Opposition Brief — Smith v. John Peter Lee, Ltd., 119 S. Ct. 544 (1998) (No. 98-542)

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OCT 30 1998

No. 98-542

In The

Supreme Court of the United States

October Term, 1998

DARREL D. SMITH,

Petitioner,

vs.

JOHN PETER LEE, LTD. and

TOM GRIMMETT, Chapter 7 Trustee,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

BRIEF IN OPPOSITION FOR RESPONDENT

TOM GRIMMETT, TRUSTEE

N. Patrick Flanagan

Counsel of Record

Lenard E. Schwartzer

HALE LANE PEEK DENNISON

HOWARD AND ANDERSON

Attorneys for Respondent

Tom Grimmett, Trustee

2300 West Sahara

Suite 800

Las Vegas, Nevada 89102

(702) 362-5118

149399 @ Counsel Press LLC

FORMERLY LUTZ APPELLATE SERVICES

(800) 274-3321 * (800) 359-6859

QUESTIONS PRESENTED

1. Whether the provisions of Smith’s plan provided that

Smith’s property did not revest in him upon confirmation of

his plan of reorganization.

2. Whether the Ninth Circuit erred under 11 U.S.C.

§ 1112(b) in affirming the conversion of Smith’s chapter 11

case to one under chapter 7 and vesting Smith’s assets into a

chapter 7 estate.

TABLE OF CONTENTS

Page

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Table Of Cited AGUMOTING oo kccccvcnsadiivvenecsa iv

Relevant DOG 6 6 vind tare ee 1

Statement GF: Ge RIG 5.0 5nd ike debn sees cereus 2

Summary of Argument for Denying the Petition ..... 4

Reasons for Denying the Petition ................. 4

I. This Court Should Deny the Petition Because The

Ninth Circuit’s Holding Is Based Upon The

Particular Provisions Of Smith’s Chapter 11 Plan.

00000 oven suks saben ereE PE Rae eens 4

A. The Plain Meaning Of 11 U.S.C. § 1141

Does Not Require That Express Provisions

Exist To Prevent Revesting. ........... 5

B. The Ninth Circuit Applied The Plain

Meaning Of 11 U.S.C. § 1141 To The

Provisions Of Smith’s Plan. ........... 7

1. The Ninth Circuit Did Not Rely Solely

Upon The Plan’s Jurisdictional

Provisions In Its Determination That

Daybreak Remained Property Of The

Estate Nor Did It Fail To Recognize

Ll URS PARSON ii cave teas os 10

34 ae ee OO ge a

Table of Contents

II. Even If The Ninth Circuit Had Not Based Its

Decision Upon The Specific Provisions Of

Smith’s Plan, Interpretation Of The Relevant

Statutes Dictates That Smith’s Property Vested

In The Chapter 7 Bankruptcy Estate Upon

Conversion Of His Chapter 11 Case. ........

Conclusion

The Plain Meaning Of 11 U.S.C. §§ 348, 541,

1112, And 1141 Dictates That Upon

Conversion Of A Chapter 11 Case To A

Chapter 7 Case The Debtor’s Assets Vest In

The Chapter 7 Estate. .......----+++++:

1. Analysis Of Statutory Framework. ..

2. Policy Considerations. .........---

The Issue Of Whether Upon Conversion Of

A Chapter 11 Case To A Chapter 7 Case A

Debtor’s Property Becomes Property of the

Chapter 7 Estate Is Not Of Substantial

Importance To Warrant Granting Smith’s

PN ROSES eae ce cee teed es wee

1. Any Confusion About The Effects Of

Conversion Can Be Resolved Pursuant

To A Plan’s Provisions. ........---

2. Congress Can Resolve Any Confusion

By Amending The Applicable Statutes.

Page

TABLE OF CITED AUTHORITIES

Page

Cases:

Blair v. Finan (In re Elless Co.), 174 F.2d 925 (6th Cir.

1949), cert. denied, 338 U.S. 824, 70 S. Ct.. 70 (1949)

cde ee CES CeO RES OTTER Coe Toko oy Cte Oeuer Lae 14, 15

Bobroff v. Continental Bank (In re Bobroff), 766 F.2d

TOT Cs MOE 5 hk acek d Chee ub cease cei wes 20

Chase Manhattan Bank, N.A. v. Sultan Corp. (In re Sultan

Corp.), 81 B.R. 599 (9th Cir. BAP 1987) ......... 14

Connecticut Nat’l Bank v. Germain, 503 U.S. 249, 112

i Aes RE OED. k wae Aa cea eee aes ck 5,14

Cunningham v. Healthco, Inc., 824 F.2d 1448 (Sth Cir.

SOD kk ke shady nes Ke lie a Pk oe 8

Fireman's Fund Ins. Co. v. M.V. DSR Atlantic, 131 F.3d

1336 (9th Cir. 1998), cert. denied, U.S. __, 1998

Wi Se CHEE hc Red ax ih oa oo Se ubewenes tess 9

Goodman v. Phillip R. Curtis Enters., Inc., 809 F.2d 228

CO ae 5 aN Satie KD ates wh nee 14

Hillis Motors, Inc. v. Hawaii Auto. Dealers Ass’n, 997

Fe Se er I nk awn eciwa hecho 3, 5, 6, 7, 8, 9

In re Calania Corp., 188 B.R. 41 (Bankr. M.D. Fla. 1995)

+ uae ek b's b OMe ec ies Ai ea tty ila bolas 14, 15, 16, 18

Table of Cited Authorities

Page

In re Cinderella Clothing Indus., Inc., 93 B.R. 373

(Bankr. E.D. Pa. 1988) ......-.-- +e sere ee eeees 15

In re Hannan, 24 B.R. 691 (Bankr. E.D.N.Y. 1982) .. 20,21

In re K&M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz.

IDOI 25s oT Rs RN ay eS 19

In re NTG Indus., Inc., 118 B.R. 606 (Bankr. N.D. Ill.

LO) Leas Coe em ein ek ea 18, 19, 21

LON 5g Fis FEE. FSS ET vic BUNS PG we ee 3, 19, 20

In re Winom Tool & Die, Inc., 173 B.R. 613 (Bankr. E.D.

Mick, 1994)... cece ccc ccs ctv ecsecsccteceres 19

Johnson v. Laing (In re Laing), 146 B.R. 482 (Bankr.

N.D. Okla. 1992), aff’d, 31 F.3d 1050 (10th Cir. 1994)

sngedra Ince Dialn Sta anny Rae oes AN Lee a Pee ee oe 23

Landreth v. Internal Revenue Service, 859 F.2d 643 (9th

re | a eee Perr reer es cise er 9

Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.

§2, 115 S. Ct. 1212 (1995) .....-. eee cece eee eee 9

Pennsylvania Dept. of Public Welfare v. Davenport, 495

U.S. 552, 110 S. Ct. 2126 (1990) ......--2+-+--- 5,14

Royal Indemnity Co., Inc. v. Special Service Supply Co.

Inc, 82 Nev. 148, 413 P.2d 500 (Nev. 1966) ...... 9

tte

‘ .

