Joe Michael Hyatt

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
JOE MICHAEL HYATT,
Debtor. No. 11-11-10973 SA
MEMORANDUM OPINION IN SUPPORT OF ORDER
DENYING RELIEF UNDER § 1112(b)
The Motion of Cornelius Dooley, M.D. and Susanne Hoffman-
Dooley [“Dooleys”} to Convert Debtor’s Chapter 11 Case to One
Under Chapter 7 or, in the Alternative, to Dismiss Debtor’s
Chapter 11 Bankruptcy (doc 59 – motion to convert; doc 63 –
motion to dismiss) (“Motion”), and the objections thereto filed
by creditors New Mexico Bank & Trust (doc 64), Farm Credit of New
Mexico, FLCA (doc 65), Christie B. Cochrell (doc 66), and Debtor
in Possession Joe Michael Hyatt (doc 68), came before the Court
for trial on July 25, July 31 and August 2, 2012 (minutes – doc
116). The Court denies the Motion and instead sets a deadline
for Debtor to file and notice out an amended plan and disclosure
statement.1
Background
On or about October 15, 2010, HDQ, LLC obtained a judgment
in the amount of $1,835,107 following a jury trial in the First
Judicial District Court, County of Santa Fe, State of New Mexico.
The judgment was against Debtor and Quiet Title Company, LLC
The Court has subject matter and personal jurisdiction	1
pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(A); and these are
findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
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(“Quiet Title”), of which Debtor was both employee and manager.
As of the date of the filing of the petition, the Dooleys assert
the amount owed on the judgment was $1,944,458.75. Debtor and	2
Quiet Title perfected an appeal which is now pending before the
New Mexico Court of Appeals. It is not clear when the Court of
Appeals will issue a decision, but it appears likely that it will
be sometime between February and June 2013.3
Promptly after entry of the judgment, in the absence of a
supersedeas bond, HDQ initiated collection actions. See Debtor	4
exhibits (H - for “Hyatt”] 3 - 6. On March 9, Debtor and Quiet
Title (No. 11-10978-s11) each filed chapter 11 petitions. The
filing of the bankruptcy petition resulted in an almost complete
loss of business for Quiet Title, a real estate title company.
Debtor listed the amount of the claim in the lesser amount	2
in his schedule F (doc 1, at 20 of 40). In theory, these two
numbers should be the same. However, for purposes of this
opinion, the precise amount is not important, only the relative
magnitude of the judgment.
See Exhibit A attached to Motion (transcript of hearing in	3
Adversary Proceeding 11-1095, doc 59-1), at 3 of 4 (six to nine
months following the completion of briefing, but as of November
28, 2011, briefing had apparently not commenced). See also
Debtor exhibit [H - for “Hyatt”] 10 (opening brief with a file
date of June 7, 2012). During closing arguments, Debtor’s
counsel informed the Court that, following an extension of time
granted to Dooleys for filing their response brief, Debtor’s
reply brief would likely be filed sometime in August.
HDQ is an LLC, one of whose members is Cornelius Dooley,	4
M.D.
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Its chapter 11 case ended with a stipulated dismissal entered on
July 18, 2011. No. 11-10978-s11, doc 95.
Prior to the sudden loss of business by Quiet Title, Debtor
received a substantial annual salary from Quiet Title: $120,000
(gross) in 2009, $130,000 in 2010, and apparently on track for
$150,00 in 2011. Statement of Financial Affairs, no. 1. Doc 1,
at 29 of 40. Faced with the unexpected loss of his primary
business activity, and with (more than) a little help from his
friends, Debtor reconstituted the title business under the name
of Prima Title, LLC, and continues his primary business activity
running a title company. He has also continued to manage a
number of mostly interrelated companies in such a way that the
aggregate net value of the companies’ assets is continuing to
grow.
Debtor filed his schedules, statement of financial affairs,
and numerous other documents timely. He attended the first
meeting of creditors (§ 341 meeting), which the United States
Trustee concluded at the end of the meeting. Debtor also, inter
alia, obtained Court approval for various professionals (Mr.
Gramer as chapter 11 counsel, Ms. Lorenz as special counsel for
the state court appeal, Mr. Dickey as accountant for the estate);
engaged the Dooleys in claim litigation; filed monthly operating
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reports (“MORs”) ; amended his schedules B and C (docs 100 and	5
101 respectively); and obtained a modification of the stay to
permit the state court appeal process to go forward (motion filed
July 11 – doc 34; default order entered August 22, 2011 – doc
50).
And Debtor filed a chapter 11 plan and disclosure statement
on July 7, 2011, the deadline for filing a plan and disclosure
statement to avoid losing the benefit of the exclusivity period
provided by § 1121(b). Docs 32 and 33. He did not, however,
take any action to obtain approval of the disclosure statement or
to obtain confirmation of the plan. Nor has he filed a
substitute plan and disclosure statement, even at this late date.
At trial, three creditors supported Debtor in resisting the
Motion. One was Christie Cochrell (“Cochrell”), personal
representative of the estate of June Cochrell, owed $92,700 on a
2005 note. Proof of claim no. 8. Debtor and that creditor
appear to have reached an accommodation that has Debtor paying
interest but relatively little principle each year. Another was
New Mexico Bank & Trust (“NMBT”), which holds a mortgage on
Debtor’s home in Tesuque, New Mexico, as well as a deed of trust
Debtor is largely current on his MOR’s, lacking only the	5
one for August 2012. The MORs also appear to lack the cumulative
running monthly totals. Debtor explained he had not been asked
to prepare that part of the MORs. There was no explanation about
why counsel signed off on the MORs without that part completed.
At a minimum, on a going-forward basis, the MORs must be complete
when filed.
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on the Plaza Rojo [sic] house. According to Schedules A and D
(doc 1), the first mortgage on the Tesuque property of about
$1,200,000 is fully secured by the property worth $1,300,000.
The Plaza Rojo numbers are considerably smaller: a $154,000
mortgage secured by collateral worth $190,000. Debtor has also	6
guarantied to NMBT debts of Trestle Ranch Corporation (“Trestle”)
and Poohbah Corporation (“Poohbah”) in the amounts of $130,00 and
$190,000 respectively. Third was Farm Credit of New Mexico, FLCA
(“Farm Credit”), which has a note for what Farm Credit says is a
debt of about $2,528,000 (Proof fo Claim No. 9)and Debtor says is
a debt of $2,666,000. Farm Credit and Debtor both agree the note
is fully collateralized by the Trestle land and improvements,
which Farm Credit values at $3,982,000. Farm Credit asserts it
is worried about a decrease in value of the collateral such that
it might in the future find itself needing to call on Debtor’s
guaranty of the Trestle debt.
Analysis
As noted, on January 23, 2012, Dooleys filed their motion to
convert the chapter 11 case to a case under chapter 7 (their
preference) or to dismiss the chapter 11 case. In closing
Both of these properties are located in Santa Fe County	6
and subject to junior liens arising from HDQ’s transcript of
judgment. Doc 1 (schedules A and D). The Court is relying on
Debtor’s schedules since NMBT has not filed a proof of claim.
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argument, Dooleys’ counsel also offered the alternatives of the
appointment of a chapter 11 trustee or an examiner.
