Unsecured Creditors Committee v. United States Bankruptcy Court for the District of New MexicoUnsecured Creditors Committee v. United States Bankruptcy Court for the District of New Mexico
Appeal from the United States Bankruptcy Court for the District of New Mexico
Debbie E. Green (Marcus A. Helt and Stacy Obenhaus with her on the brief) of Foley & Lardner LLP, Dallas, Texas for Appellant.
Thomas D. Walker (Chris W. Pierce with him on the brief) of Walker Law PC, Albuquerque, New Mexico for Appellee Unsecured Creditors Committee.
Paul M. Fish (Spencer L. Edelman with him on the brief) of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, New Mexico for Appellees Louis Abruzzo and Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C.
James A. Askew of Askew & White, LLC, Albuquerque, New Mexico for Appellee Kevin Yearout.
Before ROMERO, Chief Judge, SOMERS, and PARKER,
SOMERS, Bankruptcy Judge.
A debtor, understandably, wants to choose the chapter in which he proceeds under the Bankruptcy Code. And sometimes things change, requiring a debtor to change his or her initial choice. Debtors talk about an “absolute right to convert” giving them this choice to convert, and generally, bankruptcy courts are happy to grant a debtor a cоnversion. But are there limits? When is an “absolute right” to convert not absolute?
The Supreme Court answered the question when considering conversion from chapter 7 to 13 under
We affirm the decision of the Bankruptcy Court denying Debtor‘s motion to convert his chapter 11 case to chapter 7.
I. Facts5
Many years ago, Benjamin and Pat Abruzzo developed a ski complex and tramway in the Sandia Mountains in New Mexico under the Alvarado Realty Company
(ARCO). The elder Abruzzos died in 1985, and were survived by their four children: Louis, Benny, Richard, and Mary. The children took over management of ARCO.
Debtor married Mary Pat Abruzzo Kearney in 1988. Shortly after her marriage, Mary executed a will that placed her share of the stock in ARCO that she owned during her life in two trusts (Trust B and Trust C). Mary then died in 1997. At her death, Mary owned approximately 18.5 percent of the stock interest in ARCO, which is now managed by Mary‘s brothers Louis and Benjamin.6
Mary‘s will named Debtor as the life beneficiary of the two trusts at issue and named Debtor and her brothers as trustees;7 Mary‘s brothers (or their children) are the residual beneficiaries of the two trusts. Mary‘s will contains a spendthrift clause protecting its corpus from Debtor‘s creditors, and Debtоr‘s interest in the trusts is not part of the bankruptcy estate. Since Mary‘s death in 1997, Debtor has received distributions of about $16 million from the trusts, all generated by ARCO‘s successful business ventures.8 Debtor has no income other than from these trusts.
- In violation of a confidentiality order in the state court action, Debtor disclosed confidential ARCO information.11
- After giving direct testimony at trial, Debtor failed to appear for cross-examination, and proffered a medical excuse that was never substantiated.12
- The state court entered monetary sanctions against Debtor in April 2017, based оn findings that Debtor was an individual who “bears no allegiance to the truth, but who will say whatever he thinks will achieve his goals,” Debtor had “little or no credibility,” Debtor “repeatedly exhibited bad faith non-compliance with his discovery obligations,” and Debtor‘s conduct in the state court was “an affront to this particular Court and to the entire judicial process.”13
- Debtor repeatedly violated orders of the state court.14
- Debtor did not participate in mediation at the state court in good faith.15
- During the trial on the merits of Debtor‘s claims, the state court concluded Debtor had “significant credibility issues.”16
Damages were awarded by the state court against Debtor, and the additional matter of the appointment of a successor trustee was to be determined at a separate hearing on September 5, 2017. (By this point, Debtor had resigned as co-trustee.)