Table of Cited Authorities

Page

Smith v. John Peter Lee, Ltd. (In re Smith), 201 B.R. 267

(D. Mow. 19GB). ainsi scene iam 18, 20

Spiers Graff Spiers v. Menako (In re Spiers Graff Spiers),

190 B.R. 1001 (Bankr. N.D. Ill. 1996) ........... 15

State Bank of Southern Utah v. Gledhill (In re Gledhill),

76 F.2d TO7O CAG Car: POPS oon ec vc escisees 17

Still v. Rossville Bank (In re Chattanooga Wholesale

Antiques, Inc.), 930 F.2d 458 (6th Cir. 1991) ..... 19

United States v. Ron Pair Enters., Inc., 489 U.S. 235,

RGD. G, EE; CUR ee i ik 45 ova hie cc a cane aeae 5,14

United States v. Smith, 628 F.2d 1260 (9th Cir. 1980)

Feivese wit on cag hny snes Suess eae eee 9

Statutes

Pe to So aera re 1, 13, 14, 16, 17, 18, 19, 24

it CBE SOM. oxidised ae ee 15, 16, 17

11 USC CSR. Kisses Reeve aero 16

Be ky | Bae: ae eee ener Cape Pano re. fy 16

19 US. 4 SD 3 EC RAS 24

11 UBS) 368. 6 ores ees <a en 13, 14, 16, 19, 23

vii

Table of Cited Authorities

Page

TET UE Secciscicsicsenete cen cecseres 16, 17

Pei foe fo’. ) Bee re ie 20

ER Ser S| A re er ee 19

RE EEE sac e reise sccnserestvcedess 13, 14, 15, 17

he hk Egy ee er rrr rr ee i, 15, 16, 18

eR ie Sey oi ly Y) Ren ere ie 3, 18

eB Pe So | ee eee Da ee era 3, 18

Lik ode gt Sr ae 5, 6, 7, 11, 13, 14, 22, 23

Pe Pe Ee | Beare nea 4,5, 14, 17, 19

fee i 8 ee errr 4, 5, 10, 11, 13

bes 8 Re EST rr ree et ee Tee EE Le 14

Bh) Ft See” er reer or errr ree 26

EE 1 oi. | oi eee 25

Other Authority:

140 Cong. Rec. H 10,770 (October 4, 1994) ........ 24, 25

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RELEVANT STATUTES

11 U.S.C. § 348. Effect of conversion.

(a) Conversion of a case from a case under one chapter of

this title to a case under another chapter of this title

constitutes an order for relief under the chapter to which

the case is converted, but, except as provided in subsections

(b) and (c) of this section, does not effect a change in the

date of the filing of the petition, the commencement of the

case, or the order for relief.

(b) Unless the court for cause orders otherwise, in sections

701(a), 727(a)(10), 727(b), 728(a), 728(b), 1102(a),

1110(a)(1), 1121(b), 1121(c), 1141(d)(4), 1146(a), 1146(b),

1201(a), 1221, 1228(a), 1301(a), and 1305(a) of this title,

“the order for relief under this chapter” in a chapter to which

a case has been converted under section 706, 1112, 1208,

or 1307 of this title means the conversion of such case in

such chapter.

has been converted under section 706, 1112, 1208, or 1307

of this title, as if the conversion order were the order for

relief.

(f)(1) Except as provided in paragraph (2), when a case

under chapter 13 of this title is converted to a case under

another chapter under this title —

(A) property of the estate in the converted case

shall consist 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; and

(B) valuations of property and of allowed

secured claims in the chapter 13 case shall apply

in the converted case, with allowed secured

claims reduced to the extent that they have been

paid in accordance with the chapter 13 plan.

EE EEE

(2) If the debtor converts a case under chapter 13 of this

title to a case under another chapter under this title in bad

faith, the property in the converted case shall consist of the

property of the estate as of the date of conversion.

STATEMENT OF THE CASE

Darrel D. Smith (“Smith”) filed for relief under chapter 11 of

the Bankruptcy Code on or about March 22, 1991. An Order

Confirming Debtor’s Third Plan Of Reorganization (the “Plan”) was

entered on January 11, 1994. Smith’s means for funding the Plan

was: (1) litigation against the Doumani family for an interest in the

proceeds from the sale of the Tropicana Hotel and Casino, and (2)

the making and selling of prints of the painting Daybreak by the

artist Maxfield Parrish, the original being owned by Smith. The Plan

provided, in relevant part, that only

If, sixty (60) months after confirmation, creditors are not

substantially paid, or if the Debtor loses both litigations

and there is insufficient profit from print[s] of Daybreak to

pay all claims, the Debtor will arrange to sell or auction

Daybreak to pay creditors. . . .

P. 39a of Petition For Writ Of Certiorari (“Petition”).

On March 31, 1995, John Peter Lee, Ltd. (“Lee”) moved to

withdraw as Smith’s counsel. The Bankruptcy Court granted Lee’s

motion to withdraw. Lee also moved to convert Smith’s chapter 11

case to a case under chapter 7 and to require the sale of Smith’s

bankruptcy estate assets, particularly the painting Daybreak. On May

1, 1995, the court held a preliminary hearing on the motion to convert.

The Bankruptcy Court denied Lee’s motion without prejudice and set a

status hearing for October 3, 1995. At this hearing, the Bankruptcy

Court stated that Smith could not use the litigation as his sole source of

payment but must produce prints of Daybreak. A second status hearing

was set for October 24, 1995, to allow Smith to show that he was not in

default of the Plan. At the October 24 hearing, the Bankruptcy Court

ordered Smith to show, at a third hearing on January 23, 1996, that he

had made “reasonable efforts to start producing prints and marketing

them.” The Bankruptcy Court also warned Smith that it would convert

the case to one under chapter 7 if Smith had not made such efforts.

At the January 23, 1996 hearing, the Bankruptcy Court found that

Smith had not made reasonable efforts to sell and market prints of

Daybreak and granted Lee’s motion to convert pursuant to 11 U.S.C.

§ 1112(b)(7) and (8). The court ordered that Smith’s case be converted

to one under chapter 7 and that a trustee be appointed. On February 6,

1996, an Order To Convert Case To Chapter 7 was filed. Tom R.

Grimmett, Trustee (the “Trustee”) was duly appointed as the chapter 7

trustee in Smith’s case. Smith moved for reconsideration. The court

denied this motion and stated that it rejected the holding of Jn re T.S.P.

Indus., Inc., 117 B.R. 375 (Bankr. N.D. Ill. 1990), and similar holdings,

that postconfirmation conversion is not appropriate when the chapter

11 estate’s assets have revested in the debtor. Pp. 29a-30a of Petition.

Instead, the Bankruptcy Court held that “property of an estate does

revest in the Debtor upon confirmation.” However, when a chapter 11

case is converted to a chapter 7 case, the revested property “does become

property of an estate, a Chapter 7 estate.” P. 30a of Petition.

Smith appealed the Bankruptcy Court’s order converting his case.

The United States District Court for the District of Nevada affirmed.

P. 9a of Petition. The District Court also rejected 7.S.P. Industries and

held that postconfirmation conversion is appropriate even when property

of the debtor has revested in the debtor. The District Court stated that

otherwise, “[a] debtor could . . . materially default or lose all ability to

effectuate a plan and creditors would be entirely without remedy.”

P. 24 a of Petition.

Smith appealed the District Court’s decision, and the Ninth Circuit

affirmed. However, the Ninth Circuit affirmed based upon the provisions

of Smith’s Plan, grounds other than those cited by the lower courts.

Applying its prior decision in Hillis Motors, Inc. v. Hawaii Auto. Dealers

Ass'n, 997 F.2d 581 (9th Cir. 1993), the Ninth Circuit held that the

provisions of Smith’s Plan dictated that Smith’s property, including

Daybreak, did not revest in him upon confirmation.