Dooleys in the Motion and in the course of the trial alleged
the following to be the bases for the Motion:
1. Substantial and continuing losses to, and diminution of, the
estate, and there is no reasonable likelihood of
rehabilitation ;	7
2. Gross mismanagement of the estate (through the transfers
among various entities and extravagant, lavish and/or
exorbitant lifestyle and spending);
3. Failure to confirm a plan within the time fixed by the
Bankruptcy Code and inability to feasibly [sic] confirm the
plan on file;
4. Case filed in bad faith because this is a two-party dispute
and the Bankruptcy Court is an improper venue for such
dispute;
5. Filing the case in bad faith in attempting to use a chapter
11 filing in lieu of posting a supersedeas bond in the state
court action; and
6. Not moving toward confirmation of a plan.8
Sic in the Motion (at 1). The Court will treat this	7
allegation as if it were worded identically with the
corresponding language in the statute at § 1112(b)(4)(A), which
is set out below.
In the Motion, Dooleys also charged that Debtor was acting	8
(continued...)
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Congress significantly amended § 1112 when it passed the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”), and then again when it passed the Bankruptcy
Technical Corrections Act of 2010 (“Technical Corrections Act”) .	9
The statute, including the applicable parts of § 1112(b), now
reads as it did on the petition date, as follows:
Conversion or dismissal
(b)(1) Except as provided in paragraph (2) and
subsection ( c ) [prohibiting conversion of farmers’ or
eleemosynary entities’ cases to chapter 7 cases], on
request of a party in interest, and after notice and a
hearing, the court shall convert a case under this
(...continued)	8
in bad faith in this and in the related chapter 11 filing of
Quiet Title, but made that specific allegation without a further
specification of behavior. “Lack of good faith is atypical
conduct that constitutes an abuse of the bankruptcy process.” In
re Costa Bonita Beach Resort, Inc., 2012 WL 3716842 (Bankr.
D.P.R. 2012) at *18 (citing Marrama v. Citizens Bank of
Massachusetts, 549 U.S. 365, 375 n. 11 (2007) (“We have no
occasion here to articulate with precision what conduct qualifies
as ‘bad faith’ sufficient to permit a bankruptcy judge to dismiss
a Chapter 13 case or to deny conversion from Chapter 7. It
suffices to emphasize that the debtor’s conduct must, in fact, be
atypical.”). Not specifying the conduct that allegedly
constitutes the bad faith essentially makes the allegation
meaningless.
Pub. L. No. 111-327, 124 Stat. 3557 (December 22, 2010).	9
Whether the changes enacted by the Technical Corrections Act to §
1112 (other than the change of “521" to “521(a)”) was much more
substantive than merely technical is less than debatable. In re
Ashley Oaks Development Corp., 458 B.R. 280, 284 n.7 (Bankr.
D.S.C. 2011). But it makes little difference for purposes of
this decision since this chapter 11 case was filed after the
effective date of the Technical Corrections Act, thus not raising
the issue of the retroactivity of the statute. See In re Sparkle
Stor - All Eaton Township, LLC, 2011 WL 4542709 (Bankr. N.D. Ohio
2011) at *3 and note 2.
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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, for cause unless the court
determines that the appointment under section 1104(a)
of a trustee or an examiner is in the best interests of
creditors and the estate.
(2) The court may not convert a case under this chapter
to a case under chapter 7 or dismiss a case under this
chapter if the court finds and specifically identifies
unusual circumstances establishing that converting or
dismissing the case is not in the best interests of
creditors and the estate, and the debtor or any other
party in interest 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 converting or dismissing the
case 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.
(3). . ..
(4) For purposes of this subsection, the term ‘cause’
includes--
(A) substantial or continuing loss to or
diminution of the estate and the absence of a
reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
. . .
(J) failure to file a disclosure statement, or to
file or confirm a plan, within the time fixed by this
title or by order of the court. . . .
Most of the examples of “cause” cited in the statute are on
their face not applicable in this case (and therefore not set out
above). On the other hand, the term “includes” that leads off §
1112(b)(4) means that there can be bases for relief other than
those specifically identified in that subsection. See § 102(3);
e.g., In re Alton Telegraph Printing Co., 14 B.R. 238, 240
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(Bankr. S.D. Ill. 1981); Orbit Petroleum, 395 B.R. 145, 147-48
(Bankr. D. N.M. 2008); In re Borges, 440 B.R. 551, 560 (Bankr.
D.N.M. 2010) (citing Orbit Petroleum); 7 Alan N. Resnik et al.,
Collier on Bankruptcy ¶ 1112.04[4] (16th ed. 2011). The
allegations of bad faith based on this being a two-party dispute
and the use of a chapter 11 filing in lieu of a supersedeas bond
are examples of the latter.
[T]he movant bears the initial burden of demonstrating
that cause exists to convert the chapter 11 case to
chapter 7, or to dismiss the case, whichever is in the
best interst of creditors and estate. If cause is
established and unusual circumstances of application of
section 1104(a) are not found by the court, the statute
requires conversion to chapter 7 or dismissal of the
case. Thus, until the movant carries this burden, the
statutory direction that the court “shall convert the
case to a case under chapter 7 or dismiss the case” is
not operative.
Id. (footnotes omitted). Accord, e.g., In re Muskogee
Environmental Conservation Company, 236 B.R. 57, 59 (Bankr. N.D.
Okla. 1999) (movant bears initial burden to establish cause by
preponderance of the evidence); In re Hospital de Damas, Inc.,
2012 WL 1190651 (Bankr. D. P.R. 2012) at *3 (same); In re
Colbran, LLC, 2012 WL 2803726 (Bankr. D. Mass. 2012) at *3
(Technical Corrections Act did not change burdens).
1. Substantial and continuing loss to or diminution of the
estate and there is no reasonable likelihood of
rehabilitation:
The most obvious reason why the Motion fails on this ground
is that Debtor has financially rehabilitated himself.
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“Rehabilitation means to reestablish a business.” In re
Brutsche, 2012 WL 3150353 (Bankr. D. N.M. 2012) *3 (citations
omitted); accord, In re ARS Analytical, LLC, 433 B.R. 848, 862
(Bankr. D. N.M. 2010). Debtor has done that in spades. He	10
continues to manage the affairs of the various corporations, LLCs
The Court is aware of its language in ARS Analytical,	10
LLC, 433 B.R. at 862: “Rehabilitation in Chapter 11 starts with a
confirmable plan.” (Citing Canpartners Realty Holding Co. IV,
L.L.C. v. Vallambrosa Holdings, L.L.C. (In re Vallambrosa
Holdings, L.L.C.), 419 B.R. 81, 89 (Bankr. S.D. Ga. 2009.) A
more complete quotation from the Vallambrosa Holdings opinion is
as follows:
Nevertheless, rehabilitation in a Chapter 11 begins
with a confirmable plan. It then requires, at minimum,
the prospect of re-establishment of a business.
I find that Debtor has not advanced a plan which is
confirmable, even if Tucker does contemplate
re-establishing Debtor as an operating company.
Id. (Citation omitted.) In applying § 1112(b)(4)(A), the court
in Vallambrosa Holdings had already determined that on the
petition date, debtor had sufficient equity in its real estate to
pay the secured claim and the unsecured claims in full, but that
almost a year later, it had lost almost all its equity and in
addition had no cash to pay administrative claims. Id. at 88-89.
