SUNNYLAND FARMS, INC.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
SUNNYLAND FARMS, INC., 	Case No. 14-10231 TA
Debtor.
MEMORANDUM OPINION
Before the Court is Petitioning Creditors’ Motion to Convert Debtor’s Chapter 11 Case to
a Chapter 7 Case Pursuant to 11 U.S.C. § 1112(b)1 (the “Motion”). 	The Court held a final
hearing on the Motion on August 21, 2014 and took the matter under advisement.2 For the
reasons set forth below, the Court will deny the motion.
I. 	FACTS
The Court finds the following facts:3
The Petitioning Creditors commenced this case by filing an involuntary petition for
Chapter 7 relief on January 30, 2014. 	Debtor moved to convert the case to a voluntary case
under Chapter 11 on April 20, 2014. 	The Court entered an order granting Debtor’s motion for
conversion on May 8, 2014.
Sunnyland Farms Incorporated (“Debtor”) is a New Mexico corporation that owns and
operated a hydroponic greenhouse complex (the “Greenhouse”) in Grants, New Mexico. 	The
1 Unless otherwise indicated, all statutory reference are to 11 U.S.C..
2 Compelling circumstances prevented the court from meeting the 15-day time limit for decision
on the Motion outlined in § 1112(b)(3).
3 In making these findings, the Court took judicial notice of the docket. See St. Louis Baptist
Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir.1979) (holding that a
court may, sua sponte, take judicial notice of its docket); In re Mailman Steam Carpet Cleaning
Corp., 196 F.3d 1, 8 (1st Cir.1999) (citing Fed.R.Evid. 201 and concluding that “[t]he
bankruptcy court appropriately took judicial notice of its own docket”); In re Quade, 496 B.R.
520, 524 (Bankr.N.D.Ill.2013) (a “bankruptcy court [is authorized] ... to take judicial notice of its
own docket”).
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 1 of 10

Greenhouse consists of about 70 acres of land, improved with a 19.7 acre greenhouse and a
70,000 square foot warehouse.
A similar greenhouse in Estancia, New Mexico, also owned by the Debtor, was destroyed
by fire in 2003. 	Debtor sued the Central New Mexico Electrical Cooperative (“CNMEC”) for
breach of contract and tort, alleging that CNMEC wrongfully shut off electricity to the Estancia
greenhouse, which prevented Debtor from pumping the water it needed to fight the fire. 	After
many years of litigation, the Debtor received payment of about $5.45 million in cash, which
currently is held in a state court registry.
The only crop ever produced in the Greenhouse was a crop of tomatoes produced in
2005. Currently, the Greenhouse is in complete disrepair, apparently because the Debtor lacked
funds necessary to make repairs, maintain or secure the Greenhouse, or operate. 	The roof has
partially collapsed and the electrical and other systems have been stolen.
Debtor’s Chapter 11 case has been in progress for less than four months. Debtor filed its
statements and schedules on May 21, 2014; it scheduled assets totaling $5,815,006.71 and
liabilities totaling $41,890,322.38.
Debtor values the Greenhouse at $365,006.71. The low value is the result of a collapsed
roof, substantial vandalism and theft loss, and lack of maintenance. Debtor asserts that the value
of the Greenhouse could not fall any lower and would not be affected by future damage to the
improvements.
Debtor lists secured liabilities totaling $41,145,572.38. 	The largest secured creditor,
1670083 Ontario Inc. (“Ontario”) has a lien on all of Debtor’s assets, securing a debt of about
$7.9 million. Ontario purchased the claim from Farm Credit Bank.
-2-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 2 of 10

