455 B.R. 455
Bankr. E.D.N.C.2011Background
- Bank of America holds a promissory note secured by deeds of trust on multiple parcels of the debtor's property; foreclosure proceedings were initiated after a default of over $16 million and interest at 20% since July 2009.
- The debtor filed a Chapter 11 petition on March 1, 2010; a related state court action against the debtor and guarantors remained pending, with a $27+ million judgment against the guarantors entered later in 2010.
- Bank of America contends the debtor proposed but failed to confirm plans and violated a consent order that lifted the stay and directed disbursement of cash collateral to the bank; the debtor’s former counsel failed to disburse funds per the order.
- Mr. Bryant (the debtor’s principal) allegedly directed counsel to refuse turnover of funds and engaged in a lease of the collateral that allowed rent collection by Bryant.
- The debtor allegedly failed to insure the collateral, failed to pay property taxes, and did not timely file quarterly fees or monthly reports, prompting creditor and administrator concerns of mismanagement.
- The court later denied motions to convert or dismiss but granted Bank of America’s request for appointment of a Chapter 11 trustee; a separate order addressed disbursement of funds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the case should be converted or dismissed under § 1112(b). | Bank of America asserts cause exists (mismanagement, cash-control problems, nonpayment of fees, reporting failures). | Debtor argues no untenable conditions; potential plan likelihood and cure prospects undermine conversion/dismissal. | Conversion/dismissal not in best interests; appointment under § 1104 affirmed instead. |
| Whether a Chapter 11 trustee should be appointed under § 1104(a). | Bank of America seeks trustee due to fraud, dishonesty, incompetence, and gross mismanagement by current management. | Debtor contends no necessity for trustee beyond existing governance; plan feasibility questions remain. | Appointment of a Chapter 11 trustee is appropriate under § 1104(a) to oversee the estate. |
| Whether the court should order disbursement of funds from the former counsel's client trust account. | Bank of America argues funds should be released to satisfy the consent order and creditor needs. | Debtor/attorney argues funds should not be released without proper process or trustee oversight. | Disbursement to the estate’s trustee is approved; funds are to be disbursed to the Chapter 11 trustee rather than directly to Bank of America. |
Key Cases Cited
- In re Landmark Atlantic Hess Farm, LLC, 448 B.R. 707 (Bankr.D.Md. 2011) (application of amended statute to pending cases; Statutory amendments apply to pending cases)
- In re Sydnor, 431 B.R. 584 (Bankr.D.Md. 2010) (court may convert or appoint trustee under 1104; best interests standard)
- Landgraf v. USI Film Prods., 511 U.S. 244 (Supreme Court 1994) (application of amended statutes to pending cases; retroactivity framework)