It then found that there was simply no way the debtor could
propose and confirm a plan that would allow the debtor to rescue
its real estate development. Id. at 89-90. It was in this
context that the court ruled that rehabilitation, which it
defined as “the successful maintenance or re-establishment of the
debtor's business operations”, id. at 89, must start with a
confirmable plan. Similarly, ARS Analytical had not re-
established its business – it was continually losing money and
could not even pay its administrative claims – nor could it
propose a plan that would re-establish its business. ARS
Analytical, LLC, 433 B.R. at 862-63. In the instant case, on the
other hand, Mr. Hyatt has already re-established his business,
and so the context of this case differs materially from the
context of ARS Analytical and Vallambrosa Holdings, in which
rehabilitation could only start with the confirmation of a plan.
(The issue of a confirmable plan, of course, was and is of
critical importance in all three cases.)
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and partnerships that he has been managing for years. There is
little difference between what he was doing with these entities
and their property at almost any point before or after the
filing. Quiet Title did rather quickly go out of business, but
Debtor barely missed a beat in resuming his management of a Santa
Fe real estate title company – Prima Title – which essentially
has the same employees, location and business of Quiet Title.
Dooleys cite this arrangement as evidence of bad faith, but that
criticism in effect emphasizes how well the rehabilitation has
been accomplished.
To obtain relief under 11 U.S.C. § 1112(b)(4)(A),
movant must show both a continuing loss or diminution
and absence of a reasonable likelihood of
rehabilitation. In re Fall, 405 B.R. 863, 867 (Bankr.
N.D. Ohio 2008), aff'd, 2009 WL 974538 (N.D. Ohio
2009); Vallambrosa Holdings, 419 B.R. at 88.
Id. (Emphasis added.) Debtor’s re-establishment of its business
means that Dooleys have not proved the grounds for relief under §
1112(b)(4)(A).
It is also the case, though, that there have not been
substantial and continuing losses to or diminution of the estate.
Debtor’s management overall has resulted in the Evergreen
Apartments being put into a profitable status for the first time
ever and for the opportunity to purchase the apartments in 2015,
the oil and gas properties restored to being a steady six-figure
source of income (approximately $300,000 per year less NMBT
payments), the Santa Fe storage condominiums now debt free (and
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generating about $120,000 annual income), and the debts of
Poohbah to NMBT and of Trestle to Farm Credit and Legacy Bank
being paid down (thereby reducing Debtor’s contingent liability).
Trestle is also repaying its preferential transfer to the estate.
Selling various assets, such as the ranch held by Trestle, would
generate a loss, and thus it is not unreasonable to continue to
hold the ranch, and indeed all the real estate, for appreciation
and, where applicable, income. Similarly, the oil and gas
interests could be sold but there is really only one buyer for
them – the controlling party – so that holding the oil and gas
interests to continue collecting the revenue seems quite
reasonable .	11
2. Gross mismanagement of the estate (through the transfers
among various entities and extravagant spending):
The allegation about the improper transfers was described by
Dooleys’ counsel as “situational accounting” – obtaining assets
for and incurring debts by, and allocating or attributing those
assets and debts to, whatever corporation Debtor designates as
needed, but mainly Trestle and Poobah. Dooleys cited this
conduct as the primary instance of mismanagement. They also
argued that Debtor was living an extravagant lifestyle,
improperly supporting insiders, and using a major preference
In any event, Debtor committed to sell the oil and gas	11
interests as needed.
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recovery to sustain his too-high spending levels in the chapter
11 case.
Dooleys spent a considerable amount of time examining the
assets and debts of, and the transactions among, Debtor and the
several entities in which he has an interest. Those entities and
Debtor’s direct and indirect ownership shares are as follows
(usefully summarized on charts provided by Dooleys): Maxwell
Trust (debtor is the sole beneficiary) owns 85% of Prima Title
(source of Debtor’s earned income); Poohbah Corporation (100%);
MaxMedical (Poohbah owns 100% of stock); JMH Racing (Poohbah owns
90%; 10% held by Jon M. Hyatt); Trestle Ranch Corporation (100%);
Bison Investments, LLC (Debtor owns 25% and Trestle owns 25%);
Evergreen Apartments (Debtor owns 50% and Evergreen Apartments,
LLC owns 50%); Scottrade account (Trestle owns 100%); and (a now
defunct) Quiet Title Co., LLC (Trestle owns 100%).
Dooleys’ expert witness, Ms. Rachel Kefauver, presented
evidence that was both precise and accurate, and eminently
credible. She pointed out numerous accounting discrepancies in
the records created over a period of years. But at the end of
the day (metaphorically speaking), she did not say, nor did she
purport to say, that she had discovered any fraud, any cover up,
any other illegitimate activity or accounting or even any losses.
The Court agrees that the accounting by Mr. Charles Dickey, the
longtime accountant for Debtor and his companies, was less than
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pristine, but the significant discrepancies were all easily
explained. At most an occasional lack of expertise and some
sloppiness appear to have been the culprits. There was certainly
nothing in the evidence that pointed to cause for dismissal or
conversion. The Court also finds credible and persuasive
Debtor’s statement that over many years he has relied on the
accounting and records of Mr. Dickey, including to do millions of
dollars of transactions, and never had a problem.
The exhibits, particularly Dooley exhibit 57 (doc 111), and
the testimony from the various witnesses (all of whom the Court
finds were credible) allows the Court, without the need to detail
the contents of the exhibits and the testimony, to make several
findings. First, Debtor has for years, and continuing through
this chapter 11 case, managed the various companies’ assets in
such a way as to maximize the aggregate value of all the entities
(including himself). That effort included, indeed necessitated,
a number of intercompany transactions and, in effect, notes
payable/receivable among the entities (albeit the obligations
were documented by check register entries, bank statements, and
other records of receipts and disbursements rather than
promissory notes as such). This was what Dooleys’ counsel
characterized as “situational accounting”. Regardless of the
deprecating terminology and Dooleys’ overlooking the overall
result, it is hard to find any fault with what appears to be
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Debtor’s patient and astute accumulation and nurturing of assets,
both prepetition and postpetition.
Second, the accounting as provided by Mr. Dickey, and as
supplemented by Mr. Dickey during his examination, was less than
rigorously consistent with standard accounting procedures but
easily sufficient to provide an accurate picture of the assets,
liabilities and transactions of the entities. Third, there was
no evidence whatever of any attempt to conceal or mischaracterize
any asset, debt or transaction at any time, by Debtor or Mr.
Dickey.
All of the Court’s findings support the overarching
conclusion that there was no evidence whatever of any bad faith
on the part of Debtor, or his counsel, other than potentially the
failure to file and confirm a plan (discussed below). Rather,
the evidence overwhelmingly supports the conclusions that Debtor
has for years, including during this chapter 11 case, worked
diligently to manage the assets and grow the net value of the
companies, and has carefully tracked all those transactions.
Debtor (more accurately, the estate now) owns almost all the
companies and their assets directly or indirectly, so the
transfers do not represent any losses to the estate. And while
if any one of the entities were to end up in bankruptcy, there
might be issues of constructive fraudulent transfers, the fact is
that using the various legal entities as Debtor has done does not
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in any way constitute bad faith per se. In consequence, the net
effect of the evidence concerning the “situational accounting” is
to demonstrate that Debtor from the outset conducted a
sophisticated and successful asset management program in good
faith.
