Melendez Concrete Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
MELENDEZ CONCRETE INC., 	No. 11-09-12334 JA
Chapter 11
Debtor.
MEMORANDUM OPINION
This matter came before the Court on Community Bank’s Motion to Dismiss or Convert
Case to Chapter 7 filed July 30, 2009. Following an evidentiary hearing on September 1, 2009,
the Court took the matter under advisement. Community Bank (the “Bank”) seeks dismissal or
conversion of Debtor’s chapter 11 case under 11 U.S.C. §1112(b) on the grounds that the Debtor
committed various prepetition bad acts, failed to timely file operating reports, failed to produce
documents as required by an order of this Court, failed to adequately insure the Bank’s
equipment collateral, failed to disclose claims against insiders, and has suffered continuing losses
or diminution of the estate. 	The Debtor contends conversion or dismissal is inappropriate
because 1) prepetition bad acts may not be considered in connection with a motion to dismiss or
convert under 11. U.S.C. §1112(b); 2) the Debtor has now filed the operating reports,
substantially complied in good faith with the order, adequately insured the equipment collateral,
and inadvertently failed to disclose the claims against insiders; and 3) the estate is not suffering
losses.
After considering the Motion to Dismiss or Convert and the evidence admitted at trial, and
being otherwise informed, the Court will deny the Motion to Dismiss or Convert contingent on
the Debtor’s compliance with certain requirements specified below.
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FACTS
Melendez Concrete, Inc. (“Melendez Concrete” or “Debtor”) is a construction company
that ceased operations in or around February 2009. It commenced a voluntary chapter 11 case on
May 29, 2009 to conduct an orderly liquidation of its assets. 	Melendez Concrete is a small
business debtor as defined by 11 U.S.C. §101(51D). 	Miguel Melendez (Mr. Melendez) is
Secretary of and Designated Agent for the Debtor.
The Bank, a secured creditor of the Debtor, made three loans to the Debtor. As of May
30, 2009, the Debtor owed the Bank $381,940.05, exclusive of attorney’s fees. Of that amount,
$342,639.64 is secured by the Debtor’s inventory, chattel paper, accounts, equipment, and
general intangibles, and $132,328.74 of the $342,639.64 is also secured by certain vehicles.1
On October 20, 2008, after Debtor defaulted on Loan 505095001, the Bank commenced
litigation against the Debtor in state court to collect that loan and foreclose its security interest in
the collateral securing the loan. Subsequently, Debtor defaulted on the remaining two loans by
failing to make required payments.
On March 13, 2009, Melendez Concrete sold certain titled vehicles not pledged to the
Bank to an insider of the Debtor, Sangre de Christo Gravel Products LLC (“Sangre de Christo”),
1 Community Bank made three loans to the Debtor, designated Loan 505095001, Loan 506015002, and
Loan 505105002. 	Community Bank made Loan 505095001 on September 7, 2005. 	Community Bank
made Loan 505105002 on October 11, 2005. 	No evidence was presented on when Community Bank
made Loan 506015002. 	As collateral for Loan 505095001, and future advances, which included Loan
505105002, Debtor granted Community Bank a security interest in all of Debtor’s inventory, chattel
paper, accounts, equipment, and general intangibles, then owned or thereafter acquired, and proceeds
thereof. As collateral for Loan 505105002, Debtor granted Community Bank a security interest in certain
titled vehicles. The amounts Debtor owed Community Bank on Loan 505095001, Loan 506015002, and
Loan 505105002, as of May 30, 2009, were $210,310.90, $39,204.41, and $132,328.74, respectively,
which totals $381,940.05. Because the security agreements do not contain dragnet clauses, and no
evidence was presented on when Community Bank made Loan 506015002 or whether it is secured, the
record does not establish whether the Bank has a secured claim for Loan 506015002. .
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for $71,000. 	On or about March 17, 2008, Melendez Concrete sold equipment pledged to the
Bank for $36,947 in violation of one of the security agreements, and did not pay the sale
proceeds to the Bank. In early April 2009, Melendez Concrete collected approximately $41,000
on a receivable pledged to the Bank, and did not pay the sale proceeds to the Bank in violation of
a security agreement.2 Melendez Concrete used those funds to pay unsecured creditors,
including 	one 	or 	more 	creditors 	whose 	claims 	Mr. 	Melendez 	and 	his 	father 	personally
guaranteed.
