In re Schroeder Brothers Farms of Camp Douglas LLP, 602 B.R. 695

Background

Debtor Schroeder Brothers Farms (LLP) filed Chapter 11 on Nov. 2, 2016; the Court confirmed a Plan on June 20, 2018 that contained a Liquidation Provision permitting appointment of a Liquidating Trustee upon uncured default.
Under the Plan, the Debtor had monthly payment obligations and a 30‑day cure period after Committee notice; Committee declared a default in Aug. 2018 and Debtor failed to cure within 30 days.
In Aug. 2018 Debtor discussed liquidity shortfalls and later proposed conversion to Chapter 12 to treat certain capital gains taxes as unsecured claims (via an entity tax election), arguing sales proceeds otherwise would be consumed by taxes and fees.
The Committee and primary secured creditor (BMO Harris) opposed conversion, contending eligibility must be measured at the petition date and the Debtor exceeded Chapter 12 debt limits when it filed; they also opposed any tax election that would dilute creditors.
The Committee moved to appoint a Liquidating Trustee under the confirmed Plan; the Motion proposed a 10% carve‑out of gross sale proceeds for administrative and unsecured claims.

Issues

Issue	Debtor's Argument	Committee / BMO Argument	Held
Whether case may be converted from Ch. 11 to Ch. 12	Debtor: debts now under $4M; eligible post‑petition; conversion would allow Chapter 12 treatment of capital gains ("Grassley Law")	Committee/BMO: eligibility is measured at petition date; Debtor exceeded Chapter 12 limits when filed so conversion barred	Denied — Debtor was ineligible on petition date, so conversion to Chapter 12 is prohibited (11 U.S.C. §1112(f), §109(f))
Whether Debtor (LLP) may elect corporate tax status post‑confirmation to convert tax liabilities into unsecured claims	Debtor: may file IRS Form 8832 to be taxed as corporation; under Ch. 12 corporate tax could be treated as unsecured claim, preserving proceeds for partners	Committee: partnership is pass‑through; partners (not partnership) bear tax; election after confirmation harms creditors and was not disclosed	Prohibited — court enjoins Debtor/partners from changing election; postconfirmation election would violate creditors' expectations and harm estate
Whether proposed tax election violates absolute priority and fairness to creditors	Debtor: election benefits estate/partners by treating tax as unsecured claim	Committee/BMO: election shifts tax burden to estate and unsecured creditors, unfair and dilutive	Held — election would violate the absolute priority rule and is not fair and equitable; cannot be approved postconfirmation
Whether to appoint a Liquidating Trustee under the confirmed Plan	Debtor: appointment unnecessary; sales would trigger large capital gains and fees, leaving little for creditors	Committee: Plan authorizes appointment on uncured default; appointment protects creditors and effectuates negotiated contingency	Granted — Debtor defaulted, failed to cure, Plan authorizes appointment; appointment serves creditors' interests and Debtor lacks realistic reorganization prospects

Key Cases Cited

Campbell v. Bonney (In re Campbell), 313 B.R. 871 (10th Cir. BAP 2004) (conversion does not alter petition date for eligibility)
In re Ash, 539 B.R. 807 (Bankr. E.D. Tenn. 2015) (petition date controls eligibility analysis)
In re Perez, 30 F.3d 1209 (9th Cir. 1994) (absolute priority rule prevents owners retaining value ahead of creditors)
Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434 (U.S. 1999) (absolute priority and fairness principle in reorganization)
In re 4 C Solutions, Inc., 289 B.R. 354 (Bankr. C.D. Ill. 2003) (appointment of trustee is extraordinary remedy; consider cost and necessity)
In re Sharon Steel Corp., 871 F.2d 1217 (3d Cir. 1989) (trustee appointment should be the exception)
In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990) (factors for appointing trustee: trustworthiness, DIP performance, creditor confidence, costs/benefits)
In re G‑I Holdings, Inc., 385 F.3d 313 (3d Cir. 2004) (appointment within court discretion)
In re Waterworks, Inc., 538 B.R. 445 (Bankr. N.D. Ill. 2015) (movant must show cause by clear and convincing evidence for trustee appointment)
Jennings v. Comm’r of Internal Revenue, 110 F.2d 945 (5th Cir. 1940) (bankruptcy does not change partnership tax status)
In re Kiesner, 194 B.R. 452 (Bankr. E.D. Wis. 1996) (partnership remains pass‑through for income tax despite bankruptcy)