Douglas F Vaughan

1On February 22, 2010 both Douglas Vaughan and the Vaughan
Company, Realtors filed Chapter 11 petitions. 	Douglas Vaughan
owns 85% of the stock of Vaughan Company, Realtors. 	The U.S.
Trustee appointed an official committee of Note Holders in each
case.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
DOUGLAS F. VAUGHAN,
Debtor. 	No. 10-10763-s11
MEMORANDUM OPINION ON U.S. TRUSTEE’S
MOTION TO APPOINT CHAPTER 11 TRUSTEE
AND MOTION TO CONVERT CASE TO CHAPTER 7
This matter came before the Court on May 7, 2010 and May 12,
2010 for final hearing on the U.S. Trustee’s Motion to Appoint
Chapter 11 Trustee (doc 183) and Motion to Convert Case to
Chapter 7 (doc 184) and the Debtor’s objection to both motions
(doc 237). 	The Note Holders Committee (“NHC”) joined in both
motions and expressed a preference for conversion. 	(Docs 215,
216). 	The Note Holders Committee for The Vaughan Company,
Realtors case 1 (“VCR-NHC”)(case no. 10-10759-s11) joined in both
motions and also expressed a preference for conversion. 	(Docs
199, 200). 	BBVA Compass Bank filed a Response supporting the
motions and stating a preference for conversion. 	(Doc 202). 	For
the reasons set forth below, the Court finds that the Motion to
Convert should be granted. 	This is a core proceeding concerning
administration of the estate. 	28 U.S.C. § 157(b)(2)(A).
The U.S. Trustee (sometimes “UST”) appeared through its
trial attorney Alice Nystel Page. 	The NHC appeared through its
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attorney George Moore. 	The VCR-NHC appeared through its
attorneys William Davis and Anne Goodman. 	Douglas F. Vaughan
(“Debtor”) was self-represented.
Before launching into a detailed statement of facts, the
Court will set forth its overall reasoning as a guide to the
reader. 	This Memorandum Opinion finds that Douglas Vaughan, a
well-known, well-liked, and apparently very successful
Albuquerque businessperson has been running a Ponzi scheme of
considerable magnitude and sophistication for many years. 	That
scheme reached its inevitable demise in early 2010. 	His
operation of this scheme was done through deceit,
misrepresentations, omissions and outright lies. 	As frequently
happens in cases of this type the government regulators targeted
him for investigation. 	He then filed a Chapter 11 bankruptcy to
ward off his creditors, but refused to participate in the
bankruptcy in a meaningful way. 	He asserted his Fifth Amendment
privilege against self incrimination and thereby hindered the
United States Trustee from performing its oversight duties under
the Bankruptcy Code. 	Second, this Memorandum Opinion explains
why the Court believes that the best interest of creditors
requires an independent person to oversee the process in this
case. 	Third, it cites examples of material omissions from the
filings. 	Finally, it explains why conversion (thereby putting
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the case into the hands of a chapter 7 trustee) is a better
solution than the appointment of a chapter 11 trustee.
FINDINGS OF FACT
THE U.S. TRUSTEE’S CASE
The U.S. Trustee’s first witness was Michael D’Angelo, a
Certified Public Accountant and Certified Fraud Examiner. 	Mr.
D’Angelo has a broad background in these areas including a
Bachelor’s Degree in accounting, four to five years of audit
experience with KPMG, a Masters Degree in Business
Administration, holding the position of chief financial officer
in a private company for four years, and working in the
Enforcement Division of the Securities and Exchange Commission
(“SEC”) since 1999. 	The Court approved Mr. D’Angelo as an expert
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2The Debtor had two main objections to designation of the
witness as an expert. 	First, a statement in a declaration given
to the Debtor before Mr. D’Angelo’s deposition to advise the
Debtor what the subject matter of the deposition was going to be
stated that there were between $72 million and $80 million of
principal in outstanding promissory notes. 	Debtor’s objection
was that this wide gap between the numbers meant that the witness
was incapable of being accurate. 	Mr. D’Angelo testified that the
two numbers were provided by Debtor’s attorney to him pursuant to
a subpoena, and when questioned about the amounts the Debtor
refused to answer on Fifth Amendment grounds. 	The second
objection was that Mr. D’Angelo claimed there was a $250,000 loan
from the Bank of Albuquerque to Vaughan Capital (another related
company) which Debtor argued was never made. 	Mr. D’Angelo
testified that he relied on bank documents that showed a wire
transfer to Vaughan Capital as a “loan”. 	The Court found that
neither objection went to the witness’ qualifications and
overruled the objection.
3Vaughan Capital, LLC is a New Mexico Limited Liability
Company formed on June 20, 2008. 	Its sole initial member was
Phoenician Financial Services, LLC, which is wholly owned by
Douglas Vaughan. 	See UST Exhibit 6, p. 1.
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witness over the objection of the Debtor 2. 	Mr. D’Angelo
testified extensively regarding UST Exhibits 1 through 5.
Mr. D’Angelo began working on his investigation of the
Debtor around January 1, 2010 and continued to devote 75% of his
time to it until around March 15, 2010. 	During that time he
reviewed records subpoenaed from Debtor and his businesses
through Debtor’s attorney and various banks. 	He examined general
ledgers, work papers, emails, reports, financial reports, tax
returns, quarterly balance sheets and profit and loss statements,
a Private Placement Memorandum issued by Vaughan Capital 3, notes
from communications with banks, and complete records for several
checking accounts. 	He also had testimonial evidence from
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4“Current assets are cash or items that can be converted
into cash within one year.” 	Murphy v. Meritor Savings Bank (In
re O’Day Corp.), 126 B.R. 370, 407 (Bankr. D. Mass. 1991).
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witnesses and access to bank records. 	The Court found Mr.
D’Angelo to be intelligent, competent, diligent, thorough and
completely credible.
UST Exhibit 1 is the balance sheet as of December 31, 2008
and income statement for the year ending that date of The Vaughan
Company, Realtors (sometimes “Company”). 	The Company and Vaughan
Capital, LLC were the primary vehicles through which the many
investments were collected and distributed, with Mr. Vaughan
guaranteeing most of those investments.
UST Exhibit 1 showed current assets 4 of $14,351,631,
property, plant and equipment of $785,825 (net of depreciation),
and “other assets” of $200,000. 	Among the current assets was an
overdrawn bank account at Charter Bank in the amount of
$1,415,536. 	The current assets, however, also included
intercompany receivables from six related entities of $9,226,690
and a loan to Douglas Vaughan for $5,325,218; at this point, in
retrospect, these assets were worth nothing. 	If adjusted to
exclude the intercompany receivables and loan, current assets
would be a negative $200,278.
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5“[C]urrent liabilities are obligations which come due
within one year.” 	Oday Corp., 126 B.R. at 407.
6Among the current liabilities are $62,844,446 of
“debentures.” 	During the trial there was some testimony that
some of the notes were for periods of two or three years. 	The
evidence did not establish that all $62,844,446 of the
“debentures” were due in one year, so the categorization as a
current liability may not be entirely correct.
