GOLDEN PARK ESTATES, LLC, a New Mexico limited lia

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
GOLDEN PARK ESTATES, LLC, 	No. 14-12253 t11
Debtor.
MEMORANDUM OPINION
This matter came before the Court on creditor Laurie Knott’s Motion to Dismiss Debtor’s
Bankruptcy Case or, in the Alternative, to Convert Debtor’s Chapter 11 Case to Chapter 7, and
on the United States Trustee’s Motion to Convert this Chapter 11 Case Pursuant to 11 U.S.C. §
1112(b) or appoint Chapter 11 Trustee Pursuant to 11 U.S.C. § 1104. 	The Court held a final
hearing on the motions on May 28, 2015. For the reasons set forth below, the Court will appoint
a Chapter 11 trustee.
I. 	FINDINGS OF FACT1
On July 25, 2014, Golden Park Estates, LLC (“Golden Park”) filed a voluntary petition
under chapter 11. 	The Debtor owns a 60-unit apartment complex in Hobbs, New Mexico (the
“apartment complex” or the “Property”). The Property is the Debtor’s sole asset.
1 To the extent any finding of fact is construed as a conclusion of law, it is adopted as such, and
vice versa. The Court may make additional findings of fact and conclusions of law as it deems
appropriate or as may be requested by any of the parties. 	In making these findings, the Court
took judicial notice of the docket. See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp.,
605 F.2d 1169, 1172 (10th Cir. 1979) (a court may, sua sponte, take judicial notice of its docket);
In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999) (“[t]he bankruptcy
court appropriately took judicial notice of its own docket”); In re Quade, 496 B.R. 520, 524
(Bankr. N.D. Ill. 2013) (a “bankruptcy court [is authorized] ... to take judicial notice of its own
docket”).
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Rita Pilate is the managing member and 80% owner of the Debtor. 	Kenneth Williams,
Ms. Pilate’s husband, has a 15% ownership interest, while Ritken, Inc. (“Ritken”) owns the
remaining 5% interest. Pilate and Williams are Ritkin’s sole shareholders.
The Property is operated by a separate management company, Regal Manor Apartments,
LLC (“Regal Manor”), pursuant to a contract between the Debtor and Regal Manor. Both Pilate
and Williams have an ownership interest in Regal Manor. 	Regal Manor has managed the
Property since 2009. Under the contract, Regal Manor does everything, including collecting all
rent, paying all bills, making all repairs, and signing all leases in its own name. If there is money
left over after all bills are paid (including a 10% management fee), it is paid over to the Debtor.
One result of this unusual arrangement is that the Debtor has no cash. Another result is that the
Debtor has no operating information.
The apartment complex is encumbered by the following:
Encumbrance 	Amount 	Owner
First Mortgage 	$380,000 	Laurie Knott
Second Mortgage 	$150,000 	Regal Manor
Real Estate Contract 	$1,570,000 (net) 	Court Properties
Total 	$2,100,000
Debtor purchased the Property from Laurie Knott, Tony Knott, and Kevin White under
the Escrow Agreement and Contract for Deed dated May 4, 2009 (the “REC”). 	The REC
“wraps” the first and second mortgages. 	Sellers’ interests in the REC were assigned to Court
Properties, LLC in March, 2010. Laurie Knott and Kevin White are the sole members of Court
Properties.
The Debtor estimates that the apartment complex is worth $6,000,000. There is no other
evidence of the actual value of the complex. 	There is evidence that the real estate market in
Hobbs is tight, and that occupancy rates for area apartment complexes are very high. Knott has
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never challenged the Debtor’s assertion of value. The Court finds that there is substantial equity,
in an unknown amount.
The Debtor owes $500,000 to insiders (Ritken, Pilate, and Williams) and about $14,000
to other general unsecured creditors.
Debtor’s financial reporting has been consistently and materially deficient. 	The Debtor
has not filed a Monthly Operating Report (“MOR”) since March 10, 2015, reporting on January,
2015 activity. The Debtor therefore is at least three months behind on its MORs. Furthermore,
the MORs Debtor has filed do not comply with applicable requirements, failing to disclose such
basic information as sources of income, expense detail, post-petition accounts payable and
receivable, unpaid taxes, unpaid administrative expenses, payroll, a balance sheet, a cash flow
statement, or check copies. 	The attached bank statements are heavily redacted, making it
impossible to determine what expenses are being paid and to whom, where the rental income is
going, and the source of deposits.
Most of the MORs do not contain a rent roll. The three rent rolls that are provided do not
adequately disclose lease terms, lease expirations, deposits, or rental income received.
