629 B.R. 871
Bankr. S.D. Tex.2021Background
- Ford Steel, LLC filed Chapter 11 on September 1, 2020; the United States (IRS) filed a proof of claim asserting secured, priority, and unsecured claims totaling about $5.07 million.
- Debtor filed a disclosure statement and Chapter 11 plan on December 31, 2020; disclosure statement was approved February 9, 2021; confirmation hearing continued by agreement and is set for August 23, 2021.
- Debtor operates as debtor-in-possession, lost over $1.2 million post-petition, remained current on Monthly Operating Reports but owed roughly $40,000 in U.S. Trustee quarterly fees as of June 22, 2021.
- USA moved (May 27, 2021) to convert the case to Chapter 7 or appoint a Chapter 11 trustee under 11 U.S.C. §§ 1112 and 1104, alleging substantial/continuing loss and no reasonable likelihood of rehabilitation.
- Debtor attributes losses largely to COVID-19 (reduced workload, longer customer payment terms, denial of PPP funds) and proposes a § 363 sale and sale–leaseback of ~6 acres (Property) marketed at $10.825 million to generate working capital.
- The court found Debtor’s proposed sale would yield roughly $563,810 in unencumbered cash after paying secured and administrative claims and concluded Debtor presented a realistic remediation plan; the court denied USA’s motion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists under § 1112(b)(4)(A) (substantial/continuing loss and no reasonable likelihood of rehabilitation) | USA: Debtor lost >$1.2M post-petition, negative cash flow, and cannot generate enough cash (e.g., sale must fetch ≈$10.5M) to fund a confirmable plan. | Debtor: losses largely pandemic-driven; backlog and new jobs improving; proposed § 363 sale will provide cash to fund plan; plan payments plausible. | Court: First prong (substantial loss) met, but USA failed to prove no reasonable likelihood of rehabilitation; denial of conversion under § 1112(b)(4)(A). |
| Whether cause exists under § 1112(b)(4)(E) and (J) (failure to comply with court order / failure to file or confirm plan within court-ordered time) | USA: Debtor missed court-ordered plan deadline and plan is unconfirmable; lack of progress warrants conversion. | Debtor: timely filed plan by deadline; parties agreed to continuances; prosecution of § 363 sale and modified plan constitutes meaningful progress toward confirmation. | Court: Debtor timely filed and parties agreed to continuances; progress shown; conversion under § 1112(b)(4)(E)/(J) denied as premature. |
| Whether a Chapter 11 trustee should be appointed under § 1104(a) | USA: Debtor delayed retention of broker and management cannot be trusted to effectuate a sale/reorganization. | Debtor: promptly moved to employ broker after motion; management credibly testified re: remediation; key secured creditors support Debtor’s management. | Court: Trustee appointment is extraordinary and not warranted; USA failed to meet burden; trustee motion denied. |
| Whether the court should impose sale milestones (LOI, contract, closing) and make trustee appointment contingent on failure | Debtor/Secured creditors requested milestones and tied trustee appointment to failure. | USA opposed imposing such court milestones now. | Court: Declined to impose the agreed milestones because plan confirmation is scheduled before final milestone; denied milestone request but allowed secured creditors to seek relief later if plan not confirmed by milestone date. |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (U.S. 2011) (limits certain bankruptcy-court final adjudication power over state-law counterclaims).
- Wellness Int’l Network v. Sharif, 575 U.S. 665 (U.S. 2015) (parties may implicitly consent to adjudication by bankruptcy court).
- In re Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363 (5th Cir. 1987) (reorganization evaluation must consider best interests of creditors and estate).
- In re G-I Holdings, Inc., 385 F.3d 313 (3d Cir. 2004) (trustee-appointment burden and standards for clear-and-convincing proof discussion).
- In re Ionosphere Clubs, Inc., 113 B.R. 164 (S.D.N.Y. 1990) (sets forth factors to consider under § 1104(a) for appointing a trustee).