Plaza De Retiro, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
PLAZA DE RETIRO, INC.
Debtor. No. 11-09-10974 SA
MEMORANDUM OPINION ON UNITED STATES
TRUSTEE’S MOTION TO APPOINT TRUSTEE
This matter came before the Court for five days of trial on
the United States Trustee’s Motion to Appoint a Chapter 11
Trustee (“Motion”)(doc 72). The United States Trustee appeared
through its attorney Alice Nystel-Page. Debtor appeared through
its attorney William Davis. The Unsecured Creditors Committee
(“UCC”) supported the Motion and appeared through its attorney
Walter Reardon. This is a core proceeding. 28 U.S.C. §
157(b)(2)(A). For the reasons set forth below, the Court finds
that the Motion is well taken and should be granted.
FACTS
Debtor was incorporated in New Mexico in 1976. The Debtor
is licensed to be and in fact does operate a continuing care
facility located in Taos, New Mexico. The facility includes	1
All retirement communities in New Mexico that	1
undertake to provide “independent living and
health or health-related services,” §
24-17-3(C), for a fee, are subject to the
Continuing Care Act. See §§ 24-17-2 to -3.
The Continuing Care Act was designed to
“provide for disclosure and the inclusion of
certain information in continuing care
contracts in order that residents may make
informed decisions concerning continuing care
and to provide protection for residents and
communities.” Section 24-17-2(B). Toward that
(continued...)
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approximately sixty-four (64) residential units, a dining hall,
administration building, and a 20-bed on-site medical facility.
The facility serves approximately six-five (65) elderly
residents. The Debtor has a Home Health Care License and is
licensed as a Skilled Nursing Facility. Debtor is a “health care
business” as defined in 11 U.S.C. § 101(27A).
John Himes and Lucy Himes formed the Debtor and operated it
from 1976 to 1993. The original facility consisted of the “Main”
tract and the “Brandenburg” tract. In 2002 Debtor acquired the
“Pond” tract. There are 59 living units on the Main and
Brandenburg tracts and 5 living units on the Pond tract. William
Himes is the son of John and Lucy Himes; he came to work at the
Debtor in December 1998. William Himes holds a bachelor’s degree
in biology and biochemistry. In May 1999 he obtained a nursing
home administrator’s license. William Himes has worked full-time
as manager of the Debtor since 1999. He is also the Debtor’s
President. The Himes family owns 797,929 of the 1,147,045
outstanding shares of the Debtor’s common stock.
Each of the residents resides in either a residential living
unit or in the medical facility, pursuant to a contract called
(...continued)	1
end, the Continuing Care Act mandates that
certain information must be disclosed in all
contracts between continuing care facilities
and their residents. See id.
Bishop v. Evangelical Good Samaritan Soc., ___P.3d___, 2009 WL
2170430 at *1, 2009-NMSC-036 at {2} (2009).
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either a “Continuing Care Contract” (“CCC”) or a “Resident
Agreement” (“RA”) providing for life occupancy privileges. Under
the CCC an incoming resident pays a substantial “entrance fee”	2
and thereafter a monthly service fee. Residents under an RA do
not pay an entrance fee, but pay monthly service fees. The
Debtor provides the residents with a living unit and related
services, such as laundry and utilities. The Debtor also
provides the residents with nursing service for emergency calls
from the resident’s living unit, basic physical check-ups upon
request, and if ordered by a physician, admittance to a semi-
private room in the medical facility or the provision of required
nursing care in the living unit. Typically the nursing facility
is fully occupied or nearly so, and on March 31, 2009 had 13
residents.
Debtor employs approximately 30 people. Debtor also pays
two independent contractors for other services, such as nursing.
In October, 2008, Debtor’s management called a meeting with
the residents and informed them of the financial crisis it was
in. The residents were shocked and extremely distressed. For
many, their CCC with Plaza de Retiro represented their most
significant asset. Most had planned to live out their
retirements at Plaza de Retiro and now worried they would have to
An expert witness testified that these fees range from	2
$50,000 to $1,000,000 depending on the region of the county, with
Debtor’s fee running $200,000 to $300,000. Exhibit 3, p. 4.
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move. This meeting started the distrust the residents now have
of management and its ability to carry on the business or
reorganize. That distrust has grown to the point that the
residents are fearful generally, anxiety-ridden, fearful of
retaliation and feel they have little or no control over their
lives or their futures. In particular, the residents generally
distrust William Himes. The Court finds that the acrimony has
grown to the point that an independent third party is necessary
for this Debtor to survive and reorganize.
