John Alexander Burgess and Sylvia Santos Cruz

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
JOHN ALEXANDER BURGESS and
SYLVIA SANTOS CRUZ,
Debtors.
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Case No. 11-1257
Chapter 11
MEMORANDUM OPINION
Pending before the court are three motions: a Motion to Convert Case to Case Under Chapter
7 (“Motion to Convert”) filed by Susquehanna Bank (“Susquehanna”), in which Acquired Capital,
II, L.P. (“Acquired Capital”), the Office of the United States Trustee (“UST”), and City National
Bank of West Virginia (“City National”) join; a Renewed Motion for Relief from the Automatic
Stay (“Motion for Stay Relief”) filed by City National; and the Debtors’ Motion to Employ a
Realtor. 	On October 17, 2013, the court held an evidentiary hearing to consider the Motion to
Convert.1 The Debtors appeared at the hearing pro se and defended against the Motion to Convert.2
For the reasons stated herein, the court will grant the Motion to Convert and convert this case
to one under Chapter 7.
I. BACKGROUND
On July 7, 2011, the Debtors filed their Chapter 11 voluntary petition. As can be seen from
1 Although it was not specifically set for hearing, the court also considered the Motion
for Stay Relief given the posture of the case and the history surrounding the property that is the
subject of the motion.
2 The Debtors were represented by counsel through most of their case to date. On
September 6, 2013, the Debtors’ former counsel moved to withdraw on a mandatory basis for an
undisclosed reason. By order dated September 11, 2013, the court permitted counsel’s
withdrawal.
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the court’s docket, the Debtors’ attempt to reorganize has been difficult from the outset. Most of
the activity in the case during the first several months involved several secured creditors moving for
relief from the automatic stay. 	Ultimately, the court, in modifying the automatic stay on the
Debtors’ then-principal residence, ordered the Debtors to, among other things, file a meaningful
proposed Chapter 11 disclosure statement and plan of reorganization by November 5, 2012. The
Debtors’ proposed Chapter 11 disclosure statement and plan went through four iterations before the
court finally approved their third amended disclosure statement on May 3, 2013, and the Debtors
solicited votes on their proposed plan. On July 23, 2013, the court held a telephonic hearing in
which it denied confirmation of the Debtors’ third amended proposed plan based upon the Debtors’
inability to garner sufficient votes to obtain confirmation. No impaired class accepted the plan as
required by 11 U.S.C. § 1129(a)(8); in fact, not a single impaired creditor accepted the plan. During
the July 23, 2013 hearing, Susquehanna urged the court to convert the Debtors’ case sua sponte, but
the court indicated it would not convert the Debtors’ case without an interested party moving for
relief. On July 26, 2013, Susquehanna filed its pending Motion to Convert. 3
II. DISCUSSION
Susquehanna urges the court to convert the Debtors’ case based primarily upon the continued
diminution of the estate and an absence of a likelihood of rehabilitation, and the Debtors’ failure to
pay real property taxes that accrued postpetition. The Debtors contend that their case should remain
in Chapter 11 because they have attempted to work with their creditors in good faith to formulate
a feasible Chapter 11 plan, and their problems in that regard stem largely from a strained relationship
with their former counsel.
Section 1112(b)(1) of the Bankruptcy Code provides that the court “shall” dismiss or convert
3 The Bankruptcy Code requires that the court “commence the hearing on a motion under
[§ 1112(b)] not later than 30 days after the filing of the motion . . . .” 11 U.S.C. § 1112(b)(3).
Given the inherent challenges the court faces when scheduling business at its Martinsburg
division, it could not set an in-court evidentiary hearing until September 12, 2013. The court,
however, commenced a telephonic hearing on August 20, 2013, in order to comply with the
provisions of § 1112(b)(3), with the evidentiary portion of the hearing to begin on September 12,
2013. The court ultimately continued the evidentiary portion of the hearing to October 17, 2013,
after counsel for the Debtors withdrew just days before the evidentiary hearing, see supra note 2,
because the court wanted to afford the Debtors an opportunity to retain substitute counsel or
otherwise protect their interests.
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a case under Chapter 11, whichever is in the best interest of creditors, if a movant establishes
“cause.” 11 U.S.C. § 1112(b)(1). Section 1112(b) contains a burden-shifting mechanism. The
movant bears the initial burden to establish “cause” under § 1112(b). 	In re Ashley Oaks
Development Corp., 458 B.R. 280, 283 (Bankr. D.S.C. 2011). Once a movant establishes “cause,”
the debtor generally “is able to show that unusual circumstances exist such that dismissal is not in
the best interest of creditors.” 	In re Quail Farm, LLC, No. 09-bk-298, 2010 WL 1849867, at *2
(Bankr. N.D.W. Va. May 5, 2010) (citation omitted).
