Opinion
No. 77 B 2988
May 25, 1979
Real Property Arrangements — Conversion to Bankruptcy — Reinstatement of Chapter XII Case
The court will not reinstate a Chapter XII case converted to a bankruptcy pursuant to Rule 12-41(b)(2) of the Bankruptcy Rules of Procedure subsequent to the debtor's adjudication in bankruptcy if the likelihood for success under the reinstated case is slight while the harm to secured creditors is assured.
The debtor filed a petition for a real property arrangement under Chapter XII of the Bankruptcy Act. The court directed the debtor to post an indemnity bond which the debtor failed to timely post. The court then converted the case to bankruptcy under Rule 12-41(b)(2), adjudicated the debtor a bankrupt, and directed him to file proper financial information for the time during which he operated as a debtor-in-possession, which information the bankrupt failed to provide. The bankrupt moved for leave to reinstate his aborted Chapter XII case and file an amended plan of arrangement.
To permit a debtor to continue with his previous efforts to effect a real property arrangement, the adjudication in bankruptcy must be vacated. As the new Chapter XII petition would not divest the trustee in bankruptcy of the real estate acquired under Bankruptcy Rule 12-41(b) by conversion from the first Chapter XII case to a bankruptcy case, permission to file another Chapter XII petition would be "a hollow privilege for . . . [the bankrupt] . . . unless he can also stay the trustee in bankruptcy from disposing of his right, title and interest in and to all of the real estate formerly owned. . ." by the bankrupt. The Bankruptcy Rule 12-7 stay of adjudication and of administration of an estate in bankruptcy does not apply to a Chapter XII case aborted under Rule 12-41(b) as that adjudication terminated the Chapter XII case. A second Chapter XII case "cannot be the means for staying the bankruptcy administration following the first Chapter XII case."
In this case, the trustee had few funds to maintain the properties remaining after one mortgagee was permitted to proceed with its foreclosure on a property that was a drain on the estate. The cash flow was inadequate to make necessary repairs. The properties were heavily encumbered with no equity available for unsecured creditors and counsel for three of the first mortgages had voiced objections to the debtor's application.
The debtor's motion for leave to reinstate his Chapter XII case and file an amended plan of arrangement was denied as it presented no sufficient ground for vacation of the adjudication as bankrupt. Further, the likelihood for success under the reinstated Chapter XII case was slight, whereas the harm to secured creditors was assured if the trustee were to continue to operate and maintain the real estate in question while the debtor went through the motions of attempting to develop a Chapter XII package. See Rule 12-7 at ¶ 20,807, and Rule 12-41 at ¶ 20,841.