In December, 2008, Debtor’s four insurance policies were
cancelled for nonpayment. The insurance documents were
apparently accidentally omitted from the Initial Report (doc 44,
filed March 26, 2009), but were attached to an Amendment filed on
April 8, 2009 (doc 55). The § 341 first meeting of creditors was
held on April 9, 2009. William Himes testified on behalf of the
Debtor at the meeting. Twice he was asked about insurance
coverage and twice he responded that insurance was in effect.
Exhibit 65, p. 14, l. 7 and p. 23, l. 18. At trial, Mr. Himes
testified that the first he knew of the insurance lapse was in
mid-April, after the § 341 meeting, when the insurance agent
called him on the telephone. He claims to have not seen or been
aware of Exhibits 16 through 19 , which are: Notice of Intent to	3
Debbie Feese, Debtor’s bookkeeper up until after the	3
bankruptcy filing, testified to the contrary. She recalled
(continued...)
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Cancel dated 12/11/08 from First Insurance Funding Corp. (Exhibit
16, stating that insurance will be cancelled on 12/21/08), Fax
dated 12/17/08 from Deb Feese at Retiro to Alix Linnartz at Brown
& Brown Insurance (Exhibit 17, listing actual payments made), Fax
dated 12/18/08 from Alix Linnartz to Deb Feese and William Himes
(Exhibit 18, stating that the first payment due on September 1,
2008 had never been paid to Brown & Brown) or 4 Notices of
Cancellation respectively of each of Debtor’s four insurance
policies, effective 12/23/08 (Exhibits 19a-d). The Court does
not find this credible. It is inconceivable to the Court that
even if Mr. Himes did not see the Notice of Intent to Cancel,
either because it was mis-addressed or lost when slid under his
office door, that someone would not have mentioned it to him
before mid-April. It is further incredible because the Monthly
Operating Reports for March, 2009 and April, 2009 and the Amended
April, 2009 all show that no insurance payments had been made
during those months. Any competent management would have been
aware of or alerted to the fact that crucial insurance payments
(...continued)	3
receiving Exhibit 16, identified her handwriting on it, and
recalled telling William Himes about it on the day she received
it. She recalled seeing the fax from Brown & Brown in December,
2008. She recalled Debtor being “way behind” on insurance at the
time. She claims that Debtor had been “warned” with notices and
phone calls. She recalls giving the Notices of Cancellation to
William Himes the first week in January, 2009, perhaps by
slipping them under the door. She had a conversation with him
after that and told him “Our insurance was cancelled” and he
replied “No it wasn’t”. She did not believe him, however.
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of almost $6,000 were not being made on a monthly basis. On the
other hand, if it is true then there is a very serious
communication problem within management that needs to be
remedied. Fortunately for all involved, the insurance was
reinstated without lapse in coverage on May 8, 2009. (Exhibit C-
2-1). Mr. Himes testified that he did not know why the insurance
was reinstated. The Court found a $12,000 payment for insurance
on the May, 2009 Monthly Operating Report, which it believes is
the reason for reinstatement.
The majority of Debtor’s income comes from entrance fees and
monthly service fees. To date, Debtor’s business model was to
use both of these fees as current income. Debtor did not
maintain any percentage of the entrance fees as a reserve for
future needs. Consequently, there are currently no cash reserves
to cover shortfalls. The Court finds it unlikely that any new	4
resident would knowingly enter into a CCC with Debtor under the	5
Mr. John Ward Himes testified that at one point years ago	4
Debtor had over $240,000 in cash in a local financial institution
which he withdrew shortly before the institution collapsed. He
then invested those funds in real estate for the business, and
that real estate accumulated over the years is essentially the
reserves. There was no evidence that even suggested that the
real estate was so valuable that it could serve as a reserve.
Rather, the purpose of the real estate purchases over the years
was to expand the business.
The New Mexico Continuing Care Act, N.M. Stat. Ann. § 24-	5
17-1 et seq. contains a fairly extensive disclosure requirement.
See N.M. Stat. Ann. § 24-17-4. From the testimony presented at
trial, the Court finds that compliance with the disclosure
(continued...)
