559 B.R. 728
Bankr. D. Mont.2016Background
- Debtor (a lounge/casino and rental property operator) filed Chapter 11 on Dec. 10, 2015; had a prior Chapter 11 (Case No. 11-61605) with a confirmed plan requiring payments to Mountain West Bank (now First Interstate Bank). That prior case was closed in 2013.
- First Interstate filed Proof of Claim No. 4 asserting a secured claim of $942,380.42 (principal, post-judgment interest, and taxes advanced). Debtor listed a smaller secured amount on schedules and objected to the claim without producing evidentiary support.
- Debtor had not paid First Interstate since June 2014 and had not paid property taxes since 2010; at case commencement Debtor had only about $5,367 in cash.
- Debtor’s Disclosure Statement(s) and plan contained inconsistent projections and relied on speculative outside funding (contributions from Debtor’s president Foster and Montana Motors, Inc.) that were undocumented and uncertain.
- The U.S. Trustee and First Interstate moved to convert or dismiss under 11 U.S.C. § 1112(b); Court held final approval of disclosure statements and plan confirmation premature and proceeded on claim objection and conversion/dismissal motions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity & amount of First Interstate’s proof of claim | First Interstate: claim properly filed; prima facie valid | Debtor: bank not entitled to certain late fees/charges; claim should be reduced (no evidentiary support provided) | Claim allowed as filed; Debtor failed to rebut Rule 3001(f) prima facie presumption. |
| Cause for conversion/dismissal under § 1112(b) (loss, no rehab, material default) | Movants (First Interstate & UST): Debtor in material default, continuing diminution, unlikely to rehabilitate | Debtor: projects sufficient revenues and will obtain outside funding to make plan feasible | Cause exists under § 1112(b)(4)(A) and (N) (substantial diminution, absence of reasonable likelihood of rehabilitation, and material default). |
| Feasibility / disclosure reliance on outside funding | Debtor: Plan feasible if Foster and Montana Motors contribute as projected | Movants: contributions speculative and undocumented; projections unreliable | Court finds projections unrealistic, contributions speculative, plan not feasible without confirmed outside funding. |
| Conversion vs. Dismissal / Best interests of creditors | First Interstate: convert to Chapter 7 to maximize recovery; UST: convert or dismiss | Debtor: dismissal might allow continued operation (implicit) | Conversion to Chapter 7 ordered; dismissal would likely harm unsecured creditors and conversion better serves creditors and estate. |
Key Cases Cited
- Litton Loan Servicing, LP v. Garvida, 347 B.R. 697 (9th Cir. BAP 2006) (standard for rebutting Rule 3001(f) prima facie proof of claim)
- Lundell v. Anchor Const. Specialists, Inc., 223 F.3d 1035 (9th Cir. 2000) (burden-shifting on proof-of-claim objections)
- Pioneer Liquidating Corp. v. United States Trustee (In re Consolidated Pioneer Mortgage Entities), 264 F.3d 803 (9th Cir. 2001) (discretionary standard for conversion/dismissal under § 1112)
- Monnier Brothers v. Household Finance Corp., 755 F.2d 1336 (8th Cir. 1985) (plan must have a reasonable chance of success; court must guard against "visionary schemes")
- Pizza of Hawaii, Inc., 761 F.2d 1374 (9th Cir. 1985) (court’s duty to protect creditors from speculative plans)
- In re Sullivan, 522 B.R. 604 (9th Cir. BAP 2014) (court must consider conversion vs. dismissal and interests of all creditors)