614 B.R. 291
Bankr. N.D. Ill.2020Background:
- Debtor Louis J. Capra filed Chapter 11 on June 4, 2019; the U.S. Trustee moved to dismiss or convert under 11 U.S.C. § 1112(b) after finding cause.
- The Debtor filed multiple materially inconsistent and incomplete schedules and six conflicting Statements of Financial Affairs, omitting significant real estate, vehicles, jewelry, LLC interests, and creditor/payments information.
- The Debtor sold two luxury vehicles (a Rolls Royce and a Bentley) after filing without court authorization and failed to deposit the Rolls Royce proceeds into the debtor-in-possession account; court later denied nunc pro tunc approval.
- Creditors were split: Midwest Community Bank and First Midwest Bank (secured creditors) favored dismissal because they expected continued payments; McCormick 106 LLC, the UST, and other unsecured creditors favored conversion to Chapter 7.
- The court found significant unencumbered or undersecured estate value (including potential equity in collateral, an unencumbered Ferrari, and avoidable transfers totaling at least $353,560.59) and concluded conversion would likely increase recoveries and ensure equitable distribution.
- The court emphasized that debtor misconduct threatened the integrity of the bankruptcy process and held that converting to Chapter 7 best protected the interests of the creditors and the estate.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether, once cause is shown under § 1112(b), the case should be converted to Chapter 7 or dismissed | UST/McCormick: convert so a trustee can investigate, unwind avoidable transfers, and equitably marshal assets for creditors | Debtor/Midwest & First Midwest: dismiss to avoid trustee administrative costs; secured lenders will continue to be paid outside bankruptcy | Court converted to Chapter 7: trustee likely to increase recoverable assets and ensure fair distribution; trustee fees unlikely to consume available equity |
| Whether debtor’s pattern of omissions and unauthorized sales affects remedy choice | UST/McCormick: egregious omissions and unauthorized sales justify conversion to protect estate and deter abuse | Debtor/creditors favoring dismissal: prefer dismissal despite misconduct or emphasize ongoing business relationships | Court found misconduct especially egregious and conversion necessary to protect the bankruptcy process and prevent reward of bad-faith filings |
Key Cases Cited
- In re Aurora Memory Care, LLC, 589 B.R. 631 (Bankr. N.D. Ill. 2018) (courts compare creditor recoveries inside vs. outside bankruptcy when choosing conversion or dismissal)
- In re Bartle, 560 F.3d 724 (7th Cir. 2009) (bankruptcy court may resolve matters without an evidentiary hearing when facts are before the court)
- Northbrook Loans, LLC v. BlackAMG, 555 B.R. 680 (N.D. Ill. 2015) (bankruptcy courts have broad discretion to convert or dismiss under § 1112(b))
- In re Superior Siding & Window, Inc., 14 F.3d 240 (4th Cir. 1994) (courts should consider interests of all creditors, not merely the majority)
- In re Green Box NA Green Bay, LLC, 579 B.R. 504 (Bankr. E.D. Wis. 2017) (focus on what a Chapter 7 trustee could liquidate for unsecured creditors)
- Shulkin Hutton, Inc. v. P.S.V. Treiger (In re Owens), 552 F.3d 958 (9th Cir. 2009) (courts should weigh interests of all creditors when deciding conversion vs dismissal)
- In re Delta AG Grp., 596 B.R. 186 (Bankr. W.D. La. 2019) (conversion favored where estate assets have equity)