Before that September 5, 2017 state court hearing occurred, on September 1,
Debtor battled with the Abruzzos and the Unsecured Creditors Committee early and often, and little progress was made in his reorganization.19 The Bankruptcy Court ultimately denied Debtor‘s request for a second extension of the exclusivity period to file his own plan (and reconsideration thereof) in June 2018.20 A proposed plan by the Unsecured Creditors Committee (the “UCC plan“) required the Bankruptcy Court to grant stay relief for a return to state court to allow that court to separate Debtor from ARCO and the trusts.21 The UCC plan provided that the Abruzzos would sell the trusts’
ARCO stock back to ARCO for about $12 million, and would pay $3 million to the bankruptcy estate in exchange for releases of claims against the trusts, the Abruzzos, ARCO, and related parties. As a result, the state court had to approve trust modifications necessary to complete these transactions.22
The state court set a hearing for these issues on October 3, 2018. The day before the hearing, Debtor did two things: (1) he removed the state court action to the United States District Court for the District of New Mexico, claiming diversity jurisdiction, and (2) he filed a new lawsuit against the trustees in the United States District Court for the District of Nevada, again claiming diversity of citizenship, and alleging Debtor was a citizen of Nevada.23 Multiple courts concluded Debtor‘s actions were “frivolous,”24 a “sham litigation tactic,”25 and dubious.26 The Bankruptcy
Debtor engaged in “questionable and fruitless attempts to remove the case”27 from the state court‘s jurisdiction. The state court action was remanded to the state court after being transferred to the Bankruptcy Court,28 and the status of the Nevada action is not apparent from the record.
Ultimately, the state court approved the trust modifications and the ARCO share buyback on October 31, 2018.29 After a two-day trial on the confirmability of the UCC plan, the Bankruptcy Court confirmed the UCC plan on February 28, 2019.30 The Bankruptcy Court noted in its written opinion on confirmation of the UCC plan multiple “questionable or improper”31 actions by the Debtor, some of which have already been mentioned herein, and additionally includеd:
- Debtor likely spearheading a plan to attempt to purchase the claims of members of the Unsecured Creditors Committee.32
- Falsely claiming Mary was a Nevada resident when she died.33
- Failing and refusing to pay professional fees incurred in the Bankruptcy Court, and then responding to the Bankruptcy Court‘s order to pay fees by emptying his bank account.34
- Failing to alter his “expensive lifestyle or spending habits” while a chapter 11 bankruptcy debtor.35
- Paying his home mortgage in violation of the automatic stay.36
- Changing his position about the value of his intellectual property.37
The Bankruptcy Court also made specific findings about Debtor‘s reorganization, and the likely success thereof, finding that Debtor had a “mistaken belief that only he should be allowed to control the reorganization process, whatever the cost, delay, or acceptability of payment proposals.”38 The Bankruptcy Court noted that Debtor‘s
support obligation creditor, “substantially increasing [Debtor‘s] ability to pay alimony and child support.”42 And finally, the Bankruptcy Court concluded the UCC plan was in Debtor‘s best interest, because his debts of more than $8.6 million, including priority tax claims, would be paid off.43
The effective date of the confirmed plan is not until ten days after the confirmation order becomes final and additional substantive steps are taken.44 Debtor appealed the Bankruptcy Court‘s plan confirmation order to this Court,45 where it was upheld,46 and to the Tenth Circuit Court of Appeals, where the decision was again affirmed,47 but the appeal time from that most recent decision has not run. Until the UCC plan is effectuated, the Bankruptcy Court entered an order permitting the trusts to make estimated tax payments on Debtor‘s behalf dirеctly to taxing authorities, noting that in the past in his chapter 11 case, Debtor had failed to make payments as directed by the Court.48
On August 27, 2019, an indictment was filed against Debtor charging him with conspiring to commit fraud on the Internal Revenue Service and making and subscribing false income tax returns.49 The state court referred Debtor to the IRS in 2017 based on evidence from the trial there that showed Debtor had not “properly reported his income for many years, had unilaterally altered tax forms issued
On September 16, 2019, Debtor signed an engаgement letter with Attorney Amy Sirignano. Debtor then filed in his bankruptcy case an application to employ Attorney Sirignano as his criminal defense counsel, which the Bankruptcy Court ultimately denied in October 2019. The Bankruptcy Court instructed Debtor that if he wished to pay for his own attorney, then he “must use non-estate assets at his disposal, if any he has.”54 Attorney Sirignano entered her appearance in Debtor‘s criminal case on January 7, 2020.