In the meantime, the Trustee obtained authorization to sell Smith’s

largest asset, Daybreak, by auction at Sotheby’s. Daybreak was sold at

auction for approximately $3,900,000, and the proceeds from Daybreak

netted Smith’s estate approximately $3,700,000. This sum has been

sufficient to pay all creditors in full with interest, and leave a substantial

amount for distribution to Smith.

SUMMARY OF ARGUMENT FOR

DENYING THE PETITION

Smith’s petition for writ of certiorari should be denied because: 1)

the Ninth Circuit’s decision was based upon the specific facts and

provisions of Smith’s Plan; and 2) although there is conflicting case

law with regard to the issue of whether upon conversion of a confirmed

chapter 11 case to a case under Chapter 7, property of the debtor becomes

property of the chapter 7 estate, this issue is not one of substantial

importance.

REASONS FOR DENYING THE PETITION

Smith’s petition should be denied because the Ninth Circuit based

its holding upon the particular facts in the case before it. Specifically,

the Ninth Circuit held that the provisions of Smith’s Plan provided that

Daybreak did not revest in Smith upon confirmation. As a result, when

Smith’s chapter 11 case was converted to one under chapter 7, Daybreak

was included as part of Smith’s chapter 7 estate.

Alternatively, the petition should be denied because, although there

is conflicting case law with regard to the issue of whether upon

conversion of a confirmed chapter 11 case to a case under Chapter 7,

property of the debtor becomes property of the chapter 7 estate, this

issue is not one of importance because the provisions of a plan can

expressly determine the effect of conversion upon property of a debtor.

Furthermore, Congress, if necessary, can resolve any confusion more

effectively by amending the applicable statutes.

THIS COURT SHOULD DENY THE PETITION BECAUSE THE

NINTH CIRCUIT’S HOLDING IS BASED UPON THE

PARTICULAR PROVISIONS OF SMITH’S CHAPTER 11 PLAN.

Smith contends that the bankruptcy court did not have jurisdiction

over his assets after confirmation of his Plan pursuant to 11 U.S.C.

§ 1141(b) and (c) because confirmation of his plan vested all of his

property in him free and clear of all intervening interests, and his Plan

did not expressly provide otherwise. As a result, Smith asserts that

because Daybreak vested in him upon confirmation of the Plan, the

court did not have the authority to vest Daybreak in his chapter 7 estate.

Contrary to Smith’s contentions, the Ninth Circuit found that the

provisions of Smith’s Plan provided that Smith’s property did not revest

in Smith upon confirmation. The Ninth Circuit’s holding was based

upon the plain meaning of 11 U.S.C. § 1141 and a prior decision, Hillis

Motors, Inc. v. Hawaii Auto. Dealers’ Ass'n, 997 F.2d 581, 589 (9th

Cir. 1993).

A. The Plain Meaning Of 11 U.S.C. § 1141 Does Not Require That

Express Provisions Exist To Prevent Revesting.

Smith contends that to prevent revesting of property in a debtor

upon confirmation under 11 U.S.C. § 1141, a plan must expressly

provide that property will not revest in the debtor upon confirmation.

However, the plain meaning of 11 U.S.C. § 1141(b) does not require

that a plan contain express provisions preventing revesting.

The “fundamental cannon [of] statutory interpretation begins with

the language of the statute itself.” Pennsylvania Dept. of Public Welfare

v. Davenport, 495 U.S. 552, 110 S. Ct. 2126 (1990). “[C]ourts must

presume that a legislature says in a statute what it means and means in

a statute what it says there.” Connecticut Nat’l Bank v. Germain, 503

U.S. 249, 112 S. Ct. 1146, 1149 (1992). If the statutory language is

ambiguous, a court must then resort to examination of legislative history.

See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 109 S. Ct.

1026, 1030 (1989).

The plain meaning of legislation should be conclusive,

except in the “rare cases [in which] the literal application

of a statute will produce a result demonstrably at odds with

the intention of its drafters.”

Ron Pair Enters., Inc., 109 S. Ct. at 1031.

11 U.S.C. § 1141(b) and (c) provide:

(b) Except as otherwise provided in the plan or in the order

confirming the plan, the confirmation ofa plan vests all of

the property of the estate in the debtor.

this section and except as otherwise provided in the plan or

in the order confirming the plan, after confirmation of a

plan, the property dealt with by the plan is free and clear of

all claims and interests of creditors, equity security holders,

and of general partners in the debtor.

11 U.S.C. § 1141 (emphasis added). The plain language of § 1141

provides that unless “otherwise provided in the plan or the order

confirming the plan” property revests in the debtor upon confirmation.

Notably, § 1141 does not state “[e]xcept as otherwise expressly provided

in the plan or order confirming the plan” property revests in the debtor.

Absent the statutory requirement that a plan contain express language

preventing revesting of property in the debtor, normal principles of

contract interpretation are to be applied to determine a plan’s meaning.

As the Ninth Circuit stated:

A reorganization plan resembles a consent decree and

therefore, should be construed basically as a contract. See

The Official Creditors Committee of Stratford of Texas, Inc.

v. Stratford of Texas, Inc. (In re Stratford of Texas, Inc.),

635 F.2d 365, 368-69 (Sth Cir. Unit A Jan. 1981); see also

Rufo v. Inmates of Suffolk County Jail, U.S.__, ___, 112

S. Ct. 748, 757, 116 L. Ed. 2d 867 (1992) (a consent decree

has elements of both a judgment and a contract). Although

a confirmed bankruptcy plan is a judgment rendered by a

federal court in a case arising under federal law, because

there is little need for a nationally uniform body of law

regarding the interpretation of Chapter 11 plans and because

state law is regularly incorporated into bankruptcy law, state

law constitutes the federal rule of decision here and governs

our interpretation of [the debtor’s] plan. See Kamen v.

Kemper Financial Serv. Inc., __ U.S. __, __, 111 S. Ct.

1711, 1717, 114 L. Ed. 2d 152 (1991); United States v.

Kimbell Foods, Inc., 440 U.S. 715, 727-29, 99 S. Ct. 1448,

1458-59, 59 L. Ed. 2d 711 (1979); Stratford, 635 F.2d at

368-39.

Hillis Motors, Inc. v. Hawaii Automobile Dealers’ Ass'n, 997 F.2d 581,

588 (9th Cir. 1993).

Applying the foregoing, the court in Hillis Motors applied

applicable state law, Hawaii law, that a “legal agreement should be

construed as a whole and its meaning determined from the entire

context and not from any one part, word, phrase, or clause.” Hillis-

Motors, 997 F.2d at 588. Based upon these principles, the court held

that a plan does not need express provisions that prevent property

from revesting in the debtor. Instead, a plan is to be interpreted as a

whole and may prevent vesting in the debtor even if “[t]he plan does

not state in unambiguous terms that the property of the estate does

not revest in the debtor.” Hillis Motors, Inc., 997 F.2d at 589.

Thus, the plain language of § 1141 does not dictate that a plan

contain express provisions preventing revesting. In the absence of this

statutory requirement, a plan is to be construed as a contract whereby

its meaning is to be determined from its entire context.

B. The Ninth Circuit Applied The Plain Meaning Of 11 U.S.C.

§ 1141 To The Provisions Of Smith’s Plan.

The Ninth Circuit applied the plain meaning of 11 U.S.C.

