590 B.R. 30
E.D.N.Y2018Background
- Debtor Maura Lynch filed a Chapter 11 petition on November 9, 2015; much of the dispute related to pre-petition matrimonial litigation with creditor Stephen Vaccaro and a large Wells Fargo mortgage arrearage.
- The Bankruptcy Court granted multiple extensions for Lynch to file and obtain approval of a disclosure statement and confirmation of a Chapter 11 plan, warning that failure to meet deadlines would constitute cause for conversion to Chapter 7 or dismissal.
- Mediation between Lynch and Vaccaro was ordered; the parties announced a settlement on the record at a May 22, 2017 hearing, but Lynch later withdrew the Rule 9019 motion seeking approval of that settlement and filed an amended plan that did not incorporate the settlement terms.
- The United States Trustee and the Bankruptcy Court found Lynch’s amended disclosure statement and plan lacked necessary financial information and were unlikely to be confirmable; the estate was incurring administrative deficits and Wells Fargo’s arrearage exceeded $700,000.
- On June 28, 2017 the Bankruptcy Court converted the case to Chapter 7 under 11 U.S.C. § 1112(b)(4)(A), (E), and (J). Lynch appealed; the district court reviews conversion for abuse of discretion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether conversion to Chapter 7 was for "cause" under § 1112(b) | Lynch argued the court mishandled the case and conversion was improper; prior judicial errors caused inability to reorganize | Trustee and Bankruptcy Court argued Debtor caused delays, failed to meet court-ordered deadlines, and proposed an unconfirmable plan, prejudicing creditors | Court held conversion was not an abuse of discretion; cause existed under § 1112(b)(4)(A), (E), and (J) |
| Whether Debtor received adequate notice and hearing under § 1112(b) | Lynch contended she was denied notice and a hearing on conversion | Respondents showed multiple warnings, orders, OSCs, and hearings over 18 months including a final June 28, 2017 hearing | Court held notice and hearing requirements satisfied; no requirement for full evidentiary hearing in these circumstances |
| Whether dismissal rather than conversion was required | Lynch suggested dismissal or that conversion was inequitable because of prior rulings | Trustee argued conversion better served creditors by allowing liquidation and trustee administration; equitable mootness also raised | Court agreed conversion (not dismissal) was in creditors’ best interests and within court’s discretion |
| Whether appellate review should be barred by equitable mootness | Lynch did not obtain a stay and contended appeal merits reversal | Trustee argued appellate relief would be equitably moot due to trustee’s administration | Court did not decide equitable mootness because it affirmed the conversion on the merits |
Key Cases Cited
- Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990) (standards for abuse of discretion review of underlying findings)
- In re C-TC 9th Ave. P'ship, 113 F.3d 1304 (2d Cir. 1997) (list of § 1112(b) grounds for "cause" is illustrative, not exhaustive)
- In re Momentum Mfg. Corp., 25 F.3d 1132 (2d Cir. 1994) (legal conclusions reviewed de novo)
- In re Tiana Queen Motel, Inc., 749 F.2d 146 (2d Cir. 1984) (§ 1112(b) does not always require a full evidentiary hearing before conversion)
- In re Blaise, 219 B.R. 946 (2d Cir. BAP 1998) (conversion for cause reviewed for abuse of discretion)
- In re Lizeric Realty Corp., 188 B.R. 499 (Bankr. S.D.N.Y. 1995) (purpose of § 1112 is to prevent debtor from diminishing estate while gambling on reorganization)