Dooleys also argue that Debtor is living an extravagant life
style. Related to that are the claims that he is improperly
supporting insiders and that the preference recovery which he has
arranged from Trestle is being used for operations instead of
being reserved for payment of creditors. Debtor did not deny,
and the MORs show, that he had been using the Trestle preference
recovery as part of operations. But by itself that practice is
not improper. Money is fungible, and whether these funds are
used in operations while other funds are used to pay creditors,
or vice versa, makes no difference. Only if the preference
recoveries are being improperly dissipated would it become an
issue, but that is the case with any asset of the estate.
It is also the case that Debtor is supporting insiders, but
not improperly. First, Debtor is providing significant support
for a disabled adult son, roughly averaging $2,000 monthly. (To
Dooleys’ credit, at no time have they challenged those living and
medication expenditures as improper.) Debtor is also providing
occasional support for his other adult son. At the beginning of
the case he was also providing support for his elderly mother,
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but testified at trial that his sister had now taken over that
responsibility. But there was no evidence that the support for
those persons was extravagant or not necessary. And the mere
fact that the recipients of Debtor’s support were not minors or a
current spouse does not automatically make the support improper.
See In re Gonzales, 297 B.R. 143 (Bankr. D. N.M. 2003) (chapter
13 plan confirmed when Debtor was supporting his adult son who
was unable to obtain steady employment).
Finally, Debtor’s expenses are somewhat on the high side,
but are legitimate enough to not constitute cause for dismissal
or conversion. Debtor’s residence in Tesuque, financially
underwater, requires a monthly mortgage payment of approximately
$7,800. The home is not in a condition to be sold in the current
Santa Fe real estate market without sustaining a major loss –
thereby increasing the unsecured debt of the estate -- and so at
least for the time being it makes sense to continue to hold the
property (and provide Debtor a place to live) in the hopes that
an appreciation of real estate values in the Santa Fe area will
take hold at some point over the next few years. However, even
if one does not agree with this approach, the business decision
not to sell an asset at a loss when it might be sold later
without a loss, is not the sort of behavior that should lead to
dismissal or conversion. Rather, it is a plan confirmation
issue.
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Another of the claims was that Debtor ate out almost every
day. In part that would be expected for someone who runs a high-
end service company that depends on the good will and business of
many professionals in the community, particularly real estate
agents. Nevertheless, the MORs show that the amounts spent on
each meal mostly range from $8.00 to $15.00. Further, a number
of the meals were purchased from McDonald’s, Blake’s (Lotaburger)
and Wendy’s (together with what appears to be a lot of coffee
from McDonald’s). Short of preparing a peanut butter and jelly
sandwich every day (though this Court is certainly not
denigrating the traditional PB&J, many of which this judge has
consumed), it is hard to imagine how the amounts expended for
those meals could be materially reduced.
Overall, excluding professional fees, Debtor’s living and
operating expenses range from about $12,000 to $15,500 per
month. Subtracting the mortgage and support for his son,	12
together totaling a little under $10,000 per month, Debtor’s
remaining monthly expenses are $2,000 to $5,500. If a somewhat
typical mortgage payment – say, $2,500 – is added to those net
figures, the result is monthly expenses of $4,500 to $8,000 or,
on an annualized basis, $54,000 to $96,000 per year. By New
Mexico standards these figures are high, but not so much for
The December 2011 household expenses of $18,138 included	12
almost $2500 for continuing legal education, legal malpractice
insurance and realtor’s errors and omissions insurance.
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professionals. In any event, the amounts being spent do not rise
to the level of serving as a basis for dismissal or conversion.
Rather, the level of expenses should be determined as part of the
confirmation process. See § 1129(a)(15)(B) (individual debtor’s
projected disposable income as defined in § 1325(b)(2) may be
part of the confirmation requirements for an individual chapter
11 debtor).
3. Failure to confirm a plan within the time fixed by the
Bankruptcy Code and inability to feasibly confirm the plan
on file:
As noted, Debtor filed a plan and accompanying disclosure
statement on the 120 day following the filing of the chapter 11	th
petition. He has not since then moved to obtain approval of the
disclosure statement, nor confirmation of the plan. And in fact,
Debtor’s discussion of an alternative plan in the course of trial
is an admission that the plan on file cannot be confirmed.
However, because the plan on file is not confirmable, does not
mean that cause exists under § 1112(b)(4)(J) for dismissal or
conversion. That conclusion follows because Debtor still has
time to file an amended plan, as he apparently intends to do.
Section 1112(b)(4)(J) is relatively explicit: “failure to
file a disclosure statement, or to file or confirm a plan, within
the time fixed by this title or by order of the court.” First,
with the exception of small business cases, there is no deadline
as such provided by the Code or the rules (either the national
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rules or this Court’s local rules) for the filing of a chapter 11
plan. The 120-day period that is loosely albeit erroneously
referred to as a “deadline” for filing a plan is really only a
deadline in the sense that the debtor in possession’s exclusivity
right terminates unless the plan is filed within the 120 days or
the court extends the exclusivity period. § 1121(b) and (c).
Second, the Code deadlines for filing and confirming a plan
imposed on small business debtors by §§ 1121(e) and 1129(e) do
not apply to Debtor. Debtor is not a small business as defined
in § 101(51D). Debtor’s petition states that explicitly, but
also has checked off the box that says that “Debtor’s aggregate
noncontingent liquidated debts (excluding debts owed to insiders
or affiliates) are less than $2,343,300.” Doc 1. Schedules D
and F respectively show secured debt owed directly to non-
insiders of approximately $3,256,000 and unsecured debt owed
directly to non-insiders of about $90,000, for a total of
$3,346,000, a million dollars more than the upper limit of debt
that defines a small business. Apparently the box stating the
amount of the debt was checked off in error.
Third, this Court has not ordered Debtor to file a plan, or
an amended plan, at any time. HDQ or Dooleys could have filed
its or their own plan, albeit such a plan would face substantial
hurdles to get confirmed, and there likely would have been a
major fight over the disclosure statement. Similarly, either of
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these two creditors could have asked the Court to set a deadline
to file a plan. Neither of those events transpired. In
consequence, no cause exists under § 1112(b)(4)(J) for dismissal
or conversion.
4. Case filed in bad faith because this is a two-party dispute
and the Bankruptcy Court is an improper venue for such
dispute;
5. Filing the case in bad faith in attempting to use a chapter
11 filing in lieu of posting a supersedeas bond in the state
court action; and
6. Not moving toward confirmation of a plan.
These three grounds are largely different aspects of the
same argument, and so will be considered as a group.
