Opinion
23 Civ. 6430 (AT) (RWL)
2024-01-05
IN RE Janice CARRINGTON, Debtor. Janice Carrington, Appellant, v. Salvatore LaMonica and William K. Harrington, United States Trustee, Appellees.
Janice Carrington, Valley Forge, PA, Pro Se. Holly Ruth Holecek, Gary F. Herbst, LaMonica Herbst & Maniscalco, LLP, Wantagh, NY, for Appellee Salvatore LaMonica. Andrew D. Velez-Rivera, DOJ-Ust, New York, NY, for Appellee William K. Harrington.
Janice Carrington, Valley Forge, PA, Pro Se.
Holly Ruth Holecek, Gary F. Herbst, LaMonica Herbst & Maniscalco, LLP, Wantagh, NY, for Appellee Salvatore LaMonica.
Andrew D. Velez-Rivera, DOJ-Ust, New York, NY, for Appellee William K. Harrington. ORDER
ANALISA TORRES, District Judge:
Before the Court is the Report and Recommendation ("R&R"), ECF No. 26, from the Honorable Robert W. Lehrburger, recommending that the Court affirm an order of the Bankruptcy Court for the Southern District of New York (the "Conversion Order").
On July 25, 2023, Debtor pro se appealed the Conversion Order, which converted her case from one under Chapter 11 to one under Chapter 7. ECF Nos. 1, 6. The Bankruptcy Court found multiple grounds justifying conversion of the case, "including several acts of gross mismanagement, failure to comply with reporting requirements, and failure to timely file a confirmable plan." R&R at 11.
After careful consideration of Debtor's circumstances, Judge Lehrburger issued the R&R, proposing that the Court affirm the Conversion Order. See R&R at 16. Despite notification of the right to object to the R&R, no objections were filed, and the time to do so has passed. Id.; see Fed. R. Civ. P. 72(b)(2). When no objection is made, the Court reviews the R&R for clear error. See Whitley v. Bowden, No. 17 Civ. 3564, 2019 WL 1953941, at *1 (S.D.N.Y. May 1, 2019) (collecting cases). The Court finds no clear error.
Accordingly, the Court ADOPTS Judge Lehrburger's R&R in its entirety. The Conversion Order is AFFIRMED. The Clerk of Court is directed to enter judgment consistent with this order, mail a copy of this order to Debtor pro se, and close the case.
SO ORDERED.
REPORT AND RECOMMENDATION TO HON. ANALISA TORRES: BANKRUPTCY APPEAL
ROBERT W. LEHRBURGER, United States Magistrate Judge.
Debtor Janice Carrington ("Carrington"), pro se, appeals from a final order of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") converting her case from one under Chapter 11 to one under Chapter 7 (the "Conversion Order"). This Court has jurisdiction pursuant to 28 U.S.C. § 158(a), which provides in relevant part that "[t]he district courts of the United States shall have jurisdiction to hear appeals ... from final judgments, orders, and decrees; ... [and,] with leave of the court, from interlocutory orders and decrees of bankruptcy judges." 28 U.S.C. § 158(a). The appeal has been referred to me for report and recommendation. (Dkt. 7.) For the reasons set forth below, I recommend that the Conversion Order be affirmed.
Factual And Procedural Background
A. The Initial Filing And Conversion From Chapter 13 To Chapter 11
Carrington is a designer, and the sole proprietor of Plum Enterprises, Inc. ("Plum"). (See Bkr. Dkt. 80, Sch. I at ECF 29.) On January 7, 2020, then represented by counsel, Carrington filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. (Bkr. Dkt. 1.) Her bankruptcy schedules identified five real properties:
"Bkr. Dkt." refers to the docket of Carrington's bankruptcy case, No. 20-10034-LGB (S.D.N.Y.). "Dkt." refers to the docket of the appeal in this Court.
(1) 524 East 72nd Street, Apt. 43C, New York, NY ("First Property");
(2) 524 East 72nd Street, Apt. 31F, New York, NY ("Second Property");
(3) 200 East 69th Street, Apt. 19B, New York, NY ("Third Property");
(4) 3803 Valencia Groves Lane, Orlando, FL ("Florida Property"); and
(5) 500 Freedom View Lane, Valley Forge, PA ("Pennsylvania Property").
