650 B.R. 578
Bankr. D.S.D.2023Background
- Duling Sons, Inc. filed a voluntary Chapter 11 Subchapter V petition on December 3, 2021; Elizabeth M. Lally was appointed Subchapter V trustee.
- Brothers Joe and Dan Duling were principal stakeholders: Dan’s estate held a majority of non-voting stock; Joe held minority but all voting stock and was sole director/officer at time of filing.
- The Trustee conducted an extensive investigation reporting possible gross mismanagement, self-dealing, and transfers benefitting Joe and related entities (Trustee’s Report).
- The Estate of Dan Duling and Metropolitan Life, and separately the U.S. Trustee (joined by Advantage Land Co.), moved to convert/dismiss or remove the debtor-in-possession (DIP); Debtor opposed.
- The court found that administrative expenses and interest were accruing, progress toward a plan was scant, and an incurable conflict of interest existed because Joe would have to investigate/sue himself.
- The court removed the DIP under 11 U.S.C. §1185(a), expanded the Subchapter V trustee’s powers under §1183(b), and ordered Trustee and Debtor to file a joint plan within 90 days or face automatic conversion to Chapter 7.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "cause" exists to remove the DIP or convert/dismiss under 11 U.S.C. §§1112/1185 | Movants: cause exists—gross mismanagement, self-dealing, incurable conflict, accruing admin expenses | Debtor: opposed conversion/removal; acknowledged conflict but sought to remain in Subchapter V | Court: "cause" exists (conflict of interest, lack of progress, administrative accruals); removal appropriate |
| Whether removal of DIP and expanding Subchapter V trustee serves best interests of creditors/estate | Movants: removal and expanded trustee best preserve estate, investigate claims, and protect creditors | Debtor: preferred to remain DIP and control plan process | Court: removal + expanded trustee chosen to preserve Subchapter V benefits and avoid Chapter 11/Chapter 7 fees/delay |
| Whether expanded trustee can unilaterally propose and confirm a plan under Subchapter V | Movants favored trustee authority to act broadly to protect estate | Debtor wanted to preserve DIP’s plan role | Court: trustee cannot unilaterally propose a plan under §1189(a); plan must be jointly filed to preserve Subchapter V benefits |
| Remedy if Trustee and Debtor fail to file a joint plan | Movants: seek conversion/dismissal if no timely plan | Debtor: sought more time/ability to file plan | Court: ordered joint plan within 90 days; failure triggers automatic conversion to Chapter 7 without further hearing |
Key Cases Cited
- In re ComedyMX, LLC, 647 B.R. 457 (Bankr. D. Del. 2022) (court noted §§1112/1185 provide non‑exclusive lists of causes for conversion/removal)
- In re No Rust Rebar, Inc., 641 B.R. 412 (Bankr. S.D. Fla. 2022) (conflict where debtor would have to sue itself supports removal/conversion)
- In re Picacho Hills Utility Co., Inc., 518 B.R. 75 (Bankr. D.N.M. 2014) (discussing factors supporting a finding of cause for conversion/removal)