Here, the court announced on the record after the conclusion of Susquehanna’s case-in-chief
that cause existed to convert the case. The court first found cause based upon the Debtors’ inability
to effectuate a confirmable Chapter 11 plan of reorganization. See In re Ramreddy, Inc., 440 B.R.
103, 113 n.26 (Bankr. E.D.Pa. 2009) (citation omitted) (noting that the inability to propose a feasible
plan of reorganization, by itself, constitutes cause for conversion). The court also found cause under
§ 1112(b)(4)(A) based upon the continued diminution of the estate in the absence of a reasonable
likelihood of rehabilitation.
The probability that the Debtors can formulate a confirmable plan of reorganization is slim
at best. The Debtors filed their case on July 7, 2011. Even when they had counsel, the Debtors did
not file a proposed Chapter 11 disclosure statement and plan of reorganization until November 5,
2012, and then did so only because the court ordered that they do so. Creditors of the Debtors’
estate lodged a multitude of objections against the proposed disclosure statement and plan, which
went through four iterations before the court finally approved their third amended disclosure
statement on May 3, 2013. Ultimately, the creditors blocked confirmation of the Debtors’ third
amended proposed plan of reorganization. On July 23, 2013, the court held a telephonic hearing in
which it denied confirmation of the Debtors’ third amended proposed plan based upon the Debtors
inability to garner sufficient votes to obtain confirmation. No impaired class accepted the plan as
required by 11 U.S.C. § 1129(a)(8); in fact, not a single impaired creditor accepted the plan. In sum,
the Debtors tested the confirmation process with a fully formed proposed plan and were unable to
garner any votes from impaired creditors. Moreover, Susquehanna and City National hold sizeable
unsecured claims against the Debtors’ estate and present a significant, if not insurmountable,
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impediment to confirmation.4 The court thus finds it appropriate to grant relief to Susquehanna. See
DCNC North Carolina I, L.L.C. v. Wachovia Bank, N.A., Civil Action Nos. 09-3775, 09-3776, 2009
WL 3209728, at *5 (E.D. Pa. Oct. 5, 2009) (“If it becomes reasonably apparent that the debtor
cannot obtain the favorable vote of at least one class of impaired claims with respect to any plan that
the debtor might reasonably propose, there is no point in incurring the cost of the plan process and
cause exists to dismiss or convert the case.”).
Regarding cause under § 1112(b)(4)(A), the court first looks at whether a debtor has negative
cash flow or declining asset values; if so, the court considers whether the debtor will be able to “stop
the bleeding” and return to solid financial footing within a reasonable amount of time. See 7 Collier
on Bankruptcy ¶ 1112.04 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Here, the court found
that the value of the estate continues to diminish in the absence of a reasonable likelihood of
rehabilitation. The Debtors have made no payments to Acquired Capital or priority tax creditors
during the pendency of their case. Acquired Capital’s claim against the Debtors is secured by deeds
of trust on two parcels of real property that the Debtors presently consider to be most important to
their reorganization: their residence and the condominium building that houses their professional
offices. The Debtors’ failure in this regard is significant. It evidences the Debtors’ lack of financial
wherewithal to make their on-going payments, and it makes any conceivable rehabilitation that
much more difficult as arrearages — which must be paid in a Chapter 11 reorganization if the
property is to be retained — accumulate. In addition to not making regular monthly payments on
their secured debt obligations, the Debtors have also failed to pay real property taxes as they come
due; the Debtors have allowed taxes to accrue without regard to whether they intend to retain or sell
the property, or whether the property is encumbered. The accrual of real property taxes dating back
to 2010 is harmful in two significant ways: The value of otherwise unencumbered real property
available for liquidation and distribution to unsecured creditors continues to decline as real property
taxes accrue; and the accrual of real property taxes jeopardizes the Debtors ownership of the parcels,
the tax liens on which may ultimately be sold. In sum, the Debtors’ failure to pay their monthly
4 To be clear, City National filed its proof of claim as “secured” in the amount of
$1,015,133.17. During this case, however, it has become apparent that the value of the property
securing City National’s claim is substantially less than the amount City National is owed. Thus,
if City National were to foreclose, it would be left with a significant unsecured deficiency claim.
