Currently pending before the Court is an appeal filed by Maura Lynch ("Debtor"), appearing pro se, from an order of the United States Bankruptcy Court for the Eastern District of New York ("Bankruptcy Court"), Judge Alan S. Trust, dated June 28, 2017, converting Debtor's Chapter 11 case to a Chapter 7 proceeding (the "Conversion Order"). (See Conversion Order, Docket Entry 1, at ECF pp. 3-10.) For the reasons that follow, Debtor's appeal is DISMISSED and the Bankruptcy Court's Conversion Order is AFFIRMED.
BACKGROUND
The Court assumes the parties' familiarity with the full facts and extensive procedural history of this case and summarizes only those facts and history pertinent to the pending appeal.
I. Bankruptcy Proceedings
On November 9, 2015, Debtor filed a voluntary petition in the Bankruptcy Court, seeking bankruptcy relief under Chapter 11 of the United States Code (the "Bankruptcy Code"). (Conversion Order at 3; see generally Pet., In re Lynch, Bankr. No. 15-74795, Docket Entry 1.) Debtor's bankruptcy filing followed a contentious
After filing for bankruptcy, Debtor operated as a Debtor in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. (Conversion Order at ECF p. 3.) On June 7, 2016, Debtor filed her first Chapter 11 plan of reorganization, to which a creditor, Wells Fargo Bank, N.A. ("Wells Fargo") objected on June 17, 2016.
During a September 14, 2016 hearing, Debtor requested additional time to seek confirmation of a plan and advised the Bankruptcy Court that she wished to mediate her disputes with Vaccaro.
On November 7, 2016, the Bankruptcy Court entered an order assigning to mediation all disputes between Debtor and Vaccaro, including disputes related to their pre-petition matrimonial action. (Conversion
On March 21, 2017, Vaccaro filed a letter stating that the mediation did not result in a settlement. (Conversion Order at ECF p. 6.) During a scheduled status conference on March 22, 2017, the Bankruptcy Court advised Debtor that the deadlines to obtain approval of a plan and disclosure statement would not be extended again. (Conversion Order at ECF p. 6.)
At a May 10, 2017 hearing, the Bankruptcy Court advised the parties that it did not appear that the plan Debtor had filed had a substantial likelihood of being confirmed, and that given the objections to the plan and disclosure statement it was not likely that Debtor would be able to meet the deadlines to obtain confirmation and approval of the disclosure statement. (Conversion Order at ECF p. 6.) The Bankruptcy Court also expressed concerns about the continued accrual of costs of administration and the deficit at which the estate was operating each month. (Conversion Order at ECF p. 6.) Therefore, the Bankruptcy Court issued an Order to Show Cause ("OSC") directing Debtor to appear for a hearing on May 22, 2017 to show cause why the case should not be converted to Chapter 7, or in the alternative, dismissed. (Conversion Order at ECF p. 6.) In accordance with that order, on May 17, 2017, Debtor filed an outline of an amended plan of reorganization. (Conversion Order at ECF p. 6.) Both Debtor and Vaccaro filed their separate responses to the OSC on May 19, 2017. (Conversion Order at ECF pp. 6-7.)
At the May 22, 2017 hearing, Debtor and Vaccaro reached a settlement and stated its terms on the record. (Conversion Order at ECF p. 7.) At the Bankruptcy Court's direction, two days after the hearing, Debtor filed a term sheet (the "Term Sheet") outlining the agreed upon settlement terms, including that Vaccaro would vote in favor of a plan of reorganization that contained the terms of the parties' settlement. (Conversion Order at ECF p. 7.)
On June 6, 2017, Debtor filed a motion pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure ("Rule 9019") seeking authorization and approval of the settlement. (Conversion Order at ECF p. 7.) Eight days later, on June 14, 2017, Debtor filed a notice of withdrawal of her Rule 9019 motion. (Conversion Order at ECF p. 7.) That same day, Debtor also filed an amended disclosure statement, a second amended Chapter 11 plan, a motion to approve the adequacy of the amended disclosure statement, and a motion to shorten the time for creditors to consider approval of the disclosure statement. (Conversion Order at ECF p. 7.)
