KSB

Judge Somers

09-11696 Ortega (Doc. # 51)

In Re Ortega, 09-11696 (Bankr. D. Kan. Aug. 17, 2010) Doc. # 51

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 17 day of August, 2010.


________________________________________
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Opinion designated for on-line and print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
ERNESTINO ORTEGA and CASE NO. 09-11696
MARTHA ORTEGA, CHAPTER 7
DEBTORS.

MEMORANDUM AND OPINION GRANTING
DEBTORS’ MOTION TO CONVERT FROM CHAPTER 7 TO CHAPTER 13

This case concerns the limitation of a debtor’s right to convert from Chapter 7 to Chapter
13 under the Supreme Court’s decision in Marrama v. Citizens Bank of Massachusetts.1 Trial
was held on February 1, 2010 on the Debtors’ Motion to Convert from Chapter 7 to Chapter 13,2

1 549 U.S. 365 (2007).

2 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. A motion to convert is a core proceeding which ths Court may hear and determine as provided

Case 09-11696 Doc# 51 Filed 08/17/10 Page 1 of 10


to which Creditor Diane Barger objected, based upon the good faith standard of Marrama. The
Debtors appeared in person and by their counsel Elizabeth A. Carson of Bruce, Bruce &
Lehman, LLC. Diane Barger appeared pro se. There were no other appearances. After
receiving the evidence, admitting exhibits, and hearing the arguments of counsel, the Court took
the matter under advisement. The Court is now ready to rule and, for the reasons stated below,
overrules the objection and grants the Debtors’ motion to convert.

FINDINGS OF FACT.

The Debtors filed a voluntary petition under Chapter 7 on June 1, 2009. They moved to
convert to Chapter 13 on September 17, 2009. Diane Barger, an attorney with offices in
Wichita, Kansas, objected to the motion on the grounds that it was not filed in good faith, relying
upon the Supreme Court's decision in Marrama.

The Debtors reside in Garden City, Kansas. Mr. Ortega is employed in the meat-packing
industry, and Mrs. Ortega earns minimal income providing daycare to children in her home. The
Debtors’ primary language is Spanish. Although Mr. Ortega understands some spoken English,
he can not speak, read, or write English. Mrs. Ortega cannot understand, speak, read, or write
English. They testified through the assistance of an interpreter.

When the bankruptcy case was filed, Mr. Ortega (hereafter “Debtor”), but not Mrs.
Ortega, was a defendant in a civil case filed by Diane Barger in the District Court of Finney
County, Kansas, on or about December 2, 2008. In that case, Count I seeks a judgment for
$3,772.12, plus interest and fees, based on the allegations that: (1) Ms. Barger represented

in 28 U.S.C.§ 157(b)(2)(A). There is no objection to venue or jurisdiction over the parties.

2

Case 09-11696 Doc# 51 Filed 08/17/10 Page 2 of 10


Debtor’s son, Ramon Ortega, in a domestic-relations case in Finney County, Kansas; (2) Debtor
guaranteed payment of Ms. Barger’s fees; and (3) $3,772.12, plus interest and costs, is due and
owing. In Count II, Ms. Barger prays for a judgment in excess of $75,000 based upon
allegations that on an about August 1, 2008, Debtor attacked Ms. Barger by engaging in
intentional, willful, and malicious conduct designed to defame her and ruin her professional
reputation by communicating to a third party, through writings, allegedly wrongful conduct by
Ms. Barger during her representation of Ramon Ortega and in her communications with Debtor.
The written accusations are included in two letters and an affidavit, all dated in early August
2008. The letters are addressed to Ms. Barger with copies to David M. Rapp. Ms. Barger
testified that Mr. Rapp is a member of the Wichita bar who was assigned to investigate an ethical
complaint against Ms. Barger filed by a disgruntled former employee, which complaint has been
dismissed. Although the affidavit is not addressed to Mr. Rapp, it relates to the matters stated in
the letters and was signed three days after the second letter. The documents are typewritten and
appear to bear the Debtor’s signature. Since Debtor can neither read nor write English, the
question arises of who wrote the letters, but Ms. Barger testified that this question has not been
answered by a court.