Filed MORs show a decline in rental income from about $80,000 in August, 2014 to
about $53,000 in January, 2015.
Debtor has never used its authorized debtor in possession account. The account shows a
current balance of $88.82, with no reported income since the bankruptcy filing. 	All money
generated by the apartment complex is run through Regal Manor’s bank account.
Between December 1, 2014 and February 12, 2015, the Debtor operated without any
authority to use cash collateral.
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The lack of financial and other disclosure has been extremely problematic. 	No one can
tell how the Debtor is doing. 	The general sense is that the Debtor is not performing well, and
that the apartment complex is in need of substantial repair. The Court and the UST’s office have
prodded, cajoled, and threatened the Debtor, in an effort to obtain good bookkeeping and
financial disclosure. Debtor has been intransigent.
The Court and the UST have been asking the Debtor from the beginning to retain a good
bookkeeper or accountant. That has never happened. The debtor filed an application to retain an
accountant on April 20, 2015. 	The Court later was informed that the accountant changed its
mind and did not want to work for the Debtor.
There is evidence that the apartment complex has been poorly maintained for years, and
is in need of substantial repairs, including repairs to the roof, parking lots, landscaping, stucco,
fences, windows and screens, HVAC systems, and appliances. 	The total amount of deferred
maintenance may be in the range of $400,000-$500,000.
The apartment complex suffered a substantial roof leak during the Chapter 11. 	It has
been very difficult to obtain information about the extent of the leak, the damage done by the
leak, or the cost to repair the leak. 	The leak caused Debtor’s insurer to threaten to cancel the
property insurance.
The Court ordered the Debtor to file, by May 13, 2015, an application to retain a real
estate broker. The Debtor did not comply.
The Court also ordered the Debtor to file a plan and disclosure statement by May 13,
2015. The Debtor filed a plan (a day late) but not a disclosure statement.
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Debtor’s bankruptcy counsel withdrew on May 18, 2012. 	To date, the Debtor has not
retained new counsel. Debtor’s former counsel is owed about $14,000, according to his final fee
application.
Debtor has no counsel, no accountant, no plan in prospect, and no ability or inclination to
follow the disclosure rules of the bankruptcy court. 	To all appearances, the Debtor cannot
maintain the apartment complex. The Debtor also appears to be losing money or at best breaking
even.
Knott and Court Properties have no confidence in Debtor’s management.
If the case is dismissed, the likely outcome would be the prompt termination of the
Debtor’s rights under the REC, and the estate’s loss of equity above the $2.1 Million owed under
the REC.
II. 	DISCUSSION
A. 	11 U.S.C. § 1112(b): Conversion or Dismissal
§ 1112(b) provides:
[T]he 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, for cause unless the court determines that the appointment under
section 1104(a) of a trustee . . . is in the best interest of creditors and the estate.
§ 1112(b)(4) lists 16 grounds that constitute “cause” for conversion or dismissal. The list
is not exhaustive. 	Hall v. Vance, 887 F.2d 1041, 1044 (10th Cir. 1989) (list of enumerated
grounds is not exhaustive); In re SB Props. Inc., 185 B.R. 198, 203 (E.D. Penn. 1995) (stating
that the “legislative history of § 1112(b) confirms that what may constitute ‘cause’ is non-
exhaustive”).
The party requesting dismissal or conversion under § 1112(b) bears the burden of
establishing cause by a preponderance of the evidence. 	In re ARS Analytical, LLC, 433 B.R.
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848, 861 (Bankr. D.N.M. 2010). 	In analyzing whether cause has been established under
§ 1112(b)(4), the Court applies a materiality standard. In re Melendez Concrete, Inc., 2009 WL
2997920, at *5 (Bankr. D.N.M. 2009).
Once cause is established under § 1112(b), the Court must dismiss or convert the case, or
appoint a Chapter 11 trustee, unless the court finds “unusual circumstances ... that establish that
the requested conversion or dismissal is not in the best interests of creditors and the estate.” 11
U.S.C. § 1112(b)(2). 	See also In re Melendez Concrete, Inc., 2009 WL 2997920, at *7 (court
found sufficient unusual circumstances to deny motion to convert or dismiss despite showing of
cause, where value of debtor’s assets exceeded secured debt by more than 300%); In re Orbit
Petroleum, 395 B.R. 145, 148–49 (Bankr. D.N.M. 2008) (“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”). 	While the Code does not define “unusual
circumstances,” “[u]se of the phrase contemplates circumstances not common in most chapter 11
cases and under which the purposes of the Bankruptcy Code would be better served by the case
remaining in chapter 11.” 	In re Melendez Concrete, Inc., 2009 WL 2997920, at *7. 	“The
bankruptcy court has broad discretion ...” in fashioning relief under § 1112(b). Hall, 887 F.2d at
1044.