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current circumstances, which would be the equivalent of buying a
large and expensive insurance policy from an insolvent insurance
company that had few assets. See Michael D. Floyd, Should
Government Regulate the Financial Management of Continuing Care
Retirement Communities?, 1 Elder L. J. 29, 37 (1993)(hereafter,
“Floyd, Should Government Regulate”)(“Often the future guarantee
of nursing care is at least partially paid for in advance, in the
fees paid by the residents. To this extent, therefore, the
residents’ fees represent a form of insurance premium.”)
UST Exhibit 12 consists of the Debtor’s audited 2003
financial statements. Prior to and during 2003 Debtor kept its
books according to generally accepted accounting principles
(“GAAP”). The December 31, 2003 balance sheet included a
liability for “Deferred revenue” of $2,525,337 which were fees
paid by a resident upon entering into a continuing care contract,
net of the portion thereof that is refundable to the resident,
which are amortized to income using the straight-line method over
the estimated remaining life expectancy of the resident. Exhibit
12, p. 7. The balance sheet indicated Debtor’s liabilities
(...continued)	5
requirements was the exception rather than the rule. Several
residents testified that they were not given a financial
statement or tax return before signing their contracts; Mr.
Himes’ testimony did not dispute this fact. Rather, he stated
that prospective residents were offered the financials, but they
did not want them. Merely offering them, however, violates the
statute which requires them to be actually given.
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exceeded its assets by $1,220,824 and the Statement of Operations
indicated that Debtor had suffered a $338,834 loss from
operations in calendar year 2003.
Among the UST’s exhibits were compiled financial statements
and tax returns for the Debtor for the years ending 2005, 2006
and 2007. The Debtor’s Disclosure Statement has the 2008 tax
return as an attachment. For these years, Debtor maintained its
books on the income tax basis of accounting, which is a
comprehensive basis of accounting other than GAAP. Notably, the
income tax basis of accounting does not reflect deferred
revenues, because income is recognized on a cash basis. These
exhibits show:
Exhibits Year Net Income Cash Flow Taxable
Before NOL
6, 9 2005 (630,781) (57,068) (620,060)
7, 10 2006 91,296 36,462 97,556
8*, 11 2007 (252,164) (34,553) (246,216)
Doc 154 2008 420,362 (52,957)** 422,096
* The 2007 financial statement accountant’s letter contains a
“going concern” paragraph which warns the reader that Plaza de
Retiro may be unable to continue as a going concern or be able to
meet its obligations as they come due without a substantial
disposal of assets, restructuring of debt or a forced revision of
its operations.
** Computed by comparing opening cash balance to ending cash
balance on Schedule L of tax return. The Court is unaware if a
2008 financial statement was prepared. No evidence was presented
how Debtor’s cash flow could have been -$52,957 in a year that it
showed a profit of $420,362.
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Finances for the period of January 1, 2009 through March 11,
2009 (petition date) are reflected in the Initial Report (doc
44). The Court has little faith in the financial statements
attached to the Initial Report. First, the balance sheet does
not balance. It shows total assets of $3,369,482.02 and total
liabilities and equity of $3,408,311.13, a difference of
$38,829.11. The balance sheet discloses a net loss for the
period of ($81,414,95), but the profit and loss statement shows
net income of $10,534.50. The December 31, 2008 retained
earnings on the tax return were ($873,396); the retained earnings
on the Initial Report balance sheet are $24,699.06, which implies
income of $898,095.06 for the period January 1 to March 11. In
summary, they are just wrong.
Exhibits 22 through 27 consist of Debtor’s Monthly Operating
Reports and amendments thereto filed in the case. The Court
briefly reviewed the earlier ones, intending to rely on the
cumulative figures in the June report. In the earlier reports
the Court found attachments, presumably printed out from the
accounting system. Some stated “cash basis” on the top, some
stated “accrual basis” on the top. This cannot be right.
Exhibit 25 is the May 1 to May 31, 2009 operating report.
An attachment to it is a monthly profit and loss statement from
March 11 through the end of May, 2009. Exhibit 25 (doc 117) p.
