McQuillen Place Company, LLC, 609 B.R. 823

Background

Debtor McQuillen Place Company, LLC filed Chapter 11 on April 25, 2019; primary asset is an unfinished condominium project in Charles City, Iowa (Project ~90% complete; estimated ~90 days to finish).
First Security (mortgage holder after assignment from CRBT) holds construction mortgage and filed a proof of claim; substantial secured debt and contested lien priorities exist.
Property has significant unpaid obligations (real estate taxes and assessments, insurance) accruing monthly; taxes exceed $300,000 and continue to grow; monthly operating reports show minimal income (~$4,000/month).
Debtor filed a Chapter 11 plan and disclosure statement, then voluntarily moved to dismiss; First Security (joined by IEDA and CRBT) moved to convert to Chapter 7 (creditors generally favor conversion); U.S. Trustee neutral.
Court found cause to convert under 11 U.S.C. § 1112(b) (continuing loss and no reasonable likelihood of rehabilitation; also gross mismanagement and failure to pay taxes) and concluded conversion to Chapter 7 was in the best interests of creditors and the estate; Debtor’s dismissal denied.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether movants established "cause" under § 1112(b) based on substantial/continuing loss and lack of reasonable likelihood of rehabilitation	Estate is suffering continuing diminution: near-zero operating income while taxes, insurance and fees grow; no realistic financing to complete project	Debtor: problems can be resolved (IEDA/tax credits, pending litigation, prospective purchaser/financing) and dismissal should allow foreclosure sale	Court: Movants met burden under § 1112(b)(4)(A); continuing loss and no reasonable likelihood of rehabilitation found; "cause" established
Whether gross mismanagement and unpaid taxes constitute additional cause under § 1112(b)(4)(B) and (I)	Debtor failed to pay taxes/insurance, preserve property, or fund operations; building deterioration and unpaid obligations show mismanagement	Debtor blames third parties (IEDA, lender), disputes tax characterizations, and argues conversion disadvantages unsecured creditors	Court: Found gross mismanagement and failure to timely pay taxes; these provide further cause for conversion
Whether conversion or dismissal is in best interests of creditors and the estate	Conversion to Chapter 7 will allow a trustee to sell the property quickly under § 363, maximize recovery, reduce carrying costs, and likely complete project sooner — creditors favor conversion	Debtor: dismissal (foreclosure) protects redemption rights and may better preserve unsecured creditors’ rights; conversion could advantage secured creditors and impede Debtor’s claims	Court: Conversion favored — trustee sale under § 363 more likely to maximize value and expedite completion; conversion to Chapter 7 granted; dismissal denied

Key Cases Cited

In re Miell, 419 B.R. 357 (Bankr. N.D. Iowa 2009) (movant bears initial burden to show cause to convert or dismiss under § 1112(b))
Loop Corp. v. United States Trustee, 379 F.3d 511 (8th Cir. 2004) (negative cash flow alone can constitute cause for dismissal or conversion)
In re ARS Analytical, LLC, 433 B.R. 848 (Bankr. D.N.M. 2010) (continuing diminution shown where projected future revenue is effectively zero and administrative expenses are increasing)
In re Keeley & Grabanski Land P'ship, 460 B.R. 520 (Bankr. D.N.D. 2011) (analysis of § 1112(b) causes and exceptions to mandatory conversion)
In re Aurora Memory Care, LLC, 589 B.R. 631 (Bankr. N.D. Ill. 2018) (use of a pragmatic test favoring the option that results in the largest, quickest creditor recoveries)
In re Sandia Resorts, Inc., 562 B.R. 490 (Bankr. D.N.M. 2016) (factors to consider when deciding conversion versus dismissal)