Court Opinion

ID: 9493400
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:06:52.195846+00
Date Added: 2024-06-11T17:55:49.046387
License: Public Domain

MORAN, Senior District Judge
(dissenting).
The majority holds today that the trustee and creditors in a Chapter 7 case have fewer rights if the case was initiated by an individual under Chapter 11 and then converted (voluntarily or involuntarily) to Chapter 7 than they would have if the case had been originally filed under Chapter 7. Relying on the debatable maxim of statutory construction, expressio unius est ex-clusio alterius, the majority concludes that Congress and the Bankruptcy Advisory Committee have considered the situation before us and rejected an opportunity for a post-conversion meeting of creditors and an opportunity for the newly appointed Chapter 7 trustee to object to the debtor’s claimed exemptions.
The majority overstates its case. It concludes that the contrary position — ie., the position adopted by the majority of bankruptcy courts and the lower court in this case — has only “superficial appeal” and rests solely on policy considerations. Maj. op. at 210. There is, however, a clear ambiguity in the Code with respect to the procedures appropriate in a Chapter 11 to Chapter 7 conversion. There is strong textual support for both positions, the closest Supreme Court decision1 does not compel either result and there are policy considerations weighing in favor of both interpretations. The issue is ripe for a clarifying amendment or decision by the Supreme Court.
*223I. A Post-Conversion Objections Period is Required.
The argument in favor of a new objections period following a post-conversion meeting of creditors has been well-stated on numerous occasions. See, e.g., In re Alexander, 239 B.R. 911, 914-15 (8th Cir. BAP 1999) (Chapter 13 to Chapter 7); In re Wolf, 244 B.R. 754 (Bankr.E.D.Mich.2000) (Chapter 11 to Chapter 7); In re Havanec, 175 B.R. 920, 923-24 (Bankr.N.D.Ohio 1994) (same); In re Bergen, 163 B.R. 377 (Bankr.M.D.Fla.1994) (same); In re de Kleinman, 172 B.R. 764, 767-769 (Bankr.S.D.N.Y.1994) (same); In re Leydet, 150 B.R. 641 (Bankr.E.D.Va.1993) (same); Weissman v. Carr (In re Weissman), 173 B.R. 235 (M.D.Fla.1994) (Chapter 13 to Chapter 7); In re Jenkins, 162 B.R. 579 (Bankr.M.D.Fla.1993) (same).
Briefly, the logic is as follows: The conversion of a bankruptcy case from one chapter to another constitutes an order for relief. 11 U.S.C. § 348(a). Within a reasonable time after the order for relief in a bankruptcy case, the United States trustee must convene and preside at a meeting of creditors. 11 U.S.C. § 341(a); see also Fed. R. Bankr.P. § 2003(a) (establishing time limits). Thus, when a case brought under Chapter 11 is converted to a Chapter 7 proceeding, a new meeting of creditors is convened. This new meeting is not a continuation of the creditors meeting in the pre-conversion case, but is a separate meeting for which a new trustee must be selected. F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24, 25 (8th Cir.1985) (citing 11 U.S.C. § 348(e)). Federal Rule of Bankruptcy Procedure 4003(b) provides that the “trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a).... ” Thus, read together, the provisions establish that a second objections period begins following the post-conversion creditors meeting.
This result makes sense. Because the goal of a Chapter 11 proceeding is reorganization, the trustee generally plays a more limited role than would a trustee appointed to oversee a Chapter 7 liquidation. The majority’s approach will leave the new Chapter 7 trustee without an opportunity to object to claimed exemptions which received little or no scrutiny when reorganization was the focus. As the Ha-vanec court observed, “[t]hat job will necessarily be left to Chapter 11 creditors who are likely to have neither the interest nor expertise to do so.” 175 B.R. at 923; see also In re Bergen, 163 B.R. at 379; In re de Kleinman, 172 B.R. at 769.
II. The Alternative Position
The majority has two principal reasons for concluding that a second objections period is prohibited by the Code: the limited lists of extended time periods enumerated in 11 U.S.C. § 348 and Bankruptcy Rule 1019(2), and the resulting “recapture” of previously exempted property if a second objections period is allowed. Although I concede that neither position is particularly tidy, I do not find the majority’s reasoning sufficiently persuasive to overcome the obvious advantages of affording the newly-appointed Chapter 7 trustee an opportunity to object to the debtor’s claimed exemptions.
a. Enumerated Exceptions and Extensions
Section 341 of Title 11 provides, in relevant part, that
(a) Within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors.
(b) The United States trustee may convene a meeting of any equity security holders.
Rule 4003(b), calling for the commencement of a 30-day objection period after the meeting of creditors, does not specify whether it applies to both meetings in a converted case or just the first one after the initial order of relief. Rule 1019(2) *224addresses the extension of certain time periods upon the conversion of a case, but it does not mention Rule 4003(b). This intentional omission, the majority argues, follows from Congress’ decision to omit § 341 from the list of enumerated circumstances in which the date of “the order of relief’ is reset to the date of the conversion order.