55. Exhibit 27 is the June, 2009 operating report. An
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attachment to it is a profit and loss statement for the month of
June, 2009. Exhibit 27 (doc 168) p. 20-21. These statements
show that the Debtor is continuing to lose money in the Chapter
11 case:
For the period: Amount of loss
March 11 to March 31, 2009 $ 20,705.00
April 1 to April 30, 2009 $ 26,786.00
May 1 to May 31, 2009 $ 5,854.00
June 1 to June 30, 2009 $ 20,338.00
Total $ 73,683.00
Other significant figures from the June, 2009 operating
report are 1) an ending cash balance of ($39,516.44) and 2) post-
petition unpaid unsecured debt of $55,187.98. The first number
indicates that Debtor has been writing checks with money it does
not have. Perhaps Debtor is attempting to use the “float”, but
apparently this is not working; Debtor bounced 9 checks in May,
2009 and 21 in June, 2009. A well managed company should rarely,
if ever, bounce checks. This practice has cost the Debtor over
$1,000 in unnecessary bank charges. As to the second number, it
shows that Debtor is building up new debt that is probably
administrative debt that would have to be paid before any
payments would be made to unsecured creditors . It indicates a	6
And, Debtor’s Plan (doc 153) proposes to pay $360,000 total	6
to cover administrative, priority, and unsecured claims. So,
every dollar of post-petition administrative debt comes out of
(continued...)
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problem. Further, if Debtor is on the cash basis of accounting,
these expenses have not yet passed through the income statement
because they remain unpaid. This would indicate that in reality
Debtor’s March 11 to June 30 loss was $128,871.
Debtor filed its voluntary Chapter 11 petition with this
Court on March 11, 2009. On March 16, 2009 Debtor gave notice to
the residents that the Debtor was temporarily ceasing medical
care and would close the nursing facility on April 16, 2009. On
March 31, 2009 Debtor filed a Motion for Authority to Reject
Executory Contracts with Residents and to Cease Provision of
Medical Services, Including Closing the Debtor’s Nursing
Facility. Doc 50. This motion stated the Debtor’s intention to
permanently close the medical facility, stated that the Debtor
was losing approximately $15,000 per month from the medical
facility, and stated that the Debtor could not continue to
sustain these losses and reorganize. The notice and filing of
the motion caused extreme stress and anxiety on the part of the
residents. Several of them testified that the main reason they
joined Plaza de Retiro was the availability of the medical
center.
On July 7, 2009, Debtor filed a Plan and a Disclosure
Statement (docs 153 and 154). Among other things, the Plan
(...continued)	6
the pockets of the unsecured creditors.
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states an intention to reject existing CCC and RA contracts which
would then be replaced by similar contracts with modified price
terms. (Doc 153, ¶ 4.1(a)). It also states that “if confirmed,
the Debtor would continue the operations of the Medical
Facility.” Id. The Plan is funded by 60 payments of $6,000.00
per month to be used for administrative claims, priority claims
and unsecured claims. Id., ¶ 5.1. The Debtor estimates that
approximately $300,000 would be available for the unsecured
claims. (Doc 154, p. 10). Neither the Plan nor the Disclosure
Statement deal with or even recognize the liability for deferred
revenues that last appeared on the audited financial statement
for year 2003. That liability still exists, but no evidence
suggested what it may now be. The UCC’s attorney commented that
he believed it would be in excess of $7 million, but the Court
does not so find. The Plan calls for the common stock equity
holders to retain their interests. Id., p. 11.
Professor Nathalie Martin testified as the UST’s expert
witness on all legal matters related to continuing care
facilities, including their bankruptcies, and all business
practices related to them, including practices related to
admissions fees. Her expert report, as redacted through
evidentiary challenges, appears as Exhibit 3. A continuing care
contract is designed to control health care costs and provide
living space. In general, she feels that continuing care
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facilities should be regulated, or, for New Mexico, more
regulated. In her opinion, entrance fees (which are generally
nonrefundable) should be actuarially computed based on factors
such as age, sex, and health. The function of these fees is to
cover future health care, so the fees should be drawn on over the
resident’s lifetime to help ensure that there will be money there
when needed for the health care. Accord, Floyd, Should
Government Regulate, 1 Elder L. J. at 42 (“To the extent that
such advance payments are received, some mechanism must be
established to insure that the money actually will be available
at the time the prepaid service is to be provided.” and Id. at 43
(“A properly managed CCRC will build up a reserve to cover the
costs of each resident’s later years of residence, which are
likely to be much more expensive than the early years due to
greater needs for nursing care.”) Debtor does not compute its
entrance fees actuarially. Debtor also maintains no reserves for
payment of future health care for the residents. Prof. Martin’s
opinion is that failure to maintain reserves is per se gross
mismanagement. Her opinion is based on the belief that if
management cannot provide the main service for which they have
contracted, management has grossly mismanaged the business. On
cross examination, she admitted that no provision of New Mexico
law requires reserves, but nevertheless believed that the
business had been mismanaged. After hearing this entire trial
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and the opinions of the various experts, and finding that Prof.