First, there can be little dispute that this case is in fact
largely a two-creditor dispute, which status can serve as a basis
for a dismissal. See, e.g., Muskogee Environmental Conservation
Company, 236 B.R. at 66-67; City of Sioux City, Iowa v. Midland
Marina, Inc. (In re Midland Marina, Inc.), 259 B.R. 683, 686 (8th
Cir. BAP), aff’d 22 Fed.Appx 680, 2001 WL 1543940 (8 Cir. 2001)	th
(dismissal of chapter 11 to allow marina owner to prosecute
claims against city, which litigation was its primary asset;
chapter 11 case was largely a two-party dispute between debtor
and city); In re 266 Washington Associates, 141 B.R. 275, 288
(Bankr. E.D. N.Y. 1992) (single asset real estate chapter 11 case
dismissed when stay modified and debtor could propose no
confirmable plan that could be crammed down on secured creditor’s
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deficiency claim; other creditors were minor creditors caught up
on the petition date); In re Paolini, 312 B.R. 295, 307 (Bankr.
E.D. Va. 2004) (listing cases) (two-party dispute in which debtor
filed to avoid collection efforts as it appealed judgment; trial
court had denied debtor’s request for a stay pending appeal
without filing a supersedeas bond; debtor exhibited no serious
effort to reorganize finances and filed a plan which sought to
avoid payment of the judgment, debtor’s spouse was dissipating
assets, etc.); In re Sydnor, 431 B.R. 584, 594, 596 (Bankr. D.
Md. 2010) (inquiry about lack of good faith includes not only
whether case was filed to avoid posting of supersedeas bond but
also whether case is essentially two-party dispute, whether
debtor intends to relitigate the prior action, and whether debtor
has an ongoing business that can be reorganized; case dismissed);
c.f., Harker v. United States, 112 F.3d 513 (8 Cir. 1997)	th
(unpublished) (chapter 13 petition filed to avoid assessment by
IRS, which was the only creditor and which potentially had a
nondischargeable, priority claim); In re Shady Grove Tech Cener
Associates Limited Partnership, 216 B.R. 386, 391-92 (Bankr. D.
Md. 1998) (chapter 11 single asset real estate case was
essentially a two-party dispute in which a plan was not
confirmable; stay relief granted). The lack of any pressure from
any of the other creditors before or during this chapter 11 case
helps illustrate that. See, e.g., In re Nichols, 223 B.R. 353,
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356, 359-362 (Bankr. N.D. Okla. 1998) (chapter 11 case dismissed
for bad faith when, inter alia, debtor filed to avoid
incarceration for violating state court divorce proceeding
orders, there was no pressure from other creditors, and there was
no prospect of reorganization without resolution of divorce
proceedings). But if there were any doubt, one need only
consider the statement of Debtor’s counsel that “this is a one
creditor case. You know, it’s not like there are other
significant creditors out there. This is just a Dooleys against
Hyatt in Bankruptcy Court, 15-rounder, at this point.”
Transcript for November 28, 2011 hearing in Dooley v.Hyatt,
Adversary Proceeding 11-1095, p. 8, line 24 through p. 9, line
2.13
In fact, the case is not entirely a two-party dispute. For
example, Debtor has guarantied the debts of a number of the
related corporations and LLCs, but those other entities appear to
have the wherewithal, including the collateral value, to repay
their obligations. More important, Debtor also has a
longstanding debt to June Cochrell for about $90,000, although as
noted the historical repayment of that obligation has been
agreeably leisurely. Nevertheless Ms. Cochrell decidedly risks
A copy of the transcript is attached to the Motion.	13
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not getting repaid if the case is dismissed. Admittedly, even	14
if the case continues in its chapter 11 DIP status or is
converted, she may not be repaid in full, but her chances of at
least partial payment are greater than if the case is dismissed.
Those facts are sufficiently distinct from, for example,
Muskogee Environmental Conservation Company, 236 B.R. 57. In
that case, the chapter 11 debtor had sustained a state court
judgment against it in connection with its primary asset, a very
profitable fly ash disposal contract. The case was filed to move
“a classic two-party dispute” between debtor and the two opposing
parties from state court to bankruptcy court; the dispute was
based solely on state law. Once in the bankruptcy court, the
parties initiated three adversary proceedings and numerous
contested matters against each other. When postpetition, the
judgment against the debtor was vacated on appeal in state court
proceedings, the parties were basically back to starting the
litigation all over. Debtor filed a plan which had the effect of
taking the state court litigation and moving it to the bankruptcy
court. And in a similar vein, debtor had the wherewithal to both
obtain a supersedeas bond (and did so, but did not file it), and
to satisfy the state court judgment without losing its ability to
Schedule F also lists Trestle as a creditor for $290,000,	14
from loans advanced over the previous six years. The remainder
of the unsecured debts are monthly bills for cable and utilities
that got caught up in the filing.
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operate; for example, the debtor accumulated $1,400,000 during
the chapter 11 case.
The question presented by these cases is a simple one.
It is whether Chapter 11 of the United States
Bankruptcy Code exists for the purpose of allowing a
debtor the option of litigating a dispute with a single
party (or, in this case, two parties with identical
interests) in an alternative forum, when the debtor has
no other need of or use for the bankruptcy court. The
Court answers the question in the negative.
Id. at 68.
In the instant case, Debtor had no ability to put up a
supersedeas bond, had no cornucopia of cash, and has not
attempted to move the state court litigation to this Court. His
proposed plan (as yet unfiled) appears to contemplate paying all
his obligations in full, whatever they may be. This is clearly
not a case initiated simply to obtain an alternative forum for
litigation. Thus, although the dispute that is the basis for
this chapter 11 case is largely though not entirely a two-party	15
dispute, that is not a sufficient basis by itself for dismissing
or converting the case.
Debtor candidly admits that he filed this chapter 11 case
and the one for Quiet Title because neither debtor was able to
post a $3.5 million bond. Dooleys argue that filing a chapter 11
As noted, Cochrell is likely to go unpaid, or at best	15
partially unpaid, if there is a wholesale seizure and liquidation
of the estate’s assets by either the creditors or a chapter 7
trustee. In itself that is a strong argument against dismissal
or conversion.
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case to avoid the need to post the bond is bad faith justifying
the conversion or dismissal of the case.
There is Tenth Circuit authority to dismiss a chapter 11
case for a bad faith filing. See generally Udall v. Federal
Deposit Insurance Corp. (In re Nursery Land Development, Inc.),
91 F.3d 1414, 1416 (10 Cir. 1996):	th
[Case properly dismissed for bad faith when debtor] (1)
has only one asset; (2) has only one creditor; (3)
acquired property which was posted for foreclosure and
the prior owners had been unsuccessful in defending
against the foreclosure; (4) was revitalized on the eve
of foreclosure to acquire the insolvent property; (5)
has no ongoing business or employees; and (6) lacks a
reasonable possibility of reorganization, and (7) the
Chapter 11 filing stopped the foreclosure.
See also In re Nichols, 223 B.R. at 356, 359-362 (chapter 11 case
dismissed for bad faith when, inter alia, debtor filed to avoid
incarceration for violating state court divorce proceeding
orders, there was no pressure from other creditors, and there was
no prospect of reorganization without resolution of divorce
proceedings).
But more specifically there is conflicting authority about
whether the mere act of filing a bankruptcy case to avoid the
need to post a supersedeas bond is per se bad faith. Compare,
e.g., In re Wally Findlay Galleries (New York), Inc., 36 B.R.
849, 851 (Bankr. S.D. N.Y. 1984) (Debtor filed chapter 11 case in
face of ejectment action following grant of summary judgment
against it in state court:
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Neither the debtor, the Borynack Corporation, nor Mr.