The Court concludes that there is cause to dismiss or convert this case under § 1112(b).
1. 	Continuing Loss and No Likelihood of Rehabilitation (§ 1112(b)(4)(A)).
From what the Court can tell from the MORs on file, the Debtor has lost money post-petition and
has unpaid administrative expense claims. 	The Property is in need of substantial repairs.
Without more money and attention devoted to general upkeep and repairs, the Property will fall
further into disrepair. The material nature of the deferred maintenance and the lack of earnings
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and cash constitute a continuing loss to or diminution of the estate. 	The Debtor has not
demonstrated any likelihood of rehabilitation. 	Cause therefore exists under § 1112(b)(4)(A).
See also In re Westgate Properties, Ltd., 432 B.R. 720, 723 (Bankr. N.D. Ohio 2010) (cause
exists because of post-petition losses and no showing of ability to reorganize or rehabilitate); In
re Landmark Atlantic Hess Farm, LLC, 448 B.R. 707, 714 (Bankr. D. Md. 2011) (same).
2. 	Gross 	Mismanagement 	(§ 	1112(b)(4)(B)). 	The 	alleged 	gross
mismanagement must occur post-petition. 	See In re Rent–Rite Super Kegs West Ltd., 484 B.R.
799, 809 (Bankr. D. Colo. 2012) (pre-petition gross mismanagement is not cause under §
1112(b)(4)(B) because the estate is a post-petition entity); In re First Assured Warranty Corp.,
383 B.R. 502, 544 (Bankr. D. Colo. 2008) (citing In re Rey, 2006 WL 2457435, at *5 (Bankr.
N.D. Ill. 2006)). “Failure to maintain an effective corporate management team has been held to
constitute gross mismanagement.” In re Products Intern. Co., 395 B.R. 101, 111 (Bankr. D. Az.
2008). 	Courts have found gross mismanagement where a debtor has failed to file monthly
operating reports. In re McTiernan, 519 B.R. 860, 866 (Bankr. D. Wyo. 2014). The Court finds
that the Debtor has been grossly mismanaged in this bankruptcy case. Debtor’s bookkeeping and
accounting have been thoroughly and consistently inadequate, despite warnings and requests
from the Court and the UST’s office. The Debtor has refused to use the authorized DIP account.
The apartment complex has not been properly maintained, and the Debtor’s monthly rental
income has declined substantially (from what the Court can tell, given the state of reporting). It
is unclear whether the Debtor has paid post-petition property taxes. 	The Debtor has run off its
professionals and has missed deadlines to file a plan, disclosure statement, and an application to
retain a broker. 	Nothing has gone right in this case. 	It is in the Debtor’s best interest to try
something else, because the debtor in possession is not getting the job done.
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3. 	Unauthorized Use of Cash Collateral. 	From December 1, 2014 until
February 12, 2015, the Debtor lacked authorization to use cash collateral, but operated
nonetheless. 	Because of Debtor’s insufficient reporting, it is difficult to determine what cash
collateral was used and what expenses were paid during this time. 	These facts constitute
additional cause under § 1112(b).
4. 	Failure to File Compliant Operating Reports. 	Debtor has not reported on
its operations after January 31, 2015. The MORs for prior periods are inadequate, as discussed
above. Debtor's mishandling of the MORs constitutes additional cause to convert the case. See,
e.g., In re Whitten, 473 B.R. 380, 383 (Bankr. D. Colo. 2012) (flagrant disregard for reporting
requirements by itself can constitute cause and whether debtor eventually filed the reports is
immaterial); In re Babayoff, 445 B.R. 64, 81 (Bankr. E.D.N.Y. 2011) (operating reports provide
necessary information about the progress of reorganization; late filing make evaluation more
difficult, and missing filings may render evaluation impossible). See generally § 1112(b)(4)(F).
5. 	Failure to Timely File a Plan and Disclosure Statement. 	The Debtor
missed the Court’s May 13 deadline to file a plan and disclosure statement. Failure to file a plan
and disclosure statement within the time set by the Court constitutes cause to dismiss or convert
a case. § 1112(b)(4)(J) See generally In re Vincens, 287 Fed. Appx. 686, 688 (10th Cir. 2008)
(failure to propose a feasible plan based on objective fact, together with failure to move the case
forward in any other way constitutes cause under § 1112(b)). Debtor has been in Chapter 11 for
nearly 11 months. No progress toward reorganization has been made during that time. There is
no reason to believe the Debtor could reorganize given more time.
