chapter 13 case. See id. That same day, the trustee filed an objection to the conversion under 11 U.S.C. § 727. See id. Because the trustee objected to the conversion of debtors' case, the matter was set for hearing on February 4, 2004. See id. The clerk then mailed the debtors a notice of the hearing, but mailed it to the wrong address, even though a correct address was on file. See id. The debtors never received the notice of hearing and did not show for the hearing in February. See id. At the hearing the court made findings of bad faith on the part of the debtors, based in part on the debtors failure to appear, and further questioned their ability to successfully propose a Chapter 13 plan. See id. The bankruptcy court therefore denied the debtors' motion to convert. See id.

Analysis and Holdings

The Ninth Circuit explained that there were two issues presented for review: (1) whether the bankruptcy court abused its discretion when it denied the debtors' motion for conversion to Chapter 13 and (2) whether the debtors received notice of the hearing. See id. It also explained that § 706(a) provides a debtor with a one-time absolute right to convert a case from Chapter 7 to a reorganization or repayment plan, with the only qualification being whether the case has been converted once before. See id. The court further explained that the only other qualification in the present case was that the debtors meet the eligibility requirements of Chapter 13. See id. The Court stated that absent a disqualification by one of these two reasons, the bankruptcy court could not deny debtors' motion to convert their case to a case under Chapter 13. It thus determined that the bankruptcy court's determination that the debtors were acting in bad faith did not allow it to deny their motion. See id.

The court stated that even if the bankruptcy court could deny the motion on subjective reasoning not explicitly provided for in § 706, the case would have to be remanded due to the lack of adequate notice. See id. Because the clerk sent the notice of hearing to the wrong address, the debtors were not held to have received adequate notice of the hearing. See id. The Court therefore reversed and remanded the bankruptcy court ruling. See id.

The case was decided on August 6, 2004; this summary was posted Dec. 22, 2004.