Nicholas K. Karellas

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

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In re
NICHOLAS K. KARELLAS, Chapter 7
Debtor Case No. 08-12451-JNF

MEMORANDUM

I. INTRODUCTION

Two motions filed by Nicholas K. Karellas (the “Debtor”) are before the Court: a
“Motion to Stay Section 341 Meeting and to Rescind Order Requiring the Debtor to
Turnover Rental Income to the Trustee and for Order Requiring the Trustee to Disgorge
Rental Monies now being Held by the Trustee for Payment of Mortgage” (the “Motion to
Stay and Rescind”), and a “Motion for Expedited Hearing.” The Chapter 7 Trustee, Joseph
Braunstein (the “Trustee”), objects to the Motion to Stay and Rescind. For the reasons set
forth below, the Court denies both Motions.
II. BACKGROUND

The Debtor filed a voluntary Chapter 7 petition on April 3, 2008. The United States
Trustee scheduled the meeting of creditors pursuant to 11 U.S.C. § 341(a) for May 9, 2008
at 1:00 p.m. See 11 U.S.C. § 341(a). On April 18, 2008 the Debtor filed his Schedules and
Statement of Financial Affairs, as well as Official Form 22A. On Schedule A-Real Property,

the Debtor disclosed that he owned real estate, including an apartment building in Allston,

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Massachusetts.

On May 9, 2008, the date of the first schedule section 341 meeting, the Debtor filed
a “Notice of Continued Sec. 341 Meeting” in which he advised that the meeting had been
continued until July 2, 2008 at 1:00 p.m.

On May 21, 2008, the Trustee file a “Motion to Compel the Debtor to Cooperate with
the Trustee and Turnover to the Trustee Certain Assets of the Bankruptcy Estate” (the
“Motion to Compel”). Specifically, the Trustee requested that the Debtor be directed to
cooperate with him and turnover postpetition rental income generated from a six-unit
apartment building located at 76 Easton Street, Allston, Massachusetts (the “Allston
property”). The Trustee also requested sanctions against the Debtor. According to the
Trustee, on April 23, 2008, he contacted Debtor’s counsel by telephone and in writing,
advising him that the Debtor should not be using rents from the Allston property until
further notice and requesting from Debtor’s counsel copies of insurance policies for the
Allston property, as well as other properties owned by the Debtor located at 24 Pine Street,
Belmont, MA and 65-67 Derby Street, Newton, MA. Although the Trustee noted in his
Motion to Compel that the Debtor’s attorney had alluded to a refinancing of the Allston
property, the Trustee averred that because rents from the Allston property are not exempt
from property of the estate, as trustee he was obligated to administer them for the benefit
of creditors.

On May 22, 2008, the Debtor filed a “Motion to Dismiss Chapter 7 Proceeding.” In

his Motion, he represented that he had secured “consolidated financing sufficient to satisfy

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each and every Creditor to the extent of 100% of their Claims, whether secured or
unsecured.” In particular, he represented that he had been able to obtain financing that
would satisfy an obligation to his former spouse in the sum of $258,000, which was secured
by a lien on his income producing property in Allston.

The Court heard the Trustee’s Motion to Compel and the Debtor’s Motion to
Dismiss on May 28, 2008. The Court granted the Trustee’s Motion and denied the Debtor’s
Motion, ordering the Debtor to “forthwith turnover to the Trustee all rents collected since
the petition date.” Although the Court ruled that the Debtor did not have the right to
dismiss his Chapter 7case, the Court observed at the hearing that the Debtor could convert
his case to Chapter 11 or Chapter 13 if he wished to reorganize his financial affairs.

The Debtor took no action with respect to the conversion of his case from Chapter
7 to either Chapter 11 or Chapter 13 for over one month. On July 1, 2008, however, he filed
a Motion to Convert from Chapter 7 to Chapter 13. In view of the Supreme Court's

decision in Marrama v. Citizens Bank of Massachusetts, U.S, 127 S.Ct. 1105, 1112

(2007), the Court held the Motion to afford the Chapter 7 Trustee an opportunity to
respond. The next day, the Trustee filed an objection to the Debtor’s Motion to Convert,
noting that the Debtor failed to appear at the July 2, 2008 rescheduled meeting of creditors,
which was attended by at least one creditor, and that, therefore, the Debtor had not yet
been examined under oath with respect to his assets and liabilities. In his Objection, the
Trustee observed that he believed that the amended schedules filed by the Debtor were

inaccurate and that the Debtor had not responded to his request to turnover July rents from

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the Allston property.

On July 3, 2008, after the rescheduled the meeting of creditors, the Debtor, with the
assistance of new counsel, filed the Motion to Stay and Rescind in which he asserted that
“the role of the Chapter 7 Trustee in this case is dispensable and detrimental to the
rehabilitation of the Debtor.”