The Debtor here filed his petition under Chapter 11 on June 13, 1996. The commencement of a voluntary case constitutes “an order for relief under such Chapter.” 11 U.S.C. § 301. The case was converted from Chapter 11 to Chapter 7 on September 24, 1997. According to 11 U.S.C. § 348(a), that conversion also “constitutes an order for relief under the chapter to which the case is converted.” Section 348(a), however, goes on to state that “except as provided in subsections (b) and (c) of this section, [the conversion] does not effect a change in the date of the filing of the petition, the commencement of the ease, or the order for relief.” Id. (emphasis added). Therefore, according to the majority, for the purpose of the objections deadline, the “meeting of creditors” convened pursuant to section 341 and Rule 2003(a) was solely the meeting convened within 40 or 60 days of the commencement of the voluntary case, ie. within 40 or 60 days of June 13, 1996. See maj. op. at 211.
F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24 (8th Cir.1985), cited by the majority in support of this position, actually rejected an analogous argument while considering the time period for dis-chargeability complaints.2 The court held that a new meeting of creditors is required upon conversion from Chapter 11 to Chapter 7. F & M, 780 F.2d at 25 (citing 11 U.S.C. § 348(e) and the Advisory Committee Note to Rule 1019(2) (“A meeting of creditors may have been held in the superseded case as required by § 341(a) of the Code but that would not dispense with the need to hold one in the ensuing liquidation case.”)).3
F & M is also instructive as to the soundness of the majority’s reliance on a questionable canon of construction. Paragraph (2) of Rule 1019 used to be paragraph (3), until (2) was deleted in 1991 to eliminate redundancy. The Advisory Committee note to the 1987 amendments indicates that
“paragraph (3) of the rule is expanded to include the effect of conversion of a Chapter 11 or 13 case to a Chapter 7 case. On conversion of a case from Chapter 11 or 13 to a Chapter 7 case, parties have a new period within which to file claims or complaints relating to the granting of the discharge or the dischargeability of a debt. This amendment is consistent with the holding and reasoning of the court in F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24 (8th Cir.1985).”
*225The note suggests that the Committee simply approved of the F & M decision regarding dischargeability and sought to codify it in the rules. Nothing in the advisory notes indicates that the Committee considered and rejected provisions to deal with a host of other possible effects of conversion. See In re Leydet, 150 B.R. at 643; In re Havanec, 175 B.R. at 924 (“[T]his omission is not compelling.... For all that appears, the draftsmen of Rule 1019(2) might well have concluded that the language of Rule 4003(b) was sufficiently clear to assure that the trustee could object to claims following the conclusion of the Chapter 7 creditors meeting after the case had been converted.”).
There are other logical problems with the majority’s reliance on the enumerated exceptions in 348(b) and (c). For example, section 1102(a) (calling for a meeting of creditors holding unsecured claims and allowing a meeting of equity security holders) is on the list in section 348(b), but does not contain the phrase “the order for relief under this Chapter.” It does say that “[a]s soon as practicable after the order for relief under Chapter 11 of this title, the United States trustee shall appoint a committee of creditors.... ” Presumably (and notwithstanding inexact drafting), the inclusion of this section in 348(b) intends that a meeting of creditors be called as soon as practicable after conversion to Chapter 11. For cases converted to Chapter 7, the majority argues, there is to be no meeting because an analogous provision did not make the list.4
That in turn creates further problems. Section 701(a) is included among the enumerated provisions and provides, in those circumstances, that promptly after conversion the U.S. trustee shall appoint “an interim trustee.” That is all well and good until one tries to replace the interim trustee in the converted case. Section 701(b) provides that the services of the interim trustee conclude when the trustee duly elected under § 702 qualifies under § 322. Section 702, however, provides that the creditors may elect one person to serve as trustee at the meeting convened pursuant to § 341. And as the majority repeatedly insists, there is no § 341 meeting after conversion. The result under the majority’s logic is that the interim trustee appointed in cases converted to Chapter 7 may not be replaced by one elected by the creditors. The term “interim” is now meaningless.
Or consider.the application-of the majority’s rule to 11 U.S.C. § 303(g), which allows the court in an involuntary liquidation case to appoint an interim trustee to take possession of the debtor’s property and to operate any business of the debtor pending trial on the involuntary petition. ■ The provision is keyed to the first order of relief and is not included in the list of enumerated exceptions. It reads