Debtor owes approximately $1.7 million in federal and state taxes. The Internal Revenue
Service (“IRS”) filed a claim in the amount of $1,322,070.45, of which $459,273.27 is allegedly
entitled to priority. 	The New Mexico Taxation & Revenue Department (“NMTRD”) filed an
amended proof of claim in the amount of $43,058.16, of which $1,145.21 is allegedly entitled to
priority. 	Debtor also owes about $2.3 million in real property taxes, interest, and late fees to
Cibola County.
There is no current insurance on the Greenhouse. Because of a lack of funds, Debtor has
not maintained insurance since 2010.
Debtor has timely filed its monthly operating reports (“MORs”) since the case was
converted to Chapter 11.
Debtor is current on post-petition taxes, since none have come due since conversion to
Chapter 11. Post-petition property taxes will be due and payable in November, 2014.
The “exclusivity” period under § 1121(c)(2) expired September 5, 2014. On that date the
Debtor filed a plan of reorganization and a disclosure statement.
Unless Ontario’s lien is subordinated or set aside, there would be no funds available for
junior secured creditors, priority creditors, or general unsecured creditors if the case were
converted to Chapter 7. 	Petitioning Creditors argued at trial that there may be grounds to
equitably subordinate Ontario’s secured claim because John Stockwell (“Stockwell”), Debtor’s
principal and sole shareholder, sought at one point an option to purchase Ontario’s claim for a
nominal sum. Stockwell testified that he had initially requested such an option, but later dropped
the request on advice of counsel. Stockwell never obtained such an option. There is no evidence
that Ontario would have agreed to such an option, nor that any creditors other than Ontario
would have been harmed had such an option been granted.
-3-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 3 of 10

The following creditors expressed a preference regarding conversion of the Chapter 11
case:4
Creditor 	Type of claim 	Approximate amount
of asserted claim
Preference
John Wright 	Secured – Services
Performed
$149,503.42 	Chapter 11
Bevo Farms 	Secured 	$350,000 	Chapter 11
Carver Oil
Company
Administrative &
Unsecured -
Equipment Lease
Unknown 	Chapter 11
JeremyStockwell 	Unsecured –
Company Expenses
$184,000.00 	Chapter 11
Lynn Stockwell 	Secured 	$12,797,282.00 	Chapter 11
Albuquerque
Packaging Corp.
Secured – Judgment
Lien
$143,829.19 	Chapter 11
Kenneth Lujan –
DNA Hogs
Secured 	$150,000 	Chapter 11
Patricia Tucker 	Secured – Legal
Fees
$30,000.00 	Chapter 11
Jenna McKie 	Unsecured –
Company Expenses
$16,400.00 	Chapter 11
Petitioning Creditors, in contrast, prefer immediate conversion to Chapter 7.
II. 	DISCUSSION
A. 	§ 1112(b): Conversion for “Cause.”
Conversion of a Chapter 11 case is governed by § 1112(b).5 The Court is generally
required to dismiss or convert a case under § 1112(b) upon a finding of “cause.”
Section 1112(b)(4) contains a nonexclusive list of “causes.” See In re Frieouf, 938 F.2d
1099, 1102 (10th Cir. 1991) (noting that the list contained in § 1112(b)(4) is nonexhaustive).
4 The chart reflects claims on file and representations made by the creditors either who appeared
at the final hearing on the Motion or expressed their opinion via emails that were admitted into
evidence at the final hearing on the Motion. 	These findings do not establish conclusively the
existence, or extent, of any creditor’s allowable claim. 	Creditors may hold claims not listed in
this chart.
5 See § 1112(b)(1) (“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 ...”).
-4-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 4 of 10

Whether “cause” exists to convert a case is a threshold issue. 	In re Melendez Concrete Inc., No.
11-09-12334 JA, 2009 WL 2997920, at *3 (Bankr. D. N.M. 2009). 	If cause is established, the
Court then considers whether “conversion or dismissal . . . [is in the] best interest of creditors
and the estate.” In re American Capital Equipment, LLC, 688 F.3d 145, 161 (3rd Cir. 2012).
The party requesting dismissal or conversion under § 1112(b) bears the burden of
establishing cause by a preponderance of the evidence. 	In re ARS Analytical, LLC, 433 B.R.
848, 861 (Bankr. D.N.M. 2010). In analyzing whether cause for conversion has been established
under § 1112(b)(4), the Court applies a materiality standard to the enumerated grounds that
constitute cause. In re Melendez Concrete Inc., 2009 WL 2997920, at *5.
Petitioning Creditors assert that cause exists to convert the case under subsections
(b)(4)(A) – continuing diminution in value of the estate; (b)(4)(B) – gross mismanagement;
(b)(4)(C) – failure to maintain insurance; and (b)(4)(I) – failure to pay taxes.
1. 	Substantial Loss or Diminution of the Estate and Absence of Reasonable
Likelihood of Rehabilitation Under § 1112(b)(4)(A). 	Petitioning Creditors assert under §
1112(b)(4)(A) that there is a “substantial or continuing loss to or diminution of the estate and the
absence of a reasonable likelihood of rehabilitation.” 	This argument is not supported by the
current evidence in the record. 	Debtor’s case has been pending for four months. 	Debtor is not
engaged in business operations and has no post-petition income. 	Debtor has filed a plan of
reorganization and a disclosure statement.
Petitioning Creditors made very little effort to present evidence in support of their
position. 	They called no witnesses and submitted as exhibits only the Debtor’s schedules and
monthly operating reports. At the Court insistence Debtor’s counsel called Mr. Stockwell to the
stand and the Petitioning Creditors cross-examined him, but that is all.
-5-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 5 of 10

