534 B.R. 912
Bankr. S.D. Tex.2015Background
- Debtors (21 affiliated shipping-related entities) filed Chapter 11 on June 20, 2013; most vessels were sold by Aug. 2014 and Debtors no longer operate as going concerns.
- Hsin-Chi (Nobu) Su, the principal owner, pledged Vantage Drilling shares as post-petition collateral; ownership and control of many Vantage shares are disputed and subject to litigation/arbitration and appellate rulings.
- Remaining estate assets: roughly $16.5 million cash (subject to DIP lien), several million Vantage shares (also subject to liens), and potential litigation claims/avoidance actions that might yield recoveries.
- Debtors have incurred substantial professional fees post-petition (approx. $592,647 from Nov 2014–Mar 2015; about $548,309 outstanding), with parties stipulating $342,843 of fees attributable to litigation involving Su and his affiliates.
- Su moved under 11 U.S.C. § 1112(b) to convert the cases to Chapter 7, arguing substantial/continuing diminution of the estate and no likelihood of rehabilitation; the court preliminarily appointed an examiner limited to preservation of avoidance claims and review of professional fees.
Issues
| Issue | Plaintiff's Argument (Su) | Defendant's Argument (Debtors/Committee/DIP/Creditors) | Held |
|---|---|---|---|
| Whether § 1112(b)(4)(A) cause exists based on substantial or continuing loss/diminution | Debtors have sustained massive diminution in equity and operating losses and continue to accrue professional fees — showing substantial/continuing loss | Decline largely reflects earlier overvaluation of sold vessels; operations wound down and few ongoing out‑of‑pocket losses remain; accruals alone do not prove continuing diminution | Court: Substantial loss shown (balance‑sheet and operating losses); continuing diminution not required — first prong satisfied |
| Whether there is a reasonable likelihood of rehabilitation | No realistic prospect to reorganize as going concerns; Debtors have conceded inability to rehabilitate | Continued pursuit of litigation/avoidance actions may produce recoveries; ongoing administration in Chapter 11 can preserve value | Court: No reasonable likelihood of rehabilitation; second prong satisfied — cause exists for conversion/dismissal under § 1112(b)(4)(A) |
| Whether conversion to Chapter 7 is appropriate or an examiner is preferable | Conversion will preserve assets by stopping accrual of fees and appointing trustee to liquidate | Conversion would be costly and disruptive; most creditors oppose conversion; examiner is a cheaper, focused check on fees and preservation of avoidance claims | Court: Appointment of an examiner (already made) is in best interests of creditors/estate; conversion denied |
| Whether accrual of professional fees alone constitutes continuing loss | Accrual of unpaid professionals and DIP borrowing create continuing loss warranting conversion | In a post‑operational, asset‑limited case, accruals are not equivalent to out‑of‑pocket dissipation; examiner can control fees more cheaply than conversion | Court: Accruals alone insufficient here to require conversion; examiner adequate to police fees |
Key Cases Cited
- United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 808 F.2d 363 (5th Cir. 1987) (case‑specific balancing for § 1112 analysis and debtor viability inquiry)
- In re Woodbrook Assocs., 19 F.3d 312 (7th Cir. 1994) (burden on movant to prove cause by preponderance)
- Loop Corp. v. United States Trustee, 379 F.3d 511 (8th Cir. 2004) (purpose of § 1112(b) is to prevent debtors from gambling at creditors' expense)
- Koerner v. Colonial Bank (In re Koerner), 800 F.2d 1358 (5th Cir. 1986) (broad discretion in dismissal/ conversion decisions)
- C‑TC 9th Ave. P'ship v. Norton Co. (In re C‑TC 9th Ave. P'ship), 113 F.3d 1304 (2d Cir. 1997) (equitable considerations in § 1112 decisions)
- In re Gateway Access Solutions, Inc., 374 B.R. 556 (Bankr. M.D. Pa. 2007) (post‑petition cash decline and accrued professional fees can support continuing loss under § 1112)
- In re Miell, 419 B.R. 357 (Bankr. N.D. Iowa 2009) (negative cash flow alone may constitute cause)
- In re Westgate Props., Ltd., 432 B.R. 720 (Bankr. N.D. Ohio 2010) (rehabilitation means restoring on a sound basis, not merely confirming a plan)
- In re LG Motors, Inc., 422 B.R. 110 (Bankr. N.D. Ill. 2009) (rehabilitation inquiry focuses on business prospects justifying continued reorganization)