7Compared to the income statement, the balance sheet’s
current year loss differs by a negligible $300.
8“Working capital is that portion of a firm's assets that
are in relatively liquid form-the current assets such as cash,
accounts receivable and inventory. Net working capital is the
(continued...)
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Exhibit 1 also showed current liabilities 5 of $63,310,129 6,
no long term liabilities, and negative equity (deficit) of
$47,972,674. 	Part of the $47,972,674 deficit came from the 2008
year’s $11,733,185 loss.
Exhibit 1's income statement showed total income of
$6,228,836, of which only $11,147 was interest income. 	There
were no other sources of investment income listed. 	There was a
net loss from operations of the Company of $2,460,160.
Therefore, the Company itself was not profitable or generating
cash. 	In addition, there was an additional $9,273,326 of
interest expense. 	The total net loss for the year was
$11,733,485 7 .
In summary, Exhibit 1 showed the Company had a dearth of
working capital 8. 	As of December 31, 2008, there was a serious
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8(...continued)
excess of current assets over current liabilities; it measures
the ability of a firm to pay its debts as they mature.” 	In re
Lifschultz Fast Freight, 132 F.3d 339, 350 (7 th Cir. 1997).
9Among the current liabilities are $74,391,523 of
“debentures.”
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question whether Vaughan Company, Realtors could meet its
obligations as they became due. 	It also showed that the Company
was losing almost $1 million per month in 2008.
UST Exhibit 2 is the Vaughan Company Realtors balance sheet
as of December 31, 2009 and income statement for the year ending
that date. 	It showed current assets of $13,416,746, property,
plant and equipment of $685,108 (net of depreciation), and “other
assets” of $200,000 (unchanged from the previous year). 	Among
the current assets was an overdrawn bank account at Charter Bank
in the amount of $3,823,656. 	The current assets, however, also
included intercompany receivables from six related entities of
$11,449,416 and a Loan to Douglas Vaughan for $5,372,718; at this
point, in retrospect, these assets were worth nothing. 	If
adjusted to exclude the intercompany receivables and loan,
current assets would be a negative $3,405,389.
UST Exhibit 2 also showed current liabilities of
$63,310,129 9 , no long term liabilities, and negative equity
(deficit) of $61,340,220. 	Part of the $61,340,220 deficit came
from the 2009 year’s $13,367,546 loss.
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10 This figure differs from the balance sheet’s $13,367,546
loss by $1,372,392, which is significant. 	This discrepancy was
not addressed at the hearings. 	However, the Balance Sheet from
Exhibit 2 is marked “Vaughan Company Realtors” while the Income
Statement is marked “The Vaughan Company Combined.” 	See also
footnote 12 (discussing fact that income tax return is a
consolidated tax return). 	This unanswered question is not
material to the Court’s decision.
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UST Exhibit 2's income statement showed total income of
$4,812,716, of which only $2,569 was interest income; no other
sources of investment income were listed. 	There was a net loss
from operations of the company of $2,131,771. 	Therefore, the
company itself was not profitable or generating cash. 	In
addition, there was an additional $9,863,382 of interest expense.
The total net loss for the year was $11,995,154 10 .
In summary, Exhibit 2 shows a serious dearth of working
capital. 	As of December 31, 2009, there was a serious question
whether Vaughan Company, Realtors could meet its obligations as
they became due. 	It also showed that the Company had been
continuing to lose over $1 million per month.
Mr. D’Angelo summarized the important aspects of Exhibits 1
and 2 as follows. 	From December 2008 to December 2009 the
promissory notes grew from $53 million to $74 million. 	The
annual liability for interest payment on those notes went from
$9.3 million in 2008 to $9.8 million in 2009 and he calculated
that going forward interest requirements for 2010 would have been
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11 This figure is based on his calculated average weighted
interest rate of just over 17%.
12 Form 851 attached to the federal income tax form 1120
lists affiliated subsidiary corporations included on the return:
Vaughan Commercial Properties, Vaughan Referral Company, Vaughan
Property Management and Vaughan Company Business Opportunities.
This explains why the tax reporting numbers are different from
the financial statements for 2008, UST Exhibit 1.
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$12 million 11 . 	Taking its operations alone, Vaughan Company
Realtors was losing money; it was obviously incapable of paying
any interest on the promissory notes. 	The only way the Company
could meet its interest obligations was from funds from new
investors.
UST Exhibit 3 is the Vaughan Company Realtors balance sheet
as of January 31, 2010 and income statement for the month ending
that date. 	Its contents are similar to UST Exhibits 1 and 2 so
will not be set out in detail. 	The company lost $1,171,790 in
January, 2010. 	Charter Bank’s overdraft grew to $5,044,953 and
the Promissory note account grew by $173,328 to $74,564,851.
UST Exhibit 4 is the Vaughan Company Realtors consolidated 12
federal and state income tax returns for calendar year 2008. 	It
shows total income of $8,362,559, total expenses of $21,675,882
(including an interest expense of $10,544,314) for a net loss of
$13,313,323. 	Statement 2 attached to the federal return is a
calculation of the net operating loss deduction. 	It shows that
for every year from 1994 to 2007 Vaughan Company Realtors
incurred the following net losses:
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YEAR 	NET OPERATING LOSS
1994 	$ 	(203,875)
1995 	$ 	(403,866)
1996 	$ 	(501,609)
1997 	$ 	(626,768)
1998 	$ 	(786,818)
1999 	$ 	(1,010,229)
2000 	$ 	(1,484,680)
2001 	$ 	(2,072,591)
2002 	$ 	(3,257,108)
2003 	$ 	(3,543,753)
2004 	$ 	(4,041,048)
2005 	$ 	(5,595,285)
2006 	$ 	(7,461,409)
2007 	$ 	(9,913,893)
It demonstrates that losses increased each year from 1994 to 2007
as the business grew.
UST Exhibit 5, the only exhibit prepared by Mr. D’Angelo, is
a diagram that graphically illustrates the cash flows for 2008
and 2009 from the Promissory Note investors to Vaughan Company
Realtors ($29.4 million invested) and Vaughan Capital LLC
investors to Vaughan Capital ($6.1 million invested) and the cash
flows back from those entities to their respective investors
(Vaughan Company Realtors returned $11.1 million of principal to
investors; Vaughan Capital, LLC returned $310,000 of principal to
investors). 	It also shows the cash flows back and forth between
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13 This is the money that was invested specifically to be
used to 1) buy distressed properties in New Mexico, Arizona and
Nevada, 2) buy discounted loan portfolios, and 3) make high
interest rate loans to qualified buyers with adequate collateral
(“bridge loans” and “mezzanine financing”). 	See UST Exhibit 6,
p. 5 (Private Placement Memorandum of Vaughan Capital LLC).
