Exigent Landscaping, LLC
OPINION REGARDING THE UNITED STATES TRUSTEE‘S MOTION TO CONVERT THIS CASE TO CHAPTER 7
I. Introduction
This is a Subchapter V Chapter 11 case. The case is before the Court on the motion filed by the United States Trustee (the “UST“), seeking the conversion of this case to Chapter 7 (Docket # 91, the “Motion“). Two responses to the Motion were filed. The Debtor, Exigent Landscaping, LLC, and a pro se creditor, Jennifer A. Hernandez, each filed an objection to the Motion.1 After the UST filed a reply brief in support of the Motion,2 the Court held a telephonic hearing, on January 24, 2024.3 At the conclusion of the hearing, the Court took the Motion under advisement.4
The Court has considered all of the written and oral arguments of the parties, and all of the papers filed by the parties concerning the Motion, as well as other relevant parts of the record in this case. For the reasons stated in this Opinion, the Court will grant the Motion and convert this case to Chapter 7.
II. Jurisdiction
This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under
This proceeding also is “core” because it falls within the definition of a proceeding “arising under title 11” and of a proceeding “arising in” a case under title 11, within the meaning of
III. Background
A. The Debtor and its plan of reorganization
The Debtor filed this Chapter 11 case on August 7, 2023, and elected to proceed under Subchapter V. The Debtor is a Michigan limited liability company, and has described itself this way:
The Dеbtor was established in 2017, and its primary business is a full design [and] build outdoor construction company specializing in hardscape construction and pools based in metro Detroit. The Debtor does everything from 3D designs, pools, hardscaping, landscaping, patios, pergolas, and outdoor kitchens.5
On November 6, 2023, the Debtor timely filed a proposed plan of reorganization (the “Plan“).6 In the Plan the Debtor proposes to continue in business, to pay creditors in part, over a three year period, and to receive a discharge. Funding for the Plan is projected to come from the Debtor‘s continuing operations.
The Plan provides for the payment of administrative claims, including fees of the Debtor‘s counsel, and a small priority claim of the Internal Revenue Service. The Plan proposes thе treatment of 22 classes of secured claims. Many of those claims are secured by liens in a single vehicle or a single piece of equipment. A few of those claims are secured by liens in all of the Debtor‘s assets.
The Plan also proposes to pay a total of $105,000.00, in three annual installments, to the single class of non-priority unsecured claims. The Debtor‘s Schedule E/F listed a total of 51 such unsecured creditors, with claims totaling just over $2.2 million.7 The Debtor later amended its Schedule E/F, to add another 11 such unsecured creditors, again with the unsecured claims totaling just over $2.2 million.8 According to the claims register, 44 proofs of claim have been filed, with secured and unsecured claims totaling over $5.2 million.
The Plan proposes that the current sole member of the Debtor, Brandon Heitman, retain his interest in the Debtor.
Objections to confirmation of the Debtor‘s Plan were filed by the UST, the Internal Revenue Service, and an unsecured creditor, Mohamed Saad.9 A primary objection argued by both the UST and the creditor Saad is that the Debtor‘s Plan is not feasible. Feasibility is required for both a consensual confirmation under
the Debtor‘s operations have lost money since the Debtor filed this bankruptcy case, a point that is discussed in Part IV.B.1.b of this Opinion, below.
According to the Debtor‘s ballot summary, two of the 22 secured creditor classes voted to accept the Plan, and the non-priority unsecured creditor class voted to reject the Plan.11 The other classes did not vote on the Plan.
B. The UST Motion and the Debtor‘s recent switch to a proposed liquidation sale
On November 16, 2023, the UST filed its Motion, seeking conversion of this case to Chapter 7. As noted above, the Court held a hearing on January 24, 2024, regarding both confirmation of the Debtor‘s proposed Plan and the UST‘s Motion.