(Bkr. Dkt. 14 at ECF 3-5.) On January 14, 2020, Carrington moved to convert the case to one under Chapter 11 because her debts exceeded the limits applicable to Chapter 13 cases under 11 U.S.C. § 109(e). (Bkr. Dkt. 11 at 5 ¶ 10.) The motion was granted. (Bkr. Dkt. 50.)
B. Carrington's Early Efforts To Comply
On April 14, 2020, Carrington filed a motion to sell her First Property. (Bkr. Dkt. 10.) The Bankruptcy Court approved the sale on February 25, 2020. (Bkr. Dkt. 30.) On November 22, 2021, Carrington moved for approval of a sale of the Third Property. (Bkr. Dkt. 220.) She also moved the following month to retain special real estate counsel to assist in closing the sale. (Bkr. Dkt. 227.) The court approved both the sale and retention of special counsel. (Bkr. Dkt. 230, 232.)
C. Carrington's Later Violations Of The Code And The Court's Orders
By December 2022, Carrington had cycled through five different bankruptcy attorneys. (Bkr. Dkt. 295 ¶¶ 2-9.) Citing irreconcilable differences with Carrington, both her fifth counsel and special real estate counsel moved to withdraw. (Id. ¶ 10.) The Bankruptcy Court granted both withdrawals on January 12, 2023. (Bkr. Dkt. 299.)
At a hearing held in February 2023, Carrington, appearing pro se, requested more time to file a disclosure statement and plan beyond a then-pending March 15, 2023 deadline. (Bkr. Dkt. 311 at 2.) The court extended the deadline to May 16, 2023. (Id.) Carrington failed to meet the new deadline. At a status conference held on that date, the bankruptcy judge reiterated that Carrington would need to sell one or more of her remaining real properties in order to propose a Chapter 11 reorganization plan. (See Bkr. Dkt. 352, Tr. at 13:6-18.) The court set a deadline of June 16, 2023, for Carrington to file a "confirmable plan [that is] going to pay everyone" (id. at 14:5-8), and advised Carrington that, unless she met the deadline, her case would be converted to Chapter 7. (Id. at 14:11-14.) A corresponding order followed. (Bkr. Dkt. 326 ("Plan Deadline Order"), at 3 ¶ 1.)
On June 8, 2023, counsel to the mortgagee on Carrington's Florida Property filed a letter advising the Bankruptcy Court that Carrington had sold the property on April 24, 2023 — without court authorization. (Bkr. Dkt. 333.) On June 12, 2023, the Bankruptcy Court held a status conference about the sale of the Florida Property. (See Bkr. Dkt. 375.) The court observed that Carrington had filed prior sale motions in her bankruptcy case, and also had appeared personally before the court since April without mentioning the sale. (Id., Tr. at 6:11-17.) Calling the sale a "terrible mistake" (id. at 12:23), the court stated that it was not a "legally valid sale. It can be avoided under section 549 of the Bankruptcy Code. It wasn't approved under [section] 363." (Id. at 19:1-3.) When it came to light that Carrington had, also without approval, engaged a broker to carry out the transaction, the court added that Carrington did not "have the ability to hire a broker or pay a commission without a court order." (Id. at 13:17-19.) The Bankruptcy Court informed Carrington that she had breached her fiduciary duties by selling the property without approval, and "may have committed a bankruptcy crime." (Id. at 8:23-25.) The court then invited the United States Trustee to file a
motion to convert the case to Chapter 7. (Id. at 14:21-24; 41:20-21.)
On June 13, 2023, the Bankruptcy Court entered an order requiring that, by June 14, 2023, Carrington file several documents relating to her sale of the Florida Property. (Bkr. Dkt. 337 at 2 ¶ 1.) Due to the United States Trustee's concerns that the balance in Carrington's debtor-in-possession bank account was declining rapidly, Carrington was also ordered not to use any of the excess sale proceeds, except for $6,000 "to pay for utilities, food, and other ordinary living expenses," and was also ordered not to remove or transfer any of the sale proceeds from her account without further court order. (Id. at 2 ¶ 2.)
On June 16, 2023, Carrington filed a disclosure statement but without filing a plan of reorganization as ordered. (Bkr. Dkt. 338.)
