569 B.R. 433
Bankr. S.D. Tex.2017Background
- Debtor Irasel Sand, LLC filed a Chapter 11 petition amid oil-and-gas market decline; initial filing raised questions because only one 50% owner (Irabel) authorized the filing before Select Sand ratified.
- Debtor operated under interim DIP financing and cash-collateral orders with Carousel Specialty Products (Carousel) as DIP lender.
- Court required the Debtor to obtain a final DIP financing and cash-collateral agreement by May 30, 2017 (13 days from May 18 hearing) or face dismissal.
- By the May 30 hearing, no final DIP or alternative financing agreement existed; Carousel and receivership transactions produced a new owner/manager alignment favoring dismissal.
- Monthly operating reports showed negative cash flow, increasing DIP loan balance, negative equity, and no unencumbered assets — supporting findings of substantial/continuing loss and no realistic path to rehabilitation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a bankruptcy court may sua sponte dismiss under 11 U.S.C. §1112(b) | Debtor: dismissal should be on party request, not sua sponte | Court/Creditors: §105(a) plus §1112(b) permit sua sponte dismissal for cause | Court: sua sponte dismissal is permissible under §105 and §1112(b) given notice/hearing |
| Whether due process (notice and hearing) was satisfied before dismissal | Debtor: required adequate notice and meaningful opportunity to respond | Court: Debtor was warned on record May 18, given 13 days, and heard May 30 | Court: notice/hearing were sufficient under circumstances |
| Whether "cause" exists (substantial or continuing loss to estate) | Debtor: hoped to secure financing or Sanchez contract to avoid loss | Creditors/Court: MOR and schedules show negative cash flow, negative equity, rising DIP balance, no unencumbered assets | Court: substantial and continuing loss established |
| Whether there is a reasonable likelihood of rehabilitation | Debtor: reorganization possible if financing or Sanchez deal materializes | Creditors/Court: no certain financing, liens exceed asset value, operations dependent on DIP financing | Court: no reasonable likelihood of rehabilitation; dismissal warranted |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (Sup. Ct. 2011) (limits on bankruptcy courts’ constitutional authority in certain core proceedings)
- Matter of Little Creek Dev. Co., 779 F.2d 1068 (5th Cir. 1986) (totality-of-circumstances test for §1112(b) cause analysis)
- In re TMT Procurement Corp., 534 B.R. 912 (Bankr. S.D. Tex. 2015) (negative cash flow and balance-sheet losses can establish cause)
- In re Brown, 951 F.2d 564 (3d Cir. 1991) (§1112(b) list not exhaustive; courts consider additional factors)
- In re Krueger, 812 F.3d 365 (5th Cir. 2016) (due process satisfied where debtor had notice of dismissal grounds and opportunity to respond)
- In re Lake Michigan Beach Pottawattamie Resort, LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016) (bankruptcy courts have authority to enter final dismissal orders under §1112(b))