On March 26, 2009, shortly before a scheduled deposition of Mr. Melendez, counsel for
Melendez Concrete sent an email message to counsel for the Bank stating “We surrender,” and
agreeing to entry of a stipulated judgment against Melendez Concrete. 	After the parties could
not agree on the terms of the stipulated judgment, the Bank sought and obtained an order from
the state court, entered May 14, 2009, requiring Mr. Melendez to appear for a deposition, and
ordering Melendez Concrete to surrender certain equipment and vehicles to the Bank by May 28,
2009. Melendez Concrete commenced this chapter 11 case on May 29, 2009 to avoid complying
with the state court order.
Post-petition, the Court entered a stipulated order authorizing the Bank to take a Rule
2004 examination duces tecum. 	The order provided, in part, that “the debtor shall provide . . .
copies of the documents listed on Exhibit A [to the order] to counsel for the Bank . . . on or
before August 7, 2009,” which was in advance of a Rule 2004 examination scheduled for August
14, 2009. 	The Bank complains that the Debtor, in violation of this Court’s order, failed to
2 The Debtor delivered two checks to Community Bank on or about April 21, 2009 in the total amount of
$17,528.43. Both checks were returned for insufficient funds.
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produce its initial report, documents showing the sale of equipment on March 17, 2009 to Richie
Brothers, and cancelled checks reflected on certain bank statements. The Debtor produced other
requested documents. 	The Debtor’s explanation for not producing requested documents is that
the initial report had not yet been prepared3 , the Debtor did not understand that “items” means
checks,4 and that the requested sale documents were in storage and would be burdensome to find.
In its schedules of assets and liabilities filed June 18, 2009, Debtor scheduled total assets
it valued at $1,488,221.34, but failed to schedule claims of the Debtor against insiders in the
amount of approximately $680,000. Mr. Melendez testified that he did not realize those claims
were assets of the estate that needed to be scheduled. 	On June 23, 2009 the Debtor filed a
financial statement that disclosed insider claims as of October 30, 2008 in the Financial Notes.
Following the hearing on the Bank’s Motion to Convert or Dismiss, on September 9, 2009 the
Debtor amended its schedules to list the insider claims as an asset of the estate.
On August 19, 2009, the Debtor filed its first small business monthly operating report in
this case, which was a combined report for the period of June and July 2009. 	No financial
statements are attached to the operating report. 	Consistent with the Debtor’s testimony that all
operations of the Debtor ceased in or around February 2009, the operating report reflects no
3 On June 15, 2009, the Debtor prepared what is now the equivalent of what previously was termed an
initial report but did not provide a copy to Community Bank. 	That document is entitled United States
Trustee Financial Requirements Checklist, Certifications and Declarations 	The Debtor is required to
provide that document to the United States Trustee before the initial debtor interview of the Debtor
conducted by the United States Trustee, but it is not required to be filed of record. 	No evidence was
presented regarding the date of the initial debtor interview.
4 The Bank requested copies of bank statements with items. 	Under Section 4-104(9) of the Uniform
Commercial Code, enacted in New Mexico as §55-4-104(9) NMSA 1979, an “item” is defined as “an
instrument or a promise or order to pay money handled by a bank for collection or payment,” and
includes a check.
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income or expenses during the reporting period. The small business monthly operating report for
the period of August 2009 has not been filed; the report is not due until September 15, 2009.
Debtor’s equipment and vehicles are insured under a policy listing Sangre de Cristo as
the named insured. Debtor’s agent testified that, in consultation with Debtor’s insurance agent,
all of Debtor’s equipment and vehicles were insured under a Sangre de Cristo policy in an effort
to save money. The Bank asserts that the insurance policy failed to provide coverage for certain
equipment and vehicles, 5 while providing insufficient coverage for other equipment and
vehicles, 6 and failed to list the Bank as an additional insured. Mr. Melendez testified that he had
requested the insurance agent to add the Bank as an additional insured.
Mr. Melendez’s uncontroverted testimony was that the total value of the equipment and
vehicles owned by Debtor is approximately $1.3 million to $1.4 million if sold in an orderly
fashion and not by auction, and that in the current depressed market this is not the time or place
to sell construction equipment by auction. 	The schedules reflect total debt of $1,328,940.53,
including the debt owed to the Bank of $381,940.05 as of May 30, 2009. 	The Debtor has not
sold any equipment post-petition, and has limited funds for advertising until some equipment is
sold.