The complexion of this case changed dramatically just before the hearing. Ninety minutes before the hearing began, the Debtor filed a motion to sell all of its assets, under
The Debtor has determined, in the exercise of its business judgment, that the best way to maximize the value of its assets is to sell such assets through the Sale pursuant to
section 363 of the Bankruptcy Code . Though Debtor has a pending chapter 11 plan that it believes is confirmable, in light of the objections filed to it, Debtor believes that the most efficient path to a mutually agreeable
resolution would be a
section 363 sale, subject to higher and better offers.13
Thus, the Debtor has suddenly shifted away from trying to confirm its rehabilitative Plan, and toward holding an all-asset sale that essentially would liquidate the Debtor. Because of this, the Court agreed to the Debtor‘s request at the hearing to adjourn the confirmation hearing, to March 27, 2024.
In the meantime, the Debtor wants the Court to deny the UST‘s Motion and let the Debtor‘s proposed sale process play out. The UST persists in seeking conversion to Chapter 7.
A. Application of the “cause” standard in § 1112(b) for dismissal or conversion
The UST seeks conversion of this Chapter 11 case based on the “cause” standard in
In determining whether cause exists to dismiss [or convert] a case under
§ 1112(b) , a court must engage in a “case-specific” factual inquiry which “focus[es] on the circumstances of each debtor.” United Savs. Ass‘n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 371-72 (5th Cir.1987) (en banc), aff‘d, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988); In re Great Am. Pyramid Joint Venture, 144 B.R. 780, 791 (Bankr.W.D.Tenn.1992). The party seeking dismissal [or conversion] carries the burden of proof and must satisfy that burden by a рreponderance of the evidence. See Loop Corp. v. U.S. Tr. (In re Loop Corp.), 379 F.3d 511, 517-18 (8th Cir.2004) (citing In re Woodbrook Assocs., 19 F.3d 312, 317 (7th Cir.1994)). A “bankruptcy court has broad discretion to dismiss [or convert] a Chapter 11 case under11 U.S.C. § 1112(b) .” AMC Mortg. Co. v. Tenn. Dep‘t of Revenue (In re AMC Mortg. Co.), 213 F.3d 917, 920 (6th Cir.2000). “Accordingly, the decision to dismiss [or convert] the case will be upheld unless it was an abuse of discretion, defined as ‘a definite and clear conviction that the trial court committed a clear error of judgment.‘” Id. (quoting Bowling v. Pfizer, Inc., 102 F.3d 777, 780 (6th Cir.1996)).
In re Creekside Sr. Apartments, L.P., 489 B.R. 51, 60 (B.A.P. 6th Cir. 2013);15 see also In re Basrah Custom Design, Inc. 600 B.R. 368, 377-78 (Bankr. E.D. Mich. 2019) (same) (quoting Creekside, 489 B.R. at 60, and also citing In re Skymark Properties II, LLC, 597 B.R. 391, 395-96 (Bankr. E.D. Mich. 2019)).
”
“The court . . . has discretion in determining what additional circumstances not enumerated in
The UST seeks conversion of the case to Chapter 7 based on
1. 11 U.S.C. § 1112(b)(4)(A)
a. The standard
“Cause” under
In order to demonstrate that cause exists to dismiss a case pursuant to
§ 1112(b)(4)(A) , “the moving party must demonstrate that there is both (1) a [substantial or] continuing loss to or diminution of estate assets and (2) an absence of a reasonable likelihood of rehabilitation.” In re Westgate Props., Ltd., 432 B.R. 720, 723 (Bankr.N.D.Ohio 2010). To satisfy the first prong, a movant may demonstrate “that the debtor continues to incur losses or maintains a negative cash-flow position after the entry of the order for relief” or that the debtor‘s assets have declined in value since the case was cоmmenced. Id. (citation omitted); 3685 San Fernando Lender, LLC v. Cross Equities, LLC (In re USA Commercial Mortg., Co.), 452 Fed. Appx. 715, 724 (9th Cir.2011); In re Wahlie, 417 B.R. 8, 11 (Bankr.N.D.Ohio 2009); see also 7 Collier on Bankruptcy ¶ 1112.04[6][a] (16th ed. 2012). The loss may be substantial or continuing. It need not be both in order to constitute cause under§ 1112(b)(4)(A) . 7 Collier on Bankruptcy, ¶ 1112.04[6][a][i] (16th ed. 2012) (“By the use of the word ‘substantial’ insection 1112(b)(4)(A) , Congress has indicated that a loss need not be continuing in order to satisfy the first prong of this enumerated cause.“).To satisfy the second prong of
