Danny Ross Splawn and Mary Alice Splawn

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	DANNY ROSS SPLAWN and 	No. 7-05-19019 MA
MARY ALICE SPLAWN,
Debtors.
ORDER DENYING MOTION TO COVERT TO CHAPTER 13
THIS MATTER is before the Court on the Debtors’ Motion to Convert Chapter 7 Case to
a Case Under Chapter 13 of the Bankruptcy Code Pursuant to 11 U.S.C. § 706 (“Motion to
Convert”). 	Quicken Loans, Inc. (“Quicken”), a creditor who successfully prosecuted an
adversary proceeding to deny the Debtors’ discharge, objected to the Motion to Convert arguing
that the Debtors do not qualify to be debtors under Chapter 13 because they have acted in bad
faith. The Court held a final hearing on the Motion to Convert on April 15, 2007 and took the
matter under advisement.
After considering the evidence and testimony in light of the history of the Debtors’
bankruptcy proceeding and applicable case law, the Court finds that, under the totality of
circumstances, including Debtors’ failure to seek Chapter 13 relief until after their discharge was
denied, Debtors have not proceeded in good faith. Consistent with the Supreme Court’s
directives in Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, 166 L.Ed.2d 956
(2007), the Court finds that Debtors cannot convert from Chapter 7 to Chapter 13. They are not
eligible to be debtors under Chapter 13 of the Bankruptcy Code due to their bad faith, evidenced
by their manipulation of the bankruptcy process in their clear attempt to avoid, rather than
repay, their creditors. Consequently, the Motion to Convert will be denied. 	In reaching this
determination, the Court FINDS:
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1All statutory references are to Title 11 of the United States Code in effect as of January
2005, before the effective date of the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005.
2That section provides, in relevant part:
The court shall grant the debtor a discharge, unless --
(2) the debtor, with intent to hinder, delay, or defraud a creditor . . . , has
transferred, removed, destroyed, mutilated, or concealed, or has permitted
to be transferred, removed, destroyed, mutilated, or concealed --
(A) property of the debtor, within one year before the date of the
filing of the petition[.]
11 U.S.C. § 727(a)(2)(A).
2
1. 	Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code on
October 5, 2005.
2. On January 6, 2006, Quicken filed an adversary proceeding against the Debtors
seeking to deny the Debtors’ discharge under 11 U.S.C. § 727(a)(2)(A), 11 U.S.C. §
727(a)(2)(B), 11 U.S.C. § 727(a)(3), 11 U.S.C. § 727(a)(4)(A), and/or 11 U.S.C. § 727(a)(5).1
See Adversary Proceeding No. 06-1010 M.
3. Following a two-day trial on the merits of Adversary Proceeding No. 06-1010M in
May of 2007, the Court issued a Memorandum Opinion determining that the Debtors’ discharge
should be denied pursuant to § 727(a)(2)(A). 2 See Adversary Proceeding No. 06-1010M, Docket
# 44.
4. 	The key facts surrounding Quicken’s request for denial of discharge under §
727(a)(2)(A) are that the Debtors received and spent certain proceeds following the sale of real
property against which Quicken held a mortgage that was unrecorded as of the date of the sale,
knowing that Quicken had an interest in the proceeds by virtue of a note and mortgage executed
by the Debtors in favor of Quicken. 	The principal amount of the loan from Quicken was
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$64,400.00.
5. The Court entered a judgment denying the Debtors’ discharge on September 17, 2007.
See Adversary Proceeding No. 06-1010 M, Docket # 45.
6. Debtors filed the Motion seeking to convert their case from Chapter 7 to Chapter 13
on October 2, 2007. See Docket # 54.
7. 	Debtors’ original Schedule I reflects monthly business income of $7,962.00, and total
gross monthly income of $9,332.00. See Docket #1. The monthly business expenses reported on
Schedule J total $7,123.00, leaving net monthly business income of approximately $800.00. Id.
8. 	Post-petition, Debtors ceased operating their business as a sole proprietorship.
Debtors’ insurance sales business is presently operated as a corporation, DRS & Associates, Inc.
9. For purposes of the final hearing on the Motion, Debtors submitted an updated
Schedule I which reflects monthly social security payments in the total amount of $2,215.00 as
their only income. See Exhibit A. 	Mr. Splawn testified that based on their current income from
social security and their current monthly expenses, the Debtors could contribute approximately
$300.00 per month to a Chapter 13 plan.
10. Debtor Danny Splawn continues to operate his insurance sales business through DRS
& Associates, Inc. 	Bank account records for DRS & Associates, Inc. reflect monthly payments
of $1,380.00 and $1,650.00. 	Debtor testified that these payments respectively represent lease
payments for office space for DRS & Associates, Inc., and lease payments for an apartment Mr.
Splawn uses when on business for DRS & Associates, Inc. in Denver, Colorado. 	The
corporation also owns two vehicles and apparently pays for meals and other expenses of Mr.
Splawn when he is conducting business away from home.