As stated above, the Debtors filed for relief under Chapter 7 on June 1, 2009. Schedule
A lists two real properties in Garden City, one located on North 6th Street, which is the Debtors’
residence and homestead, and one located on Pearl Street. The statement of intention indicates
the Debtors will reaffirm debts on their home and on one vehicle. Although the Pearl Street
property is shown on Schedule A as subject to a bank lien, it is not included on the statement of
intention. Nevertheless, Debtor unequivocally testified that they intend to surrender the property

3

Case 09-11696 Doc# 51 Filed 08/17/10 Page 3 of 10


to the lender. The schedules disclose the Finney County litigation. Ms. Barger is included as an
unsecured creditor of unknown amount. Other unsecured debts include credit card debt of
approximately $28,000 and some medical expenses. The Debtors’ income is below the
applicable median family income.

On August 31, 2009, the date that the period to object to discharge expired, Ms. Barger
filed an nondischargeability adversary complaint against Debtor, but not Mrs. Ortega.3 The
factual allegations are the same as alleged in Count II of the Finney County case. Ms. Barger
claims that Debtor’s alleged liability to her in excess of $75,000 for willful and malicious
conduct is nondischargeable under 11 U.S.C. § 523(a)(6).

On September 17, 2009, the Debtors filed the motion to convert from Chapter 7 to
Chapter 13. Debtor testified that: (1) The motion to convert was filed to avoid litigation of the
adversary proceeding, (2) he had already incurred attorney’s fees for representation in defense of
the Finney County case, and (3) he knew defense of the adversary case would be expensive. He
intends to include Ms. Barger as an unsecured creditor to be paid through the Debtors’ Chapter
13 plan.

Ms. Barger objected to the conversion. She alleges that the Debtors’ “bad faith and
abuse of the bankruptcy process makes them ineligible for Chapter 13 conversion.”4
ANALYSIS.

Section 706(a) of the Code provides, “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

3 Case no. 09-5178.

4 Doc. 25, p. 2. It is curious that in her brief, Ms. Barger alleges bad faith by both the Debtors,
but she has filed the dischargeability complaint and objected to the conversion only as to Debtor .

4

Case 09-11696 Doc# 51 Filed 08/17/10 Page 4 of 10


under section 1112, 1208, or 1307 of this title.” Prior to the Supreme Court’s 2007 decision in
Marrama,5 the Tenth Circuit BAP had held that a debtor in a Chapter 7 case that had not
previously been converted had a one-time right to convert to a case under another chapter for
which he was eligible, and that the motion to convert could not be denied for any reason not set
forth in the conversion statute.6 In Marrama, the Supreme Court disagreed with this
interpretation of the Code, and held that a Chapter 7 debtor may forfeit his right to proceed under
Chapter 13 if the converted case would be subject to immediate dismissal or conversion for
cause under § 1307(c).

The facts in Marrama7 are instructive. When Marrama filed his petition, his schedules
included a number of statements about his principal asset, a house in Maine, which were
misleading or inaccurate. Although he disclosed that he was the sole beneficiary of a trust that
owned the property, he listed its value as zero. He also denied having made any transfers other
than in the ordinary course of business during the year preceding the filing. In fact, the house
had substantial value and had been transferred to the newly-created trust for no consideration
seven months before his bankruptcy filing. Marrama’s defense was scrivener’s error. He also
attempted to obtain a homestead exemption on rental property and failed to disclose an
anticipated tax refund. Marrama filed his motion to convert to Chapter 13 after the Chapter 7
trustee announced, following the meeting of creditors, that he intended to recover the Maine
property for the estate. The bankruptcy judge denied the request for conversion, and both the

5 549 U.S. 365.

