563 B.R. 76
Bankr. S.D. Ga.2016Background
- Debtor Global Emergency Resources, LLC filed Chapter 11 on July 6, 2016; schedules list ~ $489,358 in assets and ~$4.76M in liabilities after amendments.
- Debtor sold substantially all assets to Pro‑Sphere for $1.6M; initial closing payment left about $197,151.70 wired to Debtor’s DIP account and a later balance of ≈ $78,000 at hearing.
- Debtor spent ≈ $115,407 from the DIP account and paid $4,875 in UST quarterly fees without prior court or secured‑creditor (Security Federal) authorization; Security Federal holds a $75,000 cash‑collateral lien.
- Postpetition obligations include ≈ $20,000 unpaid withholding taxes and ≈ $37,478 in unpaid chapter 11 attorney fees; these claims exceed the DIP account balance together with Security Federal’s lien.
- Significant internal disputes among insiders and alleged board removals; no plan filed and Debtor has no ongoing business or employees; Debtor sought an extension of exclusivity shortly before it expired.
- UST moved to convert to Chapter 7 under 11 U.S.C. § 1112(b)(4)(A), (E), and (I); hearing held and Court granted conversion.
Issues
| Issue | UST's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether "cause" exists under §1112(b)(4)(A) (diminution/likelihood of rehabilitation) | DIP funds insufficient to cover secured lien, taxes, and fees; Debtor has no ongoing business and only a note receivable — continuing diminution and no reasonable likelihood of rehabilitation | Sale produced >$1.6M and a $24,250/month 36‑month note; future note payments and retained security interest defeat diminution finding | Cause shown in part — court found diminution/no reasonable prospect of reorganization given facts (conversion granted) |
| Whether "cause" exists under §1112(b)(4)(E) (failure to comply with court order) | Debtor spent DIP cash and disbursed funds contrary to sale order requiring funds be held until authorized | Expenditures were technical violations and used for legitimate business expenses; Security Federal ultimately did not oppose provided $75,000 protected | Cause shown — violation of court order supports conversion |
| Whether "cause" exists under §1112(b)(4)(I) (failure to pay postpetition taxes) | Debtor failed to timely pay ≈ $20,000 withholding taxes | Nonpayment will be cured with note proceeds; justified by financing restrictions | Cause shown — failure to pay postpetition taxes supports conversion |
| Whether Debtor rebutted cause by showing "unusual circumstances" under §1112(b)(2) and reasonable likelihood of confirmation | N/A (burden shifts to Debtor) | Debtor argued chapter 11 liquidation is cheaper, can treat insiders separately, and note payments will fund a plan within a reasonable time | Debtor failed to prove unusual circumstances or reasonable likelihood of confirmation; disputes and lack of business make Chapter 7 preferable |
Key Cases Cited
- Canpartners Realty Holding Co. IV v. Vallambrosa Holdings, L.L.C., 419 B.R. 81 (Bankr. S.D. Ga. 2009) (movant bears initial burden to show cause to convert under §1112)
- In re Star Broad., Inc., 336 B.R. 825 (Bankr. N.D. Fla. 2006) (list of §1112(b)(4) examples is non‑exhaustive; lack of good faith may constitute cause)
- Lamie v. United States Trustee, 540 U.S. 526 (U.S. 2004) (debtor’s counsel not compensable from estate in chapter 7 absent trustee employment and court approval)
- In re Landmark Atlantic Hess Farm, LLC, 448 B.R. 707 (Bankr. D. Md. 2011) (dismissing/ converting when debtor’s only activity is collecting a note)
- In re Nikron, 27 B.R. 773 (Bankr. E.D. Mich. 1983) (chapter 11 dismissed where debtor’s sole asset was receivable and reorganization unnecessary)
- In re MMH Auto. Group, LLC, 400 B.R. 885 (Bankr. S.D. Fla. 2008) (chapter 7 trustee pursued subordination/objections to insider claims)
- In re First NLC Fin. Servs., LLC, 396 B.R. 562 (Bankr. S.D. Fla. 2008) (chapter 7 trustee actions to recharacterize or subordinate lender claims)
- In re All Am. of Ashburn, Inc., 40 B.R. 104 (Bankr. N.D. Ga. 1984) (chapter 11 plan of liquidation permissible in limited circumstances but may be redundant if neutral trustee exists)