On June 15, 2017, Vaccaro filed an objection to Debtor's motions arguing that
At the June 28, 2017 hearing, the Bankruptcy Court noted that it could not hear the Rule 9019 motion as Debtor had withdrawn it. (OSC Hr'g Tr., 41:16-17.) It also acknowledged that the amended plan did not incorporate the terms of the agreement Vaccaro and Debtor had reached. (OSC Hr'g Tr., 41:25-42:2.) Additionally, the United States Trustee ("Trustee") stated that Debtor's amended disclosure statement was not in a form which could be approved under
Therefore, "based on the long history of this case, given the inability of Debtor to obtain approval of a Disclosure Statement and confirmation of a Plan of Reorganization as required by prior Orders of this Court, given unreasonable delays by Debtor which are prejudicial to creditors, and, given the conversion of this case to chapter 7 is in the better interests of creditors than dismissal," the Bankruptcy Court ordered conversion of the case from Chapter 11 to Chapter 7 pursuant to Section 1112(b)(4)(A),(E) and (J). (Conversion Order at ECF pp. 8-9.) R. Kenneth Barnard ("Barnard") was appointed as the Chapter 7 trustee over Debtor's estate. (See Bankr. No. 15-74795, Docket Entry 458.)
II. Procedural History
Debtor filed a Notice of Appeal of the Conversion Order on July 13, 2017. (Notice Appeal, Docket Entry 1, at 1-2.) She filed her brief on February 13, 2018, (see Appellant's Br.), and Barnard as Chapter 7 Trustee of the estate filed a brief in opposition on March 15, 2018. (Barnard Opp., Docket Entry 15.) Debtor submitted her reply on March 30, 2018 (Appellant's Reply, Docket Entry 17.)
DISCUSSION
I. Legal Standard
This Court has jurisdiction to hear appeals from decisions of a bankruptcy court pursuant to
II. Issues on Appeal
The scope of this appeal is limited to the Bankruptcy Court's Conversion Order. Accordingly, the Court will disregard Debtor's arguments that were the subject of a prior appeal to this Court,
A. Conversion of the Chapter 11 Case
Section 1112 of the Bankruptcy Code (" Section 1112") governs the conversion or dismissal of a case filed under Chapter 11, and "is intended 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."
Here, the Bankruptcy Court found cause for conversion under three independent factors: (1) under Section 1112(b)(4)(A), based upon "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation"; (2) under Section 1112(b)(4)(E), based upon "failure to comply with an order of the court"; and (3) under Section 1112(b)(4)(J), based upon "failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court."
The evidence before the Bankruptcy Court clearly supports its decision. Among other things, the Bankruptcy Court found that Debtor initially failed to timely file a disclosure statement and plan of reorganization after it granted her numerous extensions of time in which to do so. (OSC Hr'g Tr., 36:17-37:4.) Further, it found that the disclosure statement and plan that Debtor eventually submitted on June 14, 2017 was unlikely to be approved. (OSC Hr'g Tr., 22:13-24.) Thus, the Bankruptcy Court noted that it would have been impossible for Debtor to obtain confirmation of the plan by the court-imposed deadline of July 24, 2017. (OSC Hr'g Tr., 23:12-17; 42:12-21.) Additionally, the Bankruptcy Court found that the plan submitted was not consistent with the settlement agreement Debtor had reached with Vaccaro.
The Trustee's findings further support the Bankruptcy Court's Conversion Order. At the June 28, 2017 hearing on the OSC, the Trustee noted that Debtor's proposed plan was not confirmable for numerous reasons, including because "[t]he disclosure statement is incapable of being determined by the Court as containing adequate
[I]n a year and a half, other than in essence what has been forced to occur based upon the Court's decisions, nothing else has really happened in the case. The issues revolving around the matrimonial case, the equitable distribution issues have not been resolved.... So overall, we've been a year and a half and very little has been accomplished. The creditors deserve to be paid. There are assets that exist that would provide sufficient monies to pay them ... So we believe that it's in the best interest of creditors to convert the case, allow a trustee to come in.... I do believe that the appointment of a Chapter 7 trustee and the conversion is more economically consistent than would be the appointment of a Chapter 11 operating trustee.