§ 1141 to the provisions of Smith’s plan, and analyzing the provisions

of Smith’s plan, the Ninth Circuit applied its previous holding in Hillis

Motors. In Hillis Motors, the Ninth Circuit specifically addressed the

issue of whether the debtor’s plan provided that it would remain property

of the debtor’s estate after confirmation. The court acknowledged that

confirmation customarily revests property of the estate in the debtor

unless the plan otherwise provides. However, the court noted that

because a plan’s provisions are to be interpreted as a whole under state

law, it may prevent vesting in the debtor even if “[t]he plan does not

state in unambiguous terms that the property of the estate does not

revest in the debtor.” Hillis Motors, 997 F.2d at 589.

In reaching its determination, the court made the following

observations and conclusions about the debtor’s plan of reorganization:

Hillis’ first reorganization plan was atypical. The plan did

not grant Hillis a discharge but specifically contemplated

that any discharge of its debts would occur in the future.

The plan did not return control of Hillis to the company’s

sole stockholder, D. Hillis; but it did not transfer the assets

of the company to another entity either. Instead the trustee,

as the representative of the bankruptcy court, retained

management and control over Hillis’ business. Hillis was

not free to do what it pleased with its assets and property

but rather the distribution of the company’s profits was

strictly controlled. Unusually, the reorganization plan also

provided that the bankruptcy court would be involved in

the administration of the estate after confirmation.

In essence, Hillis’ plan provided that the business would

be conducted under court supervision via the trustee until

all of Hillis’ creditors were paid. While day-to-day business

decisions were to be made by Rowley [Hillis’ C.E.O], the

corporation continued to operate under the aegis of the

court and the oversight of the trustee. Rowley also

contributed the investment capital to operate the business

(for which he was to receive reimbursement ) and he was

granted compensation for his services. Nevertheless,

Hillis’ plan makes clear that the purpose of the continued

operation of the business was to pay back the company’s

creditors under the supervision of the court. Only after the

payment of all claims and expenses of the estate would

Rowley be allowed to seek permission from the estate to

obtain Hillis’ automobile broker’s license and operate the

business as the new owner free and clear of judicial

intervention. Although there was a confirmed plan, the

reorganization process continued post-confirmation. Hillis

was not free to deal with its property and the world as it

would have been if it had not been subject to the jurisdiction

of the bankruptcy court. Cf. [Cunningham v.] Healthco,

[Inc.], 824 F.2d [1448] at 1460 [Sth Cir. 1987].

Hillis Motors, 997 F.2d at 589 (footnote omitted). Thus, the debtor’s

confirmed plan provided that: 1) the management and control of the

debtor business would remain in the trustee’s hands; 2) a fixed

percentage of the company’s postconfirmation profits “were to be paid

to the estate for disbursement as ordered by the bankruptcy court”; and

3) “(t]he bankruptcy court retained jurisdiction to insure that the purpose

and intent of the plan were carried out.” Hillis Motors, 997 F.2d at 587.

Based upon its “analysis of the language, purposes, and context of Hillis’

first reorganization plan,” the court concluded that the debtor’s corporate

property remained part of the estate. Hillis Motors, 997 F.2d at 590.

Applying the analysis set forth in Hillis Motors,' the Ninth Circuit

examined Smith’s Plan, giving meaning to all its provisions,’ and found

Daybreak did not revest in Smith upon confirmation. Specifically, the

court stated:

Smith’s reorganization plan provided that his creditors “will

receive [payments] on account of their claim as soon as

funds are available [from the sale of prints of Daybreak]. . . .

If, sixty (60) months after confirmation, secured creditors

have not been substantially paid, Debtor will make

arrangements to sell or auction the painting Daybreak.”

Thus, Daybreak did not vest in Smith free and clear of all

intervening interests upon confirmation. Instead, Smith’s

creditors retained a contingent interest in the painting.

Moreover, as the district court pointed out, Smith’s

reorganization plan explicitly provides that the bankruptcy

court “shall continue to retain exclusive jurisdiction over

these proceedings until the provisions of the plan have been

fully performed for the following purposes ... (6)

supervising the enforcement of the plan; and (7) for such

other purposes as the court shall determine.” In order to

supervise the enforcement of the plan, the bankruptcy court

had to have the authority to enforce its provisions. Thus,

the bankruptcy court necessarily had jurisdiction over

1. The Ninth Circuit was bound to follow the precedent set forth in Hillis

Motors and applied its holding properly. Fireman's Fund Ins. Co. v. M.V. DSR

Atlantic, 131 F.3d 1336, 1337 n.1 (9th Cir. 1998), cert. denied, U.S. _, 1998

WL 334029 (1998) (the Ninth Circuit is bound to follow Ninth Circuit precedent);

Landreth v. Internal Revenue Service, 859 F.2d 643, 648 (9th Cir. 1988) (“we are

not normally free to reconsider controlling Ninth Circuit precedent.”); United

States v. Smith, 628 F.2d 1260, 1261 (9th Cir. 1980) (“[w]e are bound to follow

the precedent of this circuit.”).

2. Nevada law follows the same principles for contract interpretation. A

contract must be construed as a whole and “every word must be given effect if at

all possible.” Royal Indemnity Co., Inc. v. Special Service Supply Co. Inc, 82

Nev. 148, 149, 413 P.2d 500, 502 (Nev. 1966). See also Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52, 63, 115 S. Ct. 1212, 1219 (1995) (a cardinal

principle of contract construction is “that a document should be read to give effect

to all its provisions and to render them consistent with each other.”).

—_

Smith’s assets to require him to distribute the funds from

proceeds of the sale of prints of Daybreak or to force Smith

to sell Daybreak if he was unable to repay his creditors.

Therefore, Smith “was not free to deal with [his] property

and the world as [he] would have been if [he] had not been

subject to the jurisdiction of the bankruptcy court.” Jd. [Hillis

Motors, 997 F.2d] at 589.

Pp. 5a-6a of Petition.

Thus, as demonstrated and determined by the Ninth Circuit, the

provisions of Smith’s plan provide that Daybreak did not revest in Smith.

Therefore, the Ninth Circuit’s holding, which is based upon the particular

provisions of Smith’s plan, does not provide a sufficient basis for this

court to grant Smith’s Petition.

1. The Ninth Circuit Did Not Rely Solely Upon The Plan's

Jurisdictional Provisions In Its Determination That Daybreak

Remained Property Of The Estate Nor Did It Fail To Recognize

11 U.S.C. § 1141 (ce).

Smith contends that: as

[T]he Ninth Circuit concluded that, in order for the

Bankruptcy Court to retain jurisdiction necessary to enforce

the plan, the assets of Smith’s chapter 11 estate must not

have fully revested in him upon confirmation.

In holding that the Plan’s jurisdictional provisions

affected the revesting of the property in Smith’s estate under

Bankruptcy Code section 1141(b), the Ninth Circuit

nonsensically equated jurisdiction with property of the

estate. This holding conflicts with the plain statutory

language governing bankruptcy court jurisdiction, as well

as with the holdings of numerous other courts.

P. 14 of Petition. In addition, Smith alleges that:

By holding that property of a chapter 11 estate does not

revest in the reorganized debtor when creditors retain

interests in that property, the Ninth Circuit ignores the

relationship between section 1141(b), which governs

revesting and section 1141(c), which governs encumbrances

that remain on revested property postconfirmation.

P. 20 of Petition.

Smith is parsing the Ninth Circuit’s holding to create a nonexistent

conflict with case law and § 1141. The Ninth Circuit did not rely

solely upon the Plan’s jurisdictional provisions in its determination

that Daybreak remained property of the estate, nor did it fail to

recognize 11 U.S.C. § 1141(c). Instead, the Ninth Circuit analyzed

Smith’s Plan as a whole as required by principles of contract law.