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Vaughan Company Realtors and Vaughan Capital LLC (Vaughan Capital
LLC transferred $6.0 million 13 to Vaughan Company Realtors and
Vaughan Company Realtors transferred $516,000 to Vaughan Capital
LLC); the cash outflows from Vaughan Company Realtors and Vaughan
Capital LLC to Douglas Vaughan ($877,000 from Vaughan Company
Realtors and $83,000 from Vaughan Capital, LLC); the cash
outflows from Vaughan Company Realtors to other Vaughan owned
entities ($1.6 million); the cash outflows from Vaughan Company
Realtors for operations of the company and interest payments on
the promissory notes ($25.1 million); and the outflows from
Vaughan Capital, LLC for “2 properties, a bank loan & other”
($91,000). 	All told, Vaughan Company Realtors ended up with a
$3.8 million net cash outflow and Vaughan Capital, LLC ended up
with a $132,000 cash inflow.
UST Exhibit 6 is a “Confidential Private Placement
Memorandum” prepared by Vaughan Capital, LLC. 	The Memorandum
states that 800 membership units will be offered at $12,500 per
unit for an aggregate offering price of $10 million, with a
minimum investment of $125,000 and a maximum of 24 investors.
The cover sheet of the Memorandum states “Vaughan Capital, LLC, a
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New Mexico limited liability company (the ‘Company’), has been
formed for the purpose of acquiring for investment purposes real
property, mortgages, and to make commercial loans, commonly
referred to as bridge loans or mezzanine financing.” 	Article II
on page 5 reiterates these purposes.
Article IV on page 6 describes how proceeds will be used and
refers to Exhibit G. 	Exhibit G is a Pro Forma Cash Flow
Statement for Vaughan Capital, LLC. 	Assumption 1 for the Cash
Flow Statement is “Vaughan Capital will be adding assets (hard
money loans, discounted mortgages, and real estate bought at a
discount). 	It is assumed that each of these assets will comprise
33% of Vaughan Capital’s assets.” 	The five year cash flow
projections show a negligible return in years one and two, but
(assuming a full subscription of $10 million in units) profits of
$1.4 million, $1.7 million, and $3.1 million in years three
through five.
Exhibit B to the Memorandum is the Operating Agreement of
Vaughan Capital, LLC. 	Article 1.5, “Business Plan” states:
Company will engage in three (3) avenues of business or
acquisition. 	(1) The Company will make hard money
loans which will include bridge loans and/or provide
mezzanine financing to commercial customers that are
qualified for the loans, and in most cases
collateralized by second mortgages on real property;
(2) the Company will acquire real properties ...; and
(3) the Company will attempt to buy portfolios of
residential loans at deeply discounted prices ...
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14 Mr. Vaughan argued that three houses were purchased, but
provided no details or documentation. 	Considering the use of the
rest of the money, whether there were two or three houses is not
really meaningful.
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Mr. D’Angelo reviewed 100% of the transactions of Vaughan
Capital, LLC through bank records. 	He concluded, and the Court
so finds, that $6.1 million was invested in Vaughan Capital, LLC
and $6.0 million went directly to Vaughan Company Realtors to
meet its cash flow needs relating primarily to payment of
investor’s promissory notes. 	Vaughan Capital purchased two 14
houses and did not make any hard money loans or acquire any
portfolios of residential loans. 	See also UST Exhibit 5.
The U.S. Trustee called several investors as witnesses:
Donald W. Duke, Ricky D. Hewes, Philip H. Dugan, and Larry
Turner. 	Their testimonies were all credible and consistent with
each other. 	They generally established: they were all friends of
acquaintances of Debtor who they believed was a successful
businessperson; they all trusted Debtor; they were attracted by
the comparatively high rates of return; they believed their
promissory notes were secured by a deed of trust, although none
knew what that was or asked to see further documents; none had
received any literature about the promissory notes before
investing or financial reports after investing; those that had
invested in Vaughan Capital, LLC assumed their investments were
secured by the distressed properties that were to be purchased
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and were unaware that their investments could be loaned on an
unsecured basis to related Vaughan companies; all had invested a
substantial portion of their total net worth; all felt betrayed;
and none of them trusted the Debtor to repay them.
UST Exhibit 27 is a UCC Financing Statement filed with the
New Mexico Secretary of State on February 19, 2010. 	The secured
party is Abbas J. Ansari. 	The Debtors are Vaughan Company
Realtors and Douglas Vaughan. 	The collateral is a 53% interest
in the limited liability company known as Oakwood Investment
Group, LLC, a New Mexico Limited Liability Company. 	Documents
attached show that a 15.5% interest in this LLC was pledged as
collateral for a note dated November 5, 2004 and that another
37.5% interest was pledged as collateral for a note dated
February 8, 2010. 	Debtor did not list any ownership interest in
the Oakwood Investment Group, LLC on his schedule of assets. 	The
Vaughan Company Realtors also did not list any ownership interest
in this asset on its schedule of assets. 	Debtor did not disclose
this transfer on his statement of financial affairs. 	Debtor did
list Abbas J. Ansari as a creditor on his Schedule D but did not
include Oakwood Investment Group, LLC in the description of
collateral, and stated that the debt was incurred through
12/31/2009. 	At the hearing, Debtor argued that this transaction
occurred over ten years ago but produced no evidence on the
point. 	Therefore, the Court finds that the Debtor omitted either
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15 According to his Statement of Financial Affairs Suzie
Fairchild was his girlfriend. 	Debtor gave her a Corvette
convertible in July, 2009 for her birthday, and he transferred a
house (allegedly with little or no equity) back to her in
February, 2010.
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or both an asset and a transfer from his statements and
schedules. 	Also, due to the timing of the transfer (14 days
prepetition), the Court does not find it credible that Debtor
would simply forget it.
UST Exhibit 23 is a transcript of Debtor’s section 341
meeting of creditors. 	Debtor invoked the Fifth Amendment
privilege 121 times in response to almost every question asked.
Specifically, he refused to answer questions about: whether the
statements and schedules were true and complete, whether any
amendments were needed, when various bank and stock accounts were
closed, where the money went from those closed accounts, whether
there were any transfers of amounts over $10,000, the identity of
other members or partners in various entities listed on the
schedule of assets, how the entities were valued, the purposes of
these entities, whether these entities had assets or were
operating, where the records were located for these entities, why
related companies owed him money or from what period of time,
whether he received salaries from any of his companies or whether
the W-2's issued by those companies were accurate, whether
Schedule D was correct, who Suzie Fairchild was 15 , whether he
owned or ever owned certain specific parcels of real estate or
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16 The Statement of Financial Affairs discloses gambling
losses.
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ever transferred any of them to any entity he had formed, whether
he had executed mortgages or for what purposes, whether he had
made any transfers over $5,475 in the 90 days preceding the
petition, how much Debtor gambled in Las Vegas 16 or at what
casinos, what happened to shares of stock he listed as owning in
a June 1, 2009 financial statement, whether he had received any
rents from townhouses since the filing of the bankruptcy, or what
plans he had to reorganize.
THE DEBTOR’S DEFENSE
The Debtor elicited the testimony of 3 investors: James R.
