Opinion
No. 11-02-14217 MR.
March 4, 2005
ORDER CONVERTING CASE TO CHAPTER 7
THIS MATTER is before the Court on the Chapter 11 Trustee's Motion to Convert Case to Case Under Chapter 7 ("Motion to Convert"), filed by Linda S. Bloom, the appointed Chapter 11 Trustee. Debtor, represented by Davis Pierce, P.C. (William F. Davis) opposes the Motion to Convert. The Court held a final hearing on the Motion to Convert on February 15, 2005. Following the final hearing, the Court authorized the parties to submit briefs on the issue of whether a Chapter 11 trustee seeking to convert a case to Chapter 7 must show "cause" for conversion in accordance with 11 U.S.C. § 1112(b). The Court finds that a Chapter 11 trustee must demonstrate sufficient "cause" to convert a case to Chapter 7, and that, based on the evidence presented at the final hearing, sufficient cause exists to convert this proceeding to Chapter 7 in accordance with 11 U.S.C. § 1112(b).
Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 14, 2002. In December of 2004, Linda S. Bloom was appointed the Chapter 11 trustee. Pursuant to 11 U.S.C. § 1106(a)(5), a Chapter 11 trustee shall
This case was jointly administered with Dewey Matthew Runnels and Judy Runnels, Case No. 11-02-14214 MR. The cases were severed on February 4, 2005. (See Docket #348 in Case No. 11-02-14214 MR).
as soon as practicable, file a plan under section 1121 of this title, file a report of why the trustee will not file a plan, or recommend conversion of the case to a case under chapter 7, 12, or 13 of this title or dismissal of the case.
11 U.S.C. § 1106(a)(5).
The Chapter 11 trustee has not filed a plan of reorganization or a report, but instead filed the Motion to Convert, stating that she believes the Debtor's assets, consisting of seven operating radio stations, can be sold to generate sufficient funds to pay all secured claims and provide a dividend to unsecured creditors, that she plans to operate the Debtor's business until the radio stations can be liquidated, and that operation of the business under Chapter 7 rather than Chapter 11 will maximize the value of the estate and avoid the administrative expenses and costs associated with Chapter 11 proceedings and reorganization plans.
The Trustee has filed a motion to extend the time within which to file required reports until March 31, 2005. ( See Docket # 171).
Pursuant to 11 U.S.C. § 1112(a)(1), "[t]he debtor may convert a case to a case under chapter 7 of this title unless the debtor is not a debtor in possession." 11 U.S.C. § 1112(a)(1) (emphasis added). Debtor points out that while a Chapter 11 trustee is similar to a debtor-in-possession, there is no code provision conferring upon a Chapter 11 trustee the powers of a debtor-in-possession for purposes of converting a case under 11 U.S.C. § 1112(a). Therefore, while 11 U.S.C. § 1106(a)(5) allows the Chapter 11 trustee to "recommend" conversion or dismissal, and 11 U.S.C. § 1109(b) provides that parties in interest, including trustees, may raise, appear, and be heard on any issue in a chapter 11 proceeding, a Chapter 11 trustee seeking to convert a Chapter 11 proceeding to Chapter 7 must proceed under 11 U.S.C. § 1112(b), the conversion section applicable to parties in interest. This Court agrees.
Section 1112(b) contains a non-exhaustive list of grounds for conversion, including: (1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation; and (2) inability to effectuate a plan. 11 U.S.C. § 1112(b)(1) and (2); Hall v. Vance, 887 F.2d 1041, 1044 (10th Cir. 1989) (noting that the list of grounds sufficient for conversion or dismissal is not exhaustive). Whether sufficient cause exists to convert a proceeding from Chapter 11 to Chapter 7 lies within the discretion of the Bankruptcy Court. Id. (noting that "[t]he bankruptcy court has broad discretion under § 1112(b).") (citing S.Rep. No. 989, 95th Cong., 2d Sess. 117, reprinted in 1978 U.S.C.C.A.N. 5787, 5903).
Here, the Debtor has been in Chapter 11 for over two years without confirming a plan of reorganization. The monthly operating reports show that the Debtor has been unable to pay current operating expenses as they become due, or to pay all post-petition taxes. The history of this proceeding indicates that the Debtor has been unable to make its business operations sufficiently profitable to propose a reorganization plan that will result in payment to creditors through business operations. Thus, there is a lack of reasonable likelihood of rehabilitation of this Debtor. Cf. Loop Corp. v. U.S. Trustee, 379 F.3d 511, 516 (8th Cir. 2004), cert. denied, 125 S.Ct. 915 (2005) (affirming bankruptcy court's determination that a liquidating debtor with no intention of restoring its business operations had no reasonable likelihood of rehabilitation). The Debtor's only major assets are the radio station licenses that the Chapter 11 trustee proposes to sell. Although renewal of the licenses requires that the radio stations continue to operate, it is the licenses themselves, not the operating radio station businesses that constitute the valuable assets of this bankruptcy estate. Under these circumstances, the Court finds that sufficient cause exists to convert the case under 11 U.S.C. § 1112(b).
The Debtor opposes conversion, asserting that a liquidating Chapter 11 plan would yield greater value to the estate than the sale of the licenses in a Chapter 7 proceeding because of the perception that a Chapter 7 liquidation sale means assets can be purchased at "fire sale" prices. At the final hearing on the Motion to Convert, the principals of the Debtor testified that the business has suffered since the Chapter 11 trustee filed the Motion to Convert because of the negative perception within their business community of Chapter 7 proceedings as opposed to Chapter 11 proceedings. The Chapter 11 Trustee counters that in her business judgment, converting the case to Chapter 7 and liquidating the assets will save administrative costs and expenses associated with a Chapter 11 proceeding, and that the sales price which can be achieved in a Chapter 7 liquidation sale is comparable to the sales price she could expect to obtain through a liquidating Chapter 11 plan.
By arguing against conversion and in favor of a Chapter 11 liquidating plan, Debtor seeks to force the Chapter 11 trustee to file a plan in accordance with the directives contained in 11 U.S.C. § 1106(a)(5). However, Debtor has not shown that there is a reasonable prospect of rehabilitation within a reasonable time. See In re Minnesota Alpha Foundation, 122 B.R. 89, 94 (Bankr.D.Minn. 1990) (noting that once sufficient cause for conversion or dismissal has been shown, the burden shifts back to the debtor to "demonstrate the strength of its proposal for rehabilitation."). See also In re The Ledges Apartments, 58 B.R. 84, 87 (Bankr.D.Vt. 1986) ("Reorganization encompasses rehabilitation and may contemplate liquidation. Rehabilitation, on the other hand, may not include liquidation."). Whether through a liquidating Chapter 11 plan or through a Chapter 7 proceeding, the Debtor's assets will be sold in order to generate funds for the benefit of the Debtor's creditors. Proceeding under Chapter 7, the Debtor will not incur quarterly United States Trustee's fees required in Chapter 11 proceedings, and will not incur the costs associated with filing and noticing a plan of reorganization. Therefore, having found sufficient cause to convert under 11 U.S.C. § 1112(b), the Court finds that conversion is in the best interest of the creditors and the estate.
WHEREFORE, IT IS HEREBY ORDERED, that the Motion to Convert is GRANTED.