Upon consideration of all Plan provisions, the Ninth Circuit noted

as follows:

Smith’s reorganization plan provided that his creditors “will

receive [payments] on account of their claim as soon as

funds are available [from the sale of prints of Daybreak]. . . .

If, sixty (60) months after confirmation, secured creditors

have not been substantially paid, Debtor will make

arrangements to sell or auction the painting Daybreak.”

Thus, Daybreak did not vest in Smith free and clear of all

intervening interests upon confirmation. Instead, Smith’s

creditors retained a contingent interest in the painting.

In conjunction with these provisions, the Ninth Circuit considered

the Plan’s jurisdictional provisions and stated:

Moreover, as the district court pointed out, Smith’s

reorganization plan explicitly provides that the bankruptcy

court “shall continue to retain exclusive jurisdiction over

these proceedings until the provisions of the plan have been

fully performed for the following purposes. . . (6)

supervising the enforcement of the plan; and (7) for such

other purposes as the court shall determine.”

P. 6a of Petition (emphasis added).

As a result of these provisions, the Ninth Circuit concluded:

In order to supervise the enforcement of the plan, the

bankruptcy court had to have the authority to enforce its

provisions. Thus, the bankruptcy court necessarily had

jurisdiction over Smith’s assets to require him to distribute

the funds from proceeds of the sale of prints of Daybreak

or to force Smith to sell Daybreak if he was unable to repay

his creditors. Therefore, Smith “was not free to deal with

[his] property and the world as [he] would have been if [he]

had not been subject to the jurisdiction of the bankruptcy

court.” Jd. [Hillis Motors, 997 F.2d] at 589.

Pp. 5a-6a of Petition.

The Ninth Circuit’s analysis demonstrates that it considered the

provisions of the Plan as a whole. Based upon this analysis, the Ninth

Circuit found that the provisions regarding payment to creditors from

one source, Daybreak, in addition to the jurisdictional provisions,

established that Daybreak did not revest in Smith. Thus, the Ninth Circuit

did not base its determination solely upon the jurisdictional provisions

of the Plan. Likewise, it did not base its determination solely upon its

holding that Smith’s creditors retained a contingent interest. Instead, it

considered the totality of the provisions of the Plan as required.

In addition to the foregoing provisions, other provisions of Smith’s

plan demonstrate that Smith’s property did not revest in him upon

conversion. The plan provides:

(e) Additional Provisions Consented to by Debtor. In

addition to the foregoing, Debtor consents to the following

provisions and consents to their inclusion in any order of

the court, including the order of confirmation:

(2) that if the Debtor defaults in any terms of

the Plan, the court upon hearing after notice to

Debtor, the creditors and such other persons as

the court may direct, may enter an order either

adjudging the Debtor bankrupt or directing the

bankruptcy be proceeded with pursuant to the

provisions of the Bankruptcy Code, as amended,

or dismissing the proceedings, whichever in the

opinion of the court may be in the best interest of

creditors, and the amount of all claims shall be

reinstated in their allowed amount, crediting only

payments received thereon.

Thus, upon default under the Plan, including the failure to substantially

pay secured creditors within sixty months after confirmation, Smith’s

case could be converted to allow payment from Daybreak.

Accordingly, the Ninth Circuit properly based its decision upon

the particular facts and provisions contained in Smith’s Plan as a whole.

As a result, the Ninth Circuit’s holding did not erroneously interpret

statutory authority or case law. Smith is merely attempting to

mischaracterize and parse the Ninth Circuit’s decision by arguing that

it conflicts with § 1141(c) and with authority pertaining to jurisdiction

to bootstrap his argument that the Ninth Circuit’s decision conflicts

with statutory authority and case law.

Il.

EVEN IF THE NINTH CIRCUIT HAD NOT BASED ITS

DECISION UPON THE SPECIFIC PROVISIONS OF SMITH’S

PLAN, INTERPRETATION OF THE RELEVANT STATUTES

DICTATES THAT SMITH’S PROPERTY VESTED IN THE

CHAPTER 7 BANKRUPTCY ESTATE UPON CONVERSION OF

HIS CHAPTER 11 CASE.

Smith contends that this Court should grant his petition because

the Ninth Circuit failed to apply the majority view that postconfirmation

conversion to chapter 7 does not result in the vesting of assets in the

chapter 7 estate. Although the Ninth Circuit did not specifically address

this issue because it decided the case upon the facts and provisions in

the Plan, the Ninth Circuit did affirm the District Court which had held

that upon conversion of a chapter 11 case to a chapter 7 case, the debtor’s

assets vest in the chapter 7 estate.

Although there may be a conflict among courts with regard to this

issue, it is not of one of substantial importance. Resolution of Smith’s

contentions are resolved by application of the plain meaning of the

following sections of the Bankruptcy Code, 11 U.S.C. §§ 348, 541,

1112, and 1141, and by policy considerations. However, resolution of

these issues can be performed by including provisions in a plan of

reorganization addressing the effect of conversion on a debtor’s property.

In addition, Congress can amend the statutory framework to resolve

any confusion with regard to this issue.

A. The Plain Meaning Of 11 U.S.C. §§ 348, 541, 1112, And 1141

Dictates That Upon Conversion Of A Chapter 11 Case To A

Chapter 7 Case The Debtor’s Assets Vest In The Chapter 7

Estate.

1. Analysis Of Statutory Framework.

As previously stated, analysis of a statute begins with its plain

meaning. Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S.

552, 110 S. Ct. 2126 (1990); Connecticut Nat'l Bank v. Germain, 503

U.S. 249, 112 S. Ct. 1146, 1149 (1992). The plain meaning is conclusive,

“except in the ‘rare cases [in which] the literal application of a statute

will produce a result demonstrably at odds with the intention of its

drafters.’ ” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 109

S. Ct. 1026, 1031 (1989). “In such cases, the intention of the drafters,

rather than the strict language, controls.” 109 S. Ct. at 1031.

Statutory analysis must begin with 11 U.S.C. § 1141(b). Section

1141(b) pertains to confirmation and provides “[e]xcept as otherwise

provided in the plan or the order confirming the plan, the confirmation

of a plan vests all of the property of the estate in the debtor.” Thus,

pursuant to § 1141(b), unless the plan or the order confirming the plan

provides otherwise, upon confirmation a debtor is revested with property

of the debtor’s estate. However:

The confirmation ofa plan . . . does not necessarily dispose

of the bankruptcy case. Instead, the case generally remains

pending even after confirmation until the plan is

substantially consummated and a final decree is entered.

Therefore, it appears that the case continues even though

all property of the estate has been vested in the reorganized

debtor pursuant to Section 1141(b).

In re Calania Corp., 188 B.R. 41, 43 (Bankr. M.D. Fla. 1995). Thus,

the “[t]he confirmation of a Chapter 11 plan does not automatically

terminate the jurisdiction of the bankruptcy court.” Chase Manhattan

Bank, N.A. v. Sultan Corp. (In re Sultan Corp.), 81 B.R. 599, 602 (9th

Cir. BAP 1987). See also, Goodman v. Phillip R. Curtis Enters., Inc.,

809 F.2d 228, 232 (4th Cir. 1987) (Bankruptcy Code § 1142 “limits the

authority of the court to matters concerning the implementation or

execution of a confirmed plan.”); Blair v. Finan (In re Elless Co.), 174

F.2d 925, 929 (6th Cir. 1949), cert. denied, 338 U.S. 824, 70 S. Ct. 70

(1949) (“[iJn confirming a plan of reorganization, the court may only

retain jurisdiction in order to protect its decree, to prevent interference

with the execution of the plan, and to aid otherwise in its operation. . . .”);

Spiers Graff Spiers v. Menako (In re Spiers Graff Spiers), 190 B.R.