6 Miller v. Miller (In re Miller), 303 B.R. 471 (10 Cir. BAP 2003).

7 549 U.S. at 368-69.

5

Case 09-11696 Doc# 51 Filed 08/17/10 Page 5 of 10


First Circuit BAP and First Circuit Court of Appeals affirmed. The Supreme Court agreed with
the lower courts. It relied upon § 706(d), which provides that the ability to convert stated in
subsection (a) is precluded if the debtor may not be a debtor under the chapter to which
conversion is sought, and § 1307(c), which provides that a Chapter 13 case may be converted to
a case under Chapter 7 or dismissed for cause. The Court reasoned that “[n]othing in the text of
either § 706 or § 1307(c) (or the legislative history of either section) limits the authority of the
court to take appropriate action in response to fraudulent conduct by the atypical litigant who has
demonstrated that he is not entitled to the relief available to the typical debtor.”8

One “cause” recognized by the courts as a basis to dismiss or convert a Chapter 13 case
under § 1307(c) is bad faith, as evidenced by all of the facts and circumstances of the case.9
Hence, a debtor can forfeit the right to convert to Chapter 13 by bad faith conduct. However,
since denying a debtor’s motion to convert from Chapter 7 to Chapter 13 has the same harsh
effect as dismissal of a Chapter 13 case under § 1307(c), a court’s reluctance to deny conversion
should be the same as that exhibited toward motions to dismiss for cause.10 Extreme
circumstances are required.11

In Gier, the Tenth Circuit Court of Appeals enumerated the following factors to be
considered when deciding a motion to dismiss or convert under § 1307(c):
the nature of the debt, including the question of whether the debt
would be nondischargeable in a Chapter 7 proceeding; the timing

8 Marrama, 549 U.S. at 374-75.

9 Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326 (10th Cir. 1993).

10 Condon v. Smith (In re Condon), 358 B.R. 317, 325-26 (6th Cir. BAP 2007).

11 See id. at 326.

6

Case 09-11696 Doc# 51 Filed 08/17/10 Page 6 of 10


of the petition; how the debt arose; the debtor’s motive in filing the

petition; how the debtor’s actions affected creditors; the debtor’s

treatment of creditors both before and after the petition was filed;

and whether the debtor has been forthcoming with the bankruptcy

court and the creditors.12
Applying these factors in this case, the Court finds that the motion to convert to Chapter 13
should be granted and overrules Ms. Barger’s objection.

The Debtors seek to repay their consumer debt through the Chapter 13 case, including
Debtor’s debt to Ms. Barger. A portion of that debt exists because Debtor guaranteed payment
of his son’s attorneys fees owed to Ms. Barger. The majority of the claim, however, is for the
allegedly willful and malicious publication of two letters and an affidavit relating to the
investigation of an ethical complaint against Ms. Barger that was initiated by a disgruntled
former employee. Although Ms. Barger asserts substantial liability and nondischargeability of
that debt if the case proceeded under Chapter 7, there has been no determination of either
assertion. Given Debtor’s inability to read English and the circumstances surrounding the
apparent purpose of the allegedly defamatory documents, the Court finds uncertainty as to
liability and nondischargeability.

As to the timing of the motion, the motion to convert was filed in response to Ms.
Barger’s filing of her nondischargeability complaint. The Debtors state they did so to avoid the
costs of litigation.

The debt to Ms. Barger arose because of her representation of Debtor’s son. The contract
debt is based upon a guarantee. The claim for tort damages is based upon Debtor’s providing
information relating to a disciplinary complaint. Participation in disciplinary procedures is

12 In re Gier, 986 F.2d at 1329 (quoting In re Love, 957 F.2d 1350, 1357 (7th Cir. 1992)).
7

Case 09-11696 Doc# 51 Filed 08/17/10 Page 7 of 10


encouraged as a matter of public policy. The Kansas Supreme Court, through Rule 223,13 grants
judicial immunity to participants in disciplinary proceedings.

