Loop Corp. v. United States TrusteeLoop Corp. v. United States Trustee
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This matter is before the undersigned United States District Judge on Appeal [Docket No. 1] from the March 13, 2002 Order of Bankruptcy Judge Robert J. Kressel [Docket No.l, Doc. No. 2]. Appellants challenge the court’s conversion of the consolidated bankruptcy cases [Bky 01-43354] of Debtors Health Risk Management, Inc., HRM Claim Management, Inc., Institute for Healthcare Quality, Inc., and Health Benefit Reinsurance, Inc. f/k/a Health Benefit Reinsurance of Michigan, Inc. (collectively, “Debtors”), from Chapter 11 to Chapter 7. This matter was taken under advisement on November 15, 2002, upon the filing of Appellants’ Reply Brief. For the reasons stated below, the Appeal is denied and the March 13, 2002 Order is affirmed.
II. BACKGROUND
Debtor Health Risk Management (“HRM”) is a parent corporation with several subsidiaries. On May 18, 2001, Ernst & Young resigned as HRM’s independent auditors after issuing a restatement of HRM’s payables to reflect a $6 million increase. After revelation of Ernst & Young’s mistake, Loop Corporation (“Loop”), owner of roughly 50% of HRM’s stock, notified HRM that it would not fund the remaining $3.1 million of financing under an agreement in which Loop had committed to prоvide $6.1 million to HRM. Debtors’ Disclosure Statement of Dec. 5, 2001, at 7 (“Disclosure Statement”) [Docket No. 1, Doc. No. 9]. As a result of liquidity problems, on August 7, 2001, HRM and three of its subsidiaries filed four Chapter 11 cases [Bky 01-43354; Bky 01-43355; Bky 01-43356; Bky 01-43357], now consolidated and jointly administered under Bky 01-43354.
By December 5, 2001, HRM had liquidated most of its assets and filed its Disclosure Statement and Plan of Liquidation. Disclosure Statement at 1. HRM had no ongoing business concerns. Its assets consisted of: 1) approximately $3.25 million in cash; 2) potential causes of actions against Ernst & Young, Loop, and directors and accountants of HRM; and 3) net operating losses (“NOLs”). The Official Committee of Unsecured Creditors (“Committee”), HRM, and Loop then entered into roughly two months of negotiations on how to proceed. From Sеptember, 2001, through January, 2002, expenses and fees of attorneys, accountants, and consultants totaled over $1.3 million, and no final agreement was reached. See Bky 01-43354 Docket Nos. 71, 100, 103, 111, 160, 180, 206, 207, 209, 213, 224, 225, 236, 266, and 267 (applications for fees and expenses).
By motion heard on February 6, 2002, the U.S. Trustee (“UST”) asked for the
On Monday, March 4, 2002, the Committee changed its position, filing a motion requesting that the case be converted to Chapter 7 immediately, or alternаtively that HRM’s assets be frozen pending the March 13 hearing. See Motion for Expedited Hearing and Immediate Convers on ¶¶ 17, 18 [Docket No. 1, Doc. No. 22], As a basis for its motion and exigency, the Committee alleged sudden management changes, stating that on or about February 28, 2002, all of the members of HRM’s board of directors resigned, with the exception of Andrew Jahelka (“Jahelka”). Id. ¶ 12. Jаhelka thus simultaneously held positions as the sole member of HRM’s board and as president of Loop, in addition to being a target of litigation in the Chapter 11 proceedings. Id. ¶ 14; but see Debtors’ Response to Committees’ Motion ¶3 [Docket No. 1, Doc. No. 24] (stating that the management shift was a minor change because there were only two directors prior to the resignаtion). Further, the Committee stated that Jahelka, as the sole director of HRM’s board, then appointed Leon Greenblatt (“Greenblatt”), the majority owner of Loop and holder of. ownership interests in other Appellants, as chief restructuring officer of HRM. Motion for Expedited Hearing and Immediate Conversion ¶¶ 14, 16. Stating that such changes placed Debtor HRM еntirely under the control of just the Appellant creditors, the Committee argued that the requested relief was necessary to prevent insider control and usurpation of Debtors’ assets. Id. ¶¶ 14, 16, 17. Judge Kressel heard the Committee’s arguments in favor of conversion on March 7, but continued the motion without decision until the previously scheduled hearing on March 13. Tr. of 3/7/02, at 13,1. 2.
At the Mаrch 13 hearing, Loop and HRM presented a plan on which the two had agreed. The Committee and the UST opposed this plan and requested that the case be converted to Chapter 7. Referencing his earlier findings and statement that unless all the parties had agreed to a final plan he would convert the case, Judge Kressel converted thе case to Chapter 7. Appellant: now contest this ruling.