Four months after the denial of his motion to employ Attorney Sirignano, in February 2020, Debtor moved to convert his chapter 11 case to chapter 7.55 In that motion, despite having somehow already employed Attorney Sirignano, Debtor argued that he had no non-estate assets to pay a criminal attorney, and therefore had “no option but to convert this Chapter 11 case to Chapter 7.”56 Debtor argued he had an absolute right to convert under
The Bankruptcy Court entered an order denying Debtor‘s motion to convert on June 18, 2020. In its Opinion, the Bankruptcy Court made factual findings that Attorney Sirignano had been actively defending Debtor in his criminal case since her appearance therein, and though the court had no evidence as to how she had been paid to date, there was no evidence she was “concerned about or unhappy with her compensation arrangements” with Debtor.59 The Bankruptcy Court found that Debtor‘s “professed reason for conversion [was] a pretext,” and that the real desire to convert was an effort to “cancel” the confirmed UCC plan.60
The Bankruptcy Court then made multiple, alternate, legal conclusions. First, the Bankruptcy Court discussed the Supreme Court‘s decision in Marrama.61 The Bankruptcy Court concluded Debtor was a bad faith debtor, and also would be subject to immediate reconversion under
Because of the multiple motions to reconvert Debtor‘s case if his motion to convert was granted, Debtor had reasonable notice of the issue, and his argument to the contrary is rejected. See, e.g., Matter of Texas Extrusion Corp., 844 F.2d 1142, 1161 (5th Cir. 1988) (concluding that even one-day‘s notice for hearing on reconversion was reasonable when same lawyers had been involved throughout and were knowledgeable of all facts). The first pleading seeking reconversion to chapter 11 if Debtor‘s motion to convert to chapter 7 was granted was served on Debtor and all creditors fourteen days before the hearing on the motion to convert. Victor P. Kearney‘s Omnibus Response to the Objections to Debtor‘s Motion to Convert Case from Chapter 11 to Chapter 7, in Appellant‘s App. at 4593.
should impact a debtor‘s right to conversion.63 Finally, the Bankruptcy Court rejected Debtor‘s argument that his Sixth Amendment rights were impacted.64
II. Jurisdiction and Standard of Review
Debtor appeals the denial of his motion to convert. An order denying a motion to convert is generally an interlocutory order,65 but this Court has jurisdiction to hear appeals from interlocutory orders “with leave of the court.”66 Leave to appeal was granted by a prior panel of this Court.67 Debtor then sought leave to file a direct appeal to the Tenth Circuit Court of Appeals, but that request was denied.68
We will review the Bankruptcy Court‘s interpretation of the Code de novo.69 Under de novo review, we make an independent determination of each question of law.70 We will review the Bankruptcy Court‘s findings of fact for clear error,71 and
discretionary decisions concerning conversion will be reviewed for abuse of discretion.72 Under clear error review, “[a]finding is not clearly erroneous unless ‘it is without factual support in the record or if, after reviewing all of the evidence, we are left with the definite and firm conviction that a mistake has been made.‘”73 “Under the abuse of discretion standard[,] ‘a trial court‘s decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.‘”74 As with the clearly erroneous standard, when applying the abuse of discretion standard, deference is given to the Bankruptcy Court “‘because of its first-hand ability to view the witness or evidence and assess credibility and probative value.‘”75
III. Analysis
A. The So-Called “Absolute Right” to Convert
Conversion or dismissal of a chapter 11 case is governed by
(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title unless--
(1) the debtor is not a debtor in possession;
(2) the case originally was commenced as an involuntary case under this chapter; or
(3) the case was converted to a case under this chapter other than on the debtor‘s request. . . .