III. DISCUSSION

In Marrama, the Supreme Court interpreted the language of 11 U.S.C. § 706(a) (“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.”).

It stated:

The class of honest but unfortunate debtors who do possess an absolute right
to convert their cases from Chapter 7 to Chapter 13 includes the vast majority
of the hundreds of thousands of individuals who file Chapter 7 petitions each
year. Congress sought to give these individuals the chance to repay their
debts should they acquire the means to do so. Moreover, as the Court of
Appeals observed, the reference in § 706(a) to the unenforceability of a
waiver of the right to convert functions “as a consumer protection provision
against adhesion contracts, whereby a debtor’s creditors might be precluded
from attempting to prescribe a waiver of the debtor's right to convert to
chapter 13 as a non-negotiable condition of its contractual agreements.” 430
F.3d, at 479.

A statutory provision protecting a borrower from waiver is not a shield
against forfeiture. Nothing 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. On the contrary, the broad authority granted to bankruptcy
judges to take any action that is necessary or appropriate “to prevent an
abuse of process” described in § 105(a) of the Code, is surely adequate to

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authorize an immediate denial of a motion to convert filed under § 706 in
lieu of aconversion order that merely postpones the allowance of equivalent
relief and may provide a debtor with an opportunity to take action
prejudicial to creditors.

127 S.Ct. At 1111-112 (footnotes omitted). The Court also observed:

We have no occasion here to articulate with precision what conduct qualifies

as “bad faith” sufficient to permit a bankruptcy judge to dismiss a Chapter

13 case or to deny conversion from Chapter 7. It suffices to emphasize that

the debtor’s conduct must, in fact, be atypical. Limiting dismissal or denial

of conversion to extraordinary cases is particularly appropriate in light of the

fact that lack of good faith in proposing a Chapter 13 plan is an express

statutory ground for denying plan confirmation. 11 U.S.C. § 1325(a)(3) ....
Id. at 1111 n.11.

The decision in Marrama limits a debtor’s right to convert from Chapter 7 to
Chapter 13 to permit inquiry into his or her good faith. The Supreme Court recognized the
futility of permitting conversion if a case is likely to be reconverted because of the debtor’s
inability to propose a plan in good faith. See 11 U.S.C. § 1325(a)(3).

The record in this proceeding reflects an absence of good faith on the part of the
Debtor. Section 521 of the Bankruptcy Code specifies the debtor’s duties. Among those
duties is the duty to “cooperate with the trustee as necessary to enable the trustee to
perform the trustee’s duties under this title,” and the duty to “surrender to the trustee all
property of the estate.” 11 U.S.C.§ 521(a)(3), (a)(4)._ Additionally, the debtor has the duty
to attend the meeting of creditors and submit to an examination under oath. See 11 U'S.C.
§ 341(a); Interim Fed. R. Bankr. P. 2003(b)(1).

The record of proceedings in this case, which the Debtor does not and cannot

dispute, unequivocally establishes that he failed to appear at the section 341 meeting of

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creditors and failed to promptly turnover property of the estate. The Debtor voluntarily
filed a Chapter 7 petition. While he may now regret that decision, he was required to
cooperate with the Trustee until such time the Court ruled on his Motion to Convert. In
view of the Supreme Court’s decision in Marrama and this Court’s order of May 28, 2008,
the Court did not grant the Debtor’s Motion to Convert on the day it was filed.
Accordingly, the Debtor was obligated to attend the section 341(a) meeting of creditors.
He did not. His conduct reflects disdain for his responsibilities as a debtor and disrespect
for the duties and responsibilities of the Chapter 7 Trustee. See 11 U.S.C. § 704. Under
these circumstances, the Court finds that the Debtor’s conduct exhibits bad faith.
Accordingly, the Court shall not schedule a hearing on the Debtor’s Motion to Convert
until such time as the Debtor attends the section 341(a) meeting and turns over to the
Trustee all rents which constitute property of the estate. The Trustee and the Debtor’s
creditors are entitle to an opportunity to assess the integrity of the Debtor’s schedules and
statement of financial affairs with reference to the provisions of 11 U.S.C. § 727(a) and to
assess whether liquidation or reorganization is in their best interests. The Debtor’s conduct
has thwarted those assessments.
IV. CONCLUSION

In view of the foregoing, the Court shall enter and order denying the Motion for
Expedited Determination and the Motion to Stay and Rescind.

By the Court,

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PM Bata

Joan N. Feeney

United States Bankruptcy Judge
Dated: July 9, 2008
cc: Joseph Braunstein, Esq., Harvey Alford, Esq., David T. Fulmer, Esq., U.S. Trustee