578 B.R. 534
Bankr. E.D.N.C.2017Background
- NOA, LLC (Debtor), a single-owner LLC run by Insaf Nehme, filed Chapter 11 on April 28, 2017; primary assets included two real properties, imported art/furniture inventory, and bulk clothing inventory shipped overseas.
- BOA and BB&T held secured liens and objected to overseas shipments of inventory without payment; Debtor sought and obtained multiple interim cash-collateral orders negotiated as consent orders.
- The Second, Third, and Fourth Cash Collateral Orders each included an "Export Restriction": Debtor could not transfer the bill of lading or allow bulk clothing to leave U.S. ports until full payment was wired to and received by the Debtor.
- Despite acknowledging at hearings that payment for a bulk shipment to Beirut would be received before export, the Debtor shipped the container before obtaining full payment; the Debtor admitted the violation and testified it was a conscious, risk-accepting choice.
- BB&T filed a Notice of Default and moved to appoint a Chapter 11 trustee (or convert to Chapter 7). The court found the Export Restriction knowingly violated and appointed a Chapter 11 trustee, explaining its reasons in this memorandum.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "cause" exists under 11 U.S.C. § 1112 to convert/dismiss for violation of court order | BB&T: Debtor knowingly violated multiple cash-collateral orders (Export Restriction), constituting cause under § 1112(b)(4)(E) | Debtor: Violation was unintentional; ceased use of cash collateral after BB&T withdrew consent; argues factor inapplicable | Court: Cause exists under § 1112(b)(4)(E) — Debtor knowingly and willfully violated three court orders |
| Whether unauthorized use of cash collateral constitutes cause under § 1112(b)(4)(D) | BB&T: Export and shipment likely used cash collateral and harmed secured creditors | Debtor: No use of cash collateral after withdrawal of consent; harm not substantial | Court: Did not need to resolve this; relied on failure to comply with orders (§ 1112(b)(4)(E)) to find cause |
| Whether grounds exist to appoint a Chapter 11 trustee under § 1104(a) | BB&T: Debtor's willful disobedience, mismanagement, and risk-shifting justify trustee appointment for cause | Debtor: Opposed conversion/appointment; emphasized unintended nature and need to operate business | Court: Appointment appropriate under § 1104(a)(2) and § 1112(b)(1) — best interests of creditors and estate to have independent trustee manage liquidation/collections |
| Remedy: Convert to Chapter 7 vs. appoint Chapter 11 trustee | BB&T sought trustee or conversion to Chapter 7 | Debtor preferred continuation under debtor-in-possession | Court: Rather than convert, appointed a Chapter 11 trustee to preserve value and manage collection/liquidation for creditors' benefit |
Key Cases Cited
- Quarles v. U.S. Tr., 194 B.R. 94 (W.D. Va. 1996) (lists of causes in §§ 1104/1112 are not exhaustive)
- In re Russell, 60 B.R. 42 (Bankr. W.D. Ark. 1985) (same principle on non-exhaustive causes)
- In re Microwave Prods. of Am., 102 B.R. 666 (Bankr. W.D. Tenn. 1989) (burden and standard for proving grounds for trustee appointment)
- In re Woodbrook Assocs., 19 F.3d 312 (7th Cir. 1994) (movant bears burden to prove cause for conversion under § 1112)
- In re Lizeric Realty Corp., 188 B.R. 499 (Bankr. S.D.N.Y. 1995) (same)
- In re Sydnor, 431 B.R. 584 (Bankr. D. Md. 2010) (analysis comparing conversion vs. trustee appointment; trustee can optimize recovery)
- In re Corona Care Convalescent Corp., 527 B.R. 379 (Bankr. C.D. Cal. 2015) (discussion of burden/standard for trustee appointment)