Hoover v. Harrington (In Re Hoover)
828 F.3d 5
1st Cir.2016Background
- John E. Hoover III (doing business as Halloween Costume World) filed a voluntary Chapter 11 petition as an individual debtor.
- The U.S. Trustee moved under 11 U.S.C. § 1112(b) to dismiss or convert the case to Chapter 7, alleging cause for conversion.
- At the evidentiary hearing Hoover was the sole witness; the bankruptcy court relied heavily on Hoover’s monthly operating reports (MORs) and Profit & Loss statements.
- The bankruptcy court found cause to convert under § 1112(b)(4)(A) (diminution of the estate and lack of reasonable likelihood of rehabilitation) and also under (b)(4)(D) and (b)(4)(F); the district court affirmed on (b)(4)(A).
- Key factual bases: Hoover sold inventory without replenishing it, MORs showed insufficient cash flow/profits to pay expenses and creditors, and Hoover’s plans for increased income were speculative.
- The bankruptcy court converted to Chapter 7 as being in the best interests of creditors; Hoover appealed and the First Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "cause" existed to convert under § 1112(b)(4)(A) (diminution and lack of reasonable likelihood of rehabilitation) | Hoover argued there was no adequate notice that (b)(4)(A) would be relied on and that evidence did not show diminution or lack of rehabilitation | Trustee and bankruptcy court relied on MORs and financial statements showing inventory liquidation without replacement and insufficient cash flow | Affirmed: cause existed under (b)(4)(A); MORs and P&L show diminution and no reasonable likelihood of rehabilitation |
| Whether Hoover received reasonable notice and opportunity to contest reliance on (b)(4)(A) | Hoover contended he lacked adequate notice that (b)(4)(A) would be central | Trustee’s motion expressly cited (b)(4)(A); court continued hearings and ordered MORs and briefs, giving notice and opportunity | Affirmed: notice was reasonably calculated and adequate under Mullane due process principles |
| Whether the bankruptcy court abused discretion in crediting Hoover’s testimony about future business prospects | Hoover argued his reorganization plan and business prospects (e.g., flea market, lost competitor) made rehabilitation possible | Bankruptcy court found Hoover’s plans speculative, declined to credit optimistic testimony given lack of corroboration | Affirmed: credibility findings and discretionary decision not to credit speculative plans were not an abuse of discretion |
| Whether conversion was in best interests of creditors despite likely low recoveries in liquidation | Hoover argued even a long-shot Chapter 11 recovery would better serve creditors than Chapter 7 liquidation | Bankruptcy court and district court concluded further Chapter 11 would only cause more diminution; no creditor opposed conversion | Affirmed: conversion was within court’s broad discretion and in creditors’ best interests |
Key Cases Cited
- In re Gonic Realty Tr., 909 F.2d 624 (1st Cir. 1990) (standard of review for bankruptcy appeals)
- Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306 (1950) (notice must be reasonably calculated to inform interested parties)
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (deference to bankruptcy court credibility findings)
- In re Carp, 340 F.3d 15 (1st Cir. 2003) (appellate courts cannot reweigh witness credibility)
- In re Watman, 301 F.3d 3 (1st Cir. 2002) (appellate review and clear-error standard)