Martin’s report is a concise, logical, and well-thought out and
well-presented report, the Court agrees with Prof. Martin’s
conclusions. Among other things, the Court finds that merely
because a certain action (e.g., maintaining sufficient cash
reserves) is not mandated by statute does not mean that a debtor
can fail to take the action without that failure to act
constituting gross mismanagement.
Fred Winter, Debtor’s former accountant testified. His firm
performed the audits of the financial statements through 2003,
and assisted in the compilations done for later years. He
confirmed that Debtor followed GAAP through 2003, but stopped
after that when the law changed in 2005 making audited financial
statements unnecessary. Part of GAAP is SOP 90-8, promulgated by
the American Institute of Certified Public Accountants. This
principle was issued in 1990 after a study of best practices for
continuing care facilities. SOP 90-8 requires the acknowledgment
of a liability for unprovided services, thereby allocating front
end fees over actuarially computed lives. The Court finds that
even though SOP 90-8 is not a required practice, it is a prudent
and best practice that should have been and should be followed,
and the failure to do that constitutes gross mismanagement.
CONCLUSIONS OF LAW
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Appointment of a Chapter 11 trustee is governed by 11 U.S.C.
§ 1104, which provides in part:
(a) At any time after the commencement of the case but
before confirmation of a plan, on request of a party in
interest or the United States trustee, and after notice
and a hearing, the court shall order the appointment of
a trustee--
(1) for cause, including fraud, dishonesty,
incompetence, or gross mismanagement of the
affairs of the debtor by current management,
either before or after the commencement of
the case, or similar cause, but not including
the number of holders of securities of the
debtor or the amount of assets or liabilities
of the debtor;
(2) if such appointment is in the interests of
creditors, any equity security holders, and other
interests of the estate, without regard to the
number of holders of securities of the debtor or
the amount of assets or liabilities of the debtor;
or
(3) if grounds exist to convert or dismiss the
case under section 1112, but the court determines
that the appointment of a trustee or an examiner
is in the best interests of creditors and the
estate.
Under subsection a(1), appointment is mandatory when cause is
found. Oklahoma Refining Co. v. Blaik (In re Oklahoma Refining
Co.), 838 F.2d 1133, 1136 (10th Cir. 1988)(Once cause is found
the Court has no discretion and must appoint a trustee.)
Subsection (a)(2) contains a flexible standard that allows a
court look to the practical realities and necessities and appoint
a trustee when it is in everyone’s best interests. In re Marvel
Entertainment Group, Inc., 140 F.3d 463, 474 (3rd Cir. 1998); In
re Colorado-Ute Electric Assn., Inc., 120 B.R. 164, 176 (Bankr.
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D. Colo. 1990). Under 1104(a)(2) the court should consider 4
factors:
(I) the trustworthiness of the debtor;
(ii) the debtor in possession's past and present
performance and prospects for the debtor's
rehabilitation;
(iii) the confidence-or lack thereof-of the business
community and of creditors in present management;
(iv) the benefits derived by the appointment of a
trustee, balanced against the costs of appointment.
Id. (citing In re Ionosphere Clubs, Inc., 113 B.R. 164, 168
(Bankr. S.D. N.Y. 1990)(citations omitted)).
In determining whether a § 1104 appointment is
warranted or in the best interests of creditors, the
bankruptcy court must bear in mind that the appointment
of a trustee “may impose a substantial financial burden
on a hard pressed debtor seeking relief under the
Bankruptcy Code,” by incurring the expenditure of
“substantial administrative expenses” caused by further
delay in the bankruptcy proceedings.
In re Bayou Group, LLC, 564 F.3d 541, 546-47 (2nd Cir. 2009)
(citing Midlantic Nat’l Bank v. Anchorage Boat Sales, Inc. (In re
Anchorage Boat Sales, Inc.), 4 B.R. 635, 644 (Bankr. E.D. N.Y.
1980)).7
With these factors in mind, the Court should also take into
account that there is a strong presumption that a debtor should
normally remain in possession and that appointment of a trustee
On the other hand, § 1104(a)(1) would not seem to admit of	7
that consideration if the court finds “cause” for the appointment
of a trustee. The Court need not and does not address that issue
in this opinion.
