Global Processing, Inc.
- Reporters:
- ,
- Before:
- Thad J. Collins
The matter before this Court is the United States Trustee‘s (“UST“) Motion to Convert Case to Chapter 7 (Doc. 228) or, alternatively, to appoint a Chapter 11 Trustee. The Iowa Department of Agriculture and Land Stewardship and the Iowa Grain Depositors and Sellers Indemnity Fund (collectively “IDALS” here) as well as Farmers Trust & Savings Bank and the Official Committee of Unsecured Creditors joined the UST‘s motion. See Docs. 244, 247, 268. Debtor resists these motions and alternatively has proposed to appoint a Chief Reorganization Officer. The Court held evidentiary hearings on June 7–8, 2023. Ronald C. Martin and Erica L. Yoder appeared for the Debtor. Janet G. Reasoner appeared for the Office of the United States Trustee. Lindsey L. Browning and Jacob Larson appeared on behalf of IDALS. Bradley R. Kruse appeared for Chris Olson. Brian D. Jones appeared for Farmers Trust & Savings Bank. Michael S. Dove appeared for the Official Committee of Unsecured Creditors. This is a core proceeding under
The parties moving for conversion to Chapter 7 or аppointment of a Chapter 11 Trustee assert the Debtor‘s owner, David Wilcox, has engaged in fraud or improper behavior that has harmed the estate. They allege continuing harm if he is left in charge. Debtor argues that unusual circumstances exist under Section 1112(b)(2) and conversion should be denied. Rather, Debtor argues in the alternative that Greg DeWeese should be appointed as Debtor‘s Chief Reorganization Officer and that Mr. Wilcox will surrender decision-making authority to DeWeese. For the reasons that follow, this Court grants UST‘s Motion to Appoint a Chapter 11 Trustee.
II. PROCEDURAL HISTORY AND FACTUAL RECORD
During the two days of evidentiary hearing on the Motion to Convert, parties engaged in extensive discussions on and off the record regarding dismissal, conversion, and potential alternatives. No agreement was reached but the UST and Debtor both proposed alternatives for the Court to consider. The Court finished the evidentiary hearing and provided the parties the opportunity to amend pleadings in order to clarify their positions. Both sides formalized their alternatives: the UST proposed the alternative of appointing a Chapter 11 Trustee while Debtor proposed appointing DeWeese as Chief Reorganization Officer.
The Court later held an emergency interim hearing on a related issue—authority for approval of grain contracts DeWeese had worked out with several of his contacts within the industry. The Court took extensive additional testimony from DeWeese about the proposed agreements. The Court ultimately denied most of the relief requested, primarily because most creditors remained opposed to the contracts—and stood on their original request for conversion to Chapter 7 or the new alternative of appointing a Chapter 11 Trustee.
The UST, IDALS, and Farmers Trust & Savings Bank offered substantial credible evidence to support the Motions to Convert or Appoint a Chapter 11 Trustee. Much of it camе from the Debtor‘s own documents and witnesses. In particular, those parties elicited much frank and damaging testimony from DeWeese in his role as financial consultant. DeWeese acknowledged (as Debtor has throughout this case) that the books and financial records of the Debtor were a serious mess. DeWeese was brought on mid-October 2022 to, among other tasks, help prepare the bankruptcy schedules and statement of financial affairs. Doc. 305, at 140. In fulfilling his duties, DeWeеse testified that he initially had difficulty understanding Debtor‘s financial reporting system and reconciling the balance sheet accounts. Id. at 141–42. In fact, DeWeese explained that “things came to surface” each month since the bankruptcy filing, including “loans” from Debtor to Debtor‘s principal, David Wilcox, and a variety of miscellaneous charges DeWeese identified as being for the benefit of Mr. Wilcox. Id. at 143–44. DeWeese uncovered roughly $8.3 million in issued checks that had not been cashed, roughly $5 million in deposits that were recorded in Debtor‘s accounting system but that were not cleared or deposited into its bank account, at least 300 bank transactions from 2022 that were not recorded in Debtor‘s accounting system, and a $1 million reconciliation discrepancy that DeWeese did not fully investigate. Id. at 164–66. DeWeese discovered that the recorded grain inventory quantities were inaccurate, that there were over $3.5 million in royalties due under a purchase contract through Debtor‘s Kanawha, Iowa facility that were never paid and never recorded, and that insurance on Debtor‘s property was allowed to lapse after a returned check went unnoticed. Id. at 151, 157–59. These discoveries ultimately necessitated amending the bankruptcy schedules (Doc. 86) and amending monthly operating reports (Docs. 146, 147).
IDALS also presented evidence that Debtor, thrоugh fraud, incompetence, and/or a lack of careful operation, had violated Iowa state law governing the operation of grain processors and grain warehouses, causing significant losses to farmers who placed their grain with Debtor for processing and/or sale. The number of farmers experiencing losses and the total value of the losses was very significant. Specifically, IDALS offered the testimony of Jared Christensen, a grain dealer and warehоuse examiner for IDALS Grain Warehouse Bureau, who inspected Debtor‘s Kanawha, Iowa facility in October of 2022. During this inspection, Christensen discovered between 20 to 50 checks that had not been sent out to farmers within the five-day time frame required by Iowa state law. Upon further inspection, Christensen uncovered what amounted to roughly $4.7 million in withheld checks. Doc. 305, at 39. Christensen also testified that when he asked employees at the facility why the checks were being held, they respondеd that it was at the direction of Wilcox. Id. at 37.