At any time after the commencement of an involuntary case under Chapter 7 of this title but before an order for relief in the case, the court, on request of a party in interest, after notice to the debtor and a hearing, and if necessary to preserve the property of the estate or to prevent loss to the estate, may order the United States trustee to appoint an interim trustee under section 701 of this title to take possession of the property of the estate and to operate any business of the debtor. Before an order for relief, the debtor may regain possession of property in the possession of a trustee ordered appointed under this subsection if the debtor files such bond as the court requires, conditioned on the debtor’s accounting for and delivering to the trustee, if there is an order for relief in the case, such property, or the value, as of *226the date the debtor regains possession, of such property.
11 U.S.C. § 303(g). Without the time period being reset by conversion, the court in a case involuntarily converted to Chapter 7 from Chapter 11 would not have the authority to preserve certain fragile assets.
From these few examples, it is clear that expressio unius is simply not a trustworthy guide through this tangle.5
b. Practicalities of the 11 to 7 conversion
Thus, it becomes necessary to set aside the competing Code interpretations and focus on the crux of the dispute: what rights do the trustee and creditors have after learning that the estate will now be liquidated, and, more difficult, what is the status after conversion of property successfully exempted during an earlier phase of the bankruptcy case?
One commentator has concluded that the argument for a new objections period is strongest when the conversion is from Chapter 12 to Chapter 7 or from Chapter 13 to Chapter 7, because property acquired by the debtor post-petition now explicitly becomes property of the estate in the ongoing case pursuant to 11 U.S.C. § 1207(a)(1) and § 1306(a)(1). See Thomas Ray, The Effects of Conversion to Chapter 7 on Selected Time Periods, 14-May Am. Bankr.Inst. J. 16 (1995). Because there is no analogous augmentation provision for a case converted from Chapter 11, the commentator, like the majority, believes a post-conversion objections period is prohibited. The bankruptcy courts considering this result, however, point to the potential for abuse under such a regime because it would “encourag[e] debtors to increase their exemptions simply by filing Chapter 11 and converting to Chapter 7 after the 30-day period.” In re Havanec, 175 B.R. at 924.
The abstract procedural debate comes sharply into focus when there is property successfully exempted during the first phase of the case and, after conversion, the trustee seeks the opportunity to object. The Bankruptcy Appellate Panel for the Eighth Circuit in Alexander v. Jensen-Carter (In re Alexander), 239 B.R. 911 (8th Cir. BAP 1999), had no problem requiring a post-conversion meeting of creditors and a corresponding objections period in light of the fact that the Chapter 13 trustee had successfully objected to the same homestead exemption claim prior to conversion. The court gave no indication whether it would have allowed the second objection if the first had been unsuccessful or had there been no objection at all.
In the context of the more frequent 13 to 7 conversion, Congress has considered an analogous question to the one presented here. Two lines of thought had developed on the appropriate date for determining what would be considered property of the estate when a case is converted. Several circuits held that the filing date of the original petition should be the date for measuring the contents of the estate, see, *227e.g., In re Bobroff, 766 F.2d 797 (3d Cir.1986), while another held that the date of conversion would be used, see In re Lybrook, 951 F.2d 136 (7th Cir.1991). Congress resolved the split when it passed the Bankruptcy Reform Act on October 22, 1994, which specified that the converted estate consists only “of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion....” 11 U.S.C. § 348(f)(1)(A) (emphasis added). Congress’ purpose in enacting this section was to eliminate the disincentive that section 1306(a)(1) placed on a party that wanted to file under Chapter 13 but also wanted the option to convert to Chapter 7. See 140 Cong.Rec. H10752-01, at H10766, H10770, and H10772. Without the 1994 amendment, the converted Chapter 7 estate would include property acquired by the debtor after he filed the original Chapter 13 petition, even though the after-acquired property rule did not apply to cases originally filed under Chapter 7.
Under that section’s second clause, however, property owned by the debtor at the time the petition is filed, even if previously listed as exempt, would be part of the converted estate, provided that it remains in the debtor’s possession on the date of conversion. Congress reasonably chose to distinguish between after-acquired and exempt property in 13 to 7 cases, and the distinction makes just as much sense if the case begins under Chapter 11.6 If the debtor chooses to alienate exempt property before' conversion, so be it. But for the purpose of overseeing the liquidation of an estate once the case has been converted to Chapter 7, the trustee and creditors should have the opportunity to evaluate and object to previously claimed exemptions if the property remains in the debt- or’s possession.