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3Debtors’ statements and schedules reflect total secured debt in the amount of
$403,369.00, and total unsecured debt in the amount of 76,620.00. The debt to Quicken is
identified on Debtors’ Schedule D as a secured claim in the amount of $55,100.00 based on a
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11. 	Mr. Splawn testified that DRS & Associates, Inc. is not generating a profit at this
time, though he acknowledged that DRS & Associates, Inc. continues to receive commissions
from insurance companies for product sales and renewals.
12. Section 706 governs conversion from Chapter 7 to Chapter 13. It provides, in
relevant part:
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, 1208, or 1307
of this title. Any waiver of the right to convert a case under this subsection is
unenforceable.
. . . .
Notwithstanding any other provision of this section, 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.
11 U.S.C. § 706(a) and (d).
13. The eligibility requirements for relief under Chapter 13 of the Bankruptcy Code are
found in § 109(e), which provides:
Only an individual with regular income that owes, on the date of the filing of the petition,
noncontingent, liquidated, unsecured debts of less than $307,675 and noncontingent,
liquidated secured debts of less than $922,975 or an individual with regular income and
such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the
date of the filing of the petition, noncontingent, liquidated, unsecured debts that
aggregate less than $307,675 and noncontingent, liquidated, secured debts of less than
$922,975 may be a debtor under chapter 13 of this title.
11 U.S.C. § 109(e).
14. 	Debtors have not previously converted their case, and their debts do not exceed the
debt limitations under § 109(e)3; therefore, it appears that they can convert their case under §
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judgment lien. See Docket # 1.
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706(a). See In re Miller, 303 B.R. 471, 473 (10th Cir. BAP 2003)(“Pursuant to the plain
language of § 706, a debtor may convert at any time if the following two elements are met: (1)
the debtor has not previously converted his case; and (2) the debtor meets the eligibility
requirements of the chapter to which the debtor wishes to convert.”). The Supreme Court’s
decision in Marrama, changes this straightforward approach to § 706(a), holding that § 706(a)
does not afford a dishonest debtor a one-time absolute right to convert a case from Chapter 7 to
Chapter 13. See 127 S.Ct. at 1111 (acknowledging “[t]he class of honest but unfortunate debtors
who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13" but
concluding that “[n]othing in the text of either § 706 or § 1307(c) (or the legislative history of
either provision) 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.”).
15. In Marrama the Supreme Court found that eligibility for conversion under § 706(a)
is dependent upon § 1307(c), reasoning that because dismissal of a Chapter 13 proceeding under
§ 1307(c) “for cause” can be based on a debtor’s pre-petition bad-faith conduct, such a
determination “is tantamount to a ruling that the individual does not qualify as a debtor under
Chapter 13.” 	Marrama, 127 S.Ct. at 1111. Thus, under Marrama, a debtor can forfeit his or her
right to convert under § 706(a) when the debtor seeks to convert in bad faith.
16. Marrama does not establish standards for determining “bad faith” sufficient to deny a
debtor’s request for conversion, noting only that the debtor’s conduct must be “atypical” and
“extraordinary.” Id. at 1112 n.11.
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4See also, In re Pakuris, 262 B.R. 330, 335-36 (Bankr.E.D.Pa. 2001)(reciting the
following factors in deciding a contested motion to convert under § 706(a): “(i) whether the
debtor is seeking to convert to chapter 13 in good faith (including a review of facts such as the
timing of the motion to convert; the debtor’s motive in filing the motion; and whether the debtor
has been forthcoming with the bankruptcy court and creditors); (ii) whether the debtor can
propose a confirmable plan; (iii) the impact on the debtor of denying conversion weighed against
the prejudice to creditors caused by allowing conversion; (iv) the effect of conversion on the
efficient administration of the bankruptcy estate; and (v) whether conversion would further an
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17. 	The Tenth Circuit applies a “totality of the circumstances” test to motions to dismiss
under § 1307(c). Gier v. Farmers State Bank of Lucas, Kansas (In re Gier), 986 F.2d 1326, 1329
(10th Cir. 1993). “Bad faith” in filing the petition can serve as sufficient grounds for dismissal
under § 1307(c). See In re Lanham, 346 B.R. 211, 214 (Bankr.D.Colo. 2006)(noting that “[b]ad
faith is not specifically listed [under § 1307(c)], but nonetheless may constitute ‘cause’ for
dismissal.”)(citing Gier, 986 F.2d at 1326 (remaining citation omitted)).
18. “Lack of good faith is shown when a debtor files a petition without intending to
perform the statutory obligations of a debtor under the Bankruptcy Code or when a debtor’s
conduct before or during a case constitutes an abuse of the provisions, purpose or spirit of the
chapter under which relief is sought.” Lanham, 346 B.R. at 214 (Bankr.D.Colo. 2006)(citing In
re Merrill, 192 B.R. 245 (Bankr.Colo. 1995)).
19. Given Marrama’s directive that § 1307(c) is relevant to the determination of a
contested motion to convert under § 706(a), the Court will consider the following factors:
the nature of the debt, including the question of whether the debt would be
nondischargeable in a Chapter 7 proceeding; the timing of the petition [or, in this
instance, the motion to convert]; 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.