Philp, Kurt Plouff and Fred Mossman. 	The United States Trustee
also consented to Debtor’s reading three affidavits of other
investors into the record. 	Exhibits V1, V2 and V3. 	Their
testimonies were marginally credible and consistent with each
other. 	They generally established: they were all good friends of
Debtor who they believed was a very successful businessperson;
they all trusted Debtor to repay them despite the fact that he
had voluntarily filed bankruptcy; they all expressed their
preference that the Debtor remain in possession as a Chapter 11
debtor despite their obvious unfamiliarity with bankruptcy; they
all testified that conversion to a Chapter 7 would guarantee that
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17 Debtor asked each investor witness how he (the witness)
would fare on his claim if a conversion were ordered. 	This
question demonstrates a fundamental ignorance of the Bankruptcy
Code. 	There is no rule as such that a Chapter 7 estate pays less
than a Chapter 11 reorganization. 	A creditor’s chance of getting
paid depends primarily on the financial condition of the debtor
as it enters bankruptcy, not the chapter it elects to file under.
18 The “plan” is discussed below.
19 Debtor had a third purpose in eliciting their testimony,
which was to rescue his reputation. 	Albuquerque media have
continually reported on allegations of Debtor’s improper dealings
(including a Ponzi scheme), government searches of his office and
home, etc. 	One item sensationally reported was that of a “secret
room” in his home which contained a safe. 	On this issue he
called Mr. Mossman, one of the major homebuilders in the
Albuquerque area, who testified that such rooms are commonplace
in luxury homes in Albuquerque. 	Mr. Mossman also testified that
he had seen the secret room, and that it was in effect about
three foot square, with much of the space taken up by a safe.
One of the Court’s staff appears to have most accurately
characterized the secret room as “a linen closet with a lock on
it”.
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they would receive less on their claims 17 than if the Debtor
would be allowed to proceed with his “plan” 18 ; and they all
testified that they had reviewed Debtor’s plan with him and
thought it looked plausible and reasonable, and was the best
opportunity for them to get paid. 	None of them had seen Debtor’s
or the related companies’ financial statements. 	None had heard
the evidence produced by the United States Trustee in the case.
Debtor’s obvious purpose in calling these witnesses was to
establish his character as a trustworthy individual and to
establish that creditors with substantial claims wanted him to
remain in control of the case. 19 	While there is no question that
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20 Debtor’s schedules list NAI Vaughan Management, LLC as a
100% owned limited liability company worth $200,000.
21 The plan does not show income from rentals and does not
(continued...)
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each of the three witnesses testified completely honestly and
sincerely, the Court puts little weight on any of these
witnesses’ testimony given their fundamental lack of familiarity
with critical underlying facts.
After Debtor rested his case, the Court inquired whether he
had intended to put on any evidence of a possible plan of
repayment to creditors. 	Debtor responded that he was working on
it and that it was substantially finished but not cosmetically
proper, and it would be filed by the due date. 	The Court
clarified that the “due date” he referenced was really only the
deadline for exclusivity for filing a plan, and informed him that
if he had a plan, now was the time to present it. 	Debtor was
allowed to reopen his case to present his plan. 	The plan
consists of a one page spreadsheet that is a four year projection
of amounts he could repay creditors if he is allowed to remain a
debtor-in-possession. 	Exhibit V6.
The plan has three fundamental assumptions. 	First, NAI
Vaughan Management 20 will be renamed “Premier Asset Management”
and somehow supply an undefined amount of operating capital on
unknown terms for an unknown period of time. 	Second, “free and
clear rentals” 21 will be borrowed against to supply an undefined
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21 (...continued)
disclose where the rents go. 	Furthermore, Debtor’s Schedule A
does not list any rental properties free and clear of liens. 	In
fact, none of them even have equity. 	See, e.g., UST Exhibit 18,
Doc 94 (nine rentals on Fruit Street each worth $135,000 with
$78,066,363 liens against them.)
22 When asked by the Court during his presentation of the
plan, Debtor admitted that the plan would probably not pay
creditors in full during his lifetime.
23 The injunction is UST Exhibit 24.
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amount of operating capital on unknown terms for an unknown
period of time. 	Third, Debtor will organize a new company and
keep 50% of the stock and issue 50% of the stock to investors.
The plan is silent as to the dollar amount of this stock
offering.
Before the Court gets into the details of the plan, it has
serious questions about the assumptions. 	Is NAI Vaughan
Management being renamed to conceal the identity of its
principals or its connection to the Debtor? 	How does the Debtor
assume that he can exit bankruptcy with a $200,000 asset (NAI
Vaughan Management) to use as his own by pledging it before 22
paying creditors? 	Are the rentals acquired by the new entity?
How can Debtor issue stock in a new company when he is under an
injunction 23 by the United States District Court to not offer or
issue any security without a registration statement? 	Does Debtor
assume that he can get a plan approved without disclosing his
problems with the SEC? 	On what does Debtor base his assumption
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24 Debtor admits that he anticipates that the thirty best
“superstar” real estate agents in the state will eagerly join his
company. 	Debtor stated that the average house in Albuquerque
sells for $250,000. 	His plan therefore anticipates that each
real estate agent will sell one house per month.
25 Debtor does not disclose if he receives compensation as
part of the overhead, or in what amount, or for what duties.
26 The plan has no provision for payment of income taxes, so
the $390,000 figure is inflated. 	So, all numbers projected for
all following years are also inflated. 	Any number therefore
(continued...)
Page -20-
that any informed reasonable investor would invest money in a new
company, 50% owned by a person that has run a business enterprise
that was a textbook Ponzi scheme that has suffered mounting
losses every year for at least 16 years? 	Why would any informed
reasonable investor invest money in a new company, 50% of whose
profits are forever pledged to pay off the creditors of the 50%
owner of the company?
The plan itself contemplates two methods to pay creditors.
First, the new company will be engaged in the sale of real
estate. 	Second, Debtor will set up “ancillary companies”
starting in year two to add profits to the undertaking.
Regarding the new company, the plan states that during the
first year thirty real estate agents will come to work for Debtor
and each will sell $3 million dollars of real estate 24 . 	The new
company would receive 30% of the agents’ commissions. 	After
payments of commissions and overhead 25 , the new entity would have
$390,000 of net profit 26 . 	Fifty percent, or $195,000 would be
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26 (...continued)
should be assumed to be before tax.
27 Assuming that there are $97 million of claims ($86 million
of secured claims and $11 million of unsecured claims, as set
forth on Debtor’s Summary of Schedules, Doc 94, UST Exhibit 18)
means that creditors would receive a dividend of 0.20% during the
first year. 	Meanwhile, Debtor is concurrently presumably
receiving a salary for running the new entity and receiving a
profit of $97,500. 	The Court doubts that creditors would vote
for this plan.
28 Compare to UST Exhibit 6 (Private Placement Memorandum of
Vaughan Capital LLC)(LLC to invest in foreclosed properties in
Nevada, Arizona and New Mexico, buy discounted loan portfolios
and supply hard money financing). 	Unique, unusual, exotic or
even bizarre investment schemes are often the subject of Ponzi
schemes. 	See, e.g., Cunningham v. Brown, 265 U.S. 1, 7 (1924)
(scheme purporting to buy international postal coupons in foreign
countries and sell them in other countries at 100 per cent
profit, made possible by the excessive differences in the rates
of exchange following the war. This is the case from which the
(continued...)
