439 B.R. 342
Bankr. S.D.N.Y.2010Background
- Debtors BH S & B Holdings, LLC and affiliates purchased Steve & Barry's women’s clothing business in 2008 under §363.
- Debtors filed Chapter 11 in November 2008; UST appointed a Committee and Arent Fox LLP as counsel.
- By January 2009 Debtors closed 153 Steve & Barry's stores and pursued liquidation in Chapter 11 without a filed plan.
- Ableco Finance LLC provided a $1 million Litigation Fund to pursue litigation claims; exclusive authority to the Committee to prosecute litigation claims.
- Litigation funding was exhausted; Ableco declined further subordination; statute of limitations for Chapter 5 avoidance actions was near expiration (Nov. 18, 2010).
- UST moved to convert the cases to Chapter 7 under §1112(b)(4)(A) and (J); Debtors objected; the Court granted the motion following a hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether there is cause to convert under §1112(b)(4)(A) | UST argues continuing losses and no rehabilitation; liquidation intent shows no viable rehabilitation. | Debtors contend potential recovery from turnover and other actions may rehabilitate. | Cause exists due to continuing losses and lack of rehabilitation. |
| Whether administrative insolvency constitutes cause | UST cites unpaid administrative claims and exhausted cash collateral carve-out. | Debtors argue potential Turnover and litigation could avoid insolvency. | Administrative insolvency constitutes cause for conversion. |
| Whether failure to file a disclosure statement or plan constitutes cause under §1112(b)(4)(J) | UST shows deadline passed without filed disclosure statement or plan. | Debtors had extensions; exclusivity ended; no plan/statements filed. | Failure to file triggered cause for conversion. |
| Whether conversion is more appropriate than dismissal | Conversion best serves creditors/estate by enabling Chapter 7 trustee to pursue avoidance claims. | Dismissal could be alternative if no estate to administer. | Conversion is more appropriate. |
Key Cases Cited
- Loop Corp. v. U.S. Trustee, 379 F.3d 511 (8th Cir. 2004) (no likelihood of rehabilitation can justify conversion in some liquidating contexts)
- In re 1031 Tax Grp., LLC, 374 B.R. 78 (Bankr. S.D.N.Y. 2007) (must show continuing loss and absence of rehabilitation)
- In re AdBrite Corp., 290 B.R. 209 (Bankr. S.D.N.Y. 2003) (rehabilitation unlikely where liquidation anticipated)
- In re Ameribuild Const. Mgmt., Inc., 399 B.R. 129 (Bankr. S.D.N.Y. 2009) (court may consider additional grounds beyond listed §1112(b) factors)
- In re Acme Cake Co., Inc., 2010 WL 4103761 (Bankr. E.D.N.Y. 2010) (administrative insolvency and avoidance of claims support conversion rationale)