§ 1112(b)(4)(A) , a movant must demonstrate that the debtor does not have a reasonable likelihood of rehabilitation. As used in§ 1112(b)(4)(A) , “rehabilitation does not necessarily denote reorganization, which
could involve liquidation. Instead, rehabilitation signifies something
more, with it being described as ‘to put back in good condition; re-establish on a firm, sound basis.‘” Westgate Props., 432 B.R. at 723 (quoting In re V Cos., 274 B.R. 721, 725 (Bankr.N.D.Ohio 2002)). “‘Rehabilitation’ is a different and much more demanding standard than ‘reorganization.‘” In re Brutsche, 476 B.R. 298, 301 (Bankr.D.N.M.2012). If “‘the debtor, or some other party, will be able to stеm the debtor‘s losses and place the debtor‘s enterprise back on a solid financial footing within a reasonable amount of time,‘” then the debtor may have a reasonable likelihood of rehabilitation. In re Costa Bonita Beach Resort, Inc., 479 B.R. 14, 42 (Bankr.D.P.R.2012) (quoting 7 Collier on Bankruptcy ¶ 1112.04[6][a] (16th ed. 2012)). “The purpose of § 1112(b)(1) is to ‘preserve estate assets by preventing the debtor in possession from gambling on the enterprise at the creditors’ expense when there is no hope of rehabilitation.‘” Loop Corp., 379 F.3d at 516 (quoting In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr.S.D.N.Y.1995)).
b. Application of the standard
The UST argues that
i. Substantial or continuing loss to or diminution of the estate
As for loss and diminution of the estate, the UST pоints mainly to the Debtor‘s monthly operating reports. Those reports show that the Debtor has had a substantially negative net operating loss since filing this bankruptcy case on August 7, 2023. The monthly operating reports show post-petition net income and net losses from operations as follows:
- August 2023: negative $66,296.7216
(August 7-31, 2023) - September 2023: negative $6,556.3317
- October 2023: negative $3,908.6518
- November 2023: positive $14,475.6219
- December 2023: negative $16,165.6020
- Total/net to date: negative $78,451.68
| Date | Cash | Accounts Receivable |
|---|---|---|
| • August 7, 2023 (petition date) | $80,136.7221 | $185,000.0022 |
| • August 31, 2023 | $20,718.33 | $74,781.0023 |
| • September 30, 2023 | $12,775.93 | $60,900.9724 |
| • October 31, 2023 | $8,869.54 | $49,020.7025 |
| • November 30, 2023 | $24,599.67 | $30,232.6226 |
| • December 31, 2023 | $7,806.02 | $50,123.6227 |
| Net decline since petition date: | -$72,330.70 | -$134,876.38 |
Even if the Court assumes that the Debtor‘s business historically has been seasonal, as the Debtor asserts without evidence, that does not adequately respond to the evidence cited above, showing the Debtor‘s dismal financial performance since filing this bankruptcy case. And that evidence shows that during each of the months of August, September, and October 2023, during part of what the Debtor says is its busy season, the Debtor actually suffered substantial net losses, totaling $76,761.70, and the Debtor suffered a large reduction in the amount of the Debtor‘s cash on hand (a decline totaling $71,267.18 from August 7, 2023 to October 31, 2023) and accounts receivable (a decline totaling $135,979.30 from August 7, 2023 to October 31, 2023). And the Debtor has not adequately contested the following statements by the UST, made in its Motion and in its reply brief, and reiterated during the hearing:
The cornerstone of the Debtor‘s cash collateral budget [Docket #6, Exhibit 2] is that the Debtor would be able to sell a pool to a new customer every month for the months August, September, and
October. The Debtor has not sold a new pool since the case was filed.
. . .