Borynack has sufficient assets to post a bond in order
to stay these judgements pending appeal. The debtor
filed its petition herein to avoid the consequences of
adverse state court decisions while it continues
litigating. The court should not, and will not, act as
a substitute for a supersedeas bond of state court
proceedings.
. . .
The debtor is unable to propose a meaningful plan of
reorganization until its litigation with International
and Realty is resolved. Thus, it is evident that the
debtor seeks to use this court not to reorganize, but
to relitigate. This is an impermissible use of Chapter
11 of the Bankruptcy Code. Consequently, the above
captioned petition must be dismissed.
and In re Smith, 58 B.R. 448 (Bankr. W.D. Kan. 1984) (it is an
abuse of state and federal law for a solvent judgment debtor with
one (judgment) creditor to use chapter 11 as a substitute for
posting a supersedeas bond); In re Karum Group, Inc., 66 B.R.
436, 438 (Bankr. W.D. Wash. 1986) (debtor would not be insolvent
but for judgment; improper to use chapter 11 as substitute for
supersedeas bond); In re Davis, 93 B.R. 501, 503 (Bankr. S.D.
Texas 1987) (debtor filed to avoid posting supersedeas bond;
chapter 11 petition dismissed because debtor had sufficient
assets to pay judgment and because debtor may have been dishonest
in first meeting of creditors and on schedules); In re Boynton,
184 B.R. 580, 582-84 (Bankr. S.D. Cal. 1995) (Debtor had assets
to put up supersedeas bond for, and to pay, Tax Court judgment;
assets were largely liquid in investment account, and debtor did
not operate a business but filed only to stay enforcement of
judgment to be able to appeal; dismissal appropriate in this
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largely two-party case where no permissible bankruptcy purpose is
being served); Marsch v. Marsch (In re Marsch), 36 F.3d 825, 827-
29 (9 Cir. 1994) (chapter 11 case dismissed on finding that	th
petition was filed solely to delay collection of restitution
judgment and to avoid posting an appeal bond; bankruptcy court
found that debtor could satisfy judgment with nonbusiness assets;
court refrained from ruling on whether petition could be
dismissed for bad faith if debtor did not have sufficient assets
to post a supersedeas bond); In re Primary Health Services, Inc.,
227 B.R. 479, 485-86 (Bankr. N.D. Ohio 1998) (but for post-
judgment transfers, debtor would have been able to post
supersedeas bond; debtor also manufactured for itself cash flow
problems and engaged in a continuous course of deception); Epic
Metals Corp. v. Condec (In re Condec), 232 B.R. 806, 809 (M.D.
Fla. 1999) (reversing plan confirmation for, inter alia, bad
faith filing of chapter 11 case solely to avoid need to file
supersedeas bond and plan was not fair and equitable to the one
truly impaired creditor); In re SGL Carbon Corporation, 200 F.3d
154, 163-67 (3 Cir. 1999) (completely solvent chapter 11 debtor	rd
filed to aid in extracting a favorable settlement and not for any
valid reorganizational purpose; proposed plan treated the
judgment creditor substantially differently than other creditors
who were to be paid full amount of claims in cash); Chu v.
Syntron Bioresearch, Inc. (In re Chu), 253 B.R. 92, 95-96 (S.D.
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Cal. 2000) (dismissing chapter 11 case when debtor had ability to
file a supersedeas bond, could not propose a confirmable plan of
reorganization, and claimed assets and liabilities that suddenly
appeared without explanation; debtor sought to use chapter 11 to
delay and collaterally attack state court judgment);
The test of good faith is whether a debtor is
attempting to unreasonably deter and harass creditors
or attempting to affect a speedy, efficient
reorganization on a feasible basis. The overall goal
of the good faith requirement is to deter filings that
seek to achieve objectives outside the legitimate scope
of the bankruptcy laws.
Id. at 95 (citing In re Marsch, 36 F.3d at 828; internal
punctuation omitted); In re Paolini, 312 B.R. at 307; In re
Sydnor, 431 B.R. at 594, 596; c.f. Harker v. United States
(chapter 13 petition filed to avoid assessment by IRS, which was
the only creditor, and to avoid filing of supersedeas bond;
bankruptcy court’s finding that this use of chapter 13 was
inconsistent with fundamental goal of bankruptcy to reorganize
debts and so warranted dismissal was not clearly erroneous);
with In re Alton Telegraph Printing Co., 14 B.R. at 241 (chapter
11 filing due to inability to post supersedeas bond not bad faith
per se); Hillside Plaza Ltd. v. Pomodoro Restaurant (In re
Pomodora Restaurant, 251 B.R. 441 (10 Cir. BAP 1999)	th
(unpublished) (listing cases) (stay relief denied and case not
dismissed when debtor could not post supersedeas bond and debts
substantially exceeded assets; test is to look at all the
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circumstances of the case); In re Fox, 232 B.R. 229, 233-36
(Bankr. D. Kan.), appeal dism’d 241 B.R. 224 (10 Cir. BAP	th
(1999) (listing cases and declining to adopt per se rule that
filing chapter 11 case in lieu of filing supersedeas bond
constitutes bad faith; debtor had timely filed disclosure
statement and plan); Marshall v. Marshall (In re Marshall), 403
B.R. 668, 690-94 (C.D. Cal. 2009) (allegedly solvent debtors
lacked resources to put up supersedeas bond and filed petition
shortly after being ordered by Texas state court to turn over
assets; although schedules prepared by debtors were not “exactly
right” and debtors lacked many unsecured creditors or much
unsecured debt other than that of the judgment creditor, denial
of motion to dismiss chapter 11 case affirmed); see also In re
Glunk, 342 B.R. 717 Bankr. E.D. Pa. 2006) (court refused to
dismiss chapter 7 case filed by physician to address one primary
claim of malpractice, while continuing to live a lavish
lifestyle); Rocco v. King (In re King), 2008 WL 8444814 (9 Cir.	th
BAP) (unpublished) (court refused to dismiss chapter 13 case
filed in lieu of posting supersedeas bond; debtor had filed plan
which proposed 100% payment to all creditors).
To begin with, “[f]iling a chapter 11 case because of the
crushing weight of a judgment is not unusual.” In re Marshall,
403 B.R. at 690 (citations omitted). “Giving debtors the
opportunity to reorganize in response to impending financial
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distress is the purpose of chapter 11. The fact that this
financial distress was brought on by litigation rather than
borrowing is not dispositive.” Id. at 691. C.f., In re Texaco
Inc., 254 B.R. 536, 541 (Bankr. S.D. N.Y. 2000) (“Texaco filed
under Chapter 11 for the sole purpose of compromising a $10.5
billion judgment.”). Given this approach, this Court believes
that the better reasoned cases are those that hold that the mere
filing of a chapter 11 petition to avoid the need to file a
supersedeas bond, relying instead on the automatic stay to
prevent collection activities, is not by itself bad faith or a
reason to convert or dismiss the chapter 11 case.
