518 B.R. 75
Bankr. D.N.M.2014Background
- Picacho Hills Utility Company, Inc. (
- Debtor is a New Mexico utility owned by Stephen C. Blanco operating with lax controls; Blanco acted as president and owned lease space from his home; Debtor’s accounting and cash withdrawals by Blanco were irregular.
- Administrative proceeding before the New Mexico Public Regulation Commission found extensive misconduct by Debtor and Blanco, leading to a recommended receiver and substantial fines; findings included false testimony, witness intimidation, and improper transfers.
- A receiver was appointed in state court in 2011; Debtor and Blanco settled that the Bank held a lien on the Water Rights and all assets would be sold by the Receiver; Water Rights were transferred in violation of the judgment.
- After the settlement, Blanco transferred substantial Water Rights to related entities in an attempt to retain control; the transfers occurred just after the state judgment and without Receiver approval.
- Debtor filed Chapter 11 in March 2013; the Receiver sold assets including Water Rights in 2014; Debtor’s schedules show liabilities exceeding assets; Bright View filed a large claim contested by Debtor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists to convert under §1112(b) | UST/Bright View contend there is cause due to mismanagement and transfers. | Blanco argues unusual circumstances justify continued Chapter 11. | Cause exists; conversion to Chapter 7 warranted. |
| Whether Debtor still has a legitimate Chapter 11 purpose | Conversion would maximize value and protect creditors. | Debtor could reorganize, propose a plan, or liquidate later. | No legitimate Chapter 11 purpose; rehabilitation impossible; conversion appropriate. |
| Whether Debtor refused to investigate prepetition transfers | Estate’s fiduciary duty requires investigation of transfers. | Debtor’s management relied on professionals; no misconduct shown. | Reason to appoint Chapter 7 trustee to investigate transfers. |
| Blanco’s history of misconduct as affect on case | Pre-petition misconduct supports cause to convert. | Misconduct alone not enough for conversion. | Blanco’s misconduct contributes to cause for conversion. |
| Whether unusual circumstances exist to avoid conversion | Surplus after claims may favor keeping Chapter 11. | Potential creditors and claimants favorable to Chapter 11. | Unusual circumstances absent; conversion in best interest. |
Key Cases Cited
- Hall v. Vance, 887 F.2d 1041 (10th Cir. 1989) (non-exhaustive list of §1112(b) grounds for cause)
- In re SB Props., Inc., 185 B.R. 198 (E.D. Pa. 1995) (cause not exhaustively defined; broad discretion under §1112(b))
- In re East End Development, LLC, 491 B.R. 633 (Bankr. S.D.N.Y. 2013) (Chapter 11 purpose and viability; liquidation/rehabilitation as uses)
- In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004) (Chapter 11 case can be used to maximize value for creditors)
- In re 60 East 80th Street Equities, Inc., 218 F.3d 109 (2d Cir. 2000) (standing to object to claims where surplus may exist)
- St. Louis Baptist Temple, Inc. v. FDIC, 605 F.2d 1169 (10th Cir. 1979) (court may take judicial notice of its docket)