D. The Trustee's Motion For Chapter 7 Conversion
That same day, June 16, 2023, the United States Trustee filed a motion to convert Carrington's case to Chapter 7 under section 1112(b)(4)(B) based on Carrington's gross mismanagement of her bankruptcy estate ("Conversion Motion"). (Bkr. Dkt. 341.) Carrington's mismanagement included a breach of fiduciary duty inherent in Carrington's unauthorized sale of her Florida Property, and her failure to advise the court of the sale at the May 16, 2023 status conference. (Id. at 7.) Her mismanagement also included unauthorized use of the sales proceeds to pay approximately $20,000 to a lawyer she engaged in a tax matter relating to her Pennsylvania Property. (Id. at 7-8, 11 ¶ 6.) The Conversion Motion also showed that between April 26 and May 23, 2023, the balance in Ms. Carrington's debtor-in-possession bank account had declined by approximately $40,000, to roughly $68,000. (Id. at 10 ¶ 3.)
The Conversion Motion was filed as a superseding motion. On July 3, 2020, the United States Trustee had previously moved to convert the case to Chapter 7, largely because Carrington had not filed required monthly operating reports six months into the case. (Bkr. Dkt. 69.) That motion was adjourned several times. (See, e.g., Bkr. Dkt. 100.)
Carrington's objection to the Conversion Motion revealed that she "had been listing and advertising the Florida Property for a very long time," with no notice to the court or parties in interest. (Bkr. Dkt. 346 at 6.) Carrington acknowledged the court's earlier queries about the Florida Property and said "[t]here was no intent to conceal the sale." (Id.) But her objection gave no explanation for why she had failed to tell the court about the sale of the Florida Property at the post-sale status conference held on May 16, 2023. (See id.)
E. The Bankruptcy Court Finds Cause To Convert
At the June 23, 2023 hearing on the Conversion Motion, the United States Trustee's counsel informed the court that, since the filing of the motion, Carrington's last operating report revealed that she had spent almost $40,000 of the Florida Property sales proceeds without court approval (Bkr. Dkt. 355, Tr. at 7:5-16), and that her reports continued to omit even basic information as well as revenue from her company, Plum (id. at 8:15-21, 9:22-10:2).
The board of managers of Carrington's Third Property supported the Conversion Motion at the hearing, revealing for the first time in the case that "for months," again without court approval, Carrington had been listing that property for sale as well. (Id. at 26:7-17.) Carrington told the court that, needing to pay taxes on the Pennsylvania Property, she took advantage of a favorable selling season to sell her Florida Property and acted quickly to accept an offer that far exceeded others.
(Id. at 12:3-15, 13:7-10.) Carrington still did not, however, explain why she failed to tell the court about the sale at the May 16, 2023 status conference.
In ruling on the Conversion Motion, the Bankruptcy Court found that Carrington "breached [her] fiduciary duties multiple times to [her] Creditor body." (Id. at 43:11-12.) The court itemized at least five breaches and determined that they furnished cause to convert the case under 11 U.S.C. § 1112(b)(4)(B) for gross mismanagement. Specifically, the Bankruptcy Court found that Carrington (1) sold her Florida Property without obtaining prior court approval, (2) used proceeds from the sale without prior court approval, (3) used a broker to sell the property without obtaining court approval to retain and/or pay the broker, (4) failed to inform the court about the sale at the May 16, 2023 status conference, and (5) "fail[ed] to comply with and file monthly operating reports on a timely basis that are in the form required by every other Debtor in this Court." (Id. at 32:3-37:15.) Moreover, the reports filed lacked adequate information about cash flow from Plum, which remained "a big black hole," leaving the court with "no idea what the business does ... [or] the cash flow the Debtor receives from that." (Id. at 32:16-21, 32:25-33:4.)
The Bankruptcy Court reminded Carrington that, before selling the Florida Property, she had been through two sales authorized by the court, so "you know there has to be approval." (Id. at 41:10-15.) The court agreed that Carrington "got a reasonable price for this property, probably the best price ever," but admonished, "that does not excuse what you did." (Id. at 42:10-12.) Carrington did not dispute that she knew of the approval requirement, or that obtaining a favorable price did not excuse the requirement. (See id. at 41:3-42:20.)
