Summary of a Recent
Judicial
Development in
Bankruptcy
Chapter 12 Debtors Not Allowed to
Convert to Chapter 11
Kaleb K. HennighNational AgLaw Center Graduate Assistant
Summary of Decision
In In re Stumbo, 301 B.R. 34 (Bankr.S.D. Iowa 2002) the United States Bankruptcy Court for the Southern District of Iowa held that it could not properly convert debtors' Chapter 12 bankruptcy case to a Chapter 11 bankruptcy.
Background
On June 19, 2002, debtors filed a petition for relief under Chapter 12 of the United States Bankruptcy Code. See id. at 36. A motion to dismiss the bankruptcy was then filed by both the creditor, U.S. Bank, National Association f/k/a Firstar Bank ("Bank") and the Chapter 12 Trustee ("Trustee"). See id. The Bank and Trustee claimed that the debtors' debt exceeded the Chapter 12 statutory limit. See id. The debtors therefore sought to convert to another bankruptcy chapter. See id.
On October 11, 2002, debtors filed a motion with the court to convert their Chapter 12 case to a Chapter 11 bankruptcy. See id. Debtors argued, and the Bank and Trustee agreed, that the court had authority to convert their Chapter 12 to a Chapter 11 bankruptcy because the petition was filed in good faith, and the equities in the debtors' case allowed for the chapter conversion. See id. The court, however, disagreed and refused to convert the Chapter 12 bankruptcy. See id.
Analysis and Holdings
In making its determination to deny debtors' conversion request, the court examined the applicability of the conversion and dismissal section governing Chapter 12 cases contained at 11 U.S.C. § 1208. See id. Specifically, § 1208(e) states in relevant part that "(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title at any time. . . . (e) . . . [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." Id. (citation omitted).
Upon a plain reading of the relevant statutory language the court noted that the section did not specifically allow for a conversion of a Chapter 12 case to one under Chapter 11. See id. The court reasoned that "[i]f Congress had intended that a Chapter 12 debtor could convert the case to one under Chapter 11, it easily could have enacted a specific provision to that effect." Id. at 37.
In its reasoning, the court acknowledged other court decisions allowing debtor conversion from Chapter 12 to Chapter 11, but instead, preferred to base its decision on a strict reading of § 1208, and the related statutory legislative history. See id. The relevant legislative history indicated that "Congress did not enact the draft of section 1208 that would have allowed conversion from Chapter 12 to Chapter 11 . . . for cases filed under Chapter 12 mistakenly but in good faith." Id.
The court stated that debtors not eligible for relief under Chapter 12 could still utilize § 1208, "but section 1208 did not permit courts the authority to convert Chapter 12 cases to Chapter 11 cases." Id. at 37.
The case was decided on November 13, 2002; this summary was posted Sept. 14, 2004.