614 B.R. 767
Bankr. E.D. La.2020Background
- Fleetstar LLC (Debtor) is a closely held trucking company owned by George Ackel, operating intermingled with related entities (Ackel Construction, Ackel Enterprises) and lacking arm’s‑length relationships or independent bookkeeping.
- Debtor filed Chapter 11 on April 2, 2019; post‑petition it produced late/incomplete MORs, failed to provide timely/verified accounting of pre‑ and post‑petition insider transactions, and lacked reliable proofs of insurance and DIP accounting.
- Multiple secured lenders hold purchase‑money liens on trucks; many trucks were surrendered and lenders are likely undersecured with significant deficiency claims.
- The U.S. Trustee moved to convert or dismiss under 11 U.S.C. § 1112(b) citing continuing losses, failure to timely report, and lack of likelihood of rehabilitation; Debtor proposed a structured dismissal with terms favoring secured lenders and insiders (including restricting refiling and leaving unencumbered causes of action with equity).
- Creditors were divided: some secured lenders and Debtor favored dismissal with terms; unsecured creditors (Old River, Hamed) and some secured creditors opposed and sought conversion so an independent trustee could administer estate assets and causes of action (notably the Old River lawsuit).
- The Court found cause under § 1112(b), determined the proposed structured dismissal would violate Jevic by subordinating Code priorities and leaving distribution/control with an insider, and converted the case to Chapter 7 to protect creditors and the estate.
Issues
| Issue | U.S. Trustee's / Movant's Argument | Debtor / Opposing Argument | Held |
|---|---|---|---|
| Whether "cause" exists under 11 U.S.C. § 1112(b) to convert or dismiss | Debtor’s continuing losses, failure to timely/file accurate MORs/SOFA, and lack of reasonable likelihood of rehabilitation constitute cause | Debtor pointed to proposed structured dismissal and insider funding offers as better for creditors | Court: Cause exists (late/inaccurate reporting, no cash flow, lack of transparency) — convert or dismiss required |
| Whether a structured dismissal proposed by Debtor is permissible | N/A (UST opposed structured dismissal) | Dismissal with terms (surrender collateral, restrict refiling, allow insider to control unencumbered assets and claims reconciliation) would benefit creditors and avoid admin insolvency | Court: Structured dismissal is not in best interests and is barred by Jevic to the extent it alters Code priority or gives nonconsensual distributions to junior parties |
| Whether dismissal or conversion better serves creditors and the estate | Conversion preferred: independent trustee can investigate insider transactions, prosecute causes of action, and maximize recovery | Debtor argued dismissal with terms (and retention of causes of action by equity/insiders) would avoid administrative insolvency and serve creditor interests | Court: Conversion to Chapter 7 better protects creditors and the estate (disinterested trustee, preserve priority scheme, pursue avoidance/causes of action) |
| Whether insider control over estate causes of action (e.g., Old River suit) justifies dismissal | N/A for UST (opposed) | Debtor/insider argued dismissal preserves value because insider cooperation and control will maximize recovery | Court: Allowing insider to retain control risks priority‑skipping distributions and unfair claims reconciliation; conversion required so a trustee can impartially administer and pursue claims |
Key Cases Cited
- Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (U.S. 2017) (structured dismissals impermissible when distributions deviate from Bankruptcy Code priority and affected creditors do not consent)
- Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (U.S. 1985) (debtor‑in‑possession and corporate fiduciaries owe duties to creditors and must provide candid financial disclosure)
- In re Koerner, 800 F.2d 1358 (5th Cir. 1986) (conversion vs. dismissal is committed to court discretion; consider best interests of creditors and estate)
- In re Biolitec, Inc., 528 B.R. 261 (Bankr. D.N.J. 2014) (court rejected settlement/dismissal that would transfer control of estate assets or claims to a creditor absent safeguards)
- In re BH S & B Holdings, LLC, 439 B.R. 342 (Bankr. S.D.N.Y. 2010) (factors to weigh in conversion vs. dismissal include ability of chapter 7 trustee to realize assets and administrative insolvency concerns)
- In re FRGR Managing Member LLC, 419 B.R. 576 (Bankr. S.D.N.Y. 2009) (chapter 7 conversion may better serve creditors where trustee can more effectively liquidate and pursue claims)