IDALS also offered the testimony of James Kennedy, Grain Warehouse Bureau Chief for IDALS. Kennedy testified that the Grain Warehouse Bureau suspended Debtor‘s licenses (Grain Dealer 5236 and Warehouse 4951) after Christensen‘s inspection for multiple alleged violations of state law including withholding checks and failing to submit monthly financial statements. Id. at 63–
This part of the record was largely undisputed. Debtor‘s counsel offered an argument essentially that Debtor had done its best to comply with the stipulation agreement and that any record discrepancies were human error rather than evidence of fraud. In response, the Court noted its strong initial inclination tо find that no such charitable view was warranted. Further review has confirmed the Court‘s initial view. Debtor has been poorly and perhaps even fraudulently managed. The pattern and practice of poor record-keeping and missing funds appears to go beyond “human error.” The Court finds that Wilcox systematically ignored best business practices, evaded state and federal oversight and regulations, disregarded the corporate form by enmeshing his personal funds with his business,
Debtor, however, put on a strong case of the unusual factors to be considered in opposition to conversion or appointment of a Chapter 11 Trustee. This evidence also revolves almost entirely around Greg DeWeese. DeWeese has essentially turned around the book-keeping problems of Debtor, set up numerous processes to eliminate previous problems, and aggressively set a business strategy for moving forward. DeWeese even lined up several grain contracts that he calculated would bring roughly $2.8 million into the estate after costs. The Court held a separate hearing on an emergency basis on Debtor‘s motion to authorize execution of these contracts. As noted above, the Court found DeWeese‘s testimony in support of those contracts to be highly credible (as it has been throughout this case and in others where DeWeese has been before this Court). However, also as noted, the Court rejected Debtor‘s rеquest to adopt any of the contracts—mainly because virtually all of the participating creditors were opposed to moving forward with the contracts and did not think these contracts would lead to a confirmable plan.
The Court does find, however, that the efforts of DeWeese have been very beneficial to the estate, and he would be a valuable asset moving forward. This is largely undisputed. In fact, based on the involvement of DeWeese, the UST and creditоrs noted they would support appointment of a Chapter 11 Trustee as an alternative to conversion to Chapter 7. Debtors argued that the Court—with the hopes that DeWeese would remain in his role—should appoint DeWeese as Chief
IV. CONCLUSIONS OF LAW
The UST and other creditors continue to support conversion to Chapter 7 or, in the alternative, the appointment of a Chapter 11 Trustee. Debtor continues to resist all Motions to Convert or appointment of a trustee. Debtor has moved for appointmеnt of DeWeese as Chief Reorganization Officer at Doc. 346. The UST‘s Motion to Convert is based on
(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;
(C)failure to maintain appropriate insurance that poses a risk to the estate or to the public; . . .
(F)unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter; . . .
. . .
Following BAPCPA‘s 2005 amendments to the Bankruptcy Code, section 1112(b)(1) is “no longer permissive, but instead mandates conversion or dismissal if the movant establishes exclusive cause, and no unusual circumstances establish that conversion or dismissal is not in the best interest of creditors.” However, “[w]hether cause exists under § 1112(b) and, if so, whether dismissal [or conversion] is appropriate are questions left to the sound discretion of the bankruptcy court.”
In re Miell, 419 B.R. at 366 (quoting In re New Towne Development, LLC, 404 B.R. 140, 146 (Bankr. M.D. La. 2009) (citations omitted)).
There are, however, two distinct statutory exceptions to mandatory conversion or dismissal after a showing of cause. The first exception to mandatory conversion or dismissal occurs where “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 debtor 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 reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
A. Movant‘s Burden of Establishing “Cause.”
The initial burden of proof “lies with the movants to establish a cause for conversion” under
1. Substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.
To establish “cause” under
The Eighth Circuit has found that cause exists under this section when the evidence shows that the debtor has a negative cash flow and no intention of rehabilitating its business. Loop Corp. v. United States Tr., 379 F.3d 511, 518 (8th Cir. 2004) (holding that when debtors intended to liquidate their assets rather than continue their business operations, there was no reasonable likelihood of rehabilitation). Debtor has largely had a negative cash flow. Through the early part of the case, there has been a continuing negative cashflow and diminution of the estate. Debtor‘s records were in such disarray at the time of filing that much of the “diminution” of estate the UST points to was a hold-over from substantially poor business practices. While there has been some “emendation” of estate, thanks to the work of DeWeese, there has been no showing that it has taken hold to truly establish a positive cash-flow. Moreover, there is rеal uncertainty whether Wilcox would continue to interfere with or thwart DeWeese‘s efforts. The Wilcox self-dealing, catastrophic losses to other farmers, and inability to show a legal right to fully operate the business show that an independent decision-maker is needed. The Court finds that movants have met their burden under the first element.
The second element is a showing of no reasonable likelihood of rehabilitation. This is a close call. Debtor entered Chapter 11 bankruptcy with the intent to continue its business and sell itself as a continuing operation. Debtor‘s decision to employ DeWeese right before filing for bankruptcy further indicates to the Court that Debtor is taking steps in the right direction. However, this case is
Because the Court finds cause under
B. Evaluation of the Best Interest of Creditors and the Estate.
Because cause for conversion has been demonstrated, regardless of whether the motion to convert or dismiss is opposed, the Court must determinе whether the best interests of creditors and the estate are served by converting or dismissing the case. In re Modanlo, 413 B.R. 262, 2009 Bankr. LEXIS 2604, at *6 (Bankr. D. Md. June 1, 2009). While the Bankruptcy Code does not define “best interests” for purposes of the
Under this caselaw, with the UST and others expressing an interest in an alternative to conversion or dismissal, as well as the authority of
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case . . . ; or
(2) if such appointment is in the interests of creditors . . .
. . .
For all the foregoing reasons, the Court hereby orders Appointment of a Chapter 11 Trustee.
Ordered: October 6, 2023
Thad J. Collins
Chief Bankruptcy Judge