In re Sunnyland Farms, Inc., 517 B.R. 263

Involuntary Chapter 7 petition filed January 30, 2014; Debtor moved to convert to Chapter 11 on April 20, 2014; conversion granted May 8, 2014.
Sunnyland Farms Incorporated owns a hydroponic greenhouse in Grants, NM; Greenhouse is largely in disrepair with no insurance since 2010.
Greenhouse value scheduled at $365,006.71; total assets $5,815,006.71 and liabilities $41,890,322.38; no post-petition income.
Largest secured creditor Ontario holds a lien on all assets for about $7.9 million; taxes owed include $1.32m to IRS and $2.3m in NM real property taxes.
Exclusivity expired Sept. 5, 2014; debtor filed plan and disclosure statement; no liability insurance to protect estate or public.
Petitioning creditors seek conversion to Chapter 7 arguing cause under § 1112(b)(4); court ultimately denies conversion but keeps Chapter 11 ongoing.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether cause exists to convert under § 1112(b)(4)(A).	Petitioning Creditors contend substantial decline in estate value and no rehabilitation.	Debtor argues no current post-petition loss or diminution; plan filed; no evidence of ongoing decline.	No cause under § 1112(b)(4)(A) at this time.
Whether cause exists to convert under § 1112(b)(4)(B).	Debtor grossly mismanaged estate post-petition.	No post-petition gross mismanagement; insurance lack due to lack of funds is not mismanagement.	No post-petition gross mismanagement proven.
Whether cause exists to convert under § 1112(b)(4)(C).	Failure to maintain insurance threatens estate and public.	Lack of insurance is due to no funds; risk limited since no equity in Greenhouse; not a current cause.	Current lack of insurance does not constitute cause.
Whether cause exists to convert under § 1112(b)(4)(I).	Failure to pay post-petition taxes constitutes cause.	Post-petition taxes are limited; pre-petition taxes are not relevant; plan addresses post-petition taxes.	No post-petition tax default shown; no cause identified.

In re Frieouf, 938 F.2d 1099 (10th Cir. 1991) (§ 1112(b)(4) nonexhaustive list of causes; threshold issue)
In re Melendez Concrete Inc., 2009 WL 2997920 (Bankr. D.N.M. 2009) (materiality standard for enumerated grounds)
In re ARS Analytical, LLC, 433 B.R. 848 (Bankr. D.N.M. 2010) (burden on movant to prove cause by preponderance)
In re Rent-Rite S. West Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) (post-petition mismanagement requirement)
In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990) (standing to pursue equitable subordination claims)
In re Racing Servs., Inc., 363 B.R. 911 (8th Cir. BAP 2007) (standing for equitable subordination claims)
In re El-rod Holdings Corp., 392 B.R. 110 (Bankr. D. Del. 2008) (injury to secured creditors independently may pursue subordination)
In re LWD, Inc., 342 B.R. 514 (Bankr. W.D. Ky. 2006) (equitable subordination claims by creditors)
In re J.S. II, L.L.C., 389 B.R. 570 (Bankr. N.D. Ill. 2008) (Seventh Circuit allows creditor standing for equitable subordination)
In re Hoffinger Indus., Inc., 327 B.R. 389 (Bankr. E.D. Ark. 2005) (statutory subordination tools available to parties other than the trustee)
In re Quade, 496 B.R. 520 (Bankr. N.D. Ill. 2013) (bankruptcy court may take judicial notice of its docket)
St. Louis Baptist Temple v. FDIC, 605 F.2d 1169 (10th Cir. 1979) (judicial notice of docket permitted)