In addition to gross mismanagement, the Bankruptcy Court found that an earlier reorganization plan filed by Carrington could not be confirmed (id. at 34:5-15), and that Carrington had failed to file a confirmable plan in the 18 months since the earlier plan, despite numerous extensions (id. at 35:8-37:13). The court also found that the disclosure statement filed by Carrington on June 16, 2023, contained "a number of deficiencies," including the absence of funding projections and any "actual plan." (Id. at 35:11-15.) Toward the conclusion of the hearing, Carrington again requested more time, but the court declined, because "unfortunately another month isn't going to do anything here." (Id. at 42:24-43:4.) The court told Carrington that because "you decided to take things into your own hands ... no one can trust you with your property .... The actions speak louder than words." (Id. at 43:1-10.)
The court entered the Conversion Order on June 23, 2023. (Bkr. Dkt. 349.) Co-Appellee, Salvatore LaMonica, was then appointed as Chapter 7 Trustee. (Bkr. Dkt. 350.)
F. Carrington's Appeal And Motion To Stay
Carrington timely appealed the Conversion Order on July 5, 2023. (Bkr. Dkt. 354.) On August 22, 2023, Carrington filed her appeal brief ("Appeal Mem."). (Dkt. 6.) In her appeal brief, Carrington states that she "has struggled each and every day for the past 3 years to pay bills religiously," that various of her attorneys "missed hearings and deadlines," that attorneys and other professionals had undisclosed conflicts of interest, and that she is "utterly depleted financially, emotionally and physically." (Appeal Mem. at 1, 3, 5.)
On September 20, 2023, the United States Trustee filed his brief in opposition
to the appeal and seeking affirmance of the Conversion Order. (Dkt. 15.) The Chapter 7 Trustee filed his brief on September 21, 2023. (Dkt. 16.) Carrington filed replies to the briefs of both trustees on October 6, 2023. (Dkts. 24-25.)
The Court scheduled oral argument for October 11, 2023, via Teams. Counsel for both Trustees appeared; Ms. Carrington did not. The Court informed the appearing parties that the Court did not need argument from them as the Court had sufficient information on which to render its rulings. The proceeding thus ended without discussion of substantive matter.
The same day Carrington filed her appeal brief, she moved in this Court to stay the bankruptcy proceedings pending appeal (the "Stay Motion"). (Dkt. 5.) The Chapter 7 Trustee filed his opposition to the Stay Motion on August 29, 2023, and the United States Trustee filed his opposition the following day. (Dkts. 8-9.) This Court has denied the Stay Motion by separate order issued the same day as the instant R&R.
Also on August 22, 2023, the Chapter 7 Trustee moved in Bankruptcy Court to hold Carrington in contempt for failing to comply with the court's orders requiring her to turn over the Florida Property sale proceeds and provide the Trustee information about the sale. (See Bkr. Dkt. 371, 381.) After a hearing, the Bankruptcy Court granted the motion and entered an order finding Carrington in contempt and imposing coercive sanctions in an effort to gain Carrington's compliance. (Bkr. Dkt. 391.)
Standard Of Review
The Court reviews the Bankruptcy Court's Conversion Order for abuse of discretion. In re Blaise, 219 B.R. 946, 950 (B.A.P. 2d Cir. 1998) (an "order converting a bankruptcy case for cause is reviewed for abuse of discretion"); Derivium Capital LLC v. U.S. Trustee, No. 05-CV-10845, 2006 WL 1317021, at *7 (S.D.N.Y. May 12, 2006) ("This Court reviews an order converting a bankruptcy case for cause, for an abuse of discretion"). "A bankruptcy court abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings." In re Blaise, 219 B.R. at 950. Accordingly, "[d]istrict courts review a bankruptcy court's factual findings for clear error and its conclusions of law de novo." Jacobson Development Group, LLC v. Office of the United States Trustee, No. 22-CV-604, 2023 WL 2403617, at *3 (E.D.N.Y. Mar. 8, 2023) (citing, inter alia, In re Charter Communications, Inc., 691 F.3d 476, 483 (2d Cir. 2012)).