5 A few items of Debtor’s equipment appear not to be included in the list of insured equipment, including
two items pledged to Community Bank, a 1989 Ford F350XL and a 1987 Caterpillar CP-323. 	These
comprise a small portion of the equipment.
6 Exhibit 15, the CNA Inland Marine Policy, contains “Blanket coverage on small tools and equipment
used in your business” with an insurance limit of $10,000 in the aggregate and $1,000 per item. 	Mr.
Melendez testified that the amount of this “blanket coverage” is in accordance with ordinary industry
practices. He further testified that the total value of the equipment itemized on pages 16 and 17 of Exhibit
16, designated as light equipment, exceeded the $10,000 limit. 	There appear to be 47 pieces of small
tools and equipment covered under the “blanket coverage” but there was no testimony regarding the
actual value of the small tools and equipment.
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Debtor has not filed a plan or disclosure statement. The exclusivity period for Debtor to
file its plan and disclosure statement expires November 25, 2009.
DISCUSSION
A chapter 11 case may not be converted or dismissed under 11 U.S.C. §1112(b) except
for “cause.” 	If cause is established, 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. §§1104(a)(3) and 1112(b)(1). 	If the court finds such unusual circumstances exist, the
court is not required to convert or dismiss or to appoint a trustee.7 If no such unusual
circumstances are found, the court must not convert or dismiss the case if (i) the debtor or
another party objects, (ii) the act or omission is other than a substantial or continuing loss to or
diminution of the estate coupled with the absence of a reasonable likelihood of rehabilitation,
and (iii) the objecting party establishes that there is a reasonable likelihood that a plan will be
confirmed within a time specified in the statute, that there exists a reasonable justification for the
act or omission, and that the act or omission will be cured within a reasonable period fixed by the
court. 11 U.S.C. §1112(b)(2).
7 See, e.g., In re Franmar, Inc., 362 B.R. 170, 180 (Bankr. D.Colo. 2006)(stating that even if ‘cause’ to
dismiss is established under the statute, section 1112(b)(1) provides a court with discretion to deny a mot
ion to dismiss or convert if the court finds ‘. . . unusual circumstances . . . that establish that the requested
conversion or dismissal is not in the best interests of creditors and the estate.’”); In re Gateway Access
Solutions, Inc., 374 B.R. 556, 560 (Bankr.M.D.Pa. 2007)(noting that dismissal or conversion may be
disallowed when the debtor identifies ‘unusual circumstances’ that establish conversion is not in the best
interest of creditors).
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The threshold issue, thus, is whether “cause” exists to convert or dismiss. 	Section
1112(b)(4) lists sixteen nonexclusive grounds that constitute cause. 8 In re AmriCERT, Inc., 360
B.R. 398, 401 (Bankr.D.N.H.2007) (“The list [contained in 1112(b)(4)] is not exhaustive, and a
case may be dismissed for other causes, such as bad faith or if the petition does not serve a
bankruptcy purpose.”) (citations omitted). Although this section restricts the Court’s discretion,
the Court still maintains some degree of discretion to deny the relief requested. Gateway Access
Solutions, 374 B.R. at 560; Franmar, 361 B.R. at 180.
The Bank asserts that cause exists to dismiss or convert the case under 11 U.S.C.
§1112(b)(4), including (b)(4)(A), (C), (E) and (H) due to Debtor’s conduct both pre-petition and
post-petition. 	The Bank asserts that pre-petition, Debtor intentionally delayed state court
litigation during which time it sold some of the bank’s collateral and collected an account, and
8 Section 1112(b)(4) provides:
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; (C) failure to maintain appropriate insurance that poses a risk to the estate
or to the public; (D) unauthorized use of cash collateral substantially harmful to 1 or more creditors; (E)
failure to comply with an order of the court; (F) unexcused failure to satisfy timely any filing or reporting
requirement established by this title or by any rule applicable to a case under this chapter; (G) failure to
attend the meeting of creditors convened under section 341(a) or an examination ordered under rule 2004
of the Federal Rules of Bankruptcy Procedure without good cause shown by the debtor; (H) failure timely
to provide information or attend meetings reasonably requested by the United States trustee (or the
bankruptcy administrator, if any); (I) failure timely to pay taxes owed after the date of the order for relief
or to file tax returns due after the date of the order for relief; (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; (K) failure to pay any
fees or charges required under chapter 123 of title 28; (L) revocation of an order of confirmation under
section 1144; (M) inability to effectuate substantial consummation of a confirmed plan; (N) material
default by the debtor with respect to a confirmed plan; (O) termination of a confirmed plan by reason of
the occurrence of a condition specified in the plan; and (P) failure of the debtor to pay any domestic
support obligation that first becomes payable after the date of the filing of the petition.
