653 B.R. 843
Bankr. S.D. Tex.2023Background
- M.A.R. Designs & Construction, Inc. (Debtor), owned and run by Mario Rodriguez, filed a Subchapter V Chapter 11 petition on Jan. 1, 2023 and proposed multiple amended plans, culminating in a Fifth Amended Plan that is a liquidating plan removing the debtor-in-possession and naming the Subchapter V trustee as liquidating trustee.
- Multiple creditors (including Sierra Title, Comack Investments, Copesa LLC, individual creditors) and the U.S. Trustee (UST) filed objections; the UST moved to convert to Chapter 7; Comack moved to convert or dismiss with prejudice.
- The Court held hearings (July 31 and Aug. 3, 2023) and considered motions to convert/dismiss and confirmation of the Fifth Amended Plan.
- The UST alleged cause to convert under 11 U.S.C. § 1112(b) based on diminution of the estate, gross mismanagement, failure to maintain insurance, noncompliance with court orders, failure to provide information, delay in confirmation, and lack of good faith.
- The Court found multiple instances of post-petition misconduct (notably failure to collect rents, inaccurate Monthly Operating Reports, and provision of insurance for non‑estate properties), undisclosed creditor claims, Rodriguez’s fraud convictions, and other indicia of bad faith.
- Holding: the Court granted the UST’s and Comack’s conversion motions, converted the case to Chapter 7, denied confirmation of the Fifth Amended Plan as moot, and overruled related objections as moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists under § 1112(b)(4)(A) (substantial/continuing loss or diminution and no reasonable likelihood of rehabilitation) | UST: Debtor’s liquidation posture and lack of operating funds will diminish the estate and eliminate rehabilitation prospects. | Debtor: Plan projects positive cashflow (rent) and liquidation does not show present diminution. | Court: No cause under (A); UST failed to show present diminution. |
| Whether § 1112(b)(4)(B) (gross mismanagement) applies | UST: Post‑petition gross mismanagement — failure to collect rents, inaccurate MORs, unauthorized payments, misleading insurance. | Debtor: Some issues pre‑petition or funded by gifts; mistakes are not gross mismanagement. | Court: Found gross mismanagement based on failure to collect rents, inaccurate MORs, and insuring non‑estate property. |
| Whether §§ 1112(b)(4)(C), (E), (H) (failure to insure, comply with court order, provide information) apply | UST: Debtor failed to obtain required insurance, violated the Court’s insurance order, and failed timely to produce accurate MORs and other requested info. | Debtor: Lack of funds/excusable mistakes; some insurance obtained; non‑willful. | Court: Found cause under C, E, and H — Debtor failed to insure estate property, comply with the Court’s order, and provide timely accurate reports. |
| Whether Debtor acted in bad faith; whether unusual circumstances preclude conversion and whether to convert or dismiss (including dismissal with prejudice) | UST/Comack: Debtor’s and Rodriguez’s conduct (criminal fraud convictions, undisclosed creditor claims, lack of cashflow, sole‑employee business, reporting failures) show bad faith; conversion or dismissal with prejudice warranted. | Debtor: Has been making progress toward plan confirmation; plan would yield greater creditor recovery; some issues are pre‑petition or curable. | Court: Found totality of circumstances shows lack of good faith; no unusual circumstances that bar conversion; granted conversion to Chapter 7 (denying confirmation as moot); Comack’s motion to convert/dismiss granted (case converted rather than dismissed with prejudice). |
Key Cases Cited
- Southmark Corp. v. Coopers & Lybrand, 163 F.3d 925 (5th Cir. 1999) (describing core proceedings in bankruptcy)
- Wood v. Wood, 825 F.2d 90 (5th Cir. 1987) (bankruptcy jurisdiction/core proceeding principles)
- United Savs. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363 (5th Cir. 1987) (case‑specific inquiry under § 1112)
- In re Little Creek Dev. Co., 779 F.2d 1068 (5th Cir. 1985) (good‑faith standard for bankruptcy filings)
- Marrama v. Citizens Bank, 549 U.S. 365 (2007) (bad‑faith conduct may justify dismissal/conversion)
- Loop Corp. v. United States Trustee, 379 F.3d 511 (8th Cir. 2004) (negative cashflow/administrative expenses can constitute diminution of the estate)