Appellant, secured creditor John Nady (“Nady”), appeals the bankruptcy court’s order granting the motion of debtor, James Earl DeFrantz, to convert his chapter 13 to one under chapter 7.
The issue presented to the Panel was whether debtor’s right to convert from chapter 13 to chapter 7 under Section 1307(a) of the Bankruptcy Code was conditioned by Nady’s pending motion to dismiss under Section 1307(c).
An order converting a case is reviewed for abuse of discretion. However, this case involves the alleged failure of the trial court to exercise its discretion, not the abuse of it. Here, the bankruptcy court did not address the merits of Nady’s motion to dismiss debtor’s chapter 13 case under Section 1307(c) because it had approved conversion of debtor’s case to chapter 7. Because the bankruptcy court did not exercise its discretion, the issue of whether or not it should have done so presents a legal question which is subject to de novo review.
Whether the right to convert from chapter 13 to chapter 7 is truly “absolute” has been called into question by the Supreme Court’s decision in Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007).
Nady’s primary concern is that § 1307(a) can be used by unscrupulous debtors to dodge the consequences of their bad faith conduct and avoid a hearing on the issue of bad faith. This assertion simply has no support in light of the statutory framework for chapter 7 bankruptcy cases. In reality, applying Section 1307(a) by its terms does not grant chapter 13 debtors immunity from misconduct once they convert their case — quite the opposite. Unlike dismissal, upon conversion a debtor’s case continues, the court retains jurisdiction over the debtor and the debtor’s estate, and the court has continuing power to address any improprieties that may result from the change in the nature of the proceedings. Furthermore, if bad faith is involved, chapter 7 debtors may be denied a discharge for engaging in improper conduct under Bankruptcy Code Section 727, including Section 727(a)(4)(A) (authorizing denial of discharge for making false oath or account). There is also the possibility that a debtor may face criminal penalties under 18 U.S.C. § 152 for knowingly and fraudulently making a false oath or account in or in relation to any case under title 11.
Therefore, any concern that a debtor can escape the consequences of bad faith conduct or for abuse of process is simply unwarranted.
Affirmed.