The Debtors have been forthright about their motives for conversion. They seek to avoid
litigation of the dischargeability complaint filed by Ms. Barger.

The Debtors’ action in seeking conversion may be detrimental to Ms. Barger, if one
assumes she would prevail on her dischargeability complaint and eventually recover from
Debtor. There is no evidence that the Debtors’ actions toward creditors in general was wrongful
or that conversion may be harmful to any creditors other than Ms. Barger. The Debtors’ conduct
regarding creditors both before and after the filing for relief does not evidence bad faith.

The Debtors have been forthcoming with the bankruptcy court and creditors. There is no
evidence that assets were concealed, income misstated, or liabilities erroneously stated. There
are no allegations of prepetition transfers, fraud, or manipulation of financial affairs. The only
error in the Debtors’ schedules pointed out by Ms. Barger is the failure to disclose their intent to
surrender a rental house to the creditor holding a mortgage on the property. Despite such
omission, Debtor testified that they intend to surrender the property, so the omission is of limited
consequence. There is no evidence that the Debtors have not fully cooperated and performed the
duties of debtors during the pendency of the case.

13 Kansas Supreme Court Rule 223 provides:

Complaints, reports, or testimony in the course of disciplinary proceedings under
these Rules shall be deemed to be made in the course of judicial proceedings. All
participants shall be entitled to judicial immunity and all rights, privileges and
immunities afforded public officials and other participants in actions filed in the courts of
this state.

8

Case 09-11696 Doc# 51 Filed 08/17/10 Page 8 of 10


Based upon the factors identified by the Tenth Circuit for purposes of good faith under
§ 1307(c), the Court finds that the only circumstance which could even suggest bad faith is the
Debtors’ motivation for conversion and its relationship to the nondischargeability complaint
filed by Ms. Barger. The Court finds that this circumstance, standing alone, is insufficient to
deny conversion. The Court does not question the Debtors’ honesty and intent to faithfully
perform under Chapter 13. Avoiding litigation of the Finney County case undoubtedly was a
motive the Debtors had in filing this case. There are many reasons for filing bankruptcy, and
few if any constitute bad faith, however detrimental they may be to creditors, either collectively
or individually. For example, it is generally accepted that debtors may in good faith file for
relief in response to a mortgage foreclosure action or attempts by creditors to repossess
collateral. A motive for conversion focused upon avoiding the immediate consequences of
actions by a single creditor likewise does not constitute bad faith.

 The Debtors were eligible for Chapter 13 when they initially filed for bankruptcy. The
Court finds in this case, it was not bad faith for them to wait to convert to Chapter 13 until after
the filing of a dischargeability complaint. Both Chapters 7 and 13 are available to honest and
unfortunate debtors, and debtors have a right to choose the chapter which best suits their
circumstances. If the Debtors had not filed a Chapter 7 case but initially filed for relief under
Chapter 13, there would be no basis for dismissal under § 1307. The fact that the case was
initiated under Chapter 7 does not change the good faith analysis. The rationale for denying
conversion in Marrama was that the case would have been subject to immediate dismissal if
conversion were allowed. That circumstance is not present here.

9


Case 09-11696 Doc# 51 Filed 08/17/10 Page 9 of 10


CONCLUSION.

For the foregoing reasons, the Debtors’ motion to convert from Chapter 7 to Chapter 13
under § 506(a) is granted, and Ms. Barger’s objection to conversion is denied.

The foregoing constitute Findings of Fact and Conclusions of Law under Rules 7052 and
9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a) of the Federal
Rules of Civil Procedure applicable to this matter. A judgment based upon this ruling will be
entered on a separate document and, as provided by Federal Rule of Bankruptcy Procedure 9021,
become effective when it is entered on the docket for this case.

IT IS SO ORDERED.
# # #


10

Case 09-11696 Doc# 51 Filed 08/17/10 Page 10 of 10

 

You are here: Home Opinions Judge Somers 09-11696 Ortega (Doc. # 51)