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is an “extraordinary” remedy . In re Sundale, Ltd., 400 B.R.	8
890, 899 (Bankr. S.D. Fla. 2009). See also In re The 1031 Tax
Group, LLC, 374 B.R. 78, 85 (Bankr. S.D. N.Y. 2007)(same.)
Finally, the decision to appoint a trustee is fact intensive
and must be made on a case by case basis. Sundale, 400 B.R. at
901. The Court’s task is to determine whether the totality of
the circumstances warrant appointment of a trustee. Id.
The Court has observed that acrimony between a debtor-in-
possession’s management and the creditors that impedes the
reorganization effort has routinely been found to constitute a
ground for appointing a trustee. See Marvel Entertainment, 140
F.3d at 473 (“The district court concluded that ‘there is no
reasonable likelihood of any cooperation between the parties in
the near future.’” ... [T]he district court did not clearly err
... when it found a deep conflict to exist between the ...
debtor-in-possession and the creditors in bankruptcy.”)
(Appointing trustee); Petit v. New England Mortgage Services,
Inc. (In re Petit), 182 B.R. 64, 70 (D. Me. 1995)(“[D]eep-seeded
In connection with categorizing the appointment of a	8
trustee as “extraordinary”, courts usually state that to overcome
the presumption the movant must prove cause by clear and
convincing evidence. See Bayou Group, 564 F.3d at 546, Marvel
Entertainment Group, 140 F.3d at 471. But see Tradex Corp. v.
Morse (In re Tradex), 339 B.R. 823, 829-32 (D. Mass. 2006)
(Rejecting the clear and convincing standard and adopting
preponderance of evidence standard.) The Tenth Circuit has not
ruled on this issue, but the Court finds that in this case either
standard would be met.
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conflict and animosity between a debtor and its creditors
provides a basis for the appointment of a trustee.”)(Appointing
trustee)(Citing [In re V.] Savino [Oil & Heating Co., Inc.], 99
B.R. [518] at 526 n.11 [(Bankr. E.D. N.Y. 1989)]); In re The
Bible Speaks, 74 B.R. 511, 513 (Bankr. D. Mass. 1987)(“The need
for a neutral party to mediate disputes between the debtor and
its creditors is ground for a trustee’s appointment.”)(Appointing
trustee)(Citing In re Bonded Mailings, Inc., 20 B.R. 781 (E.D.
N.Y. 1982)).
Another independent ground for appointing a trustee is
either a perceived dishonesty or withholding of information or a
debtor’s inability to provide accurate records and reports.
“One of the most fundamental and crucial duties of a
debtor-in-possession upon the filing of a Chapter 11
petition is to keep the Court and creditors informed
about the nature, status and condition of the business
undergoing reorganization.” Savino, 99 B.R. at 526 .
Consequently, “[w]here, as here, the Debtor fails to
disclose material and relevant information to the Court
and creditors, a Chapter 11 trustee is required.” Id.;
see In re Oklahoma Refining Co., 838 F.2d 1133, 1136
(10th Cir.1988) (“It is also established that failure
to keep adequate records and make prompt and complete
reports justifies the appointment of a trustee.”); [In
re ]Ford, 36 B.R. [501] at 504 [(Bankr. D. Ky.
1983)](“Inherent in debtor's fiduciary obligations
under the Code is the duty to file accurate financial
reports disclosing all transactions involving estate
assets.... Any failure to file accurate financial
statements is an omission contributing to cause for
appointment of a trustee.”); see also Sanders, 2000 WL
329574, at *4, 2000 Bankr. 263, at *11 (“Where a debtor
fails to disclose material information to the Court and
to the creditors, the appointment of a chapter 11
trustee is appropriate. Misrepresenting the facts of a
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debtor's financial situation constitutes grounds for
the appointment of a trustee.”).
More particularly, a failure to provide accurate
schedules to the court has been deemed sufficient
“cause” under § 1104(a)(1). See Sanders, 2000 WL
329574, 2000 Bankr. 263; see also [In re] Deena
Packaging [Industries, Inc.], 29 B.R. at 707 (“Section
1104 ... specifically proscribes certain conduct by
debtors in possession; dishonesty is one such
enumerated, prohibited act.... [T]he trial record
reveals that Deena's failure to include relevant
financial data on their original and amended schedules
raises questions of dishonest conduct.”).