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used the proceeds to pay other creditors in violation of the Bank’s lien rights. The Bank asserts
that post-petition Debtor failed to comply with a discovery order of the Court; failed to maintain
appropriate insurance coverage for Debtor’s equipment and vehicles; failed to disclose claims
against insiders that are property of the estate; and failed to timely file proper operating reports.
The Debtor’s Pre-petition Conduct is Relevant to the Court’s Consideration of “Cause”
Debtor contends that its prepetition conduct is irrelevant to a motion to dismiss or
convert. 	This contention is not correct. 	Prepetition conduct of a debtor can be considered to
determine whether cause exists under §1112(b)(4) to convert or dismiss on the ground the
chapter 11 case was filed in bad faith.9 To determine whether a chapter 11 case was filed in bad
faith, courts consider all relevant factors, including (i) whether the petition serves a valid
bankruptcy purpose such as by preserving a going concern or maximizing the value of the
debtor’s estate; (ii) whether the petition is filed merely to obtain a tactical litigation advantage;
(iii) whether the debtor’s financial problems involve essentially a dispute between the debtor and
secured creditors that can be resolved in the pending state court litigation; (iv) whether it is a
single asset case, (v) whether there are one or a very few unsecured creditors, (vi) whether there
is no ongoing business or employees; (vii) whether the pre-petition conduct of the debtor has
been improper; and (viii) whether the case is filed to evade one or more court orders.10 No single
9See, e.g. In re Integrated Telecom Express, Inc., 384 F.3d 108, (3rd Cir. 2004); In re Nursery Land
Development, Inc., 91 F.3d 1414, 1415 (10th Cir. 1996); In re Trident Associates Ltd. Partnership, 52
F.3d 127,130 (6th Cir. 1995); In re Phoenix Piccadilly, Ltd., 849 F.2d 1393, 1394 (11th Cir. 1988).
10 See Integrated Telecom Express, Inc., 384 F.3d at 122 (applying one or more of the factors); In re
Nursery Land Development, Inc., 91 F.3d at 1416 (same); Trident Associates Ltd. Partnership, 52 F.3d at
130 (same); Phoenix Piccadilly, Ltd., 849 F.2d at 1394 (same).
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factor is determinative, and the weight given each factor will necessarily vary with the facts and
circumstances of each case. 11
Factors (vi), (vii) and (viii) support a finding of bad faith. Debtor engaged in conduct to
delay the Bank’s exercise of remedies prepetition during which time it sold or collected and then
paid about $78,000 of the Bank’s collateral, in breach of a security agreement, to creditors other
than the Bank, including a creditor whose debt was personally guaranteed by Mr. Melendez and
his father. Debtor commenced the chapter 11 case to avoid compliance with a state court order
requiring surrender of the Bank’s collateral; has no business operations; and has only one
employee. 	On the other hand, the schedules list two unsecured priority claims and twelve
unsecured 	nonpriority 	claims 	totaling 	$842,372.65, 	in 	addition 	to 	the 	Bank’s 	claim 	of
$381,940.05. The uncontroverted testimony was that the Debtor’s equipment assets, all or most
of which are pledged to the Bank, have a value of approximately $1.3 million to $1.4 million,
and that in the current recessionary market an orderly sale of Debtor’s equipment in chapter 11
rather than by auction provides the best prospect for maximizing value for the benefit of
creditors as a whole. Mr. Melendez and his father are motivated to maximize value as a result of
personal guarantees not only to the Bank but also to unsecured creditors. The Court is persuaded
by these facts and the testimony that the petition serves a valid bankruptcy purpose. Under these
circumstances, the Court gives particular weight to factor (i), and finds that the Debtor did not
file the chapter 11 case in bad faith.
11 Cf. Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983) (applying a factors test in the context of
whether a chapter 13 plan is proposed in good faith).
