513 B.R. 184
Bankr. D.P.R.2014Background
- DF Servicing, LLC moved to convert the Debtor’s Chapter 11 case to Chapter 7; the Debtor opposed.
- The case involves a single-asset real estate collateral (Costa Bonita Project) with a secured claim by DF totaling about $5.22 million.
- Prior decisions recognized the Debtor as a SARE and addressed access-road disputes and related litigation; this case follows those decisions.
- Valuation evidence shows substantial diminution of the Real Estate Collateral from roughly $12.24 million (petition date) to about $5.2 million (July 2013).
- The Debtor’s project insurance was contested as inadequate; MOR filings were delayed; post-petition taxes were unpaid; and an access-road issue remained unresolved.
- The court held a two-day conversion hearing, heard from real estate, insurance, and accounting experts, and later considered a post-hearing request for dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists to convert or dismiss under 1112(b) | DF and HOA argue substantial diminution and no rehabilitation. | Debtor contends rehabilitation possible and no sole grounds mandate conversion. | Cause exists to convert or dismiss; conversion favored after balancing interests. |
| Whether substantial diminution and lack of rehabilitation justify dismissal or conversion | Market value collapsed to $5.2M; no realistic rehabilitation plan; estate administratively insolvent. | Debtor asserts potential plan and sale; rehabilitation not proven impossible. | Diminution and lack of rehabilitation support conversion/dismissal; rehabilitation unlikely. |
| Whether failure to maintain appropriate insurance constitutes cause under 1112(b)(4)(C) | Project was uninsured or inadequately insured; HOA controls insurance; coverage gaps risk creditors. | Debtor contends coverage acceptable under certificates; new certificates later contested. | Insurance deficiencies constitute cause; continued risk to the estate justifies conversion/dismissal. |
| Whether failure to file MORs timely supports cause under 1112(b)(4)(F) | Debtor filed MORs late or belatedly; information withheld from creditors. | Delays were cured before or during hearing; no persistent pattern established. | Unexcused MOR filing failures establish cause for dismissal or conversion. |
| Whether failure to pay taxes post-petition supports cause under 1112(b)(4)(I) | Debtor did not pay post-petition taxes; taxes are overdue and will burden estate. | Taxes may be paid as administrative expenses under plan. | Failure to timely pay taxes constitutes cause for dismissal or conversion. |
Key Cases Cited
- In re Costa Bonita Beach Resort, Inc., 479 B.R. 14 (Bankr.P.R. 2012) (SARE and related plan/conversion considerations (insufficient feasibility))
- In re De Jounghe, 334 B.R. 760 (Bankr.D. R.I. 2005) (non-evidentiary grounds for dismissal/conversion; unusual circumstances analysis)
- Rollex Corp. v. Associated Materials, Inc., 14 F.3d 240 (4th Cir. 1994) (best interests balancing test after cause is found)
- In re Orbit Petroleum, Inc., 395 B.R. 145 (Bankr.D.N.M. 2008) (unusual-circumstances and plan-feasibility considerations)
- In re AmeriCERT, Inc., 360 B.R. 398 (Bankr.D.N.H. 2007) (application of 1112(b)(4) causes and dismissal/conversion standards)
- In re Tornheim, 181 B.R. 161 (Bankr.S.D.N.Y. 1995) (importance of timely financial reporting to Chapter 11 process)