Page -21-
paid to the creditors. 	The plan is silent on what happens to the
other $195,000 but the Court presumes that it would be
distributed to the stockholders of the new entity, $97,500 to the
new investors and $97,500 to Debtor 27 .
In the second year, the plan anticipates that twenty
additional real estate agents will join the new company and they
also will each sell $3 million of real estate and the resulting
profit would be $600,000. 	In addition, Debtor will start up a
title company that will profit $200,000, a mortgage company that
will profit $150,000, and a commercial division that will profit
$100,000. 	During year two Debtor will start organizing new
investment LLC’s to invest in special situations 28 such as “fix up
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28 (...continued)
term “Ponzi scheme” arose. 	“The litigation grows out of the
remarkable criminal financial career of Charles Ponzi.”);
Securities and Exchange Comm. v. J.T. Wallenbrock and Assoc., 313
F.3d 532, 535 (9 th Cir. 2002)(“Wallenbrock sold promissory notes
ostensibly secured by the accounts receivable of Malaysian latex
glove manufacturers.”); United States v. Treadwell, 593 F.3d 990,
993 n. 2 (9 th Cir. 2010):
It has been reported that Albanian pyramid schemes
netted a purported $1.2 billion after the fall of
Communism in the 1980s, and that a Florida church in
the 1990s amassed $500 million by promising that God
would double the money of pious investors. 	Alex
Altman, A Brief History Of: Ponzi Schemes, TIME, Jan.
8, 2009, at 13. 	Lest one think Ponzi schemes are too
simple and obvious to bamboozle the financially savvy,
an oil-drilling swindle in the 1970s duped top
executives at Pepsico, Time, and General Electric, as
well as the chairman of U.S. Trust, the president of
First Boston Corp., and an author of several books on
Wall Street finance. 	See Donald H. Dunn, Ponzi! The
Boston Swindler xi-xii (1975). 	Most recently, the 2008
collapse of Bernard “Bernie” Madoff's grandiose Ponzi
scheme resulted in over $50 billion in investor losses,
a 150-year prison sentence for Madoff, and numerous
investor lawsuits that predictably will take years for
resolution.
29 This would be a 0.64% return to creditors in year two.
Page -22-
and flips”, “discounted mortgages”, etc. and this will profit
$100,000. 	Therefore, the second year total profit for all
activities would be $1.25 million and $625,000 29 would be paid to
investors. 	Debtor would presumably receive salaries from all the
entities and take home $312,500 of the profit of the new company.
Years three and four continue along the same lines, with the
number of agents increasing to seventy, then one hundred, the new
companies profits increasing to $840,000 then $1.2 million, and
ancillary companies’ profits increasing to $1 million then $1.65
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30 This would be a 0.95% return to creditors in year three.
31 This would be a 1.47% return to creditors in year four.
32 This would be a total four year return of 3.26%.
Page -23-
million. 	The totals paid to creditors would be $920,000 30 in year
three and $1.425 31 million in year four. 	Debtor would take home
profits of $460,000 plus salaries in year three and profits of
$712,500 plus salaries in year four. 	So, all told, after four
years of this plan the creditors would have cumulatively received
$3,165,000 32 and Debtor would have received $1,582,500.
Debtor testified at the hearing regarding his plan. 	He
believes that the figures are conservative, achievable and
reasonable. 	He claims that he has had such success in the past
starting similar types of organizations. 	The Court finds these
projections fanciful at best. 	They show a total disconnect from
economic reality. 	A review of the plan suggests that Debtor is
trying to rebuild the hugely unsuccessful empire he controlled
before bankruptcy. 	If it were so easy to make the fantastic sums
as set forth in this plan there would be no reason for the
Debtor’s and Debtor’s companies to be massively insolvent and in
Chapter 11. 	This plan is not feasible and it also violates the
absolute priority rule (11 U.S.C. § 1129(b)(2)(B)(ii)). 	It is
unconfirmable.
CONCLUSIONS OF LAW
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Page -24-
The United States Trustee has moved to appoint a Chapter 11
Trustee or to convert this case to Chapter 7. 	These actions are
governed by 11 U.S.C. § 1104 and § 1112. 	Section 1104,
Appointment of trustee or examiner, provides, in part:
(a) 	At any time after the commencement of the case but
before confirmation of a plan, on request of a party in
interest or the United States trustee, and after notice
and a hearing, the court shall order the appointment of
a trustee--
(1) for cause, including fraud, dishonesty,
incompetence, or gross mismanagement of the
affairs of the debtor by current management,
either before or after the commencement of the
case, or similar cause, but not including the
number of holders of securities of the debtor or
the amount of assets or liabilities of the debtor;
(2) if such appointment is in the interests of
creditors, any equity security holders, and other
interests of the estate, without regard to the
number of holders of securities of the debtor or
the amount of assets or liabilities of the debtor;
or
(3) if grounds exist to convert or dismiss the
case under section 1112, but the court determines
that the appointment of a trustee or an examiner
is in the best interests of creditors and the
estate.
Section 1112, Conversion or dismissal, provides, in part:
...
(b) 	(1) Except as provided in paragraph (2) of this
subsection, subsection (c) of this section, and
section 1104(a)(3), on request of a party in
interest, and after notice and a hearing, absent
unusual circumstances specifically identified by
the court that establish that the requested
conversion or dismissal is not in the best
interests of creditors and the estate, 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, if the movant
establishes cause.
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33 Thus in the original. 	The “not” appears to be another of
the drafting errors in the statute resulting from Congress’
failure to proofread the statute before passing it. 	(Other
examples are cited in In re Martin, 424 B.R. 496, 506-07 nn. 8
and 9 (Bankr. D. N.M. 2010)). 	Not disregarding the “not” leads
to a logical but absurd interpretation of the statute; to wit,
dismissal or conversion shall be granted where unusual
circumstances establish that dismissal or conversion is not in
the best interests of the creditors and the estate. 	7 Collier on
Bankruptcy ¶ 1112.05[2] (Alan N. Resnick and Henry J. Sommer,
eds., 16th ed.). 	As the authors of Collier suggest, the most
cogent approach to the statute is that taken by the court in In
re Orbit Petroleum, Inc., 395 B.R. 145, 147 (Bankr. D. N.M.,
2008), which simply reads the “not” out of the statute.
Page -25-
(2) The relief provided in paragraph (1) shall
not 33 be granted absent unusual circumstances
specifically identified by the court that
establish that such relief is not in the best
interests of creditors and the estate, if the
debtor or another party in interest objects and
establishes that--
(A) there is a reasonable likelihood that a plan
will be confirmed within the timeframes
established in sections 1121(e) and 1129(e) of
this title, or if such sections do not apply,
within a reasonable period of time; and
(B) the grounds for granting such relief include
an act or omission of the debtor other than under
paragraph (4)(A)--
(I) for which there exists a reasonable
justification for the act or omission; and
(ii) that will be cured within a reasonable
period of time fixed by the court.
...