"A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Lynch v. Barnard, 590 B.R. 30, 35 (E.D.N.Y. 2018) (quoting In re Robbins International, Inc., 275 B.R. 456, 464-65 (S.D.N.Y. 2002)); accord Zervos v. Verizon New York, Inc., 252 F.3d 163, 168 (2d Cir. 2001). "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson v. City of Bessemer City, 470 U.S. 564, 574, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
Discussion
"The principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor." Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (internal quotation marks omitted). The Bankruptcy Code provides varied paths to resolution known as "Chapter 7," "Chapter 11," and "Chapter 13." Chapter 11 primarily is employed by business debtors, Toibb v. Radloff, 501 U.S. 157, 166, 111 S.Ct. 2197, 115 L.Ed.2d
145 (1991), whereas Chapters 7 and 13 typically are invoked by individuals, see Marrama, 549 U.S. at 367, 127 S.Ct. 1105. As explained by the Supreme Court:
Both Chapter 7 and Chapter 13 of the Code permit an insolvent individual to discharge certain unpaid debts .... Chapter 7 authorizes a discharge of prepetition debts following the liquidation of the debtor's assets by a bankruptcy trustee, who then distributes the proceeds to creditors. Chapter 13 authorizes an individual with regular income to obtain a discharge after the successful completion of a payment plan approved by the bankruptcy court. Under Chapter 7 the debtor's nonexempt assets are controlled by the bankruptcy trustee; under Chapter 13 the debtor retains possession of his property."
Marrama, 549 U.S. at 367, 127 S.Ct. 1105. Similar to Chapter 13, "[i]n Chapter 11, debtor and creditors try to negotiate a plan that will govern the distribution of valuable assets from the debtor's estate and often keep the business operating as a going concern." Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 455, 137 S.Ct. 973, 197 L.Ed.2d 398 (2017). In short, Chapters 11 and 13 contemplate discharge following completion of a payment plan, whereas Chapter 7 entails discharge following liquidation of the debtor's assets.
Under defined circumstances, a bankruptcy case proceeding under one chapter may be converted to one under another chapter. "Section 1112 of the Bankruptcy Code ('Section 1112') governs the conversion or dismissal of a [Chapter 11 case], and 'is intended to preserve estate assets by preventing the debtor in possession from gambling on the enterprise at the creditor's expense when there is no hope for rehabilitation.'" Lynch, 590 B.R. at 35-36 (quoting In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr. S.D.N.Y. 1995)). Under Section 1112(b)(1), a Chapter 11 case "shall" be converted to a Chapter 7 case "for cause." Specifically, "on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause." 11 U.S.C. § 1112(b)(1).
Section 1112(b) lists what may constitute cause, including, inter alia, the "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation," "gross mismanagement of the estate," and "failure to ... file or confirm a plan, within the time fixed by this title or by order of the court." 11 U.S.C. § 1112(b)(4)(A, B & J). The list of examples is "illustrative, not exhaustive." In re C-TC 9th Avenue Partnership, 113 F.3d 1304, 1311 and n.5 (2d Cir. 1997).
Here, the Bankruptcy Court found multiple grounds for cause, warranting conversion of Carrington's Chapter 11 case to Chapter 7, including several acts of gross mismanagement, failure to comply with reporting requirements, and failure to timely file a confirmable plan. Having reviewed the record, the Court finds no error of law or clearly erroneous findings of fact that would allow the Court to reverse the Conversion Order for abuse of discretion.
First, the Bankruptcy Court did not abuse its discretion in finding that Carrington's unauthorized sale of the Florida Property and use of some of the sale proceeds, both of which are undisputed, as well as Carrington's failure to disclose the sale after the fact, constitute gross mismanagement under Section 1112(b)(4). Carrington knew approval was required, as she had previously gone through the approval process for sale of other of her properties. (See Bkr. Dkt. 355, Tr. at 41:3-42:20.) On appeal, Carrington defends her actions, asserting that she had been "aggressively
advertising" her Florida Property and "had a very narrow opportunity to sell." (Appeal Mem. at 5.) Regardless of whether Carrington acted with good intentions, her actions violate 11 U.S.C. § 363(b), which requires court approval for debtors in possession to "use, sell, or lease, other than in the ordinary course of business, property of the estate." The approval requirement is far from a mere technicality. The requirements for notice, hearing, and approval "afford due process protections to parties interested in the disposition of the estate" and are "intended to protect both debtors and creditors ... by subjecting a [debtor in possession's] actions to complete disclosure and review by the creditors of the estate and by the bankruptcy court." Northview Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 351 (3d Cir. 1999). Carrington, however, took matters "into [her] own hands" (Bkr. Dkt. 355, Tr. at 43:2), demonstrating her inability or unwillingness to adhere to the requirements designed to protect the parties and the estate.