1001, 1007 (Bankr. N.D. Ill. 1996); Jn re Cinderella Clothing Indus.,

Inc., 93 B.R. 373, 377 (Bankr. E.D. Pa. 1988).

11 U.S.C. § 1112 provides in relevant part:

(b) Except as provided in subsection (c) of this section, on

request of a party in interest or the United States trustee or

bankruptcy administrator, and after notice and a hearing,

the bankruptcy court may convert a case under this chapter

to a case under chapter 7 of this title or may dismiss a case

under this chapter, whichever is in the best interest of

creditors and the estate, for cause including —

(7) inability to effectuate substantial

consummation of a confirmed plan;

(8) material default by the debtor with respect to

a confirmed plan;

(9) termination of a plan by reason of the

occurrence of a condition specified in the plan[.]

11 U.S.C. § 1112 (emphasis added). Section 1112(b), which pertains to

conversion for a chapter 11 case to a chapter 7 case, clearly demonstrates

that a bankruptcy court retains jurisdiction to convert or dismiss a case

even though a plan has been confirmed. Thus, the plain language of §

1112(b) “clearly contemplates the conversion of a Chapter 11 case

following confirmation of the chapter 11 plan.” Jn re Calania Corp.,

188 B.R. at 43.

Section 348(a) sets forth the effect of conversion, providing:

Conversion of a case from a case under one chapter of this

title to a case under another chapter of this title constitutes

an order for relief under the chapter to which the case is

converted, but, except as provided in subsections (b) and

the filing of the petition, the commencement of the case, or

the order for relief.

11 U.S.C. § 348 (emphasis added). Accordingly, under § 348(a) two

postulates are created: First, conversion is an order for relief. Second,

and more significantly, except as otherwise set forth in §§ 348(b) and

the filing of the commencement of the case. That is, this date does not

change because of a conversion.

The phrase “commencement of the case” contained in § 348 is

extremely significant. The date of the “commencement of the case” is

used to determine what constitutes property of the debtor’s bankruptcy

estate. See 11 U.S.C. § 541(a). Specifically, § 541(a) defines “property

of the estate” as follows:

The commencement of a case under section 301, 302, or

303 of this title creates an estate. Such estate is comprised

of all the following property, wherever located and by

whomever held:

(1) Except as provided in subsections (b) and

(c)(2) of this section, all legal or equitable

interests of the debtor in property as of the

commencement of the case.

11 U.S.C. § 541 (emphasis added). There is no language in

§ 1112(b) that redefines property of the estate or when it is determined.

Thus, even after conversion, the estate consists of property of the debtor

determined as of the commencement of the case. Calania, 188 B.R. at

42.

It would therefore appear from the combined operation of

Section 541 and Section 348 that the conversion of a case

does not affect the scope of the property of the estate in the

converted case, since that property had been fixed as of the

date of the original filing.

Calania, 188 B.R. at 42-43.

Therefore, the plain language of § 1141(b), § 1112, § 348, and

§ 541(a) demonstrates that Congress intended that (1) a confirmed

chapter 11 case could be converted to a case under chapter 7, and (2) in

that event, the property of the estate would include the property that the

debtor held as of the commencement of the case; that is, on the date he

or she filed the petition for bankruptcy relief. These statutes expressly

provide that, even though a debtor converts his case to another chapter

under the Bankruptcy Code, the conversion does not change the date of

the commencement of the case. And, the date of the commencement of

the case serves as the date as for which the property of the estate is

determined.

Although upon confirmation of a chapter 11 plan property of the

bankruptcy estate vests in a debtor (absent plan provisions that provide

otherwise), § 348 which governs the effect of conversion is controlling

under the fundamental tenet of statutory construction that a specific

statute governs over a general statute.

[A] court should not construe a general statute to eviscerate

a statute of specific effect. See Morales v. Trans World

Airlines, Inc., 504 U.S. 374, 384, 112 S. Ct. 2031, 2037,

119 L. Ed. 2d 157 (1992) (“[I]t is a commonplace of

statutory construction that the specific governs the

general.”); Franklin v United States, 992 F.2d 1492, 1502

(10th Cir. 1993) (“[A] specific statute ... should not be

deemed controlled or nullified by a general statute . . . absent

a definite contrary intention.”); 2A Norman J. Singer,

Sutherland Statutory Construction, § 46.05, at 105 (Sth ed.

1992) (“Where there is inescapable conflict between general

and specific terms or provisions of a statute, the specific

will prevail.”).

State Bank of Southern Utah v. Gledhill (In re Gledhill), 76 F.3d 1070,

1078 (10th Cir. 1996). The express language of § 348(a) is specific. It

pertains exclusively to the effect of conversion and thus governs over

§ 1141(b). Although § 348 may be characterized as a procedural statute

as opposed to a substantive statute, it dictates the effect that conversion

has on a debtor, a debtor’s rights, creditors, and a creditor’s rights.

Moreover, there are no contradictory provisions under the Code

that dictate a different analysis. Section 1141(b) contains no language

which specifically applies in the event of conversion or contradicts

§ 348. And, in fact, other Code provisions bolster this analysis. Sections

1112(b)(7) and (8) provide for the conversion of a case even after

confirmation of a plan for “cause.”

However, despite § 1112(b)(7) or (8), under Smith’s analysis a

confirmed plan would never be converted because the property held by

a reorganized debtor pursuant to the plan could never become available

to creditors in the event of conversion. A debtor would still hold his

pre-petition assets and the trustee would hold title to nothing. Thus,

any conversion under the statute would be worthless to creditors and

would allow a debtor to intentionally default on his plan of

reorganization without losing his assets upon conversion. Smith v. John

Peter Lee, Ltd. (In re Smith), 201 B.R. 267, 273 (D. Nev. 1996).

Certainly, this could not be the result intended by the drafters of

§ 1112(b). As the court noted in Calania:

[I]t would be utterly pointless to make a provision for the

conversion of an aborted Chapter 11 case to a Chapter 7

case if by virtue of Section 1141 there would not be any

assets for the Chapter 7 trustee to administer. A careful

analysis of the Code provisions permits only one conclusion

that properties which were subject to the confirmed plan

that is properties in which the Debtor had a cognizable legal

or equitable ownership interest on the date of confirmation

will be properties of the estate in a Chapter 7 case, but

properties which are clearly acquired by the Debtor post-

confirmation will not be subject to administration by the

Chapter 7 trustee.

Calania, 188 B.R. at 43.

Another case on point is Jn re NTG Indus., Inc., 118 B.R. 606

(Bankr. N.D. Ill. 1990). N7G involved a post-confirmation conversion

of a chapter 11 case to chapter 7. Under the confirmed plan, certain

preference actions were given to the creditors’ committee for prosecution

and collection with the proceeds to be divided among the unsecured

creditors. The court recognized that upon confirmation, the estate ceased

to exist. N7G Indus., Inc., 118 B.R. at 610. However, the Court found

that upon conversion, the rights held by the reorganized debtor “passed

to the Trustee under the broad umbrella of section 541(a)(1) or section

541(a)(6), as proceeds of or from property of the estate.” N7G Indus.,

Inc., 118 B.R. at 610. The court stated:

Someone has to complete the administration of the

preference proceeds and possibly pursue additional

preference actions. Furthermore, someone may need to

pursue additional preference actions under sections 544 and

548 which neither the Committee, T&Z [the Committee’s

counsel] nor the Debtor have brought to date.