But as the cases also make clear, filing a chapter 11
petition obligates the filer to proceed with the chapter 11 in
good faith, including taking those actions to fulfil the purpose
of a chapter 11 case. That will ordinarily include filing a
confirmable plan and disclosure statement and then timely
confirming the plan. E.g., In re Sparkle Stor - All Eaton
Township, LLC:
Both subparts (b)(4)(J) and (b)(4)(E) in turn seem
reasonably construed to include not only the
requirement that filing deadlines and court orders be
met, but that they be met with documents and actions
that substantially comply with the statute and the
directives of the court, thus placing the case in a
reasonable posture to move forward toward
reorganization. Debtors' most recent proposed form of
plan and disclosure statement do not place the case in
that posture, as they remain fundamentally flawed and
lacking substantial compliance with §§ 1122 and 1129.
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2011 WL 4542709 at *4; c.f., In re 266 Washington Associates,
141 B.R. at 281 (“However, restraining creditors from enforcing
their legitimate rights is strong medicine and our bankruptcy
laws do not sanction the stay for stay’s sake.” Case dismissed
because no effective reorganization was in prospect, citing
United Savings Ass’n of Texas v. Timbers of Inwood Forest
Assocs., 484 U.S. 365, 375-76 (1988)).
In this case Debtor filed a plan and disclosure statement on
the 120 day following the filing of the petition. That of	th
course precluded any other person, including Dooleys, from filing
a plan for another sixty days. § 1121(c)(2) and (3). But then
Debtor took no further steps to complete the confirmation
process. In response to the Court’s question during closing
argument about whether Debtor had not largely “parked” the
chapter 11 case to await the outcome of the state court appeal,
Debtor’s counsel insisted the case had been very active, pointing
out that Debtor had not only timely performed various duties
imposed by the Code but also had spent nine months resisting a
non-dischargeability action from the Dooleys. When the Court
asked when an amended plan could be filed, Debtor’s counsel
estimated sixty days. This estimate was in the context of
counsel’s other estimate that a decision from the New Mexico
Court of Appeals was certainly possible by January 2013. Thus, a
plan filed around the beginning of October, assuming at least one
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one-month delay for a disclosure statement dispute, could easily
come up for a confirmation hearing in January 2013 as well. That
would accomplish Debtor’s transparent goal of getting an
appellate decision on the judgment without any collection action
in the interim and without a supersedeas bond. The Court notes
also that in response to the sixty-day estimate, the Court told
counsel that sixty days was too long, yet even now, approximately
7 ½ weeks following oral argument, Debtor has still not filed an
amended plan.
Debtor’s position on the filing of a plan, evidenced by its
conduct in this chapter 11 case, is that he wants and needs to
obtain an appellate review, and a reversal, of the jury verdict,
in order to provide some certainty for purposes of a plan.
However, the decision by the Court of Appeals will not inevitably
end the litigation. Depending on the outcome, either party will
be entitled to ask the New Mexico Supreme Court to review the
decision of the Court of Appeals. Alternatively, the Court of
Appeals may remand for another trial. In short, the state court
litigation could continue for years, even though all of the
discussion on this issue has focused only on the upcoming
decision by the Court of Appeals. Neither side has stated a
position on what might happen after the Court of Appeals issues
its decision. And it would be unreasonable for Debtor to put off
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filing an amended plan until the conclusion of all the
litigation.
Thus Debtor is faced with submitting a plan that takes into
account that uncertainty. Whether such a plan provides
alternative dispositions of the assets depending on the outcome
of the litigation, or seeks in effect to compromise the HDQ
claim, or in effect concedes that the HDQ claim is treated in the
full amount of the judgment, is not at issue at this time, of
course. It suffices that plans with alternative treatment of
claims are frequently filed.
As the case law makes clear, filing and confirming a plan
are at the heart of a debtor in possession’s reorganization.
“Confirmation of a plan of reorganization is the
statutory goal of every chapter 11 case. Section 1129
provides the requirements for such confirmation,
containing Congress' minimum requirements for allowing
an entity to discharge its unpaid debts and continue
its operations.” 7 Collier on Bankruptcy ¶ 1129.01, p.
1129–10 (rev. 15th ed.1998).
Bank of America Nat. Trust and Sav. Ass'n v. 203 North LaSalle
Street Partnership, 526 U.S. 434, 465 n. 4 (Stevens, J.,
dissenting); Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 470-
71 (1974); ARS Analytical, 433 B.R. at 862; see Nursery Land
Development, 91 F.3d at 1416 and Nichols, 223 B.R. at 359 (one
bad faith factor is lack of ability to reorganize). The
structural importance of the plan in a chapter 11 case is further
reflected in § 1112(b)(2)(A), which conditions a finding of
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“unusual circumstances” on, inter alia, “a reasonable likelihood
that a plan will be confirmed . . . within a reasonable period of
time. . . .” Indeed, the failure to confirm a plan timely has a
particularly pernicious effect on a DIP chapter 11 case. That is
because, unlike almost any other “cause” specified in §
1112(b)(4), the failure to file and confirm a plan within a
reasonable time period not only constitutes cause to trigger
dismissal or conversion, but filing and confirmation are also
prerequisites for obtaining the exception to conversion or
dismissal. In other words, failure to file and confirm a plan
timely triggers conversion or dismissal and also precludes use of
the one way to avoid conversion or dismissal. As with a finding
of § 1112(b)(4)(A) cause – substantial and continuing loss or
diminution of the estate and no reasonable prospect of
rehabilitation – a finding of cause for failure to confirm a plan
timely has this two-fold “unforgiveable sin” effect.
Thus the Court finds that Debtor’s attempted manipulation of
the chapter 11 process – the filing without moving forward in
good faith to confirm and implement a plan – should constitute
bad faith and “cause” under § 1112(b)(4) sufficient to trigger
the consequences of § 1112(b)(1). In re Ashley Oaks Development
Corp., 458 B.R. at 287 (failure to file plan timely as required
by local rule, coupled with continuing losses and no prospect of
reorganization, results in dismissal); In re Van Eck, 425 B.R.
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54, 63-64 (Bankr. D. Conn. 2010) (debtor filed plan without
disclosure statement 18 months into the case and on day of
hearing on motion to dismiss; case dismissed). And that behavior
would constitute cause but for the fact that § 1112(b)(4)(J)
specifically addresses deadlines for filing a plan.
That subsection specifically addresses when a plan must be
filed. As noted above, Debtor has not missed any deadline for
filing a plan, and therefore there is no cause to dismiss or
convert pursuant to that subsection. With Congress having
explicitly addressed when not filing a plan constitutes cause for
dismissal or conversion, the Court should not in effect modify §
1112(b)(4)(J) by adding a deadline under the guise of “bad
faith”. This conclusion gives effect to the statutory canon of
interpretation that “inclusio unius est exclusion alterius”,
despite the fact that the sixteen instances of cause listed in §
1112(b)(4) are not exclusive. See also Radlax Gateway Hotel, LLC
v. Amalgamated Bank, ___ U.S. ___, 123 S.Ct. 2065, 2070-73 (2012)
(commonplace canon of statutory interpretation, that the specific
governs the general, required debtor’s chapter 11 plan to permit
the secured creditor to credit bid at the sale of the collateral
pursuant to § 1129(b)(2)(A)(ii) (incorporating credit bidding
rights of § 363(k)) rather than no credit bidding by invoking the
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more general standard of indubitable equivalence of §
1129(b)(2)(A)(iii)).16
In consequence, the Court cannot dismiss or convert this
chapter 11 case, nor appoint a chapter 11 trustee, at least
pursuant to § 1112(b). The Court will therefore deny the Motion
without prejudice.