This case bears some similarities to In re Hoyle, No. 10-01484-TLM, 2013 WL 210254 (Bankr. D. Idaho Jan. 17, 2013). In Hoyle, the bankruptcy court found cause and converted a Chapter 11 case under Section 1112(b)(4)(B) where the debtor in possession, much like Carrington, sold stock without disclosure or the requisite court approval, transferred real property without bankruptcy court authority, "failed to make a clear and express disclosure of what he had done," and only when discovered, "argued the transfer did not matter because" the sales proceeds would be used to pay creditors. Id., 2013 WL 210254, at *12; see also In re Sillerman, 605 B.R. 631, 657 (Bankr. S.D.N.Y. 2019) (selling assets without following section 363(b) "reflect[s] gross mismanagement of the estate (§ 1112(b)(4)(B))").
Second, the Bankruptcy Court did not abuse its discretion in finding cause under Section 1112(b)(4)(B) based on Carrington's unauthorized retention and payment of the real estate broker to handle the Florida Property sale. Carrington violated 11 U.S.C. § 327(a), which requires court approval for debtors in possession to retain professionals. Real estate brokers are professionals for which authorization is required. In re Palm Coast, Matanza Shores Ltd. Partnership, 101 F.3d 253, 257 (2d Cir. 1996) (real estate brokers are professionals whose employment requires court approval under 11 U.S.C. § 327(a)). Carrington's unilateral hiring of the Florida broker without seeking and obtaining authorization qualifies as gross mismanagement. See In re Sillerman, 605 B.R. at 657 (among other transgressions, unauthorized retention and payment of professionals, was gross mismanagement of the estate).
Third, the Bankruptcy Court did not abuse its discretion in finding cause due to Carrington's failure to timely file compliant monthly operating reports and to provide any information about income she received from Plum. As one court has explained, timely operating reports and the accuracy of their information "are the life blood of the Chapter 11 process," serving as a "litmus test for the debtor's ability to reorganize." In re Alston, 756 F. App'x 160, 164 (3d Cir. 2019) (internal quotation marks omitted). Yet even after three years, Carrington had provided insufficient information about Plum, leaving "a big black hole." (Bkr. Dkt. 355, Tr. at 32:20.) This missing information was not news to Carrington. The
Carrington contends that she was never provided information "and certainly no formula" from her attorneys for completing monthly operating reports. (Appeal Mem. at 2.) But immediately following that statement, Carrington admits that she received warnings that her case would be converted to Chapter 7 if she did not file the monthly reports; that her attorneys explained to her that it was not their job to complete the reports; and that her attorneys recommended a consultant to her for completing the reports. (Id.) Carrington claims that the reports prepared by the consultant "were incorrect" but provides no facts to support that conclusory assertion. (Id.)
United States Trustee had raised the insufficient disclosure about Plum with the Bankruptcy Court and Carrington in December 2022 (see Bkr. Dkt. 289 at 2 (referring to Carrington's S Corp)), but Carrington did nothing to cure the omission or even address it at the conversion hearing. The Bankruptcy Court thus appropriately invoked Section 1112(b)(4)(B) in citing the lapse as gross mismanagement of the estate, although it would also qualify as cause under Section 1112(b)(4)(F), which identifies the "unexcused failure to satisfy timely any filing or reporting requirement" as cause for conversion. See In re Alston, 756 F. App'x at 164 (affirming finding of cause under section 1112(b)(4)(F) where debtor's monthly reports were "incomplete").
Although the Bankruptcy Court did not expressly cite Section 1112(b)(4)(F), the Court may affirm on any ground supported by the record. Thyroff v. Nationwide Mutual Insurance, Co., 460 F.3d 400, 405 (2d Cir. 2006).