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The Enumerated Grounds for Dismissal or Conversion Should be Evaluated under a
Materiality Standard
The Bank asserts that cause to convert or dismiss also exists under several of the
enumerated grounds contained in § 1112(b)(4). 	The Debtor counters that it is in substantial
compliance with the prescriptions of § 1112(b)(4). 	The parties’ contentions raises the question
whether the materiality of the Debtor’s infractions are to be considered. 	To determine whether
the Court should apply a materiality standard to the enumerated grounds set forth in §
1112(b)(4), the words of the statute should be read in context and with a view to carry out the
purpose of the statutory scheme. 12 A fundamental purpose of chapter 11, in the case of a
reorganization, “is to prevent a debtor from going into liquidation, with an attendant loss of jobs
and possible misuse of economic resources. N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513,528,
104 S.Ct. 1188 (1984). Fundamental purposes of chapter 11 also include maximizing the value
of the estate for the benefit of all creditors, promoting equality of distribution among creditors,
and avoiding piecemeal, preferential dismemberment of a debtor’s assets. In re Holley Garden
Apartments, Ltd., 238 B.R. 488, 494 (Bankr. M.D. Fla. 1999).
A materiality standard should be applied when assessing whether cause exists under the
enumerated grounds that constitute cause under § 1112(b)(4). 	Not applying a materiality
standard to the enumerated grounds would undermine the fundamental purposes of chapter 11.
For example, it is common sense that a chapter 11 case should not be converted or dismissed
12 Cf. Bailey v. U.S., 516 U.S. 137, 145, 116 S.Ct. 501 (1995) (the Court considered the meaning of the
word “use” under 18 U.S.C. §924(c)(1) as well as its “placement and purpose in the statutory scheme”);
Been v. O.K. Industries, Inc., 495 F.3d 1217, 1227 (10 TH Cir. 2007) (where the Court interpreted §202(a)
of the Packers and Stockyards Act (“PCA”), 7 U.S.C. §181 et seq. “in light of the purposes Congress
sought to serve”. The Court read “the words of the statute in their context and with a view to their place
in the overall statutory scheme”).
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under §1112(b)(4)(F) or §1112(b)(4)(I) if a debtor in possession that is generally discharging its
duties files a monthly operating report a few days late, even if without just excuse, or pays a
post-petition tax a day late.
“Cause” Has Not Been Demonstrated Under § 1112(b)(4)(A), (C) or (E): the Debtor’s
Failures Are Not Material Enough to Constitute “Cause”
The Bank asserts that cause to convert or dismiss exists under 11 U.S.C. §1112(b)(4)(A),
which provides that cause exists if there is a “substantial or continuing loss to or diminution of
the estate and the absence of a reasonable likelihood of rehabilitation.” 	This case has been
pending for less than four months. 	The Debtor has no business operations. 	The Debtor’s
monthly operating report reflects no post-petition income, and that no post-petition expenses
have been paid. 	The Debtor has incurred minimal post-petition expenses. The Court finds that
cause does not exist under §1112(b)(4)(A).
The Bank asserts that cause to convert or dismiss exists under 11 U.S.C. §1112(b)(4)(C)
based on failure to maintain appropriate insurance that poses a risk to the estate or to the public.
Applying a materiality standard, the Court finds, based on the evidence presented, that the
Debtor’s insurance in place does not pose a risk to the estate sufficiently material to constitute
cause under 11 U.S.C. §1112(b)(4)(C) and poses no risk to the public, and therefore alone does
constitute cause to convert or dismiss.
The Bank asserts that cause to convert or dismiss exists under 11 U.S.C. §1112(b)(4)(E),
which provides that cause includes “failure to comply with an order of the Court,” as a result of
the Debtor’s failure to produce all of the requested documents on a timely basis as required by a
Stipulated Order to Take Rule 2004 Examination Duces Tecum. Cause has not been established
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under this ground for two reasons. 	First, the nature and extent of documents not produced was
not sufficiently material to rise to the level of the type of violation of a court order that results in
conversion or dismissal of a chapter 11 case. Second, reading the language of §1112(b)(4)(E) in
the context used and with a view to its place in statutory scheme of chapter 11, the Court
concludes that violation of a document production requirement in a stipulated order authorizing a
creditor to take a Rule 2004 examination of a debtor is not a type of violation of an order
encompassed by §1112(b)(4)(E).
