In Re Rundlett
DECISION ON MOTION TO CONVERT CASE TO CHAPTER 7
Fivе banks, which are creditors of Mary Jane Rundlett, the debtor in this Chapter 11 case, have jointly moved pursuant to
FINDINGS OF FACT
1. On November 15, 1991, ASB, BONY and BOA filed an involuntary petition against the debtor for relief under Chapter 7 of the Bankruptcy Code. Thereafter, on December 5, 1991, the debtor converted the involuntary Chaрter 7 case to a voluntary case under Chapter 11 of the Bankruptcy Code in accordance with
2. The debtor is the widow of Donald H. Rundlett, who died on August 25, 1991. She is 56 years of age and has four children ranging in age from 23 to 31. Mr. Rundlett was the Chairman and Chief Executive Officer of Private Capital Partners Inc. (“PCPI”), an investment banking firm which filed with this court a voluntary petition for reorganizational relief under Chapter 11 of the Bankruptcy Code on October 10, 1991.
3. The debtor and her husband had beеn married for approximately 33 years when he died. Although, she did not participate in his business, she did sign various guaranties and promissory notes with respect to the business, as requested by her late husband. The movant banks are creditors of the debtor as a result of the guaranties and notes which she executed in their favor.
4. In September of 1991, the debtor received approximately $3,500,000.00 in life insurance proceeds from Equitable Life Assurance Society of America as the beneficiary of life insurance policies purchased by her husband on his life. In addition to these proceeds, the debtor owns the family home in Bronxville, New York which is allegedly valued at approximately $1,500,-000.00 but may be lacking in equity due to secured claims. At the time of her husband’s death, the debtor also owned a 1988 Acura automobile and a condominium on Singer Island, Florida, which is presently listed for sale.
5. Before the conversion of the involuntary Chapter 7 case to a voluntary Chapter 11 case on December 5, 1991, the debtor spent over $1,000,000.00 from the insurance proceeds for the following items:
(a) $745,000.00 in cash for a house in Palm Beach, Florida;
(b) $12,000.00 to a homeowners association with respect to the Palm Beach house;
(c) Approximately $150,000.00 in cash to pay contractors in advance for renovations to the Palm Beach house;
(d) $130,000.00 to the debtor’s sister on account of an obligation owed to the sister by the debtor’s late husband;
(e) $30,000.00 for the purchase of a new Lexus automobile;
(f) $75,000.00 to bankruptcy counsel; and
(g) $6,000.00 for moving the contents of the Bronxville house to the Palm Beach house.
6. Upon application by ASB, BONY, Barclay’s and BOA, this court entered an order dated November 21, 1991, temporarily restraining the debtоr from transferring or disposing of any real or personal property until further order of this court. The restraining order carved out an exception to the extent that the debtor was permitted to spend up to $350 per week from property of the estate for ordinary, necessary, and reasonable living expenses.
7. There are approximately $2,000,-000.00 remaining from the proceeds of the life insurance policies which the debtor received after her late husband’s death. The debtor invested these funds in tax exempt securities which produce an annual income of approximately $120,000.00.
9. The debtor has filed а proposed Chapter 11 plan of reorganization and a disclosure statement. The debtor’s plan generally provides that the allowed unsecured claims and the allowed deficiency claims after the payment of allowed secured claims shall receive a pro rata share on the effectivе date of the plan of $1,000,-000.00 from the insurance proceeds. Additionally, such claims will receive a pro rata beneficiary interest in a trust fund to be established for the debtor’s benefit for life, known as the Rundlett Trust. The Rund-lett Trust will be vested with title to the debtor’s Florida real estate together with the balance of the insurance procеeds after the pro rata distribution of the $1,000,-000.00 cash and the distribution, if any, from the Chapter 11 case involving the debtor’s late husband’s corporation, PCPI. The debtor’s plan provides that the interest on the investment of the Rundlett Trust will be paid to the debtor for her lifetime and the debtor will be granted a life estate in the Florida real estate. Thе unsecured claims will be paid a pro rata distribution of the proceeds of sale of the Florida home after the debtor’s death.
