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Section 706(b) Conversion

In re Karlinger-Smith (January 21, 2016)
The Debtors filed for chapter 7 bankruptcy after a creditor of the Debtors’ failed veterinarian business filed a state-court action to collect a debt personally guaranteed by the Debtors. The U.S. Trustee filed a motion under section 706(b) to convert the case from chapter 7 to chapter 11. The Court held that in deciding whether to convert a case under section 706(b), a bankruptcy court must determine whether conversion would inure to the benefit of all parties in interest, including the debtor, the creditors, and any other parties with a stake in the outcome. Applying that standard to the facts at issue, the Court found that while the creditor would benefit from conversion because the Debtors had sufficient income to pay at least some of their debts under chapter 11, the Debtors and other parties in interest would receive no benefit. Converting the case would cause a zero-sum transfer from the Debtors to the business creditor. And because the Debtors made a significant efforts to pay their debts and reach a settlement with the business creditor before and during bankruptcy without success, confirming a plan could be difficult. The resulting expense of administering the case under chapter 11 could lead to a net loss for the parties in interest. The Court therefore denied the U.S. Trustee’s motion to convert.
Cite: In re Karlinger-Smith, 544 B.R. 126 (Bankr. W.D. Tex. 2016).