523 B.R. 453
Bankr. E.D. Pa.2014Background
- Debtor Scott Korn filed Chapter 11 after a state-court jury returned a ~$2.4 million verdict against him; creditor John Brown moved to convert the case to Chapter 7 (or appoint trustee/examiner).
- Debtor initially filed schedules and SOFA that omitted numerous material assets, recent transfers (including luxury car purchases days before filing), creditors, and a large collateralized brokerage account; many omissions were corrected only months later after creditor discovery.
- Post-petition, the Debtor liquidated a brokerage account without notice/approval, retained ~$214,000 in cash (not in a DIP account), made unauthorized payments to an accountant, continued heavy credit-card use, and closed a safe-deposit box after the conversion motion.
- The Debtor proposed a revised Chapter 11 plan funded largely by projected business income and limited "new value," proposing minimal distributions to unsecured creditors (total ≈ 6.8% over five years) and retaining litigation claims against Ocwen as part of plan strategy.
- The court found the Debtor’s failures to disclose were reckless or intentional, constituted breaches of his fiduciary duties as DIP, and identified multiple unauthorized post-petition transactions and lack of transparency.
Issues
| Issue | Plaintiff's Argument (Brown) | Defendant's Argument (Korn) | Held |
|---|---|---|---|
| Whether "cause" exists under 11 U.S.C. § 1112(b)(1) to convert to Chapter 7 | Debtor’s reckless/intentional omissions, unauthorized post-petition transactions, and mismanagement establish cause for conversion | Denies culpability; blames anxiety and prior counsel; seeks appointment of examiner instead | Court: Cause exists — Debtor acted recklessly or intentionally; conversion warranted |
| Whether Debtor established "unusual circumstances" under § 1112(b)(2) to avoid conversion | N/A (movant seeks conversion) | Argues unusual circumstances and that appointment of examiner or continued Chapter 11 is in creditors’ best interest; claims reasonable likelihood of confirmation | Court: Debtor failed to prove unusual circumstances, reasonable justification, or reasonable likelihood of confirmation |
| Whether Debtor’s proposed Chapter 11 plan is feasible and better for creditors than Chapter 7 | Brown: Plan is speculative, underfunded, and unlikely to yield better distributions than Chapter 7 | Debtor: Plan funded by business income and new-value contributions; creditors would be better off in Chapter 11 | Court: Plan is speculative, inadequately funded, and provides only modest distributions; not a basis to deny conversion |
| Whether appellate/other remedies (examiner/trustee appointment) are appropriate instead of conversion | Brown (and U.S. Trustee): conversion is appropriate; trustee appointment withdrawn by Brown | Debtor: seeks examiner with expanded powers rather than conversion | Court: Appointment of trustee/examiner not required; conversion to Chapter 7 ordered |
Key Cases Cited
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (discusses standard for reckless conduct in nondischargeability context)
- Marvel Entertainment Group, Inc. v. Official Comm. of Unsecured Creditors, 140 F.3d 463 (3d Cir. 1998) (bankruptcy court discretion and procedures)
- In re American Capital Equipment, LLC, 688 F.3d 145 (3d Cir. 2012) (court may reject visionary or impracticable reorganization schemes)
- In re McTiernan, 519 B.R. 860 (Bankr. D. Wyo. 2014) (factors supporting denial of conversion when liquidation likely to pay creditors in full)