(4) 	For purposes of this subsection, the term
‘cause’ includes--
...
(H) 	failure timely to provide information or
attend meetings reasonably requested by the United
States trustee[.]
I. 	MOTION TO APPOINT TRUSTEE
The U.S. Trustee proved that Debtor was the principal in a
Ponzi scheme. 	Ponzi schemes are fraudulent. 	Fraud, before or
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Page -26-
after the filing of a bankruptcy case, is a ground to appoint a
trustee. 	Appointment would also be in the best interest of
creditors. 	Therefore, the Court can grant the U.S. Trustee’s
Motion to Appoint a Trustee.
A. 	PONZI SCHEME
A “Ponzi” scheme, as that term is generally used,
refers to an investment scheme in which returns to
investors are not financed through the success of the
underlying business venture, but are taken from
principal sums of newly attracted investments.
Typically, investors are promised large returns for
their investments. 	Initial investors are actually paid
the promised returns, which attract additional
investors.
Sender v. The Nancy Elizabeth R. Heggland Family Trust (In re
Hedged-Investment Associates, Inc.), 48 F.3d 470, 471 n. 2 (10 th
Cir. 1995)(citing In re Independent Clearing House Co., 41 B.R.
985, 994 n. 12 (Bankr. D. Utah 1984)). 	See also McHale v. Huff
(In re Huff), 109 B.R. 506, 512 (Bankr. S.D. Fla. 1989):
A ponzi scheme is a scheme whereby a corporation
operates and continues to operate at a loss. 	The
corporation gives the appearance of being profitable by
obtaining new investors and using those investments to
pay for the high premiums promised to earlier
investors. 	The effect of such a scheme is to put the
corporation farther and farther into debt by incurring
more and more liability and to give the corporation the
false appearance of profitability in order to obtain
new investors.
In order to prove that a Debtor engaged in a Ponzi scheme,
the plaintiff must prove: “(1) deposits were made by investors;
(2) the Debtor conducted little or no legitimate business
operations as represented to investors; (3) the purported
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Page -27-
business operations of the Debtor produced little or no profits
or earnings; and (4) the source of payments to investors was from
cash infused by new investors.” 	Reiser v. Hayslip (In re Canyon
Systems Corp.), 343 B.R. 615, 630 (Bankr. S.D. Ohio 2006). 	See
also Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 431
(Bankr. S.D. Tex. 1997)(same 4 part inquiry).
Under the two descriptions and one test listed above, Debtor
was engaged in a Ponzi scheme. 	Debtor’s business entities were
not successful and did not generate cash. 	In fact, they lost
money continuously and in increasing amounts from 1994 to date.
The only way the businesses were able to continue in operation
was from the infusion of funds from investors who were promised
high rates of return on their investments. 	The funds invested
were not utilized as represented; rather, they went to pay the
high rates of returns to the prior investors. 	This is a textbook
example of a Ponzi scheme. 	See Cuthill v. Greenmark, LLC (In re
World Vision Entertainment, Inc.), 275 B.R. 641, 656-57 (Bankr.
M.D. Fla. 2002)(Describing a “textbook” Ponzi scheme as follows:
None of the debtor's investments ever produced any
income or revenue. The debtor's primary source of funds
was through the sale of its promissory notes. The
debtor used funds invested by new investors to make
interest and principal payments to earlier investors.
Any remaining funds were used to pay general and
administrative expenses such as officer salaries and
rent, to make occasional investments in companies not
expected to generate any substantial return, and to
enrich the debtor's insiders.)
B. 	FRAUD
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Page -28-
Ponzi schemes are fraudulent. 	Donell v. Kowell, 533 F.3d
762, 767 n. 2 (9 th Cir.), cert. denied, 129 S.Ct. 640 (2008):
A Ponzi scheme is a financial fraud that induces
investment by promising extremely high, risk-free
returns, usually in a short time period, from an
allegedly legitimate business venture. 	“The fraud
consists of funnelling proceeds received from new
investors to previous investors in the guise of profits
from the alleged business venture, thereby cultivating
an illusion that a legitimate profit-making business
opportunity exists and inducing further investment.”
In re United Energy Corp., 944 F.2d 589, 590 n. 1 (9th
Cir. 1991).
See also World Vision Entertainment, 275 B.R. at 656 (“A Ponzi
scheme is by definition fraudulent.”); Ramirez Rodriguez, 209
B.R. at 430 (“A Ponzi scheme is a fraudulent investment
arrangement whereby an entity makes payments to investors from
monies obtained from later investors rather than from any
‘profits’ of the underlying business venture.”)(Citation
omitted.)
C. 	OTHER GROUNDS TO APPOINT A TRUSTEE
Grounds also exist under 11 U.S.C. § 1104(a)(2) to appoint a
trustee. 	Debtor’s refusal to testify at the first meeting of
creditors suggests that appointment of a trustee would be in the
best interest of the creditors. 	Tradex Corp. v. Morse (In re
Tradex Corp.), 339 B.R. 823, 834 (D. Mass. 2006)(unwillingness to
testify prevents the court and creditors from receiving
information from the person entrusted to act as a fiduciary).
Without a trustee to verify or reconstruct Debtor’s assets and
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34 For example, $6.0 million was transferred from Vaughan
Capital, LLC to Vaughan Company Realtors. 	The Court seriously
questions the Vaughan Capital, LLC manager’s business judgment
when it (an entity 100% owned and controlled by Debtor)
transferred virtually all the money it received as invested funds
in a private placement to Vaughan Company Realtors, a company
owned 85% by Debtor. 	Debtor knew the financial condition of
Vaughan Company Realtors. 	There was no evidence offered as to
(continued...)
Page -29-
transfers, funds otherwise available to creditors might remain
undiscovered.
A failure to provide accurate schedules to the court has
been deemed sufficient “cause” under § 1104(a)(1) to appoint a
trustee. 	In re Plaza de Retiro, Inc., 417 B.R. 632, 641 (Bankr.
D. N.M. 2009). 	As previously described, Debtor failed to
schedule an asset (his interest in Oakwood Investment Group, LLC)
and/or a transfer of a lien on that asset.
Additionally, the Tenth Circuit Court of Appeals has found
that “a history of transactions with companies affiliated with
the debtor company is sufficient cause for the appointment of a
trustee where the best interests of the creditors require.”
Oklahoma Refining Co. v. Blaik (In re Oklahoma Refining Co.), 838
F.2d 1133, 1136 (10 th Cir. 1988)(citing five bankruptcy court
cases). 	In this case, the United States Trustee has demonstrated
millions of dollars of intercompany transfers, most of which were
1) probably not made with sound business judgment, 2) against the
interests of the creditors of and investors in the transferring
companies, and 3) not disclosed to the investors 34 . 	See UST
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34 (...continued)
whether any formal documents were drawn to evidence these
transfers, whether they were interest bearing, whether they were
secured, or even if they were authorized. 	The investors that
owned interests in Vaughan Capital, LLC who testified were all
unaware of the transfers and unaware of any authority to make
these transfers.
