665 B.R. 129
Bankr. S.D. Tex.2024Background
- Turkey Leg Hut, LLC filed for Chapter 11 bankruptcy under Subchapter V on March 26, 2024.
- The Subchapter V Trustee was appointed, and the debtor was later removed from possession by stipulation among the parties.
- The U.S. Trustee filed a motion to convert or dismiss the case with prejudice, citing various failures by the debtor, including missing deadlines, inadequate insurance, noncompliance with orders, and tax delinquencies.
- The Texas Comptroller and Texas Workforce Commission supported dismissal, pointing to unpaid post-petition taxes.
- After proceedings and further motions, the Subchapter V Trustee also sought conversion to Chapter 7.
- The court found multiple grounds for "cause" under 11 U.S.C. § 1112(b), including gross mismanagement and noncompliance with court orders, and determined conversion to Chapter 7 was in the best interest of creditors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Default for failure to respond | U.S. Trustee: No timely response justifies entry of default | No direct response (Debtor silent) | Motion for default denied; court requires hearing and finding of cause |
| Cause for conversion/dismissal | U.S. Trustee: Multiple failures—insurance, reports, court orders | No active opposition | Cause found under several 1112(b) grounds including gross mismanagement |
| Payment of post-petition taxes | Texas agencies: Debtor failed to pay/file required taxes | No contest | Cause found for conversion/dismissal |
| Conversion vs. Dismissal | Subchapter V Trustee/US Trustee: Prefer conversion; TWC/Comptroller: dismiss | No position; Debtor inactive | Conversion to Chapter 7 ordered |
Key Cases Cited
- Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir. 1999) (Core proceedings defined; bankruptcy jurisdiction emphasized)
- In re T-H New Orleans, L.P., 116 F.3d 790 (5th Cir. 1997) (Totality of circumstances guides cause analysis under § 1112)
- Stern v. Marshall, 564 U.S. 462 (2011) (Limits on bankruptcy courts’ authority to issue final judgments)
- Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 655 (2015) (Implied consent to bankruptcy court authority allowed)