However, this denial of the Motion is in effect, albeit not
literally, conditional : Debtor must file a reasonably	17
confirmable amended plan and accompanying disclosure statement,
and have noticed out that plan and disclosure statement, and
obtain a hearing on any objections to the disclosure statement,
no later than Wednesday, October 10, 2012. Debtor’s failure to	18
meet this deadline will constitute cause pursuant to § 1112(b)(4)
This interpretation follows from the plain language of	16
the statute, it does not use an alternative and perhaps non-
obvious ground to in effect modify the statute, and it has the
additional advantage of allowing a common-sense reading of the
statute to provide a reasonable assurance about what it takes to
comply with the statute.
See Orbit Petroleum, 395 B.R. at 149 (denying motion	17
conditioned on debtor confirming plan; failure to confirm would
result in order of dismissal); In re Melendez Concrete Inc., 2009
WL 2997920 at *7 (Bankr. D.N.M. 2009) (debtor allowed to attempt
to confirm a plan conditioned on filing a plan and disclosure
statement timely, obtaining insurance for property, refiling
defective MORs, and other requirements).
Since Debtor’s counsel stated that he could have a plan	18
on file within sixty days of August 2, a deadline of October 8
provides Debtor an additional nine days for filing the plan. The
Court assumes that Debtor and counsel have not ignored the
Court’s comments made during oral argument.
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sufficient to trigger the consequences of § 1112(b)(1) without
the need for any further evidentiary hearing. In that
circumstance, the Court will conduct oral argument on Wednesday,
October 17, 2012, at 1.30 pm (Mountain Daylight Time), in the
Animas Courtroom, 13 Floor, 500 Gold S.W., Albuquerque, New	th
Mexico 87102, to consider what the evidence showed concerning
“unusual circumstances” and what remedy is most appropriate among
the choices of dismissal, conversion or appointment of a chapter
11 trustee. The parties should be prepared to address the
question of whether the “unusual circumstances” test is
applicable if the Court decides to appoint a chapter 11 trustee,
as opposed to dismissing or converting the case, in light of the
lack of a reference to the appointment of a chapter 11 trustee in
§ 1112(b)(1) but not in § 1112(b)(2). The parties, and Debtor in
particular, should also be prepared to address the consequences
and ramifications of the appointment of a chapter 11 trustee ,	19
See, e.g., Margaret Howard, Bankruptcy Bondage, 2009 U.	19
Ill. L. Rev. 191, 192:
Under the 2005 Amendments, an individual debtor
may be put into a chapter 11 proceeding involuntarily,
and required to make payments under a plan proposed by
creditors out of future income. During consideration of
the 1978 Bankruptcy Code, Congress thought that similar
provisions proposed for chapter 13 raised problems
under the Thirteenth Amendment. We now, however, have
the very statutory configuration that was rejected at
that time, partly on constitutional grounds. Now that
these provisions are part of the law, full discussion
of the Thirteenth Amendment's possible application is
timely.
(continued...)
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since the appointment of a chapter 11 trustee might comport best
with the dictate of § 1112(b)(1) for a disposition that is in the
“best interests of the creditors and the estate [but not
necessarily of the debtor].” Of course, if Debtor files and	20
notices out the amended plan and disclosure statement timely,
(...continued)	19
(footnotes omitted); In re Clemente, 409 B.R. 288 (Bankr. D. N.J.
2009) (debtor in trusteed chapter 11 case moved to convert his
case to chapter 7; court treated motion as request to terminate
chapter 11 trustee for limited purpose of converting case to
chapter 7 in order to avoid constitutional issue of involuntary
servitude); Misuraca v. United States Trustee, 2009 WL 1212471
(D. Ariz.) (claim that chapter 11 provision to pay future wages
to trustee is unconstitutional not ripe for judicial
determination).
Prior to the enactment of BAPCPA, the statute permitted	20
but did not require the Court to convert or dismiss if it found
cause; the Court’s discretion has now been considerably albeit
not entirely removed. See Orbit Petroleum, 395 B.R. at 147; In
re Miell, 419 B.R. 357, 366 (Bankr. N.D. Iowa 2009). The wider
discretion was consistent with the dual chapter 11 purposes of
reorganization by the debtor to preserve or increase value and to
pay creditors. See United States v. Whiting Pools, Inc., 462
U.S. 198, 203 (1983). After BAPCPA, if the debtor has failed to
file MORs timely, pay postpetition taxes, pay United States
Trustee fees, etc., all of which might be easily curable, the
debtor in possession may still lose control, or have the case
dismissed, even if the creditors wish otherwise, because the
circumstances at issue have to be “unusual”; that is,
“circumstances [that] cannot solely be facts that are common to
Chapter 11 cases generally.” Sydnor, 431 B.R. at 591 (citation
omitted); In re Pittsfield Weaving, 393 B.R. 271, 274 (Bankr. D.
N.H. 2008) (“the phrase [“unusual circumstances”] contemplates
conditions that are not common in chapter 11 cases. Citation
omitted.). In other words, by taking away the flexibility to
continue a case in its chapter 11 DIP status except in “unusual
circumstances”, Congress has elevated punishment for a debtor’s
misbehavior or even only missteps over payment to creditors.
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there will be no hearing on conversion, dismissal or appointment
of a chapter 11 trustee.
An order will issue.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date entered on docket: September 26, 2012
Copies to:
Citibank, N.A.
701 East 60th Street North
SIOUX FALLS, SD 57117
Citibank, N.A.
Payment Center, 4740 121st St.
Urbandale, IA 50323
Christie B Cochrell
c/o Thomas G Rice
8608 Greenarbor Rd NE
Albuquerque, NM 87122
Charles Dickey, Jr.
PO Box 93427
Albuquerque, NM 87199
Cornelius Dooley
Susanne Dooley-Hoffman
c/o Aletheia Vadin Pamela
Allen
Arland & Associates LLC
201 Third St NW Ste 505
Albuquerque, NM 87102
William J Arland, III
PO Box 1089
Santa Fe, NM 87504-1357
Duquque Bank and Trust
c/o Peggy A Whitmore
Castle Stawiarski, LLC
20 First Plaza NW, Suite 602
Albuquerque, NM 87102
Farm Credit of New Mexico,
FLCA,
a wholly owned subsidiary of
Farm Credit of New Mexico, ACA
c/o Michelle Ostrye
PO Box 1945
Albuquerque, NM 87103-1945
HDQ, LLC
c/o Kelcey C Nichols
The Simons Firm, LLP
PO Box 5333
Santa Fe, NM 87502
HDQ, LLC
Thomas D Walker
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Joe Michael Hyatt
c/o Clifford C Gramer, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
New Mexico Bank & Trust
c/o Francis J Mathew
PO Box 23945
2011 Botulph, Ste 200
Santa Fe, NM 87502-3945
Page 40 of 41
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Quiet Title Co., LLC
c/o George M Moore
Moore, Berkson & Gandarilla,
P.C.
PO Box 7459
Albuquerque, NM 87194
U.S. Bank, National
Association, as Trustee for
the Certificateholders of the
SARM 2006-1 Trust Fund
c/o Karen H Bradley
PO Box 3509
Albuquerque, NM 87190-3509
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