562 B.R. 490
Bankr. D.N.M.2016Background
- Debtor Sandia Resorts, Inc. (operator of an America’s Best Value Inn in Albuquerque) filed a voluntary Chapter 11 on June 9, 2016; this was its second bankruptcy filing and the case was heavily litigated.
- Debtor and secured creditor NCG, LLC each proposed competing Chapter 11 plans but neither could satisfy § 1129(a)(10); both conceded no confirmable plan is feasible.
- The U.S. Trustee (UST) moved under 11 U.S.C. § 1112 to convert the case to Chapter 7 or dismiss it; Debtor concurred and NCG agreed cause existed but preferred conversion.
- NCG submitted an amended, court-recorded offer to any chapter 7 trustee: pay $550,000 (plus satisfaction of NCG’s claims) to purchase substantially all estate assets (excluding cash/AR and professional malpractice claims), subject to court approval and financing.
- Estate liabilities include a large secured claim by NCG (~$1.876M), unpaid taxes (~$260k), lodger’s tax (~$18k), administrative claims (~$95–100k), and roughly $365–400k of unsecured claims; a chapter 7 sale under NCG’s offer likely would pay taxes, secured/priority claims, administrative claims, and provide a meaningful dividend to unsecured creditors.
Issues
| Issue | Plaintiff's Argument (UST) | Defendant's Argument (NCG/Debtor) | Held |
|---|---|---|---|
| Whether "cause" exists to convert or dismiss under § 1112(b) | Cause exists because there is no realistic prospect of confirming a plan | Parties (Debtor and NCG) conceded inability to confirm a plan | Court: Cause exists to either convert or dismiss under § 1112(b) |
| Whether conversion or dismissal is in best interests of creditors and estate | Conversion preferred (UST ultimately did not oppose conversion given NCG’s amended offer) | NCG: conversion best; Debtor: argued dismissal might better enable pursuit of claims against NCG (but waived some arguments) | Court: conversion is in the best interest of creditors and estate |
| Whether NCG’s chapter 7 offer justifies conversion rather than dismissal | Offer creates realistic prospect to pay administrative, priority, and unsecured claims (protects creditor interests) | Debtor argued its own pursuit of claims post‑dismissal might yield greater recovery; NCG emphasized financing and sale conditions | Court: NCG’s offer weighs heavily; provides a safety net and favors conversion |
| Whether conversion would unfairly favor secured creditor without benefiting others | UST/neutral view: conversion with trustee preserves neutrality and maximizes distributions | Concern that conversion could empower secured creditor to realize collateral | Court: conversion would not unduly benefit NCG at expense of others; trustee can evaluate offers and pursue estate claims; factors favor conversion |
Key Cases Cited
- In re American Capital Equipment, LLC, 688 F.3d 145 (3d Cir. 2012) (two-step § 1112(b) analysis: first find cause, then decide whether dismissal or conversion is in creditors’/estate’s best interests)
- Loop Corp. v. U.S. Trustee, 379 F.3d 511 (8th Cir. 2004) (bankruptcy court has broad discretion to convert or dismiss a Chapter 11 case)
- Matter of Woodbrook Associates, 19 F.3d 312 (7th Cir. 1994) (inability to confirm a plan can constitute cause under § 1112)
- Windsor on the River Associates v. Balcor Real Estate Finance (In re Windsor on the River Assocs., Ltd.), 7 F.3d 127 (8th Cir. 1993) (same: lack of reasonable likelihood of plan confirmation supports dismissal/conversion)
- In re All Denominational New Church, 268 B.R. 536 (B.A.P. 8th Cir. 2001) (court may dismiss/convert where confirmation is unrealistic)