. The F & M court concluded that "debtor, at bottom, interprets section 348(a) for self-serving purposes in claiming that because a meeting of creditors was held in the previous Chapter 11 proceeding, his creditors should have only one opportunity in which to file their dischargeability complaints, regardless of the fact that his case was converted to another Chapter. We decline to construe the statutes and rules so narrowly." 780 F.2d at 26.

. One bankruptcy court recently pointed out that unlike a debtor proceeding under Chapter 13, the Chapter 11 debtor has the exclusive right to file a plan for 120 days after the order for relief. In re Wolf, 244 B.R. at 758. See 11 U.S.C. § 1121(b). "Meanwhile, the section 341 meeting is required to have been held no later than forty days after the order for relief." Id. In cases converting from 11 to 7, "the issue of exemptions does not effectively come into focus or play until after a plan is filed and a disclosure statement approved, and after that, at confirmation, and in effectuation of the § 1129(a)(7) 'best interest of creditors’ test.” Id., 244 B.R. at 759. Considering these practicalities, the Wolf court concluded that "Not until the second § 341 hearing, after conversion, is there a trustee who has the incentive, focus, interest and awareness of the importance of the exemption issue....”

. This goes against what some have called the "universal” position "that in a conversion situation a second section 341 hearing is mandated under Fed.R.Bankr.P. 2003.” In the Matter of Wolf, 244 B.R. 754, 756 (Bankr.E.D.Mich.2000). One wonders, additionally, why Congress would provide for a second creditors meeting to address a reorganization plan, but not a liquidation of the estate.

. Without some indication, that other provisions were considered for the list and rejected, we cannot be confident that "the expression of one is the exclusion of others.” See Herman & MacLean v. Huddleston, 459 U.S. 375, 387 n. 23, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983) (rejecting application "expressio unius est exclusio alterius” and noting that such canons "long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose”); SEC v. Joiner Corp., 320 U.S. 344, 350-351 & n. 8, 64 S.Ct. 120, 88 L.Ed. 88 (1943) (citing other cases "treat[ing] the maxim 'expressio unius est exclusio alteri-us1 as but an aid to construction”); Ford v. United States, 273 U.S. 593, 612, 47 S.Ct. 531, 71 L.Ed. 793 (1927) ("[The maxim] is often a valuable servant, but a dangerous master to follow in the construction of statutes or documents. The ‘exclusio’ is often the result of inadvertence or accident, and the maxim ought not to be applied, when its application ... leads to inconsistency or injustice.”). The canon "rests on the assumption that all omissions in legislative drafting are deliberate, an assumption we know to be false.” Custis v. U.S., 511 U.S. 485, 501, 114 S.Ct. 1732, 128 L.Ed.2d 517 (1994) (Souter J., dissenting).

. The majority argues that the absence of a similar provision for cases converted from Chapter 11 confirms their position. If the Code and Rules were not ambiguous on the issue presented here, I might agree. But, as the above discussion indicates, there are a number of procedural holes to be filled in the context of 11 to 7 conversions and the best gap-fillers will come from Congress’ explicit instructions on closely analogous problems.