The Debtor‘s income has been based on “change orders” - updates or additions to current projects with current customers. The Debtor does not have any new pool clients . . . .28The Debtor needs a steady supply of new pool clients to sustain its business (Docket #6, page 26). But the Debtor does not have any new pool clients. Its income has come exclusively from updates or additions to current projects with current customers.29
For all of the above reasons, the Court finds that there has been both a “substantial” and a “continuing” loss to and diminution of the bankruptcy estate in this case, within the meaning of
ii. Absence of a reasonable likelihood of rehabilitation
The Court also finds that therе is an “absence of a reasonable likelihood of rehabilitation,” within the meaning of
For the reasons stated above, the Court finds that there is “cause” to convert or dismiss this case under
2. 11 U.S.C. § 1112(b)(4)(B)
a. The standard
What constitutes “gross mismanagement of the estate” for purposes of
Section 1112(b)(4)(B) provides that gross mismanagement of the estate is cause for dismissal or conversion. Analysis under§ 1112(b)(4)(B) focuses solely on the manаgement of the estate and does not include mismanagement of the pre-petition debtor. Therefore, the Court considers only the post-petition conduct of Debtor as debtor-in-possession.A debtor-in-possession is vested with significant power under the Bankruptcy Code and that power comes with certain responsibilities. A debtor-in-possession owes a fiduciary duty to its creditors. Gross mismanagement of the estate is a breach of that duty. And while “gross mismanagement” is not defined by the Bankruptcy Code, Black‘s Law Dictionary defines “gross” as “beyond all reasonable measure; flagrant.” Given the plain language, a debtor‘s mismanagement must be beyond all reasonable measure. . . .
A variety of conduct can establish gross mismanagement. In [In re] Visicon [Shareholders Trust, 478 B.R. 292 (Bankr. S.D. Ohio 2012)], the court found that the debtor grossly mismanaged the estate because the debtor used the еstate‘s cash to pay the personal expenses of insiders and pre-petition unsecured creditors, and to make costly renovations to the debtor‘s business. In [In re] 210 West Liberty [Holdings, LLC, No. 08-677, 2009 WL 1522047, 2009 Bankr. LEXIS 1706 (Bankr. N.D. W. Va. May 29, 2009)], the court found that the debtor engaged in gross mismanagement because the debtor made no attempt to collect a rent obligation owing to it and provided no compelling reason why the debtor was not pursuing the estate asset; received money from third parties to
pay the debtor‘s expenses without timely disclosure to the court and parties in interest or without seeking approval of the court for engaging in some form of post-petition financing, if the money received was indeed a loan rather than a gift; and failed to remedy fire code violations that threatened the loss of the debtor‘s occupancy permit. In In re Wallace, No. 09-20496-TLM, 2010 WL 378351, at *4-5, 2010 Bankr. LEXIS 261, at *16-19 (Bankr. D. Idaho Jan. 26, 2010), the court found that the debtors compensated professionals out of the debtor-in-possession‘s account without first seeking court approval, obtained post-petition financing without court approval, and paid pre-petition credit card debt. Those actions, in conjunction with the debtors’ inadequate financial report and conduct falling under
§ 1112(b)(4)(A) , constituted gross mismanagement of the estate. In In re Fall, 405 B.R. 863, 869 (Bankr. N.D. Ohio 2009), the court found that the debtor grossly mismanaged the estate where the debtor used cash collateral without court authority, failed to maximize estate assets, in part by failing to pursue its accounts receivable, and failed to provide the court with an accurate financial picture of the debtor-in-possession.
Id.; see also In re Stream TV Networks, Inc., No. BR 23-10763 (MDC), 2024 WL 87639, at *15 (Bankr. E.D. Pa. Jan. 5, 2024). Although “[s]imple mismanagement is insuffiсient for a finding of gross mismanagement of the estate[, s]imple misconduct can collectively demonstrate gross mismanagement of the estate.” In re M.A.R. Designs & Constr., Inc., 653 B.R. 843, 857 (Bankr. S.D. Tex. 2023) (footnotes omitted) (emphasis added).
b. Application of the standard
The UST argues that the Debtor is guilty of gross mismanagement of the estate, for a variety of reasons. The Debtor vigorously contests the UST‘s charge of gross mismanagement.
Under the circumstances, the Court finds it unnecessary to decide whether the Debtor is guilty of gross mismanagement. This is so because other grounds clearly exist for converting this case to Chapter 7, as described in this Opinion.