Page -30-
Exhibit 5. 	While it is true that Debtor was probably only a net
recipient of transfers from the various companies, his refusal to
testify regarding details of the various companies and their
interconnections suggests to the Court that a trustee should be
appointed to see if there are any possible claims for the estate.
D. 	CONCLUSION ON MOTION TO APPOINT TRUSTEE
Debtor engaged in fraud. 	There are also other reasons to
convert the case. 	Grounds exist under both 11 U.S.C. §
1104(a)(1) and (2) to appoint a trustee.
II. 	MOTION TO CONVERT
In In re Modanlo the Bankruptcy Court for the District of
Maryland set forth the process for a court to decide a motion to
convert under the current version of Bankruptcy Code 1112:
The mechanics of determining whether a court should
convert or dismiss a case under the post-BAPCPA version
of 11 U.S.C. § 1112(b) appear to be as follows: First,
the movant must demonstrate that cause exists by a
preponderance of the evidence. 	At this point, if cause
has been demonstrated, the court must ascertain whether
unusual circumstances exist to prevent conversion or
dismissal. 	If no such unusual circumstances exist, the
court must convert or dismiss. 	The non-moving party is
able to try to defeat a motion to convert or dismiss
the bankruptcy case by showing that unusual
circumstances exist to prevent dismissal or that
factors specifically set out in § 1112(b)(2)(A) and (B)
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Page -31-
exist (e.g., reasonable likelihood of timely
confirmation, reasonable excuse for an omission by the
debtor). 	If these exist, the opponent to the motion to
convert or dismiss prevails, unless the court
determines that the best interests of the estate are
otherwise. 	And, the court must make this best
interests assessment even if the opponent does not
carry its burden or even make a defense. 	Thus, if
cause has been demonstrated (and whether or not the
motion is opposed), the court must ascertain whether
the best interests of creditors and the estate are
served by granting or denying the motion. 	In re Hook,
397 B.R. 544, 2008 WL 3906794, at *4 (10th Cir. BAP
Aug. 26, 2008) (“[ Section 1112(b)(1) ] allows the
court to deny the motion if doing so would be in
furtherance of the best interests of the creditors or
the estate.”)(unpublished); In re Orbit Petroleum,
Inc., 395 B.R. 145, 148-49 (Bankr. D. N.M., 2008) (“In
this case, because a plan has been filed which purports
to pay all creditors in full as of the effective date
... neither conversion nor dismissal is in the best
interest of the creditors of the estate.”).
In re Modanlo, 413 B.R. 262, 271 (Bankr. D. Md. 2009)(footnote
omitted).
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35 In McCormick v. Banc One Leasing Corp. (In re McCormick),
the Court of Appeals for the Eleventh Circuit ruled that invoking
the Fifth Amendment was not a sufficient ground, in itself, to
deny confirmation of an individual Chapter 11 debtor’s plan.
McCormick, 49 F.3d 1524, 1527 (11 th Cir. 1995). 	In that case,
however, the Debtor invoked the Fifth Amendment in a separate
adversary proceeding seeking to have a debt declared
nondischargeable under section 523, reached a settlement with the
creditor in the adversary proceeding, and then pursued
confirmation of a plan without further invoking the Fifth
Amendment privilege. 	Id. at 1526. 	The Court of Appeals vacated
and remanded for a determination of whether debtor’s failure to
testify at a deposition in the adversary proceeding impeded the
basic bankruptcy administration of his case. 	Id. at 1527. 	In
Mr. Vaughan’s case, he invoked the Fifth Amendment 121 times
during the 341 meeting. 	There is no question this impeded the
basic bankruptcy administration of his case.
Page -32-
Debtor’s refusal to testify 35 at the first meeting of
creditors constitutes cause to convert as a “failure timely to
provide information ... reasonably requested by the United States
trustee.” 	11 U.S.C. § 1112(b)(4)(H). 	In closing argument,
Debtor argued that his taking the Fifth Amendment should not be
held against him because the United States Trustee could discover
the information itself without much trouble. 	The Court doubts
that the United States Trustee could discover the requested
information. 	Debtor is in the unique position of having the
information. 	That is not the issue, however. 	For one thing, the
statute does not read “failure timely to provide information ...
reasonably requested by the United States trustee unless the
trustee can discover the information itself without much
trouble.” 	Secondly, for a chapter 11 debtor-in-possession,
absolute transparency is required.
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Page -33-
The American bankruptcy system is often described
as having two primary objectives: first, ensuring the
equitable and timely repayment of creditors with valid
claims; and second, affording debtors a fresh start
once they emerge from bankruptcy. 	In re Ortiz, No.
05-39982, 2006 WL 2946500, at *9 (Bankr. S.D. Tex. Oct.
13, 2006) (quoting In re T-H New Orleans Ltd. P'ship,
188 B.R. 799, 807 (E.D. La. 1995), aff'd, 116 F.3d 790
(5th Cir. 1997)). 	In order for these twin goals to be
achieved-indeed, in order for the bankruptcy system to
function-every entity involved in a bankruptcy
proceeding must fully disclose all relevant facts. 	In
re Coastal Plains, Inc., 179 F.3d 197, 208 (5th Cir.
1999) (“The duty of disclosure in a bankruptcy
proceeding is a continuing one.”); In re Ramirez, No.
03-47872, 2006 WL 3838176, at *3 (Bankr. S.D. Tex. Dec.
29, 2006) (“[T]he broad policy of the Bankruptcy Code
... favors transparency and disclosure whenever
possible.”); In re eToys, Inc. 331 B.R. 176, 187
(Bankr. D. Del. 2005) (“Disclosure ‘goes to the heart
of the integrity of the bankruptcy system.’ ”) (citing
In re B.E.S. Concrete Products, Inc., 93 B.R. 228, 236
(Bankr. E.D. Cal. 1988)); In re Century Plaza Assoc.,
154 B.R. 349, 352 (Bankr. S.D. Fla. 1992) (“Disclosure
of fees is a fundamental concept in bankruptcy.”).
Sanchez v. Ameriquest Mortgage Co. (In re Sanchez), 372 B.R. 289,
296-97 (Bankr. S.D. Tex. 2007). 	See also Plaza de Retiro, 417
B.R. at 641 (One of the most fundamental and crucial duties of a
debtor-in-possession is to keep the Court and creditors informed
about the nature, status and condition of the business undergoing
reorganization.)(citing In re V. Savino Oil & Heating Co., Inc.,
99 B.R. 518, 526 (Bankr. E.D. N.Y. 1989)). Therefore, the Court
finds that Debtor’s refusal to testify is “cause” to convert
under 11 U.S.C. § 1112(b)(4)(H).
Once “cause” has been demonstrated, the Court must
convert or dismiss, unless the Court specifically
identifies “unusual circumstances ... that establish
that such relief is not in the best interest of
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Page -34-
creditors and the estate.” 	11 U.S.C. § 1112(b)(1).