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secured debt obligations and real property taxes constitute a continued diminution of the estate as
encumbrances on their real property continue to accrue and otherwise endanger their ownership
interest therein. See 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, 88-89 (Bankr. S.D.Ga. 2009) (citing In re Avis,
No. 07-13483-SSM, 2008 WL 5786807, at *2 (Bankr. E.D.Va. Nov. 13, 2008)) (finding a
diminution of the estate where equity in real property eroded based upon the accrual of unpaid
arrearages). Moreover, although “rehabilitation” is not another word for reorganization, the analysis
in that regard under § 1112(b)(4)(A) focuses on whether continuing the reorganization effort is
justified under the circumstances. Here, the court finds that continuing the reorganization effort is
not justified given the length of time since the Debtors filed their case and the continued accrual of
secured debt arrearages and real property tax obligations.
The court having found cause, the burden shifted to the Debtors to show that unusual
circumstances existed under § 1112(b)(2) such that conversion or dismissal is not in the best interest
of creditors and the estate. 	The court noted, however, before the Debtors commenced their
presentation, that the “unusual circumstances” defense may be unavailable to them based upon its
finding of “cause” under § 1112(b)(4)(A). 	The court explained that a split of authority exists
regarding the availability of the “unusual circumstances” defense when a court finds “cause” under
§ 1112(b)(4)(A). Nonetheless, the court heard from the Debtors in that regard because it did not
have sufficient time to then decide whether the defense was available to the Debtors; and given the
court’s schedule, it explained that it was not then ruling upon the issue but simply receiving the
evidence in that regard. 	Having considered the legal authority regarding the “unusual
circumstances” defense under § 1112(b)(2), the court finds that it is unavailable here. Put simply,
“if cause is established by virtue of § 1112(b)(4)(A), then the provisions of § 1112(b)(2) do not
apply.” In re Quail Farm, LLC, 2010 WL 1849867, at *2 (Bankr. N.D.W. Va. May 5, 2010); see
In re Ashley Oaks Development Corp., 458 B.R. at 284-85; In re Ramreddy, Inc., 440 B.R. at 112-13
(citation omitted).
Although the court finds it unnecessary to apply the provisions of § 1112(b)(2) as part of its
decision given its findings of cause under § 1112(b)(1), including under subparagraph (b)(4)(A), it
acknowledges the Debtors’ attempt to demonstrate that “unusual circumstances” justify denying the
motion to convert. 	In that regard, the Debtors primarily rely upon the evidence they adduced
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suggesting that their inability to formulate a confirmable plan and pay down some of their accruing
secured and priority debt obligations was the result of miscommunications with, or neglect by, their
former legal counsel and the refusal of one or more creditors to deal with them directly since they
were represented by an attorney, involved in a bankruptcy case, or both. 	Further, the Debtors
offered a one-page outline of terms that they believe could serve as the backbone of a reorganization
plan. 	However, as noted, it is not necessary to consider the Debtors assertions regarding the
existence of unusual circumstances and the court, therefore, makes no specific findings pertaining
to them.
Having found cause for relief under § 1112(b), the court is left with the choice to convert or
dismiss the case, whichever is in the best interest of creditors. 	Here, Susquehanna moved for
conversion, and the court finds that conversion is in the best interest of creditors because the Debtors
appear to have equity in several parcels of real property that can be liquidated with the proceeds
distributed to unsecured creditors, absent validly asserted exemptions. The court will thus convert
this case to one under Chapter 7.
Regarding City National’s Motion for Stay Relief, the court will grant it relief from the
automatic stay so that it may pursue its rights at state law. 	City National seeks relief from the
automatic stay with regard to the Debtors’ former residence known as Lot 129, Section III, Round
Top Estates Subdivision (the “Property”). Although the court deferred the motion at its October 17,
2013 evidentiary hearing, it finds that further proceedings are unnecessary. 	The clerk’s office
provided notice of City National’s motion to interested parties, including the Debtors. The deadline
for written objections expired on October 17, 2013, the date of the evidentiary hearing. But for the
fact that the Debtors are pro se and the court already had Susquehanna’s Motion to Convert set for
hearing, the court likely would have entered an order granting stay relief to City National because
no interested party filed a written objection to the Motion for Stay Relief. In fact, the Debtors did
not challenge the Motion for Stay Relief at the October 17, 2013 hearing but simply stated an
interest in working with City National to market the Property in an effort to reduce the amount of
the anticipated deficiency judgment. Moreover, the Debtors agree no equity exists in the Property,
and the Property is not necessary for an effective reorganization; even if this case remained in
Chapter 11, the Debtors’ most recent proposed Chapter 11 plan — which they filed May 3, 2013 —
contemplates surrendering the Property. The court will thus grant City National’s Motion for Stay
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Relief.
III. CONCLUSION
For the above-stated reasons, the court will enter a separate order that grants Susquehanna’s
Motion to Convert and City National’s Motion for Stay Relief. Because the court will convert this
case to one under Chapter 7, it will deny as moot the Debtors’ Motion to Employ a Realtor.
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