Sixth Circuit Affirms Bankruptcy Courts Retroactive Conversion Order

By: Brandi Sinkovich

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Sixth Circuit recently held that a bankruptcy court had the equitable power under section 105(a) of the Bankruptcy Code (the “Code”) to retroactively convert a chapter 11 case to chapter 7.[1] In Mitan v. Duval (In re Mitan), debtor Kenneth Mitan filed a chapter 11 petition in the Bankruptcy Court for the Central District of California that unsecured creditors, which had been awarded judgments against debtor in connection with a fraudulent business scheme the debtor operated, successfully moved to transfer to the Bankruptcy Court for the Eastern District of Michigan, where debtor resided and several creditors’ businesses were located.[2] After none of the parties appeared at either the status conference or the subsequent hearing to show cause why the case should not be dismissed or converted to chapter 7, the court dismissed the case. Later the court granted the creditors’ reconsideration motion in which the creditors argued that their absence was inadvertent while debtor's absence was calculated to result in dismissal of the case, which had been previously denied to the debtor.[3] At the hearing on the reconsideration motion, the bankruptcy court reopened the case and sua sponte converted it to chapter 7 after finding that it was necessary for a trustee to investigate debtor’s affairs in light of debtor’s alleged scheme to avoid his obligations and abscond with assets hidden overseas.[4]

 

Frank Mitan (“Mitan”), debtor’s father and a creditor not party to the motion, appealed the order to the Sixth Circuit based on lack of notice, but did not seek a stay of the conversion order, so the trustee proceeded to administer the estate. The Sixth Circuit reversed and remanded after finding Mitan had not received requisite notice of the hearing.[5] On remand, the bankruptcy court converted the case to chapter 7 retroactively to the initial conversion order date, reasoning that dismissal of the case would undo the significant work of the trustee and the court.[6] Mitan again appealed the retroactive conversion to the Sixth Circuit.[7]

 

The Sixth Circuit rejected Mitan’s contention that the bankruptcy court lacked authority to retroactively convert the case to chapter 7.[8].[16] Second, the court determined that a balancing of the equities weighed in favor of the retroactive conversion because debtor initially filed the petition in an inconvenient forum and refused to cooperate with the trustee, and Mitan neglected to seek a stay pending appeal of the conversion order, which resulted in the case being administered for more than two years as a chapter 7 case. Retroactive relief was necessary to ensure that the work of the court and the trustee was not undone. The Sixth Circuit also found that the bankruptcy court's retroactive conversion order did not violate any provisions of the Code, and Mitan could not identify any prejudice that would result to his position as a creditor because of the retroactive conversion.[17] Although neither the court nor the parties could identify any case law or statutory authority governing the precise issue of whether the bankruptcy court’s equitable powers include the authority to enter a conversion order nunc pro tunc, the Sixth Circuit relied on the plain language of section 105(a) and circuit court decisions regarding other types of orders issued nunc pro tunc in bankruptcy cases to analyze this case of first impression.[9] Section 105(a) permits a bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to . . . prevent an abuse of process.”[10] The Sixth Circuit noted that nunc pro tunc orders are authorized under section 105(a) as long as they are “necessary or appropriate” to implement the provisions of the Code.[11] The Sixth Circuit also discussed circumstances in which a bankruptcy court’s use of its equitable powers to grant retroactive relief has been found “necessary or appropriate,” including where a bankruptcy court (i) annulled an automatic stay retroactively to the filing date of a petition filed in bad faith,[12] (ii) retroactively rejected a lease,[13] (iii) lifted an automatic stay nunc pro tunc because debtor had no prospects for a successful reorganization,[14] and (iv) appointed a professional nunc pro tunc.[15] Reviewing the facts, the court concluded retroactive relief was similarly necessary in this situation. First, the retroactive conversion prevented debtor from benefiting from what the creditors characterized as a “second bite at the discharge apple” because had the retroactive conversion been vacated, the bankruptcy court’s orders regarding the non-dischargability of certain claims would also have been vacated, and the victims of debtor’s business scams would have had to relitigate those issues

 

In In re Mitan, the Sixth Circuit established that the broad discretion bankruptcy courts have to fashion equitable relief includes the authority to issue conversion orders nunc pro tunc. Retroactive conversion orders are within the bankruptcy court’s powers under section 105(a) of the Code in situations where equities demand, particularly where there is a lack of demonstrated prejudice, and such orders are permissible as long as they are not sought to justify actions not in accordance with the Code.

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