4 ABR 496 UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re	Case No. A96-00477-HAR
	Chapter 7
CLIFFORD N. BUCHTA,
	*COURT'S SUA SPONTE* MEMORANDUM RE-**
Debtor(s)	GARDING CONVERSION TO CHAPTER 13
	AFTER ENTRY OF CHAPTER 7 DISCHARGE

     1. INTRODUCTION- The Clerk's office just brought this case to my attention because of some anomalies created by debtor's motion under 11 USC Ї 706(a) to convert this case to a chapter 13 after a chapter 7 discharge had been entered. The debtor made no application to set aside the chapter 7 discharge until just the other day, although the motion to convert was filed about 2Н months ago.

     I find that the conversion of this case to chapter 13 would be appropriate provided the debtor obtains an order setting aside the chapter 7 discharge.

     2. BACKGROUND- Clifford Buchta filed a pro se chapter 7 petition on June 10, 1996. The information on the schedules is filled in in pen. It is incomplete and difficult to follow.

     Debtor's discharge under chapter 7 was entered on October 23, 1996 (Docket Entry 10). About a month later, on November 25, 1996, Chris Johansen filed a Notice And Motion To Convert Chapter 7 Case To Chapter 13 (Docket Entry 14). Mr. Johansen also submitted a Memorandum In Support Of Conversion Of Chapter 7 To Chapter 13 (Docket Entry 15), citing authority regarding the idiosyncrasies in switching from a chapter 7 trustee to a chapter 13 trustee. The memorandum stated nothing about the fact that a chapter 7 discharge had been entered, or suggested how that discharge should be treated in light of the motion to convert to chapter 13.

     Apparently the Clerk's office questioned Mr. Johansen's appearance in the case, since he had not filed a formal appearance or any disclosures required under FRBP 2016(b). He still has not done this.

The Clerk's office wrote me a memorandum on February 13, 1997, asking how to proceed with this case. Things were simplified by the fact that on February 12, 1997, Mr. Johansen filed a Motion To Vacate Order

4 ABR 497 Of Discharge (Docket Entry 18) and a chapter 13 plan was filed (Docket Entry 21).

3. LEGAL ANALYSIS- The procedure regarding conversion of a chapter 7 to chapter 13 can create some anomalies which are not addressed by the statute. 11 USC Ї 706(a) 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 under section 1112, 1028, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

     Probably, in a majority of cases, this "automatic" right to convert creates no problem. It is easy to devise a scenario, however, where an automatic conversion creates problems which must be addressed. The present case is such a situation.

     The debtor has received a chapter 7 discharge. When the debtor filed his chapter 7, the property he owned at the petition date became part of an estate administered by the trustee. 11 USC ЇЇ 541(a) and 704.

     On conversion to chapter 13, a separate chapter 13 trustee is appointed who has only some of the duties of the chapter 7 trustee. 11 USC Ї 1302. A chapter 13 debtor, on the other hand, retains the right to use, sell or lease property of the estate [11 USC Ї1303, incorporating 11 USC ЇЇ 363(b), 363(d), 363(e), 363(f) and 363(l)], and to operate the business [11 USC Ї 1304].

     Hypothetically, unless something is done about the discharge in chapter 7, a debtor with assets can discharge claims in chapter 7, reacquire the estate's assets by converting to chapter 13, and keep those assets since there are no creditors to be paid. Few people believe that this is or should be the law.

     A debtor may convert a chapter 7 case to chapter 13 even after a chapter 7 discharge has been entered. In re Martin, 880 F2d 857 (5^th Cir 1989). The 5^th Circuit noted that there might be a problem because of the chapter 7 discharge, but did not suggest any solution. The court also noted that some courts had put some judge-made restrictions on the absolute right to convert under Ї 706(a) that one might surmise from just reading the statute.

     In Martin, a chapter 7 debtor received a discharge. The chapter 7

   4 ABR 498 trustee proposed to sell real property owned by the estate to the debtor's ex-spouse, who was going to buy the property and assume some of the estate's obligations. Before the sale could be approved, debtor moved to convert to chapter 13. The bankruptcy court denied the motion but was reversed by the district court in In re Martin, 87 BR 20 (ED La 1988), which was affirmed by the 5^th Circuit.

     A number of other cases have refused to automatically allow conversion. In re Tardiff, 145 BR 357 (Bankr D Maine 1992) involved a debtor who had injured five people in an automobile accident cause by debtor's intoxication. The damages for the injuries were declared to be nondischargeable under 11 USC Ї 523(a)(9). Thus, the chapter 7 discharge that Tardiff received in 1988 did not discharge the damage claims. In a civil action in state court in April of 1990, the damage claims were liquidated. Years after his discharge, on January 3, 1992, Tardiff moved to reopen the case, revoke his chapter 7 discharge, and convert to chapter 13.

     The judge in Tardiff acknowledged the 5^th Circuit decision in In re Martin, but noted that the 5^th Circuit alluded to certain extreme cases in which conversion would not be allowed. One example is In re Calder, 93 BR 739 (Bankr D Utah 1988) concerning an attorney who had filed four bankruptcy petitions in seven years, two of which were dismissed for bad faith. Also, In re Spencer, 137 BR 506 (Bankr ND Okla 1992) (noting that there is a good faith requirement to conversion).

     Tardiff also said, at 360:

Similarly, conversion is pointless where, as here, a pre-existing Chapter 7 discharge renders resort to Chapter 13 meaningless and the debtor cannot or will not obtain relief from that order. In re Safley, 132 B.R. at 399-400 [132 BR 397 (Bankr D Ark 1991)]; In re Jones, 111 B.R. at 680 [111 BR 674 (Bankr ED Tenn 1990)].

See, also, In re Wyciskalla, 156 BR 579 (Bankr SD Ill 1993).

Thus, setting aside the discharge seems to be a prerequisite to the conversion as Buchta has recognized by his filing of the February 12, 1997, motion. In re Tardiff, at 316 fn 15, discussed the procedure regarding such a motion. The court held that setting aside a discharge 4 ABR 499 should be governed by FRBP 9055, which incorporates FRCivP 60(b). The court said in footnote 15:

Assuming that a motion for relief from discharge was brought under Rule 60(b)(6), the "exceptional circumstances" warranting relief might include the opportunity to implement congressional favoring providing the debtors with an opportunity to repay obligations by invoking Chapter 13. Resolution of the motion would require inquiry into all three factors: timeliness, prejudice and exceptional circumstances. [Citations omitted]

     In the present case, the Memorandum In Support Of Conversion Of Chapter 7 To Chapter 13 (Docket Entry 15, filed November 25, 1996) indicated that debtor made a big mistake in filing his pro se chapter 7. Debtor alleges that the chapter 13 will preserve a significant property, which was not exempt, and debtor had sufficiently stable income to propose a confirmable chapter 13 plan.

     At this point, the court does not perceive any of the factors in those cases where courts have been reluctant to permit the "automatic" conversion in light of negative factors, such as trying to manipulate the system, as opposed to paying creditors. Cf. In re Street, 55 BR 763 (9^th Cir BAP 1985) (conversion of chapter 7 case to chapter 13 after an adverse decision in a dischargeability proceeding is not per se a manipulation of the Bankruptcy Code).

     4. CONCLUSION- Assuming the motion to set aside the discharge, which was filed on February 12, 1997, is not opposed, the court will set aside the discharge and the case can proceed as a chapter 13. If there is an opposition, the court will weigh the reasons for the opposition and determine if setting aside the discharge is appropriate.

DATED: February 14, 1997

HERBERT A. ROSS

U.S. Bankruptcy Judge