B. 	§ 1104(a)(1): Appointment of a Chapter 11 Trustee for Cause.
The appointment of a trustee in a Chapter 11 case is governed by § 1104(a), which
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provides, in relevant part:
At any time after the commencement of the case but before confirmation of a
plan, on request of a party in interest ... 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 ...; or
(2) if such appointment is in the interest 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 in the amount of assets or liabilities of the debtor.
The movant bears the burden of demonstrating cause. 	In re Celeritas Tech. LLC, 446
B.R. 514, 518-19 (Bankr. D. Kan. 2011). 	Some courts have held that the movant must
demonstrate the need for a trustee by clear and convincing evidence. 	See, e.g., In re Bayou
Group, LLC, 564 F.3d 541, 546 (2d Cir. 2009); In re G-I Holdings, Inc., 385 F.3d 313, 317-318
(3d Cir. 2004). 	The Tenth Circuit has not adopted such a standard, and likely would use a
preponderance of the evidence standard. 	Celeritas Technologies, LLC, 446 B.R. at 518 (citing
cases).
Prepetition 	activity may be considered 	in 	evaluating 	Debtor’s 	wrongdoing and/or
incompetence. In re Oklahoma Refining Co., 838 F.2d 1133, 1136 (10th Cir. 1988).
The inability to maintain adequate records and make prompt and complete reports
justifies the appointment of a trustee. In re Oklahoma Refining Co., 838 F.2d 1133, 1136 (10th
Cir. 1988) (citing In re State Capital Corp., 51 B.R. 400, 403 (Bankr. M.D. Fla. 1985); In re
Humphreys Pest Control Franchises, Inc., 40 B.R. 174, 177 (Bankr. E.D. Pa. 1984); In re Ford,
36 B.R. 501, 504 (Bankr. W.D. Ky. 1983)). See also In re Plaza de Retiro, Inc., 417 B.R. 632,
641 (Bankr. D.N.M. 2009) (“Another independent ground for appointing a trustee is either
perceived dishonesty or withholding of information or a debtor’s inability to provide accurate
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records and reports.”).
Other factors courts have used to determine whether a trustee should be appointed for
cause include:
(1) 	Materiality of the misconduct;
(2) 	Evenhandedness or lack of same in dealings with insiders or
affiliated entities vis a-vis other creditors or customers;
(3) 	The existence of pre-petition voidable preferences or fraudulent
transfers;
(4) 	Unwillingness or inability of management to pursue estate causes
of action;
(5) 	Conflicts of interest on the part of management interfering with its
ability to fulfill fiduciary duties to the debtor; and
(6) 	Self-dealings by management or waste or squandering of corporate
assets.
In re Nartron Corp., 330 B.R. 573, 592 (Bankr. W.D. Mich. 2005) (collecting factors from
circuit cases).
The “determination 	of 	cause ... 	is 	within 	the discretion 	of 	the court[,] 	and 	due
consideration must be given to the various interests involved in the bankruptcy proceeding.” In
re Bergeron, 2013 WL 5874571, at *6 (Bankr. E.D.N.C. 2013) (quoting Dalkon Shield
Claimants v. A.H. Robins Co., 828 F.2d 239, 242 (4th Cir. 1987)).
When an estate is solvent, a trustee has responsibility to safeguard surplus property that
would be returned to the debtor. Ebel v. King (In re Ebel), 338 B.R. 862, 877 (Bankr. D. Colo.
2005); In re Kazis, 257 B.R. 112, 113 (Bankr. D. Mass. 2001) (if the estate is solvent, the Debtor
becomes a party in interest and the trustee must consider Debtor’s equity).
“[O]nce a bankruptcy court determines that ‘cause’ exists for appointment of a trustee
under section 1104(a)(1) or that appointment of a trustee would be in the best interest of creditors
under section 1104(a)(2),” the appointment of a trustee is mandatory. 	In re Sims, 1997 WL
854793, * 4 (10th Cir. BAP 1997) (citing Oklahoma Refining Co., 838 F.2d at 1136).
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The decision to appoint a trustee is fact intensive and should be made on a case by case
basis. In re Plaza de Retiro, 417 B.R. at 640.