(f) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.76
Despite arguing that he had an absolute right to convert his case, Debtor does acknowledge that
First, the initial three limits on conversion are found in
Debtor‘s case contains language delaying its effective date until ten days after the confirmation order becomes final, documents, actions, and agreements necessary to implement the UCC plan have been executed, closing on the redemption of the ARCO stock has occurred, and the trust payment has been received.80 As noted above, Debtor appealed the Bankruptcy Court‘s plan confirmation order.81 That decision was upheld on appeal to this court,82 and to the Tenth Circuit Court of Appeals.83 The appeal time has not run on a potential further appeal to the United States Supreme Court, and regardless, the additional actions concerning execution of necessary documents, redemption of the ARCO stock, and payment have not occurred.
creditor body pursuant to
to convert to chapter 7 under
Second, and the matter at issue in this appeal, under the express dictate of
Subsection (f) of
Like
appeal is constitutionally moot if events have taken place during the pendency of the appeal that make it impossible for the court to grant any effectual relief).
| | Section 1112:92 |
|---|---|
| (a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable. | (a) The debtor may convert a case under this chapter to a case under chapter 7 of this title unless-- (1) the debtor is not a debtor in possession; (2) the case originally was commenced as an involuntary case under this chapter; or (3) the case was converted to а case under this chapter other than on the debtor‘s request. |
| (d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter. | (f) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter. |
The Supreme Court rejected the debtor‘s argument that he had an absolute right to convert, noting that the right to convert under subsection (a) of
prepetition bad-faith conduct, the Supreme Court concluded that was “implicitly authorized” by the use of a “for cause” standard in
Again, the statutory framework analyzed in Marrama is very similar to the governing statutory sections herein. The debtor in Marrama sought to convert his case to chapter 13, and the Supreme Court
We conclude that Marrama controls: there is no “absolute right to convert”98 a chapter 11 case to chapter 7, subsection (f) of
anomaly”99 of conversion before taking that step, but can instead deny conversion on that basis.
Debtor argues that the subsequent Supreme Court case Law v. Siegel provides that because
Importantly, however, the Supreme Court in Law addressed its decision in Marrama, and concluded it had no relevance to the situation in Law.103 In Marrama, after reaching its conclusion that
sanction ‘abusive litigation practices‘”105 might also provide an adequate justification for denying a motion to convert a bad faith debtor from chapter 7 to chapter 13. But the Supreme Court explained in Law that Marrama was really just saying that if an express action is authorized by the Code (i.e., the dismissal or conversion of a debtor‘s case), then a bankruptcy court may be able to use its
We know that
We acknowledge that, presumably knowing an appeal would follow, the Bankruptcy Court rested its denial of Debtor‘s motion to convert on multiple independent bases, namely, that (1) Debtor engaged in bad faith and was not entitled to be a debtor under chapter 7, (2) Debtor‘s case would immediately be reconverted under
factual finding on the record before this Court.107
But that is not the question the Bankruptcy Court or this court should be asking. We affirm the Bankruptcy Court‘s denial of Debtor‘s motion to convert because it also followed the exact analysis required by Marrama and Law. It said that under
We also acknowledge that there are cases holding that a bankruptcy court may not deny conversion under
individual chapter 11 is the same as conversion to chapter 13 from chapter 7. What we are saying is that bankruptcy courts are directed by
We conclude that the Bankruptcy Court correctly applied the provisions of the Code. Yes, the Bankruptcy Court found Debtor had engaged in significant bad faith, and we are not saying that finding should not be considered at all. We conclude that as long as a bankruptcy court correctly applies a Code provision limiting a debtor‘s ability to proceed under the chapter they seek to convert, then that Debtor is ineligible to be a debtor under that chapter, and both Marrama and Law v. Siegel bless this course of action.