The Debtor’s Failure to Timely File Proper Operating Reports and Failure to Schedule or
Disclose Substantial Assets Constitutes “Cause” to Dismiss or Convert under§1112(b)
Finally, the Bank asserts that cause exists for conversion or dismissal based on the
Debtor’s failure timely to file proper operating reports or to disclose certain claims of the Debtor
against insiders. 	This assertion implicates 11 U.S.C. §1112(b)(4)(F) (“unexcused failure to
satisfy timely any filing or reporting requirement established by this title or by any rule
applicable to a case under this chapter”)13 and §1112(b)(H) (“failure timely to provide
information or attend meetings reasonably requested by the United States trustee (or the
bankruptcy administrator, if any)”).14 The Debtor’s schedules filed June 16, 2009 failed to list
13 Bankruptcy Rule 1007 requires a debtor to file schedules of assets and liabilities as prescribed by the
appropriate Official Forms within 15 days after the petition date (or 15 days after entry of the order for
relief in an involuntary case), unless the court extends such time. 	The schedules are executed by an
authorized representative of the debtor and certified, under penalty of perjury, to be true and correct. No
extension of the time for Debtor to file it schedules was sought or obtained in this case.
14 11 U.S.C. §§1106(a)(1) and 1107(a) read in conjunction with § 704(8) require a debtor in possession to
file monthly operating reports as required by the United States Trustee. The United States Trustee
requires debtors in possession in small business chapter 11 cases to file small business debtor monthly
operating reports by the fifteenth day after the end of the reporting period, unless otherwise ordered by the
Court. See also 11 U.S.C. §1116.
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claims against various insiders of the Debtor totaling some $680,000.15 The small business
monthly operating report filed by the Debtor for June and July 2009 similarly failed to disclose
those claims. 	The information the Debtor provided to the United States Trustee prior to the
initial debtor interview does not include a balance sheet as of the month-end immediately
preceding the filing, with the explanation that it was not available. 	If provided, it should have
disclosed the claims against insiders. 	Although the Debtor filed a balance sheet as of October
31, 2008 that disclosed claims against insiders, the Debtor filed its chapter 11 case almost seven
months later and had a duty to schedule and disclose those claims as of the petition date.
Further, the Debtor, without excuse, failed to file its first small business monthly operating report
due July 15, 2009 until August 19, 2009, and as part of the report that was filed failed to include
a financial statement. The first report, and only report filed to date, was filed over a month late
even though, as prepared, the report should have taken very little time to complete. 	It reported
no income or expenses during the reporting period, and failed to include an internally prepared
income statement and balance sheet as required.
Under the facts and circumstances of this case, and taking into account the limited
discretion Congress has afforded to bankruptcy courts with respect to the enumerated grounds
for cause under §1112(b)(4), the Court finds that the failures on the part of the Debtor to
schedule or disclose substantial claims against insiders until raised by the Bank's motion to
15 Although the Debtor, on September 9, 2009, filed an amendment to Schedule B to reflect receivables
due from insiders in the amount of $681,352.95, such amendment was filed over three months after
commencement of the chapter 11 case, well after the first meeting of creditors, and only after Debtor’s
failure to schedule or disclose the insider claims was asserted at the hearing on the motion to convert or
dismiss. The Court is not determining, however, that the failure to schedule or disclose the insider claims
constituted a knowing and willful concealment.
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convert or dismiss, failure to timely file the June 2009 monthly operating report, and failure to
include an income statement and balance sheet as part of the operating reports for either June or
July 2009, together with pre-petition conduct on the part of the Debtor, discrepancies between
the Debtor’s equipment list and the equipment list for the insurance policy, and the Debtor’s lack
of care in producing documents required by the Rule 2004 order, constitute cause to dismiss or
convert.16 These circumstances suggest a pattern of lack of diligence by the Debtor in complying
with obligations of a litigant or debtor in possession.
Since “cause” has been demonstrated, the Court must convert or dismiss the chapter 11
case “absent unusual circumstances specifically identified by the court that establish that the
requested conversion or dismissal is not in the best interest of creditors and the estate.” 	11
U.S.C. § 1112(b)(1). The Bankruptcy Code does not define “unusual circumstances” within the
meaning of 11 U.S.C. 1112(b) but does give a clue. 	When Congress enacted the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005, it used the phrase “absent unusual
circumstances” in 11 U.S.C. § 1112(b)(1), while using the different phrase “absent extraordinary
and compelling circumstances” in the newly enacted 11 U.S.C. §1116.17 The court need not find
that the circumstances are “extraordinary and compelling” to find that they are “unusual.”