.... The Trustee succeeds to the remaining property of

the estate upon conversion, subject to existing unavoidable

liens, encumbrances and claims against it.

NTG Indus., Inc., 118 B.R. at 612.

Nonetheless, despite the plain language of the applicable statutes,

courts have reached contrary conclusions. See Still v. Rossville Bank

(In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458 (6th Cir.

1991); In re K&M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz. 1997);

In re Winom Tool & Die, Inc., 173 B.R. 613 (Bankr. E.D. Mich. 1994);

In re T.S.P. Indus., Inc., 117 B.R. 375 (Bankr. N.D. Ill. 1990). 7.S.P.

supports Smith’s argument that a debtor’s property does not become

part of a new chapter 7 estate. In 7.S.P., the debtor’s chapter 11 plan

had been confirmed. The U.S. Trustee moved to convert or dismiss the

case because of the reorganized debtor’s failure to make payments

required by the plan. Rather than converting the debtor’s case, the court

dismissed it because it had found that the chapter 7 trustee would not

have any assets to distribute to the creditors. TSP Indus., Inc., 117 B.R.

at 379. Specifically, the court stated that “the conversion of this case to

a case under chapter 7 would not create a new estate or convert property

of the Debtor into property of the estate.” TSP Indus., Inc., 117 B.R. at

378.

In reaching this conclusion, the court in 7.S.P. failed to analyze

the plain language ofall the applicable sections of the Bankruptcy Code.

Instead, the court based its decision primarily upon

§ 1141(b). The 7.S.P. court did not consider the plain language of

§ 541 and § 348 which specifically pertain to the effect of conversion

and property of the estate. The court’s failure to consider § 541 and

§ 348 is demonstrated by its illogical statement that it could cite

—

circumstances where conversion of a chapter 11 case would be in the

best interests of creditors and therefore would be warranted. See 7.S.P.

Indus., Inc., 117 B.R. at 379. For instance, the court stated that there

may be no “significant” assets in the estate except for a potential

preference or fraudulent conveyance action which occurred prior to the

commencement of the case. Under these circumstances, the case should

be converted because “the chapter 7 trustee could exercise his or her

powers to recover property that, under 11 U.S.C. § 541(a)(3), would

become property of the estate for the benefit of creditors.” 7.S.P. Indus.,

Inc., 117 B.R. at 379. Thus, the 7.S.P. court’s reasoning is faulty and

contradictory. It used the date of commencement of the case to determine

property of the estate despite the fact that it did not use this date to

determine that physical property owned on that date became property

of the estate upon conversion.

Thus, it is obvious that the court in 7.S.P. arbitrarily applied

statutory language and did not follow the dictates of the Supreme Court

requiring that the plain meaning of the language of a statute be

considered for statutory interpretation. Therefore, the holding in 7.S.P.

is not persuasive.

The other cases cited by Smith are likewise unpersuasive because

these courts failed to apply the rules for statutory analysis to each of

the statutes that are applicable.

2. Policy Considerations.

Policy concerns underlying the Bankruptcy Code also support the

foregoing statutory analysis. If a bankruptcy court did not have the

authority to convert a chapter 11 case and hold that the debtor’s property

vested in a chapter 7 estate, “[a] debtor could . . . materially default or

lose all ability to effectuate a plan and creditors would be entirely without

remedy.” Smith, 201 B.R. at 274. As courts have stated, when a debtor’s

attempt at reorganization proves to be

[U]}navailing “no reason of policy suggests itself why the

creditors should not be put back in precisely the same

position as they would have been had the debtor never sought

to repay his debts. . . .”

Cf. Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797, 803 (3d

Cir. 1985) (involving a chapter 13 case; quoting Jn re Hannan, 24 B.R.

691, 692 (Bankr. E.D.N.Y. 1982)). Or as stated in the N7G Indus., Inc.

case, “someone” has to administer the assets when the reorganized debtor

has failed to execute its plan. N7G Indus., Inc., 118 B.R. at 612.

If a creditor whose rights have been established under a confirmed

plan cannot convert the chapter 11 case and pursue a debtor’s assets in

bankruptcy court, a creditor is forced to start all over and pursue its

rights in state court. As a result, a creditor is not restored to the position

it would have been in if a debtor would have never sought to repay his

debts. Instead, a creditor who has established its rights under the

bankruptcy court’s jurisdiction must now protect its rights again and

enforce these rights in state court, a court unlike the bankruptcy court,

which is not familiar with the history and negotiations between the

parties. Consequently, a creditor is left chasing the debtor in state court,

expending additional time and money, pursuing a claim that in likelihood

has been compromised under the debtor’s plan. This is a result which is

often not economically worthwhile and will, therefore, not be pursued.

The Bankruptcy Code was not drafted to allow for such a result.

The Code was drafted to offer honest debtors a “fresh start.” It was not

drafted to allow debtors the opportunity to drag creditors through

protracted, expensive court proceedings in the federal and state court

systems. Accordingly, policy reasons underlying the Code also support

the statutory analysis that a bankruptcy court has jurisdiction to convert

a chapter 11 case in which there is a confirmed plan of reorganization

and to vest the legal and equitable interests of the debtor as of the

commencement of the case in a chapter 7 trustee.

B. The Issue Of Whether Upon Conversion Of A Chapter 11 Case

To A Chapter 7 Case A Debtor’s Property Becomes Property

of the Chapter 7 Estate Is Not Of Substantial Importance To

Warrant Granting Smith’s Petition.

1. Any Confusion About The Effects Of Conversion Can Be

Resolved Pursuant To A Plan’s Provisions.

Any confusion about the effect of conversion can be resolved

pursuant to the provisions of the plan of reorganization. That is, a plan

can be drafted to include provisions pertaining to the effect of

confirmation upon property of the debtor and the effect of conversion

upon property of the estate.

As previously stated, 11 U.S.C. § 1141 provides that as “except as

set forth in the plan or in the order confirming the plan, the confirmation

of a plan vests all of the property of the estate in the debtor.”

The effect of confirmation under the plain language of

§ 1141(a) is to bind all parties to the terms of the plan. It

binds not only creditors but debtors as well. In essence, a

‘confirmed plan is a binding contract and is res judicata

as to all issues decided. Stoll v. Gottlieb, 305 U.S. 16S,

59 S. Ct. 134, 83 L. Ed. 104 (1938); Paul v. Monts, 906

F.2d 1468 (10th Cir. 1990) (holding that confirmation of

a Chapter 11 plan creates a binding contract which may

be enforced in state court). This is true even if the plan is

not consummated and the Chapter 11 is converted to

Chapter 7. See Jn re Blanton Smith Corp., 81 B.R. 440

(Bankr. M.D. Tenn. 1987). Once a plan is confirmed,

neither a debtor nor a creditor may assert rights that are

inconsistent with its provisions. Jn re Riverside Nursing

Home, 137 B.R. 134 (Bankr. S.D.N.Y. 1992). See also

Republic Supply Company v. Shoaf, 815 F.2d 1046 (Sth

Cir. 1987); Jn re Stratford of Texas, Inc., 635 F.2d 365

(Sth Cir. 1981); In re Dooley, 116 B.R. 573 (Bankr. S.D.

Ohio 1990); Jn re Moussa, 95 B.R. 449 (Bankr. N.D. Tex.

1989); In re Astroglass Boat Co., Inc., 32 B.R. 538

(Bankr. M.D. Tenn. 1983).