Fourth, the Bankruptcy Court did not abuse its discretion in finding cause under Section 1112(b)(4)(J) due to Carrington's failure file or confirm a reorganization plan by a time fixed by the Bankruptcy Court. After repeated extensions, the Bankruptcy Court fixed June 16, 2023 as the deadline for Carrington to file a reorganization plan. (Bkr. Dkt. 326.) Carrington, however, did not comply with that deadline and did not file a plan. (See Bkr. Dkt. 355, Tr. at 37:7-12.) "[A] debtor cannot wallow in chapter 11. The debtor must prosecute his or her case to a prompt and successful conclusion." In re Tornheim, 181 B.R. 161, 164 (Bankr. S.D.N.Y. 1995). Carrington has been in bankruptcy for over three years; a plan of reorganization has not been confirmed; and the Bankruptcy Court found no evidence to suggest that Carrington could successfully reorganize. To the contrary, when Carrington asked for another plan extension at the June 23, 2023 hearing, the Bankruptcy Court opined that "unfortunately another month isn't going to do anything here." (Bkr. Dkt. 355, Tr. at 42:24-43:1.)
The Bankruptcy Court set July 27, 2021 as an initial deadline for Carrington to file a confirmable plan, and October 25, 2021 as the deadline for confirmation. (Bkr. Dkt. 143 ¶¶ 1-2.) After Carrington filed two plans that were not confirmable, in July 2021 and August 2022, the Bankruptcy Court further extended the deadline three times, to March 15, 2023, May 16, 2023, and then June 16, 2023. (Bkr. Dkt. 309, Tr. at 6:19-22; Bkr. Dkt. 311 at 2 ¶ 1; Bkr. Dkt. 326 at 3 ¶ 1.) Carrington missed them all. The court expressly warned Carrington at the May 16, 2023 conference that, unless she met the new June 16, 2023 plan deadline, her case would be converted to Chapter 7. (Bkr. Dkt. 352, Tr. at 14:4-15:11.)
Faced with Carrington's violation of her financial disclosure obligations, unauthorized sale of the Florida Property, unauthorized retention of a broker, and later failure to bring the sale to the court's attention, the Bankruptcy Court aptly concluded that "[it is c]lear to me that you cannot — you are not able to follow the code here" (Bkr. Dkt. 375, Tr. at 14:18-19), and that "no one can trust you with your property" (Bkr. Dkt. 355, Tr. at 43:3-4). The Bankruptcy Court thus had ample cause for conversion. See In re Babayoff, 445 B.R. 64, 79 (Bankr. E.D.N.Y. 2011) (recognizing Chapter 11 debtor's inability to confirm a plan of reorganization as cause justifying conversion).
Even if a bankruptcy court finds cause under Section 1112(b)(4), it
nonetheless may not convert or dismiss a case upon a finding of unusual circumstances. See 11 U.S.C. § 1112(b)(2). Carrington, however, did not allege any such circumstances below; the Bankruptcy Court did not find any, and this Court is not aware of any. Instead, Carrington asserts that she "has struggled each and every day for the past 3 years to pay her bills and has done so religiously despite profound obstacles," but that she is "utterly depleted financially, emotionally and physically." (Stay Motion at 1-2.) While the Court is sympathetic to Carrington's plight, her state of emotional, physical, and financial exhaustion only further supports the Bankruptcy Court's finding that Carrington is not up to fulfilling her duties under Chapter 11. And although Carrington seeks to shift blame to attorneys and other professionals, her statements are either unsupported or contradicted by the record. Regardless, the Bankruptcy Court had ample ground to find cause for conversion. The Bankruptcy Court thus did not abuse its discretion in issuing the Conversion Order.
Although Section 1112(b) directs that the Bankruptcy Court shall either convert or dismiss the case upon finding cause, no party sought dismissal instead of conversion. In any event, the Bankruptcy Court found that dismissal would not serve the interests of the estate and the creditors because of the creditors and professionals who still needed to be paid. (Bkr. Dkt. 375, Tr. at 30:19-31:2.)
Conclusion
For the reasons set forth above, I recommend that the Bankruptcy Court's Conversion Order be affirmed.
Procedure For Filing Objections And Preserving Right To Appeal
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Criminal Procedure, the parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the Chambers of the Honorable Analisa Torres, 500 Pearl Street, New York, New York 10007, and to Chambers of the undersigned, 500 Pearl Street, New York, New York 10007. FAILURE TO FILE TIMELY OBJECTIONS WILL RESULT IN WAIVER OF OBJECTIONS AND PRECLUDE APPELLATE REVIEW.
Dated: October 16, 2023