There is no evidence that the bankruptcy estate, consisting only of the Greenhouse and
the Funds, has lost value since the Chapter 11 case began. Further, there is no evidence that the
estate would diminish if the case remains in Chapter 11. Petitioning Creditors pointed to a lack
of insurance. That is a real concern, but since there is no equity in the Greenhouse for the estate,
any further damage to the Greenhouse would hurt only Ontario. 	Ontario is not seeking
conversion, and apparently is willing to let Debtor attempt to reorganize. The Court finds that, at
least at this time, cause does not exist under § 1112(b)(4)(A).
2. 	Gross Mismanagement of the Estate Under § 1112(b)(4)(B). 	Petitioning
Creditors assert that cause to convert exists under § 1112(b)(4)(B) based on Debtor’s gross
mismanagement of the estate. The alleged gross mismanagement must occur post-petition. See
In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012) (pre-petition
gross mismanagement is not cause under § 1112(b)(4)(B) because the estate is a post-petition
entity); In re First Assured Warranty Corp., 383 B.R. 502, 544 (Bankr. D. Colo. 2008), citing In
re Rey, 2006 WL 2457435, *5 (Bankr. N.D. Ill. 2006).
There is no evidence of mismanagement, let alone gross mismanagement, post-petition.
Since bankruptcy proceedings began, Debtor has timely filed all monthly operating reports and
has drafted and filed a plan of reorganization. Prudent management dictates that insurance be in
place if possible, but here the estate has no money with which to pay insurance premiums. The
Court finds that Petitioning Creditors have failed to prove post-petition gross mismanagement as
specified in § (b)(4)(B).
3. 	Failure 	to 	Maintain 	Insurance 	Under 	§ 	1112(b)(4)(C). 	Petitioning
Creditors assert that cause to convert exists under § 1112 (b)(4)(C) based on Debtor’s failure to
maintain insurance, posing a risk to the estate or the public. 	There is no dispute that Debtor
-6-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 6 of 10

currently has no insurance of any kind. 	However, Petitioning Creditors presented no evidence
that the lack of insurance poses a material risk to the estate. Debtor’s uncontroverted testimony
is that the Greenhouse’s value is as low as it can possibly go based on physical condition.
Furthermore, as set forth above any risk of further loss to the Greenhouse is borne by Ontario,
not the estate, because there is no equity in the property.
There also is no evidence that the lack of insurance poses a risk to the public. If Debtor
were an operating business, liability insurance in all likelihood would be required for the benefit
of the Debtor and the public. 	Lacking operations, the only potential harm would be to
trespassers and thieves. 	Petitioning Creditors presented no evidence that the Greenhouse is an
attractive nuisance or otherwise a danger to ordinary citizens. 	The Court is not happy that the
Debtor cannot afford to purchase reasonable insurance, and will not allow the lack of insurance
to go on any longer than necessary to see if Debtor’s plan of reorganization is confirmable and
has sufficient creditor support. Nevertheless, the Court finds that the current situation does not,
at this point in the case, constitute cause under § 1112(b)(4)(C).
4. 	Failure to Pay Taxes Under § 1112(b)(4)(I). Finally, Petitioning Creditors
assert that cause exists to convert based on Debtor’s “failure to timely pay taxes owed after the
date of the order for relief.” The Code plainly refers to taxes that become due after the date that
the order for relief is entered. Unpaid prepetition taxes are not relevant in the cause analysis.
Debtor owes significant taxes to the IRS and the NMTRD. 	Petitioning Creditors
presented no evidence, however, that any post-petition taxes have gone unpaid. Since Debtor is
not operating, the only taxes accruing post-petition likely are real property taxes. Those are paid
twice a year, in April and November. See N.M.S.A. § 7-38-38. Thus, Debtor’s first post-petition
property tax bill will be due in about two months. 	Debtor’s plan of reorganization addresses
-7-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 7 of 10