Tradex Corp. 339 B.R. at 833. See also New England Mortgage, 182
B.R. at 69-70 (“Open, honest and straightforward disclosure to
the Court and creditors is intrinsic to the entire reorganization
process. ... Therefore, where the Debtor fails to disclose
material and relevant information to the Court and creditors, a
Chapter 11 trustee is required.”)(Citing Savino, 99 B.R. at
526)(Internal punctuation omitted.) And see In re Sharon Steel
Corp., 871 F.2d 1217, 1228 n.15 (3rd Cir. 1989)(“The trustee and
the committee also cite a number of cases maintaining that
inaccurate, incomplete recordkeeping alone amounts to cause
requiring appointment of a trustee under 11 U.S.C. §
1104(a)(1).”)(Collecting cases.)
Next, the Court will apply the law, in turn, to the facts
discussed above. First, the Court finds the conflicts with the
residents so severe and the loss of respect so great that an
independent third party is necessary for the Debtor to survive
and reorganize.
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Second, cancelled insurance documents were presented to the	9
Court and creditors in the initial report amendment and at the §
341 meeting. The Court did not find William Himes’
explanation/excuses credible. His handling of this matter on the
witness stand, coupled with directly conflicting testimony, put
his general credibility in doubt. As discussed in the text
above, the Court finds that the insurance lapse and subsequent
concealment was gross mismanagement at best or a lie at worst.
Third, Debtor’s business model for the Plan is fundamentally
unchanged from their pre-petition model, which did not work. It
appears to the Court that simply raising monthly fees will not do
it. Furthermore, as discussed above, the Court thinks it
unlikely that Debtor will get any new business unless the model
is changed substantially. Therefore, for the purpose of this
Motion only, the Court finds that the Plan on file is not
A failure to maintain insurance also constitutes “cause” to	9
dismiss or convert a case under 11 U.S.C. § 1112(b)(4)(C) so is
also automatically a ground to appoint a trustee under §
1104(a)(3).
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feasible . A trustee is needed to propose a feasible plan that	10
complies with Title 11.
Fourth, there are no cash reserves to provide the care for
which the residents contracted. This is gross mismanagement.
Fifth, Debtor’s continuing sales of CCC contracts after the
2003 audit (which showed insolvency and continuing losses) verges
on the fraudulent. Debtor was selling that which it knew or
should have known it could not supply: lifetime medical care for
elderly persons. However, even if it is not fraudulent it was
dishonest. This dishonestly apparently continues to today. This
is a ground to appoint a trustee under 11 U.S.C. § 1104(a)(1).
Sixth, the initial report’s financial statement and the
Monthly Operating Reports contain so many errors and
inconsistencies that their value is questionable. This is a
ground for a trustee. Furthermore, even if inaccurate, the
It also appears that the Plan is unconfirmable as	10
violative of the absolute priority rule, which allows
confirmation over an objecting class of creditors only if it is
“fair and equitable.” See 11 U.S.C. § 1129(b)(1). A plan is
“fair and equitable” with respect to an unsecured creditor only
if:
(i) the plan provides that each holder of a claim of
such class receive or retain on account of such claim
property of a value, as of the effective date of the
plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior
to the claims of such class will not receive or retain
under the plan on account of such junior claim or
interest any property.
11 U.S.C. § 1129(b)(2)(B). In Debtor’s plan, common stockholders
retain their stock upon the unsecured creditors receiving a
portion of the $360,000 plan payments.
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Monthly Operating Reports show continuing losses to the estate.
Continuing losses, combined with other factors already listed
above, are grounds to convert or dismiss a case under §
1112(b)(3)(A), so are grounds to appoint a trustee under 11
U.S.C. § 1104(a)(3).
Seventh, bouncing checks is gross mismanagement.
Eighth, Debtor’s communications with residents over the past
9 months, e.g., closing the medical center then changing
directions, have added to the uncertainty in the residents’ lives
and increased their distrust of the management.
For these reasons, the Court finds that the United States
Trustee’s Motion to Appoint a Chapter 11 Trustee are well taken.
A separate Order granting the Motion will be entered.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date entered on docket: August 13, 2009
Copies to:
William F. Davis
Attorney for Debtor
6709 Academy NE, Suite A
Albuquerque, NM 87109
Alice Nystel Page
Office of the UST
PO Box 608
Albuquerque, NM 87103-0608
Walter L Reardon, Jr
Attorney for the UCC
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
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