B. Application of the Statutory Directive in this Case
As stated throughout, the Bankruptcy Court ruled that Debtor‘s case would be immediately reconverted under
Subsection (b) permits the court, on request of a party in interest and after notice and a hearing, to convert the case to chapter 11 at any time. The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.110
A bankruptcy court has broad discretion to make conversion decisions under
Taking this guidance, a bankruptcy court must ask what will most benefit
Appeals courts have blessed various considerations for this analysis, including the viability of a chapter 11 plan,113 “‘anything relevant that would further the goals of the Bankruptcy Code,‘”114 but especially a debtor‘s ability to pay,115 weighing of the benefit to each of the parties,116 and a movant‘s “questionable” motives to “interfere with or impede” a chapter 11 reorganization.117
In this case, the Bankruptcy Court did not abuse its discretion in concluding it would immediately reconvert Debtor‘s case under
chosen counsel,120 the motion to convert was filed shortly after a panel of this Court affirmed the Bankruptcy Court‘s order confirming the UCC plan,121 and the motion to convert was filed nearly simultaneously with a motion to dismiss filed by Debtor‘s ex-wife, which the Bankruptcy Court found was itself likely an attempt to aid Debtor in defeating the UCC plan.122 The Bankruptcy Court also concluded that the UCC plan was the best chance for creditors ever to be paid, noting that a chapter 7 trusteе could not obtain the infusion of cash from the Abruzzos that the confirmed chapter
The Bankruptcy Court concluded: “Debtor‘s conduct in this case makes him ineligible to be a chapter 7 debtor, so the motion to convert should be denied.”126
Debtor argues that the findings from the Bankruptcy Court rested on pure litigation tactics, and should not have been considered. Again, we find no error in the Bankruptcy Court‘s judgment. We give deference to the Bankruptcy Court here, as we should. It is the Bankruptcy Court that has had the first-hand experience with Debtor, the creditors, and all parties in interest. The Bankruptcy Court did not consider each of Debtor‘s litigation tactics in a vacuum. Rather, it issued an inordinate number of opinions in Debtor‘s bankruptcy case, assessed Debtor and his motives, creditors and their motives, the documentary evidence, the credibility of every witness, and so much more. The Bankruptcy Court relied on the totality of the circumstances—the knowledge it gained from the over thirty-three months this case had been on file when it issued its opinion on Debtor‘s motion to convert, not to mention the two-day trial on confirmation of the UCC plan, and the countless other hearings in this case.
As noted above, the Bankruptcy Court alternately held that a chapter 11 debtor with a confirmed creditor plan loses the right to convert, even if he remained a debtor in possession, because allowing a debtor to convert after confirmation of a plan would “severely undermine the potent creditor threat of a competing plan and tilt the playing field unfairly in the debtor‘s favor,”127 citing In re Pero Brothers Farms, Inc.,128 and In re West Pointe Ltd. Partnership
in support of this so-called “confirmed creditor plan exception” to conversion.130 We agree that a chapter 11 debtor with a confirmed creditor plan is less likely able to convince a court that conversion will “most inure to the benefit of all parties,”131 but believe that a confirmed creditor plan should be just one factor bankruptcy courts look at to determine
Finally, we reject Debtor‘s argument that the Bankruptcy Court abused its discretion on his motion to convert, by not reassessing the arguments Debtor previously made as to his Sixth Amendment right to counsel for his criminal indictment. Debtor‘s arguments on the Sixth Amendment issue were decided by the Bankruptcy Court in a thorough opinion rejecting his application to employ counsel with estate funds.132 That decision was not appealed and is final. Regardless, it was not an abuse of discretion to reject these arguments in light of the other factors considered by the Bankruptcy Court in this matter.
IV. Conclusion
For the foregoing reasons, we affirm the decision of the Bankruptcy Court.