The Court finds that movants have carried their burden of proving (under either standard)
that cause exists to appoint a trustee under § 1104(a)(1). Causes include all of the factors listed
in the discussion of § 1112(b). 	In addition, the Court finds that the facts outlined above
constitute incompetence, justifying the appointment of a trustee. See, e.g., In re Mako, 102 B.R.
809 (Bankr. E.D. Okla. 1988) (incompetency has its roots in mismanagement, requiring a
showing of a lack of business acumen and ability). 	The decline in the rental income and the
condition of the Property, during a time of high occupancy and demand, strongly suggests that
the Debtor is not being competently managed.
C. 	§ 1104(a)(2): Appointment of a Chapter 11 Trustee; Best Interest of Creditors. In
addition, “the Court need not find any of the enumerated wrongs in order to find cause for
appointing a trustee. . . . It is sufficient that the appointment be in the interest of creditors.”
Oklahoma Refining Co., 838 F.2d at 1136. Courts have found that a history of transactions with
companies affiliated with the debtor is sufficient cause to appoint a trustee in the best interest of
creditors. 	Id. (citing In re State Capital Corp., 51 B.R. 400 (Bankr. M.D. Fla. 1985); In re
Humphreys Pest Control Franchises, Inc., 40 B.R. 174 (Bankr. E.D. Pa. 1984); In re Concord
Coal Corp., 11 B.R. 552 (Bankr. S.D.W. Va. 1981); In re Main Line Motors, Inc., 9 B.R. 782
(Bankr. E. D. Pa. 1981); In re L.S. Good & Co., 8 B.R. 315 (Bankr. N. D. W. Va. 1980)). “[T]he
debtor’s ability to fulfill its duty of care to protect assets, its duty of loyalty, and its duty of
impartiality” is at the core of an § 1104(a)(2) analysis. 	In re Celeritas Tech., LLC, 446 B.R. at
520. Other factors courts consider when determining whether appointment of a trustee is in the
best interest of creditors under § 1104(a)(2) include:
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(1) 	The trustworthiness of the debtor;
(2) 	The debtor in possession’s past and present performance and
prospects for the debtor’s rehabilitation;
(3) 	The confidence –or lack thereof–of the business community and of
creditors in present management; and
(4) 	The benefits derived by the appointment of a trustee, balanced
against the costs of appointment.
In re Plaza de Retiro, 417 B.R. at 640; In re Colorado-Ute Elec. Ass’n, Inc., 120 B.R. 164, 176
(Bankr. D. Colo. 1990) (citing In re Ionosphere Clubs, Inc., 113 B.R. 164, 168 (Bankr. S.D.N.Y.
1990)).
The Court finds that the appointment of a trustee is in the best interests of creditors and
equity security holders, pursuant to § 1104(a)(2). 	A Chapter 11 trustee would benefit Knott
because he would attempt to sell the apartment complex as soon as practicable, would do what
he could to maintain the property and operate it professionally, would file accurate and detailed
operating reports, and would otherwise provide Knott and her counsel with information,
reporting, and/or access. 	The appointment of a Chapter 11 trustee would benefit the holders of
the “insider” debt (totaling $500,000) and other general unsecured debt, which otherwise would
not get paid. 	Finally, appointment of a Chapter 11 trustee would benefit equity, to the extent
there is value in the apartment complex over and above the costs of sale and the payment of
secured and unsecured claims.
D. 	Dismissal, Conversion, or Appointment of a Chapter 11 Trustee?
Cause exists to dismiss the case, convert the case, or appoint a Chapter 11 trustee.
Because of the $514,000 of unsecured debt (albeit $500,000 is insider debt) and the substantial
potential equity in the Property, the Court concludes that it would be better for creditors and
equity holders, overall, to appoint a Chapter 11 trustee. 	The Chapter 11 trustee’s first concern
should be to protect Knott’s and Court Properties’ collateral and ensure they are fully paid as
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soon as practicable, but the Trustee should also see if he or she can sell the Property for enough
money to pay the other creditors and return funds to the Debtor.
III. 	CONCLUSION
Cause exists to dismiss or convert the case under § 1112(b), and also to appoint a Chapter
11 trustee pursuant to § 1104(a). All things considered, the Court elects to appoint a Chapter 11
trustee. A separate order will be entered.
__________________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered: June 11, 2015
Copies to:
William J. Arland, III
201 Third Street NW, Suite 505
Albuquerque, NM 87102
Alice Nystel Page
P.O. Box 608
Albuquerque, NM 87103-0608
Golden Park Estates, LLC
P.O. Box 72
Skillman, NJ 08558
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