656 B.R. 757
Bankr. E.D. Mich.2024Background
- Exigent Landscaping, LLC filed a Subchapter V Chapter 11 bankruptcy in August 2023, seeking to reorganize and continue business operations in Metro Detroit.
- The Debtor proposed a plan to pay creditors over three years; however, objections raised feasibility concerns centering on financial losses and lack of reliable projections.
- The U.S. Trustee (UST) moved to convert the case to Chapter 7, citing ongoing losses and administrative failures. The Debtor and a creditor objected to conversion.
- Shortly before a key hearing, the Debtor abruptly abandoned its reorganization plan and moved to sell all assets under § 363, with the proposed buyer being the sole member’s wife.
- The Court evaluated whether "cause" existed for conversion or dismissal under § 1112(b), focusing on: (1) estate losses, (2) feasibility of rehabilitation, and (3) reporting failures.
- The judge found (i) continuing and substantial losses, (ii) no likelihood of rehabilitation, (iii) significant, unexcused reporting deficiencies, and significant insider conflicts in the proposed sale, and thus granted conversion to Chapter 7.
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Substantial/continuing loss & no rehabilitation | Debtor has ongoing losses, no realistic chance of recovery | Losses are seasonal; reorganization/§363 sale can benefit creditors | Ongoing losses and infeasibility warrant conversion |
| Gross mismanagement of the estate | Post-petition management irregularities amounted to mismanagement | Management has been diligent and disputes mismanagement claims | Not decided (conversion granted on other grounds) |
| Unexcused reporting/filing failures (§1112(b)(4)(F)) | Debtor’s Statement of Financial Affairs was grossly incomplete | Errors were unintentional and later corrected | Unexcused failures support conversion |
| Dismissal vs. conversion to Chapter 7 | Chapter 7 trustee should handle liquidation for neutrality | Debtor can maximize asset value via controlled sale | Chapter 7 conversion is in best interests |
Key Cases Cited
- United Savs. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363 (5th Cir. 1987) (explains case-specific inquiry for cause under § 1112(b))
- AMC Mortg. Co. v. Tenn. Dep’t of Revenue, 213 F.3d 917 (6th Cir. 2000) (bankruptcy court has broad discretion for conversion/dismissal)
- Loop Corp. v. U.S. Tr., 379 F.3d 511 (8th Cir. 2004) ("cause" for conversion includes continuing loss and lack of rehabilitation)
- Reagan v. Wetzel (In re Reagan), 403 B.R. 614 (8th Cir. BAP 2009) (one ground for cause suffices for conversion/dismissal)
- In re V Cos., 274 B.R. 721 (Bankr. N.D. Ohio 2002) (rehabilitation standard defined under § 1112(b)(4)(A))