Gier, 986 F.2d at 1329 (quoting In re Love, 957 F.2d 1350, 1357 (7th Cir. 1992)).4
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abuse of the bankruptcy process.”); In re Murray, 377 B.R. 464, 469 (Bankr.D.Del.
2007)(applying the Pakuris standards for conversion in light of Marrama); In re Condon, 358
B.R. 317, 325 (6th Cir. BAP 2007)(concluding that “bankruptcy courts should apply the same
good faith standard when evaluating a debtor’s motion to convert to chapter 13 as is utilized
when considering dismissal of a case under § 1307(c).”)(citations omitted).
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20. 	“[A] motion to convert can be abusive when it is filed to frustrate the bankruptcy
process, rather than to implement the Congressional policy of repayment of creditors.” Pakuris,
262 B.R. at 338 (citing In re Sully, 223 B.R. 582, 585 (Bankr.M.D.Fla. 1998) and In re Tardiff,
145 B.R. 357, 360 (Bankr.D.Me. 1992)).
21. 	However, because “denying a debtor’s motion to convert from chapter 7 to chapter
13 has the same ‘harsh result’ as dismissal of a chapter 13 case under § 1307(c). . . . “the
bankruptcy courts should exhibit the same ‘reluctance’ to deny a motion to convert to chapter 13
that they employ when dismissing a petition for lack of good faith under § 1307(c).” Condon,
358 B.R. at 325 and 326.
22. In the instant case, the Debtors sought to convert to Chapter 13 following the Court’s
determination that they were not entitled to a discharge of any of their debts under Chapter 7 of
the Bankruptcy Code. 	Thus the nature of the debt the Debtors now seek to repay in part through
a Chapter 13 proceeding would otherwise be non-dischargeable.
23. 	The timing of the Motion is extremely suspect. The Debtors did not seek conversion
to Chapter 13 until after the Court determined that their chapter 7 discharge would be denied.
Instead, they took a wait and see attitude, hoping that they would prevail in their defense of the
adversary proceeding and not have to repay Quicken at all.
24. Debtors acknowledged that Quicken’s actions in garnishing the Debtors’ bank
account in an effort to execute on its judgment precipitated the original bankruptcy filing.
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Instead of seeking to repay a portion of their debts through a Chapter 13, Debtors first
determined to proceed under Chapter 7. 	The Court finds that one of the Debtors’ primary
motives in filing under Chapter 7 was to avoid repaying Quicken. By waiting to seek conversion
until after Quicken prevailed on its action to deny the Debtors’ discharge, Debtors once again
seek to put off repayment of Quicken and ultimately obtain a discharge of the debt owing to
Quicken. Such maneuvering is an abuse of the bankruptcy process.
25. 	Debtors assert that other than their pre-petition conduct upon which the Court based
its decision to deny the Debtors’ discharge, Debtors have been forthcoming in their bankruptcy
proceeding and have “played by the rules,” disclosing their assets on their statements and
schedules in accordance the requirements of the Bankruptcy Code. 	But most relevant to the
question of good faith in seeking conversion, are “the debtor’s actions to repay or avoid the debt
after incurring it.” Condon, 358 B.R. at 329 (emphasis in original)(citation omitted).
26. At the final hearing on the Motion, Debtors offered a sample Schedule I and J
reflecting disposable income of $300.00 per month that they could contribute to a Chapter 13
plan. The sample Schedule I reflects no income from Mr. Splawn’s operation of DRS &
Associates, Inc. Nevertheless bank statements from DRS & Associates, Inc. reflect that it
maintains office space and an apartment in Denver for use by Mr. Splawn while doing business
for DRS & Associates, Inc. at a monthly expense exceeding $2,500.00.
27. Mr. Splawn testified that the business income from DRS & Associates, Inc. has
dropped off significantly in the two and one-half years since the filing of the bankruptcy petition,
and that DRS & Associates, Inc. is not presently netting any income. By waiting to seek
conversion to Chapter 13 until the business income of DRS & Associates, Inc. dropped
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dramatically, Debtors have been able to reduce the anticipated monthly plan payment by
approximately $800.00, the net monthly business income reflected in Debtors’ original
Schedules I and J.
28. Mr. Splawn also testified that DRS & Associates, Inc. owns two vehicles; yet,
individually, the Debtors now own only one vehicle. 	This testimony further suggests that the
Debtors have been engineering their financial situation in an effort to minimize the plan
payments that would be required under a Chapter 13 plan.
29. Based on the totality of circumstances, the Court finds that the Debtors engaged in a
consistent pattern of evading repayment of their debt to Quicken and have not proceeded in good
faith.
WHEREFORE, IT IS HEREBY ORDERED that the Motion is DENIED.
___________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: April 25, 2008
COPY TO:
George Moore 	Karla K. Poe 	United States Trustee
Attorney for Debtors 	Attorney for Quicken Loans, Inc. 	PO Box 608
PO Box 216 	PO Box 1888 	Albuquerque, NM
Albuquerque, NM 87103-0216 	Albuquerque, NM 87103-1888 	87103
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