10. Counsel for the unsecured bank claims, representing approximately 88 percent of the impaired class of unsecured claims, have stated that the banks object to the debtor’s аttempt to retain income from the insurance proceeds in excess of $1,000,-000.00 and a lifetime interest in the Florida house as well as interest from the balance of the insurance proceeds held in trust because these assets are property of the estate, which should be distributed to the debtor’s creditors. Accordingly, the unsecured bank creditors assert that the debt- or’s plan is unconfirmable because they will oppose and reject any plan in which the debtor seeks to retain an interest in property of the estate while the creditors are not paid the full allowed amount of their claims as of the еffective date of the plan.
DISCUSSION
A Chapter 11 case may be converted to Chapter 7 or dismissed for cause, whichever is in the best interests of creditors and the estate. There are ten factors delineated in
Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including—
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
The movants contend that any money that the debtor takes from the invested insurance proceeds and related income for her living expenses constitutes a diminution of property of the estate and represents a continuing loss of estate property within the meaning of
Hence, while the assets of the estate will generate income in excess of the debtor’s living expenses, the debtor will be living at the expense of the creditors without infusing any post-petition income that would not otherwise be regarded as property of the estate. In the context of thеse facts, every dollar expended by the debtor from the invested funds thereby reduces and diminishes the property of the estate. In
In re Silverstein,
The instant case reflects a more striking example of a diminution of the estate because the only income in the estate is derived from the interest earned on the invested insurance proceeds. As in the case of
In re Kanterman,
I note that neithеr the statute nor cases cited by the debtor require a finding of significant diminution of the estate. All that need be found is that the estate is suffering some diminution in value.
In re Kanterman, 88 B.R. at 29.
The second prong of
It does not appear therе is anything here that can be rehabilitated for we have to return to the basic premise, namely, that the woman is unemployed, she has no income, there is nothing to rehabilitate.
In re Kanterman,
In the instant case, there is no visible independent cash flow to support the debtor’s living expenses other than from the interest earned on the invested insurance proceeds. The debtor cannot expect to be supported by money that belongs to the creditors as property of the estate. There is no assured post-petition property of the debtor, as distinguished from property of the estate, thаt will contribute to the cash flow to meet the debtor’s current obligations. In these circumstances even the meager allowance to the debtor of $350.00 per week for living expenses, as set forth in the temporary restraining order dated November 21,1991, will lead to a continued diminution of the estate because there will be no cash flow from independent sources to offset this weekly loss. The phrase independent sources is intended to mean assets or income not regarded as property of the estate claimed by creditors. Although a debtor who is not engaged in business is eligible to file a Chapter 11 petition, thе debtor’s plan must be tenable and must reflect that the debtor will fund the plan with income that does not already
[T]he Code gives bankruptcy courts substantial discretion to dismiss a Chapter 11 casé in which the debtor files an untenable plan of reorganization. See§§ 1112(b) and 1129(a).
Toibb v. Radloff,
— U.S.-,-,
In light of the facts in this case, there is an absence of a reasonable likelihood of rehabilitation because the Chapter 11 petition and plan were filed by a consumer debtor who doеs not have any independent income and who relies on the property of the estate to satisfy the debtor’s normal living expenses and to fund her Chapter 11 plan.
In re Silverstein,
Inability To Effectuate A Plan
This factor, as expressed in
CONCLUSIONS OF LAW
1. This court has jurisdiction of the subject matter and the parties pursuant to
2. The consumer debtor’s use of property of the estate to meet ordinary living expenses without any source of income that is not property of the estate results in a continuing loss or diminution of the estate as described in
3. Without any reliable outside source of income available to the debtor to fund a Chapter 11 plan of reorganization, it follows that there is an absence of a reasonable likelihood of rehabilitation within the meaning of
4. The refusal of approximately 83 percent of the unsecured claims, which is the only impaired class of claims in this case, to accept any plan under which the debtor retains an interest in the Florida real estate and pays her normal living expenses with property of the estate, means that the debt- or is unable to effectuate a plan, as expressed in
5. The motion to convert this Chapter 11 case to Chapter 7 is granted.
SETTLE order on notice.