553 B.R. 162
1st Cir. BAP2016Background
- Debtor Andover Covered Bridge, LLC bought a single commercial property ("the Property") and financed it with a mortgage; affiliates operated a seasonal attraction (Pumpkin Land) that generated most cash flow.
- A fatal accident in October 2014 reduced Pumpkin Land’s revenues; the Debtor stopped making mortgage payments and had virtually no postpetition income.
- Debtor filed chapter 11 on July 2, 2015, listing the Property as its sole asset and identifying as a small business debtor; schedules showed secured debt and little liquidity.
- Debtor failed to timely file required monthly operating reports for multiple months and initially did not provide requested financial records to the U.S. Trustee; late reports showed negligible receipts.
- The U.S. Trustee moved to convert or dismiss under 11 U.S.C. § 1112(b) based on (inter alia) continuing losses, lack of likelihood of rehabilitation, and failure to timely file reports; the secured lender consented to dismissal.
- Bankruptcy court dismissed the case (choosing dismissal over conversion) for cause under § 1112(b)(4)(A), (F), and (H); the Debtor’s motion for reconsideration was denied. The district BAP affirmed.
Issues
| Issue | Debtor's Argument | U.S. Trustee / Secured Party's Argument | Held |
|---|---|---|---|
| Whether Debtor’s late monthly operating reports and failure to provide requested information constituted "cause" under § 1112(b)(4)(F) and (H) | Late filings were excusable (caught in counsel’s spam filter); cured promptly once discovered | Reporting requirements are mandatory; failure undermines chapter 11 and is cause to dismiss | Cause found: failure to timely file and provide information warranted dismissal under § 1112(b)(4)(F) and (H) |
| Whether there was "substantial or continuing loss" and absence of reasonable likelihood of rehabilitation under § 1112(b)(4)(A) | Debtor intended to propose a liquidating plan and could market/sell the Property to benefit creditors | Debtor had virtually no income, continued accrual of postpetition debt, and liquidation plans do not satisfy "rehabilitation" | Cause found: continuing losses and no reasonable likelihood of rehabilitation warranted dismissal under § 1112(b)(4)(A) |
| Whether § 1112(b)(2) "unusual circumstances" exception blocked dismissal | A liquidating plan and prompt cure of reporting defaults showed justification and likely plan confirmation within a reasonable time | § 1112(b)(2) exception inapplicable where cause includes § 1112(b)(4)(A); Debtor did not show unusual circumstances or the other required prongs | Held: Exception did not apply; Debtor failed to prove unusual circumstances or the conjunctive elements of § 1112(b)(2) |
| Whether dismissal (vs. conversion) was an abuse of discretion | Debtor argued dismissal was improper, asserting it could proceed with a sale/liquidation | U.S. Trustee and secured lender supported dismissal; record showed a single-asset estate with limited prospects | Held: Bankruptcy court’s choice to dismiss rather than convert was within its broad discretion; no abuse shown |
Key Cases Cited
- Hoover v. Harrington (In re Hoover), 828 F.3d 5 (1st Cir. 2016) (standard for § 1112(b) inquiry and appellate review of bankruptcy-court discretion)
- Gonic Realty Trust v. R.H. White Co., 909 F.2d 624 (1st Cir. 1990) (Chapter 11 inappropriate when no business remains to reorganize)
- Colón Martínez (In re Colón Martínez), 472 B.R. 137 (1st Cir. BAP 2012) (cause under § 1112(b) and appellate standard)
- Whetten (In re Whetten), 473 B.R. 380 (Bankr. D. Colo. 2012) (monthly operating reports are central to chapter 11 and failure supports cause)
- Costa Bonita Beach Resort, Inc. (In re Costa Bonita Beach Resort, Inc.), 513 B.R. 184 (Bankr. D.P.R. 2014) (liquidation intent does not satisfy "rehabilitation" requirement)
- Hannon (In re Hannon), 512 B.R. 1 (Bankr. D. Mass. 2014) (monthly operating reports provide necessary information to monitor debtor progress)
- Efron (In re Efron), 529 B.R. 396 (1st Cir. BAP 2015) (burden-shifting once movant establishes cause under § 1112(b))