However, absent unusual circumstances, the Court must
not convert or dismiss a case if (1) there is a
reasonable likelihood that a plan will be confirmed
within a reasonable time, (2) the “cause” for dismissal
or conversion is something other than a continuing loss
or diminution of the estate coupled with a lack of
reasonable likelihood of rehabilitation; and (3) there
is reasonable justification or excuse for a debtor's
act or omission and the act or omission will be cured
within a reasonable time. 	11 U.S.C. § 1112(b)(2); 7
Collier on Bankruptcy ¶ 1112.04[1] (Alan N. Resnick and
Henry J. Sommer, eds., 15th ed. rev.2008).
Orbit Petroleum, 395 B.R. at 148.
The code does not define “unusual circumstances” within
the meaning of 11 U.S.C. § 1112(b). 	See [In re ]
Gateway Access [Solutions, Inc.], 374 B.R. [556] at 560
[(Bankr. M.D. Pa. 2007)] (acknowledging that the
statute does not define “unusual circumstances”); In re
Fisher, No. 07-61338-11, 2008 WL 1775123, at *5 (Bankr.
D. Mont. April 15, 2008)(“ ‘Although section 1112(b)
does not define the phrase “unusual circumstances,” it
clearly contemplates conditions that are not common in
most chapter 11 cases.’ ”)(quoting 7 Collier on
Bankruptcy, ¶ 1112.04[3], p. 1112-26 (15th ed. rev.)).
Nevertheless, “the import of section 1112(b) is that,
if cause exists, the case should be converted or
dismissed unless unusual facts or circumstances
demonstrate that the purposes of chapter 11 would be
better served by maintaining the case as a chapter 11
proceeding.” 7 Collier on Bankruptcy ¶ 1112.04[3], p.
1112-26 (Alan N. Resnick and Henry J. Sommer, eds.,
15th ed. rev. 2008).
Id. at 148-49.
In closing arguments, Debtor argued that the “unusual
circumstances” language of Section 1112 means that if there is a
good chance a plan will give creditors more money, then the Court
should not convert or appoint a Chapter 11 Trustee. 	Debtor did
not specifically argue that his plan constituted unusual
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Page -35-
circumstances but he made no other argument, so the Court
presumes that this was the intended argument. 	The simple filing
of a plan is not an unusual circumstance in Chapter 11. 	In re
Wahlie, 417 B.R. 8, 13 (Bankr. N.D. Ohio 2009). 	Compare Orbit
Petroleum, 395 B.R. at 149:
In this case, because a plan has been filed which
purports to pay all creditors in full as of the
effective date of the plan, neither conversion nor
dismissal is in the best interest of the creditors and
the estate. 	A plan which proposes to pay all creditors
in full on the effective date is an unusual
circumstance sufficient to deny conversion or dismissal
even in the face of demonstrated cause. 	Creditors and
the estate will be far better off if the plan is
confirmed than if the case were dismissed or converted.
By affording the Debtor an opportunity to confirm a
plan that proposes to pay all creditors in full, the
purposes of the bankruptcy code to encourage financial
restructuring and facilitate payments to creditors is
furthered.
(footnote omitted.)
As discussed above, the plan in this case cannot be
confirmed. 	Even if it could, the plan does not actually make any
meaningful payment to the creditors. 	In fact, the Court finds it
highly unlikely that any plan could be confirmed. 	Debtor has
shown no other “unusual circumstances.” 	In summary, the Court
does not find “unusual circumstances” in this case that establish
that the requested conversion or dismissal is not in the best
interests of creditors and the estate. 	Therefore under 11 U.S.C.
§ 1112(b)(1) the Court “shall” convert or dismiss the case unless
§ 1112(b)(2) applies.
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36 The pending SEC action is a civil proceeding, not a
criminal proceeding. 	But should a federal criminal proceeding
ensue (the possibility of which cannot be eliminated), it will be
months if not years before Mr. Vaughan is beyond the stage where
he need no longer invoke the Fifth Amendment privilege. 	This is
simply too long a period for a personal chapter 11 reorganization
to wait for disclosure and confirmation of a plan, so there is no
point in the Court setting a deadline for Debtor to waive his
Fifth Amendment privilege.
Page -36-
The conditions set out in Section 1112(b)(2) are not
present. 	There is no likelihood that a plan will be confirmed
with a reasonable period of time. 	This takes Section
1112(b)(2)(A) out of the picture. 	Section 1112(b)(2)(B) requires
both a reasonable justification for the act or omission and a
cure of the act or omission within a reasonable period of time
fixed by the court. 	Debtor did not offer any remedial measures
to cure his failures to disclose information such that complete
information would be available within a reasonable time. 36 	And he
certainly did not offer to revoke his assertion of his Fifth
Amendment privilege. 	Thus the standard of Section 1112(b)(2)(B)
is also not met. 	Therefore Section 1112(b)(2) does not prevent
the Court from converting the case.
III 	DECISION TO CONVERT
As discussed above, there are grounds to either appoint a
trustee or convert the case to Chapter 7. 	From the discussion
above, it is clear that Debtor cannot remain a debtor-in-
possession.
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Page -37-
Once the court determines that "cause" exists (and
the Sections 1112(b) exceptions have not been
established), Section 1112(b) offers a choice between
converting the chapter 11 case to a case under chapter
7 or outright dismissal, "whichever is in the best
interests of creditors and the estate," 11 U.S.C.A. §
1112(b) (West 2010). 	"Also, instead of either
dismissal or conversion, the court may appoint a
trustee or an examiner, if such appointment is in the
best interests of creditors and the estate." 	Collier
on Bankruptcy ¶ 1112.04[7], at 1112-39--1112-40.
The Code does not define the phrase "best
interests of creditors and the estate." 	Presumably,
the parties will be the best judge of their own best
interests, and if all of the parties agree on one
course of action, the court should accommodate their
desire. 	Id. at 1112-40 (footnote omitted).
In re Van Eck, 425 B.R. 54, 67 (Bankr. D. Conn. 2010).
In this case, all creditors that commented in writing
(including the official committees of Noteholders in both cases
and BBVA Compass Bank) are in favor of conversion. 	The U.S.
Trustee prefers conversion.
Debtor himself is not a business entity. 	He was an employee
of various companies he established. 	Those companies are mostly
out of business. 	Debtor seems to have no ongoing business.
There are no funds to support a reorganization plan. 	Debtor’s
only choice is to liquidate. 	This is more easily accomplished in
Chapter 7 by a professional panel trustee. 	The Court will enter
an Order converting the case to Chapter 7 and an Order denying
the motion to appoint a Chapter 11 Trustee as moot.
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Page -38-
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	May 20, 2010
Copies to:
Douglas F Vaughan
PO Box 70009
Albuquerque, NM 87197
Alice Nystel Page
Office of the U.S. Trustee
PO Box 608
Albuquerque, NM 87103-0608
Ronald Andazola
Assistant U.S. Trustee
PO Box 608
Albuquerque, NM 87103-0608
Susan Vandiver
for the Creditor Committee
PO Box 36112
Albuquerque, NM 87176
George M Moore
for the Note Holder Committee
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
William F. Davis
for the Vaughan Co Realtors Note Holder Committee
6709 Academy NE, Suite A
Albuquerque, NM 87109
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