562 B.R. 490
Bankr. D.N.M.2016Background
- Debtor Sandia Resorts, Inc. (owner/operator of an America’s Best Value Inn in Albuquerque) filed a voluntary Chapter 11 on June 9, 2016; this is its second Chapter 11 case.
- Debtor and secured creditor NCG, LLC each proposed competing Chapter 11 plans but both conceded they cannot satisfy §1129(a)(10) and thus cannot confirm a plan.
- The U.S. Trustee (UST) moved to convert the case to Chapter 7 or dismiss under 11 U.S.C. §1112(b); Debtor concurred with the UST that cause exists but waived an argument against conversion.
- NCG offered a binding, amended purchase proposal to any Chapter 7 trustee upon conversion: pay $550,000 (and waive/allow satisfaction of all NCG claims) for substantially all estate assets (excluding cash, receivables, and professional malpractice claims), conditioned on Court approval and Main Bank lending $500,000.
- Estate liabilities include a large secured NCG claim (~$1.876M), unpaid real/personal property taxes (~$260k), lodger’s taxes, ~ $75k unpaid professionals, and unsecured claims (approx. $365k–$400k); UST and Court found conversion more likely to fund administrative, tax, priority, and a ~20% dividend to unsecured creditors than dismissal.
- The Court concluded cause exists to convert or dismiss and, weighing the statutory factors and NCG’s offer, held conversion to Chapter 7 is in the best interests of creditors and the estate.
Issues
| Issue | UST/Debtor Argument | NCG Argument | Held |
|---|---|---|---|
| Whether cause exists to convert or dismiss under §1112(b) | Cause exists because no confirmable plan is possible | Agreed cause exists | Court: Cause exists (inability to confirm is sufficient) |
| Whether conversion or dismissal is in best interests of creditors and the estate | Conversion preferred because a Chapter 7 trustee could accept NCG’s sale offer and likely pay administrative, tax, secured (other than NCG) and priority claims and yield a dividend to unsecureds | Conversion preferred over dismissal; NCG emphasized its offer benefits estate; Debtor argued dismissal might better allow Debtor to pursue claims against NCG | Court: Conversion is in best interests given likelihood of creditor recoveries under NCG’s Offer and trustee’s neutrality |
| Whether NCG’s offer supports conversion (practical effect) | UST relied on the Offer as a realistic path to administrative solvency and distributions | NCG asserted Offer (pay $550k, satisfy its claims) would enable sale free and clear and fund distributions; Main Bank had loan commitment to fund $500k | Court: NCG’s Offer strongly favored conversion; a trustee could accept, shop, or pursue claims—Offer provides a safety net absent on dismissal |
| Effect of dismissal on administrative, tax, priority, and unsecured claims | Dismissal would likely eliminate administrative priorities and risk nonpayment to administrative, priority and unsecured creditors | NCG: dismissal would forfeit the sale option and likely reduce recoveries; Debtor: argued Debtor more motivated to pursue estate claims post-dismissal | Court: Dismissal risks nonpayment; conversion more likely to produce payments to administrative, priority and unsecured claimants |
Key Cases Cited
- American Capital Equipment, LLC v. U.S. Trustee, 688 F.3d 145 (3d Cir. 2012) (two-step §1112(b) analysis: cause then best-interests inquiry)
- Loop Corp. v. U.S. Trustee, 379 F.3d 511 (8th Cir. 2004) (bankruptcy court has broad discretion to convert or dismiss)
- Frieouf v. U.S. Trustee, 938 F.2d 1099 (10th Cir. 1991) (list in §1112(b)(4) is nonexclusive for cause)
- Woodbrook Assocs. v. Firemen’s Ins. Co., 19 F.3d 312 (7th Cir. 1994) (inability to confirm a plan can constitute cause under §1112)
- Windsor on the River Assocs. v. Balcor Real Estate Finance, 7 F.3d 127 (8th Cir. 1993) (reliance on feasibility/no-confirmation as ground to dismiss under §1112)