3. 11 U.S.C. § 1112(b)(4)(F)
Under
Without explicitly arguing that this section applies, the UST‘s arguments implicitly invoke this section. As the prime example of this, and as the UST points out, it is undisputed that the Debtor failed to timely file a complete and accurate Statement of Financial Affairs (the “SOFA“). Although the Debtor did file a SOFA by the August 21, 2023 deadline to do so,30 the UST argues that the SOFA filed on that date was grossly inaccurate and incomplete. If that is so, it may mean that the Debtor failed to satisfy its filing/reporting requirement to file a SOFA, within the meaning of
[T]he Debtor‘s failure to provide accurate schedules and statements falls under
§ 1112(b)(4)(F) as an unexcused failure to satisfy timely any filing or reporting requirement. Simply filing the correct form on time is not compliance with§ 1112(b)(4)(F) , at least where the timely filed documents contain grossly erroneous, material information. “Filing a piece of paper is meaningless if the content is inaccurate, misleading, or wrong, thus the content of these documents is . . . relevant [under§ 1112(b)(4)(F) ].” In re Tucker, 411 B.R. 530, 532 (Bankr.S.D.Ga. 2009); see also In re Charles Street African Methodist Episcopal Church of Boston, 499 B.R. 66, 115-16 (Bankr.D.Mass.2013); In re Hoyle, [No. 10-01484-TLM,] 2013 WL 210254, at *6-7 (Bankr.D.Idaho Jan. 17, 2013); In re Whetten, 473 B.R. 380, 383 (Bankr.D.Colo.2012); In re Sanders, [No. 09-09094-dd,] 2010 WL 5136192, at *4 (Bankr.D.S.C. Apr. 29, 2010).
In re Korn, 523 B.R. 453, 467 n.32 (Bankr. E.D. Pa. 2014); see also In re Visicon S‘holders Tr., 478 B.R. 292, 311, 315 (Bankr. S.D. Ohio 2012) (explaining that “full, complete and candid
disclosure of all financial information concerning the Chapter 11 debtor in possession is compulsory” and dismissing the debtor‘s bankruptcy case for “cause” under
The Court finds that the Debtor‘s originally-filed SOFA was substantially inaccurate and incomplete, particularly with respect to the Debtor‘s answer to Question 13 in Part 6 of the SOFA. Question 13 required the Debtor to provide the following information about pre-petition transfers of propеrty:
13. Transfers not already listed on this statement
List any transfers of money or other property by sale, trade, or any other means made by the debtor or a person acting on behalf of the debtor within 2 years before the filing of this case to another person, other than property transferred in the ordinary course of business or financial affairs. Include both outright transfers and transfers made as security. Do not include gifts or transfers previously listed on the statement.31
And Question 13 required the Debtor to disclose all of the following, for each transfer:
- Who received [the] transfer?
- Address [of the transferee]
- Description of property transferred or payments received or debts paid in exchange
- Date transfer was made
- Total amount or value [of the transfer]32
It now turns out that in its Original SOFA, filed August 21, 2023, the Debtor failed to disclose its pre-petition sales of at least 11 pieces of equipment, the value of which the Debtor now says totals $161,000.00. The Debtor did not rectify these significant errors in its Original SOFA until the Debtor filed its amended SOFA on January 3, 2024, more than four months after the Original SOFA was filed.33
The Debtor stated as its excuse for failing to list so many transfers in its Original SOFA that “[t]he Debtor did not have its 2022 Tax Returns filed at the time of filing the bankruptcy case. The Debtor discovered that more equipment was transferred during the preparation of the 2022 Tax Return.”34
This stated excuse is really no excuse at all. It raises some obvious questions, which the Debtor has not satisfactorily answered.
And in any event, of course, the Debtor, through its management, had a duty to review its records and investigate its pre-petition transfers, at least to the extent necessary to timely, fully, and accurately disclose them as required in the Original SOFA.