(OSC Hr'g Tr., 23:21-24:25.)
In light of the above, the Bankruptcy Court's order converting Debtor's Chapter 11 case to a Chapter 7 proceeding was not an abuse of discretion. The Bankruptcy Court ordered conversion principally because of its concern that the value of the estate was being diminished and the proposed reorganization plans appeared to have little chance of succeeding. (OSC Hr'g Tr., 30:16-31:7; 41:4-44:22.) The Bankruptcy Court emphasized that eighteen months into the bankruptcy case, "there [was] no agreement for repayment of or modification of the Wells Fargo mortgage nor does the estate have adequate unencumbered funds to secure those substantial arrears which now appear to exceed $700,000." (OSC Hr'g Tr., 41:11-15.) The Bankruptcy Court also noted that there were more creditors in the case that were not afforded the opportunity to object to or approve the Rule 9019 motion, as Debtor withdrew it. (OSC Hr'g Tr., 41:17-24.)
Therefore, in light of Debtor's inability to obtain approval of the disclosure statement and confirmation of a plan as required by prior court orders and Debtor's series of delays that were prejudicial to creditors, the Bankruptcy Court concluded that converting the case to Chapter 7, rather than dismissal, would be in the best interest of the creditors.
Under Section 1112(b) of the Bankruptcy Code, the court may convert a case only "after notice and a hearing."
Debtor argues that the Bankruptcy Court's Conversion Order should be overturned on the ground that she was denied notice and a hearing. (Appellant Br. at 33-35.) This argument rests upon a flawed factual premise inasmuch as the Bankruptcy Court provided notice and hearings to Debtor on multiple occasions. First, at a hearing held on July 13, 2016, the Bankruptcy Court warned Debtor that "[i]f [she] is not able to obtain confirmation of a plan by November 7th the Court will convert the case to Chapter 7 unless the debtor shows cause why even after being unable to obtain confirmation dismissal is better for her creditors." (July 13, 2016 Hr'g Tr., In re Lynch, Bankr. No. 15-74795, Docket Entry 268, 47:1-5.) Further, in three orders memorializing extended deadlines in which Debtor was to obtain approval of a disclosure statement and confirmation of a plan of reorganization, the Bankruptcy Court noted that "any unexcused failure to comply" with those deadlines "shall constitute cause for immediate conversion of the case to chapter 7 or dismissal." (July 16, 2016 Order, In re Lynch, Bankr. No. 15-74795, Docket Entry 257, at 2; Sept. 19, 2016 Am. Order, In re Lynch, Bankr. No. 15-74795, Docket Entry 284, at 2; Jan. 13, 2017 Am. Order, In re Lynch, Bankr. No. 15-74795, Docket Entry 317, at 2.) Additionally, at a hearing held on May 10, 2017, the Bankruptcy Court warned Debtor that it did not appear that the current plan had a substantial likelihood of being confirmed or that Debtor would likely meet the deadlines set out in the January 13, 2017 Order. (May 10, 2017 OSC, In re Lynch, Bankr. No. 15-74795, Docket Entry 408, at 5.) The Bankruptcy Court also "expressed concerns for the continued accrual of costs of administration and the deficit at which the estate [was] operating each month." (May 10, 2017 OSC, In re Lynch, Bankr. No. 15-74795, at 5.) That same day, the Bankruptcy Court entered an OSC, "to show cause why this case should not be converted to a case under Chapter 7, ... or in the alternative dismissed", and scheduled a hearing date for May 22, 2017. (Conversion Order at ECF p. 6.) Debtor subsequently filed a plan summary and response to the OSC, and Vaccaro filed a statement in support of the OSC. (Conversion Order at ECF p. 6.)