payment of all taxes owed. The Court finds no failure to pay post-petition taxes and therefore no
cause to convert under § 1112 (b)(4)(I).
B. 	Best Interest of Creditors and the Estate.
The Court has reviewed the status of the case and the interests of secured and general
unsecured creditors, and finds that conversion or dismissal would not benefit unsecured creditors
at this time.
Debtor has scheduled liabilities of more than $41.89 million and assets of $5.8 million.
The first position secured creditor, Ontario, filed a proof of claim for $7.9 million. If the estate
were liquidated under Chapter 7, Ontario’s secured claim would prevent payment of any other
claims, secured or unsecured. 	Allowing the Debtor a chance to file a plan of reorganization
provides a possibility that other creditors would receive a dividend on their claims.
Petitioning Creditors argue that Ontario’s secured claim could be equitably subordinated,
thus providing assets to pay general creditors. 	That argument is unpersuasive based on the
evidence in the current record. 	Little or nothing in the record indicates grounds for equitable
subordination. 	Stockwell’s one-time interest in obtaining an option to take over Ontario’s
secured claim for a nominal purchase price might (or might not) be a breach of Stockwell’s duty
to creditors, but it does not follow that Ontario’s secured claim is at risk. 	The Court does not
have many facts relating to this issue, but from the current record there is no reason to believe an
equitable subordination claim has much promise.
Further, the Petitioning Creditors could bring an equitable subordination claim on their
own if they chose. 	See, e.g., In re Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.
1990) (individual creditor has standing to pursue equitable subordination claims under § 510(c);
P.W. Enters., Inc. v. N.D. (In re Racing Servs., Inc.), 363 B.R. 911 (8th Cir. BAP 2007), reversed
-8-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 8 of 10

on other grounds 540 F.3d 892 (8th Cir. 2008) (a creditor has standing to pursue § 510(c)
equitable subordination claim); In re Elrod Holdings Corp., 392 B.R. 110, 115 (Bankr. D. Del.
2008) (an injured secured creditor should be permitted to pursue an equitable subordination
claim apart from the trustee); Clippard v. LWD, Inc. (In re LWD, Inc.), 342 B.R. 514, 520
(Bankr. W.D. Ky. 2006) (equitable subordination claims may be brought by individual creditors
on their own behalf); In re J.S. II, L.L.C., 389 B.R. 570, 580 (Bankr. N.D. Ill. 2008) (the Seventh
Circuit has held that creditors have direct standing to pursue an equitable subordination claim
under § 510); Bunch v. J.M. Capital Fin., Ltd. (In re Hoffinger Indus., Inc.), 327 B.R. 389, 413
(Bankr. E.D. Ark. 2005) (Congress intended for § 510(c) to be available to parties other than the
trustee).
All this is not to say that Debtor appears to be headed for easy confirmation of a plan of
reorganization. 	Based on the evidence before the Court, it seems Debtor will have an uphill
battle to obtain sufficient funding to pay creditors as required by the Bankruptcy Code, rebuild
the Greenhouse, recommence operations, and grow vegetables in the years ahead. 	If Debtor’s
reorganization efforts fail or are abandoned, the Court will revisit the issue of conversion or
dismissal, likely at the conclusion of a confirmation hearing on the Debtor’s recently filed plan
of reorganization. The lack of insurance adds additional pressure.
III. 	CONCLUSION
The Court concludes that cause has not been established for conversion at this time. The
Court will allow Debtor to proceed with its Chapter 11 case and pursue confirmation of its plan
of reorganization. 	Because there is no liability insurance, the Court will require the Debtor to
proceed expeditiously toward confirmation. 	If the Debtor is able to raise enough money in the
-9-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 9 of 10

near future to purchase insurance, the Court will decrease the time pressure to reorganize or
convert.
____________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered: September 9, 2014
Copies to:
Christopher M. Gatton
10400 Academy NE, Ste. 350
Albuquerque, NM 87111
Robert A. Johnson
P.O. Box 25547
Albuquerque, NM 87125
Stephen Curtis
6747 Academy Rd. NE, Suite D
Albuquerque, NM 87109
-10-
Case 14-10231-t11 Doc 92 Filed 09/09/14 Entered 09/09/14 10:14:55 Page 10 of 10