Even the Debtor‘s Amended SOFA is seriously deficient on its face. It lists the transferee for three of the transfers disclosed, which total $67,000.00, as “Unknown,” and gives no address for those transferees.35 And it gives only the year as the date for nine of the transfers, and gives no date at all for one of the transfers.36
For the five transfers that the Debtor did list in its Original SOFA, the Debtor failed to disclose important required information. For the Debtor‘s sale of a “247B Compact Track Loader,” sold for $24,000.00 on the stated date of “10/2022,” the Debtor listed the Transferee as “Unknown,” and listed no address for the transferеe.37 The Debtor‘s Amended SOFA changed the amount of this transfer to $22,000.00, but still failed to state the name or address of the “Unknown” transferee.38
Another deficiency in the Debtor‘s Original SOFA concerns the transfer on the stated date of “1/2023” to “Classic Pools” of “Misc. Construction Equipment” for a value of “Unknown.”39 This information about the transfer to Classic Pools is inadequate and incomplete; it is essentially useless. And it turns out that the value of this transfer was significant — the
Debtor‘s Amended SOFA later listed the previously “Unknown” value of this transfer as $80,000.00.40
This additional transfer value of $80,000.00, plus the $161,000.00 value of the 11 transfers not disclosed in the Debtor‘s Original SOFA, means that there is a total of $241,000.00 in value in pre-petition transfers that the Debtor failed to disclose in its original SOFA.
“[T]here are circumstances under which scheduling an asset‘s value as ‘unknown’ is appropriate; however, doing so when a debtor has access to information from which either an exact or approximate valuation is ascertainable is not ‘reasonable under the circumstances.‘” In re Ozcelebi, 639 B.R. 365, 402-03 (Bankr. S.D. Tex. 2022) (footnote omitted). Here, where the Debtor is owned, managed, and operated by its sole member and President, Brandon Heitman, it is not reasonable for Mr. Heitman, who executed and verified the Debtor‘s Original SOFA and Amended SOFA, and other required bankruptcy filings, not to know or have access to the prices for which the Debtor‘s assets sold, and not to know or have access to information
about who purchased such assets from the Debtor and when.
Given all of the omissions in the Debtor‘s Original SOFA, the Court finds that such document was so seriously deficient that it did not satisfy the Debtor‘s filing/reporting obligation. This unexcused failure demonstrates “cause” to convert or dismiss this case, under
In sum, the Court finds and concludes thаt there is “cause” to dismiss or convert this case, based on
B. The Court will convert this case to Chapter 7, because conversion, rather than dismissal, is in the best interests of creditors and the estate.
1. The choice is between dismissal and conversion.
Having found that cause exists to dismiss or convert this case under
The statutory exceptions are contained in
(1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtors or any other party in interest establishes that—
(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and
(B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)—
(i) for which there exists a reasоnable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
These exceptions to making the conversion-or-dismissal choice do not apply. First, the exception under
(c) The court may not convert a case under this chapter to a case under chapter 7 of this title if the debtor is a farmer or a corporation that is not a moneyed, business, or commercial corporation, unless the debtor requests such conversion.
In this case, the Debtor is not “a farmer” or “a corporation that is not a moneyed, business, or commercial corporation.”
Second, the exception in
Third, the exception in
2. Conversion, rather than dismissal, is in the best interests of creditors and the estate.
In this case, therefore, the choice under
[C]reditors are generally “best served by the course of action that results in the largest number of [them] being paid the largest amount of money in the shortest amount of time.” The best interest of the estate turns on whether its economic value “is greater in or out of bankruptcy.”
In re Aurora Memory Care, LLC, 589 B.R. 631, 643 (Bankr. N.D. Ill. 2018) (citations omitted).
The Court finds that conversion to Chapter 7, rather than dismissal, is in the best interests of creditors and the estate, for the following reasons.
First, as evidenced by the UST‘s Motion and by the Debtor‘s
Second, it is best for creditors and the estate that a neutral Chapter 7 trustee, rather than the Debtor, conduct the liquidation of the Debtor. As the Debtor argues, it is true that conversion to Chapter 7 will result in the added administrative expenses of the Chapter 7 trustee and his/her counsel. But in the Court‘s view that consideration is far outweighed by the benefits of having a neutral Chapter 7 trustee conduct the liquidation of the Debtor. This is particularly true in this case, because by filing its
The Debtor‘s Sale Motion proposes to sell the Debtor‘s assets to Amanda Pisarski, who is
The Debtor‘s sole manager and owner, Mr. Heitman, obviously has a significant conflict of interest. Under the Sale Motion, Mr. Heitman would be tasked with causing the Debtor to seek bidders to compete with his own wife, and to outbid his wife‘s bid. The Court and the creditors reasonably may question whether the Debtor will make much effort to obtain other bidders and higher bids, let alone make a vigorous effort. The Debtor and its management have a fiduciary duty to the bankruptcy estate and its creditors, and the Court cannot permit the Debtor to be compromised, or even appear to be compromised, by this clear conflict of interest.
