476 B.R. 298
Bankr. D.N.M.2012Background
- Creditor groups move to dismiss or convert the chapter 11 case to chapter 7 under 11 U.S.C. § 1112(b); debtor opposes.
- Court conducted an evidentiary hearing in early 2012 and issued a Stay Memorandum preceding this decision.
- Case centers on rehabilitation prospects for a debtor whose core business (real estate development) has effectively vanished.
- Court finds the debtor has suffered substantial and continuing loss to the estate, with mounting administrative costs.
- Unusual circumstances alleged by the debtor are found insufficient to avoid conversion or dismissal.
- Court ultimately converts the case to chapter 7, rather than dismissing, to maximize creditor recoveries.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether there is a reasonable likelihood of rehabilitation | Starzynski (debtor) argues potential plan viability and asset liquidation could rehabilitate. | Creditors argue no workable rehabilitation and ongoing losses. | No reasonable likelihood of rehabilitation; convert. |
| Whether substantial or continuing loss to the estate justifies conversion | Debtor contends some assets could be realized through ongoing litigation. | Estate faces significant ongoing losses and depreciating assets. | Yes; substantial losses warrant conversion. |
| Whether unusual circumstances permit avoiding conversion/dismissal | Debtor enumerates several unusual circumstances supporting continued Chapter 11. | Circumstances are not sufficiently unusual to override § 1112(b)(4)(A) grounds. | No; no unusual circumstances justify avoidance of conversion. |
| Whether a Chapter 7 trustee should be appointed or a debtor in possession remains | Debtor argues trustee unnecessary; liquidation through existing control suffices. | Appointment of a trustee would better maximize creditor recovery. | Appointment of a Chapter 7 trustee preferable; conversion chosen. |
| Public and strategic policy considerations favoring creditor recovery | Creditor interests require active management to maximize returns. | Debtor views as litigation-driven recovery; less efficient. | Conversion to Chapter 7 serves creditors' interests better. |
Key Cases Cited
- Orbit Petroleum, Inc. v. Orbit Petroleum, 395 B.R. 145 (Bankr. D.N.M. 2008) (unusual subsections may block conversion where plan feasibly rehabilitates)
- In re Pittsfield Weaving Co., 393 B.R. 271 (Bankr. D.N.H. 2008) (ongoing administrative debt weighs against reorganization)
- Toibb v. Radloff, 501 U.S. 157 (U.S. 1991) (eligibility of individuals for Chapter 11; rehabilitation standard applies)
- In re ARS Analytical, LLC, 433 B.R. 848 (Bankr. D.N.M. 2010) (unusual circumstances cannot justify avoiding § 1112(b)(4)(A) cause)
- In re Great American Pyramid Joint Venture, 144 B.R. 780 (Bankr. W.D. Tenn. 1992) (rehabilitation concept distinguished from liquidation)
- City of Sioux City, Iowa v. Midland Marina, Inc., 259 B.R. 683 (B.A.P. 8th Cir. 2001) (dismissal may allow debtor to pursue state court claims; trustee may be preferable)
- In re Foster, 188 F.3d 1259 (10th Cir. 1999) (factor regarding information turnover and 542(e) privilege)