617 B.R. 625
Bankr. E.D. Wis.2020Background
- Debtors H2D Motorcycle Ventures, LLC and JHD Holdings, Inc. (both owned by Sara Pomeroy) filed joint Chapter 11 petitions in July 2019 but soon pursued nationwide sales of their Harley‑Davidson dealerships via a specialized broker.
- H2D’s § 363 sale closed Feb. 20, 2020, netting about $888,107.50 (plus $50,000 escrow); JHD’s assets ultimately sold to Harley‑Davidson Motor Co. and closed June 2, 2020, netting about $971,357.00.
- After the sales the debtors conceded they were administratively insolvent, had no viable Chapter 11 plan, and moved to distribute selected sale proceeds to certain administrative claimants and then dismiss.
- The U.S. Trustee (UST) and landlord (CARS) opposed a structured dismissal and sought conversion to Chapter 7, citing potential Chapter 5 avoidance claims (CARS estimates ~ $4.5M) and the need for independent trustee investigations.
- The Court found cause under 11 U.S.C. § 1112(b), concluded conversion better serves creditors and the estate (given minimal plan efforts and potential avoidance recoveries), converted both cases to Chapter 7, and held in abeyance the debtors’ distribution motion, pending appointment of Chapter 7 trustees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether to convert or dismiss under 11 U.S.C. § 1112(b) | UST: convert to Chapter 7 to allow trustee investigations and preserve estate assets for equitable distribution | Debtors: dismiss after approving a limited distribution to selected administrative claimants from sale proceeds | Court granted UST’s motion and converted both cases to Chapter 7 (effective immediately) |
| Whether sale proceeds are estate property and whether court should approve debtors’ motion to distribute proceeds to select administrative claimants before conversion | Debtors: proceeds are collateral of secured creditor (HDCC) and, with its consent, may be carved out to pay select administrative claimants before dismissal | UST/CARS: proceeds remain property of the estate; structured dismissal paying select claimants impermissible without trustee review; conversion needed | Motion to distribute held in abeyance pending appointment of Chapter 7 trustees and their recommendations |
| HDCC’s motion for relief from the automatic stay to repossess collateral or sale proceeds | HDCC: lacks equity in proceeds/unsold assets and should be permitted to repossess or obtain proceeds | UST/Debtors/Court: request premature while conversion pending; trustee input needed | Relief from stay held in abeyance; automatic stay remains in effect as to HDCC; 30‑day §362(e)(1) period extended 90 days |
| Pending administrative expense applications (counsel, broker, accountants, landlord, etc.) | Debtors/applicants: services benefitted sales and estate; request payment from proceeds | Creditors/UST: object to selective payments pre‑conversion; trustee should evaluate entitlement | All outstanding administrative expense applications held in abeyance pending Chapter 7 trustees’ recommendations |
Key Cases Cited
- Westmoreland County Emp. Retirement Sys. v. Parkinson, 727 F.3d 719 (7th Cir. 2013) (articulating business‑judgment presumption in corporate decision review)
- Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir.) (holding party with notice who failed to object could not block § 363(f) free‑and‑clear sales)
- Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) (Supreme Court cautions against structured dismissals that order non‑priority distributions outside statutory scheme)