Appellants raise six issues on appeal. All center around the interpretation of
III. DISCUSSION
A. Standard of Review
The District Court reviews the Bankruptcy Court’s factual findings for clear error and conclusions of law de novo.
In re Svoboda,
B.
Though some dispute exists as to the number of factors under which the court found cause to convert, the record shows Judge Kressel decided that cause had been established under the first statutory circumstance, continuing loss to or diminution of the estate coupled with no reasonable likelihood of rehabilitation.
See
The first ground requires a showing of both a continuing loss to the estate аnd the absence of a reasonable likelihood of rehabilitation.
a. Continuing Loss
Citing case law from other jurisdictions, Appellants complain that the court incorrectly considered the continuing administrative expenses to constitute diminution of the estate. In doing so, they assert, the court created a per se rule that there will be cause for conversion in every liquidating Chapter 11 case. However, within the Eighth Circuit, continuing loss can be demonstrated by a bare showing that the debtor suffered continuing losses or maintained a negative cash flow position after the entry of the order for relief.
Fort Knox,
b. Likelihood of Rehabilitation
Similarly, Judge Kressel’s conclusion that rehabilitation was not reasonаbly likely was not clearly erroneous.
See Minnesota Alpha,
The bankruptcy court’s findings on this point, based on the record before it, properly applied the precedent of this Circuit and evidenced consideration of multiple factors.
See Minnesota Alpha,
Even if the court’s application of these legal standards to the facts of this case implied a per se rule of cause, the court has. broad discretion in determining cause and is not limited to grounds specified in
c. The Best Interests of the Creditors
In addition to finding cause under any factor, the court must determine whether conversion or dismissal is in the bеst interests of the creditors.
C. Movant’s Burden of Proof
As another ground of attack, Appellants argue Judge Kressel improperly shifted the burden of proof from the movant, the UST, to the Appellants. The February 6, 2002 Transcript, however, specifically states the court’s recognition of thе movant’s burden and its conclusion that the movant had established cause.
See
Tr. of 2/6/02, at 37, 11. 8-15. Once cause has been shown, the judge may shift the burden of proof to the debtor to demonstrate that Chapter 11 would be better than Chapter 7.
Minnesota Alpha,
D. The Court’s Findings of Fact
Appellants next assert that the court did not make sufficient findings of fact. Particularly, Appellants challenge Judge Kressel’s basis for his сonclusion that conversion was in the best interests of the creditors.
An order of conversion does not require extensive findings of fact. Findings merely need to be sufficient to allow a reviewing court to determine the basis of decision.
In re Fossum,
After reading the Plan, Judge Kressel determined that it was overly complicated and unlikely to be confirmed. Tr. of 2/6/02, at 34, 11. 8-10, 35, 11. 6-8, 35-36, 11. 25-11. Considering the contents of the Plаn, the fact that several of the parties had already threatened, and the Committee had actually filed a motion to commence litigation against one another, along with the $1.3 million in legal, accounting and consulting expenses that had already accumulated, Judge Kressel found cause.
E.Movant’s Evidence
Appellants cite no authority for the proposition that the UST may not rely on evidence of the debtor’s circumstances already in the record to meet its burden of proof. In fact, in
Fort Knox,
the bankruptсy court stated that the trustee was relying on the debtor’s financial statements and proceeded to find continuing losses based on this evidence.
Fort Knox,
F. Failure to Give Proper Weight to the Value of the NOLs
Without supporting citation, Appellants aver that the court abused its discretion by giving insufficient weight to the value of the NOLs. This exercise of judgment was not an abuse of judicial discretion. Indeed, under the standards of this Circuit, it is not clear that Judge Kressel even needed to consider this evidence.
See e.g., Fort Knox,
G. Premature Conversion/Failure to Hear Evidence
As another basis of appeal, it is asserted that the court erroneously denied Appellants the opportunity at the March 13, 2002 hearing to present evidence regarding the new proposed plan. Motions for conversion do not require full evidentiary hearings but only an adequate record on which to determine thе relevant issues.
Sunflower Racing,
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY ORDERED that:
1. Appellants’ Appeal [Docket No. 1] is DENIED, and
2. The March 13, 2002 Order of Bankruptcy Judge Robert J. Kressel [Docket No. 1, Doc. 2; Bky 01-43354 Docket No. 296] is AFFIRMED.
LET JUDGMENT BE ENTERED ACCORDINGLY.