The Court‘s concern about this conflict is only enhanced by the terms of the Debtor‘s proposed sale to this insider.45 The terms of the proposed sale to Ms. Pisarski, which are set out in the Asset Purchase Agreement (the “APA“) attached to the Sale Motion,46 appear to greatly favor Ms. Pisarski, to the detriment of the Debtor.
First and foremost, the purchase price for the Debtor‘s assets appears to be extremely low. The price is $35,000.00, plus the assumption of three loans that are secured by a pickup truck and two Caterpillar excavators.47 That purchase price is in exchangе for the Debtor‘s sale of all of its personal property (i.e., all of the Debtor‘s assets), other than “avoidance actions and cash or cash equivalents,” but including the Debtor‘s accounts receivable.48 The Debtor‘s accounts receivable alone totaled $30,232.62 as of the end of November, according to the Debtor‘s November monthly operating report. That was the latest information publicly available as of the time of the January 24, 2024 hearing. The day after that hearing, the Debtor filed its untimely monthly operating report for December, and that showed that the Debtor‘s accounts receivable totaled $50,123.62 as of December 31, 2023.49 The assets to be sold, essentially for $35,000.00, in addition to these accounts receivable, include three trucks, two “vacuum paver lifters,” three trailers, two Caterpillar excavators, three Caterрillar track loaders, office furniture and office equipment, and many other items.
Thus, the proposed purchase price of $35,000.00 on its face appears to be extremely low.
Another favorable term for the proposed purchaser, Ms. Pisarski, is that her obligation to close under her sale agreement with the Debtor is “contingent upon” her “receiving satisfactory funding of the . . . Purchase Price.”50
Given the Debtor‘s significant conflict of interest, it is clear that a neutral Chapter 7 trustee should be in control of the liquidation of the Debtor‘s assets, rather than the Debtor. Conversion to Chapter 7 is in the best interests of the creditors and the estate.
Finally, thеre a numerous reasons why a conversion and liquidation of the Debtor in this Court, rather than a dismissal of the case, is better for the creditors. A dismissal of this case likely would lead to an inefficient, possibly chaotic, and potentially unfair race by the Debtor‘s many creditors individually to try to collect their debts from the Debtor, in one or more non-bankruptcy courts. Keeping this Debtor in a single bankruptcy case is likely to be much more efficient for both the Debtor and its many creditors. And a liquidation in bankruptcy will insure the equality of treatment among the Debtor‘s unsecured creditors that the Bankruptcy Code provides.
In addition, if this case remains in bankruptcy, the Chapter 7 trustee will be able to investigate possible avoidance actions under Chapter 5 of the Bankruptcy Code, and may be able to avoid some of the Debtor‘s pre-petition transfers for the benefit of the creditors, either as preferential transfers under
For all of the foregoing reasons, conversion to Chapter 7 clearly is in the best interests of creditors and the estate.
V. Conclusion
For the reasons stated in this Opinion, the Court will enter an order granting the Motion, converting this casе to Chapter 7, and denying the Debtor‘s Sale Motion without prejudice. The Order also will cancel the March 27, 2024 adjourned confirmation hearing, as no longer necessary.
Signed on February 12, 2024
/s/ Thomas J. Tucker
Thomas J. Tucker
United States Bankruptcy Judge
Notes
Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is рroposed in the plan.
(A) The debtor will be able to make all payments under the plan; or
(B) (i) there is a reasonable likelihood that the debtor will be able to make all payments under the plan; and
(ii) the plan provides appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that the payments are not made.
(b)(1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. . . .
(4) For purposes of this subsection, the term “cause” includes--
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of
rehabilitation;
(B) gross mismanagement of the estate;
. . .
(F) unexcused failure to satisfy timely any filing or reporting requirement establishеd by this title or by any rule applicable to a case under this chapter;