At the May 22, 2017 hearing, the Bankruptcy Court allowed the parties to mediate, which resulted in a settlement agreement memorialized on the record. (Conversion Order at ECF p. 7.) However, as noted, Debtor pulled out of that agreement by withdrawing her Rule 9019 motion on June 14, 2017. (Conversion Order at ECF pp. 7.) Finally, the Bankruptcy Court held a final hearing on the issue of conversion on June 28, 2017, when it noted that it had been "consistent and clear that if the debtor could not efficiently administer the estate by the deadlines previously set, the case
Thus, Debtor was provided with ample notice and numerous hearings prior to the conversion of her Chapter 11 case, which satisfied Section 1112(b)'s notice and hearing requirements.
CONCLUSION
The order appealed from is AFFIRMED and Debtor's appeal is DISMISSED. The Clerk of the Court is directed to mail a copy of this Order to the pro se Appellant and mark the case CLOSED.
SO ORDERED.
Notes
In the State Action, the court ordered equitable distribution of certain marital properties owned by Debtor and Vaccaro, including a property located at 43 Harbor Drive, Sag Harbor, New York ("Harbor Drive"). (See Lynch,
Wells Fargo is a secured creditor as the holder of a note and mortgage secured by property located at 24 Ninevah Place, Sag Harbor, New York. (See Wells Fargo Obj. to Plan Confirmation, Bankr. No. 15-74795, Docket Entry 282.)
Debtor also filed a federal civil rights action in this Court against Vaccaro, the Village of Sag Harbor, and another individual. (See Case No. 15-CV-4630), which all parties agreed to mediate. (Conversion Order at ECF p. 4.)
Specifically, Debtor argues that the Bankruptcy Court erred in its' prior orders excusing the receiver from compliance with Sections 543(a) and (b) of the Bankruptcy Code and approving the auction procedures for the sale of Harbor Drive, pursuant to Section 363 of the Bankruptcy Code. (Appellant Br. at 17-27.) Debtor contends that "the same deprivations and incorrect rulings which deprived Debtor of utilizing Bankruptcy Code sections 362 and 543, and the proper use of Code section 363, with regard to the Harbor property repeated throughout the rest of the case resulting in additional adverse rulings that prevented Debtor from having any fair opportunity of reorganization, and led to the Bankruptcy Court's erroneous decision to convert her case to one under Chapter 7." (Appellant's Reply at 16.) Thus, Debtor contends that it was the Bankruptcy Court's own mishandling of the Chapter 11 case that led to conversion. However, these issues were fully adjudicated on a prior appeal to this Court, see Lynch,
These claims are not properly before this Court. (See Appellant's Br. at 15-17.) As Judge Bianco emphasized in his dismissal of Debtor's prior appeal to this Court, "there is a long tradition of federal abstention in cases pertaining to family affairs .... In concert with this principle, this Court, like the Bankruptcy Court, refuses [Debtor's] invitation to impugn the integrity of the State Court proceedings." Lynch,
In fact, the Bankruptcy Court had granted a final extension to Debtor based on her agreement to mediate with Vaccaro. (See Conversion Order at ECF pp. 4-5.) However, after reaching a settlement with Vaccaro and stating its terms on the record, Debtor pulled out of that agreement by withdrawing her Rule 9019 motion and changing the terms of her proposed reorganization plan. (See Conversion Order at ECF p. 7.)
Furthermore, at the time of the conversion hearing, Debtor attempted to terminate her third set of bankruptcy counsel. (See OSC Hr'g Tr., 8:14-25.) The Bankruptcy Court noted that the estate had already incurred $400,000 in fees for the first two counsel who were terminated by Debtor. (OSC Hr'g Tr., 44:3-5.) Emphasizing that Bankruptcy counsel represent the estate, not Debtor individually, the Bankruptcy Court expressed its reluctance to allow Debtor to terminate counsel and hire a fourth set of Chapter 11 counsel. (OSC Hr'g Tr., 43:9-44:13.)
Barnard contends that not only was the Conversion Order properly granted, but also that the doctrine of equitable mootness precludes Debtor's appeal since Debtor failed to seek or obtain a stay of the administration of her estate pending the instant appeal, and the Trustee has significantly intervened in the administration of the estate. (Bernard Opp. at 14-17.) However, the Court need not address the issue of equitable mootness as it finds that the Bankruptcy Court's Conversion Order was not an abuse of discretion.