In a thorough discussion of the binding effect of a

confirmed plan, the Court in Jn re Blanton Smith Corp.,

supra stated:

[T]he Supreme Court [has] determined that the

order confirming a plan of reorganization is res

judicata. Stoll v. Gottlieb, 305 U.S. 165, 59 S.

Ct. 134, 83 L. Ed. 104 (1938), reh den’d, 305

U.S. 675, 59 S. Ct. 250, 83 L. Ed. 437 (1938). In

subsequent decisions, the courts of other circuits,

relying on Stoll, have held a confirmation order

to be equivalent to a judgment. In Miller v.

Meinhard-Commercial Corporations, 462 F.2d

358, 360 (Sth Cir. 1972), the Fifth Circuit stated:

An arrangement confirmed by a bankruptcy

court has the effect of a judgment rendered

by a district court, and any attempt by the

parties or those in privity with them to

relitigate any of the matters that were raised

or could have been raised therein is barred

under the doctrine of res judicata. (Citations

omitted).

81 B.R. at 442.

The binding effect of a confirmed plan extends to

provisions that are later determined to be inconsistent with

bankruptcy law. As the court stated in Republic Supply

Company v. Shoaf, supra:

Regardless of whether that provision is

inconsistent with the bankruptcy laws or within

the authority of the bankruptcy court, it is

nonetheless included in the Plan, which was

confirmed by the bankruptcy court without

objection and was not appealed.

815 F.2d at 1050.

Johnson v. Laing (In re Laing), 146 B.R. 482, 484-85 (Bankr. N.D.

Okla. 1992) (footnote omitted; emphasis added), aff’d, 31 F.3d 1050

(10th Cir. 1994).

Thus, a plan can provide provisions that relate to the effect of

conversion and its effect on the debtor’s property, and the debtor and

creditors will be bound by these provisions. This is true regardless of

whether or not such provisions are inconsistent with other provisions

of the Bankruptcy Code such as 11 U.S.C. § 541. In this case, the Plan

provided that upon Smith’s default in consummating the Plan, the Court

could “adjudge” Smith “bankrupt” and order the case “proceeded with

pursuant to the provisions of the Bankruptcy Code.”

Accordingly, § 1141 already provides a remedy for any possible

confusion arising from the effect of conversion upon a confirmed chapter

11 case to a case under chapter 7 of the Bankruptcy Code. As a result,

the conflict among courts with regard to this issue does not create an

issue of importance necessary to warrant granting Smith’s petition.

2. Congress Can Resolve Any Confusion By Amending The

Applicable Statutes.

Because the statutory scheme drafted by Congress is so complex,

Congress is the appropriate body to resolve the conflict among courts

with regard to the issue of whether upon conversion of a confirmed

chapter 11 case to a chapter 7 case the debtor’s property becomes

property of the chapter 7 estate. In fact, Congress resolved similar

confusion and clarified contradictory case law pertaining to conversion

under Chapter 13. Specifically, Congress amended 11 U.S.C. § 348

and added subsection (f).’ Section 348(f) provides:

(f)(1) Except as provided in paragraph (2), when a case under

chapter 13 of this title is converted to a case under another

chapter under this title —

(A) property of the estate in the converted case

shall consist 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; and

; (B) valuations of property and of allowed

; secured claims in the chapter 13 case shall apply

in the converted case, with allowed secured

claims reduced to the extent that they have been

paid in accordance with the chapter 13 plan.

(2) If the debtor converts a case under chapter 13 of this

title to a case under another chapter under this title in bad

faith, the property in the converted case shall consist of the

property of the estate as of the date of conversion.

Thus, if a chapter 13 reorganization case is converted to any other

chapter, property of the estate includes all property belonging to the

debtor as of the date of the filing of the petition that the debtor still

possesses.

3. The legislative history provides that “[t]his amendment would clarify the

Code to resolve a split in the case of law about what property is in the bankruptcy

estate when a debtor converts from chapter 13 to chapter 7.” 140 Cong. Rec. H

10,770 (October 4, 1994). Thus, § 348(f) does not serve to change existing law

pertaining to conversion, but merely serves to clarify existing law.

As Congress stated:

This amendment would clarify the Code to resolve a split

in the case of law about what property is in the bankruptcy

estate when a debtor converts from chapter 13 to chapter 7.

The problem arises because in chapter 13 (and chapter 12),

any property acquired after the petition becomes property

of the estate, at least until confirmation of a plan. Some

courts have held that if the case is converted, all of this

after-acquired property becomes part of the estate in the

converted chapter 7 case, even though the statutory

provisions making it property of the estate does not apply

to chapter 7. Other courts have held that the property of the

estate in a converted case is the property the debtor had

when the original chapter 13 petition was filed.

These latter courts have noted that to hold otherwise

would create a serious disincentive to chapter 13 filings.

For example, a debtor who had $10,000 equity in a home at

the beginning of the case, in a State with a $10,000

homestead exemption, would have to be counseled

concerning the risk that after he or she paid off a $10,000

second mortgage in the chapter 13 case, creating $10,000

in equity, there would be a risk that the home could be lost

if the case were converted to chapter 7 (which can occur

involuntarily). If all of the debtor’s property at the time of

conversion is property of the chapter 7 estate, the trustee

would sell the home, to realize the $10,000 for the unsecured

creditor and the debtor would lose the home.

This amendment overrules the holding in cases such as

Matter of Lybrook, 951 F.2d 136 (7th Cir. 1991) and adopts

the reasoning of Jn re Bobroff, 766 F.2d 797 (3d Cir. 1985).

However, it also gives the court discretion, in a case in which

the debtor has abused the right to convert and converted in

bad faith, to order that all property held at the time of

conversion shall constitute property of the estate in the

converted case.

140 Cong. Rec. H 10,770 (October 4, 1994).

This statutory amendment is significant in that, although under

§ 1327(b)(2) property of the debtor revests in the debtor upon

confirmation unless otherwise provided,* Congress drafted this statute

to include property that the debtor had a legal or equitable interest in on

the date of the filing of the petition. Therefore, although this statute

does not pertain to chapter 11, it demonstrates the process that Congress

intends to be undertaken when there is a conversion. That is, upon

conversion, property of the estate includes all interests of the debtor

that existed as of the date of commencement of the petition that the

debtor retained as of the date of conversion. In addition, in drafting this

statute, Congress recognized the need to create a provision to deal with

a debtor’s bad faith.

CONCLUSION

The Ninth Circuit based its decision upon the particular provisions

of Smith’s Plan and applicable law. Its determination is not contrary to

the plain language of the Bankruptcy Code and decisions interpreting

the Code. Thus, because the Ninth Circuit based its decision upon the

particular provisions of Smith’s Plan, this Court should deny granting

Smith’s petition.

Furthermore, to the extent that the Ninth Circuit improperly

interpreted the provisions of Smith’s Plan, the plain language of the

Bankruptcy Code dictates that upon conversion of a confirmed chapter

11 case to a case under chapter 7, property of the debtor becomes

property of the chapter 7 estate.

Respectfully submitted,

N. Patrick Flanagan

Counsel of Record

Lenard E. Schwartzer

HALE LANE PEEK DENNISON

HOWARD AND ANDERSON

Attorneys for Respondent

Tom Grimmett, Trustee

2300 West Sahara

Suite 800

Las Vegas, Nevada 89102

(702) 362-5118

4. Under chapter 13, property also revests upon confirmation. 11 U.S.C.

§ 1327(b).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.