Use of the phrase “unusual circumstances” 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. See In re Alternate Fuels, Inc., 2009 WL 1298447
16 The Court is not finding that the Debtor willfully concealed the claims against insiders.
17 The Merriam-Webster Online Dictionary defines “unusual” to mean “uncommon,” “extraordinary” to
mean “exceptional to a very marked extent,” and “compelling” to mean “forceful” or “convincing.”
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*4 (Bankr. D. Kan. 2009) (the code does not define “unusual circumstances” but it “clearly
contemplates conditions that are not common in most chapter 11 cases.”); In re Orbit Petroleum,
Inc., 395 B.R. 145, 148 (Bankr. D.N.M. 2008) (to the same effect). 	This construction of the
language “unusual circumstances” is consistent with the ordinary meaning of the terms, and with
use of the terms in the context of the statute. 	“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).
The Debtor commenced its chapter 11 case to effectuate an orderly liquidation of its
construction equipment and vehicles to not only pay the Bank in full, but to maximize value for
creditors as a whole. Mr. Melendez testified the total value of the equipment and vehicles based
on his experience is $1.3 million to $1.4 million if sold in an orderly fashion and not by auction,
which is well in excess of three times the amount necessary to fully satisfy the Bank’s claims,
and enough to pay all creditors nearly in full. 	Mr. Melendez testified that he is knowledgeable
and experienced in the construction industry, has purchased and sold a substantial amount of
construction equipment over the years, and that this is not the time or place to sell construction
equipment by auction to maximize value.
It is not common for the value of a debtor’s assets in a chapter 11 to exceed the amount
of the debt secured by those assets by more than 300%, and for a debtor by maximizing value in
a chapter 11 through an orderly liquidation to have a good prospect of not only paying the
secured creditor in full but also paying all or a substantial portion of unsecured debt that well
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exceeds the amount of secured debt. The depth and severity of the current recession is also not a
common circumstance, in which an orderly sale of construction equipment by an experienced
owner financially motivated to maximize value is of unusual value and benefit to the estate and
its creditors as a whole. Based on the evidence before the Court, and common knowledge of the
depressed market in New Mexico in the current recessionary environment, the Court finds these
are unusual circumstances that establish that dismissal or conversion of Debtor’s chapter 11 case
would not be in the best interests of the creditors and the estate.
The Court is persuaded that Debtor should be afforded the opportunity to propose a plan
for the orderly liquidation of its assets and payment of all creditors if the Debtor complies with
certain requirements. 	Those requirements are that the Debtor, by October 20, 2009: (1) file its
plan and disclosure statement; (2) amend its operating reports (including any operating reports to
be filed prior to October 20, 2009) to include a current financial statement for months in
question; 18 (3) obtain insurance for any of the Debtor’s equipment or vehicles not currently
insured; (4) increase the amount of blanket insurance coverage on small tools and equipment as
necessary to fully insure those items subject to the deductible in place; and (5) obtain insurance
coverage naming the Bank as an insured or loss payee. 	If any of these requirements are not
satisfied timely, the Court will convert the case to Chapter 7, finding that, given the amount of
equity in the Debtor’s equipment and the total amount of unsecured claims, conversion, rather
than dismissal, is in the best interest of the estate.
18 The Court expects the Debtor to file its small business operating reports timely, and to seek an
extension of the filing dates if circumstances prevent it from doing so.
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This Memorandum Opinion constitutes the Courts findings of fact and conclusions of law
issued in accordance with Rule 7052, Fed.R.Bankr.P. and Rule 9014, Fed.R.Bankr.P. 	An order
consistent with this Memorandum Opinion will be entered.
_________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Entered on Docket Date: September 15, 2009
Copies to:
James R. Jurgens
Jurges & With, P.A.
100 La Salle Circle, Suite A
Santa Fe, NM 87505
Attorneys for Community Bank
Daniel J. Behles
Cuddy & McCarthy, LLP
7770 Jefferson NE, Suite 305
Albuquerque, NM 87109
Attorneys for Debtor
Leonard K. Martinez-Metzgar
P.O. Box 608
Albuquerque, NM 87103-0608
Office of the United States Trustee
Case 09-12334-j11 Doc 40 Filed 09/15/09 Entered 09/15/09 17:10:33 Page 17 of 17