Andover Covered Bridge, LLC v. Harrington

Bankruptcy Case No. 15-20489-PGC, BAP No. EP 16-005
Procedural context:
Andover Covered Bridge, LLC (the “Debtor”) appeals from the following orders of the bankruptcy court: (1) the December 14, 2015 Order Granting Motion of the United States Trustee to Dismiss Chapter 11 Case of Andover Covered Bridge, LLC, Pursuant to 11 U.S.C. § 1112(b); and (2) the January 11, 2016 Order Denying Debtor’s Motion to Alter or Amend or for a New Trial on Order of Dismissal Pursuant to Bankruptcy Rule 9023 and FRCP 59; And Alternatively For Amended Findings and An Amended Order Pursuant to Bankruptcy Rule 7052 and FRCP 52(b).1 For the reasons set forth below, we AFFIRM.
the U.S. Trustee filed a motion to convert or dismiss the case (“Motion to Dismiss”). The U.S. Trustee asserted that cause existed to dismiss or convert the case due to: (1) the Debtor’s failure to file the required monthly operating reports for August and September 2015, and failure to produce financial information as requested by the U.S. Trustee (§ 1112(b)(4)(F) and (H)); and (2) the Debtor’s continuing losses (the accrual of unpaid mortgage obligations) and the absence of a reasonable likelihood of rehabilitation as the Debtor had no income (§ 1112(b)(4)(A)). The U.S. Trustee asserted that conversion to chapter 7 would be in the best interests of the creditors and the estate because there appeared to be equity in the Property and there might be claims which could be asserted against the Debtor’s affiliates for failure to pay the Debtor for their use of the Property. Alternatively, the U.S. Trustee requested that the case be dismissed. The U.S. Trustee’s counsel indicated the U.S. Trustee was pressing for dismissal of the case, rather than conversion, and pointed out the following: (1) the Secured Party had not received a mortgage payment since December 2014 because Harvest Hills was unable to generate enough money during its peak season; (2) the Debtor’s intent to file a liquidating plan did not satisfy the rehabilitation requirement in § 1112(b)(4)(A); and (3) the Debtor’s failure to offer a valid excuse or justification for the late filing of its monthly operating reports. The Debtor reiterated that its bankruptcy strategy was to sell the Property, which would benefit the Bolducs and the Secured Party and would adversely affect no one. It argued that there was no diminution to the estate because there was “no one in the estate to be . . . [a]ffected by diminution other than the debtor’s equity.” It also asserted that it would retain a broker and file a liquidating plan, but offered no specifics. According to the Debtor, rehabilitation in the context of § 1112(b)(4)(A) can include a liquidating plan. The Debtor also maintained that it had “cured all the defects” by filing the outstanding monthly operating reports and paying the outstanding quarterly fees. Finally, the Debtor argued conversion did not make sense “because it would just be a sale of the property with a three percent commission to the trustee.” The Bankruptcy Court dismissed the case. The Debtor filed a Motion to Reconsider. The U.S. Trustee objected to the Motion to Reconsider, arguing that the evidence before the court—including the Debtor’s own admissions—supported dismissal of the case, and there was no newly discovered evidence. The Bankruptcy Court denied the Motion to Reconsider. The Debtor appealed the dismissal under § 1112(b). When reviewing a dismissal of a bankruptcy case under § 1112(b), we review the bankruptcy court’s findings of fact for clear error and conclusions of law de novo. In re Colón Martinez, 472 B.R. at 143 (citing Gilroy v. Ameriquest Mortg. Co. (In re Gilroy), BAP No. NH 07-054, 2008 WL 4531982, at *4 (B.A.P. 1st Cir. Aug. 4, 2008. The initial burden is on the movant to prove there is cause for either conversion or dismissal of the chapter 11 case. Efron v. Candelario (In re Efron), 529 B.R. 396, 411 (B.A.P. 1st Cir. 2015). Once the movant establishes cause, the burden shifts to the opposing party to demonstrate “unusual circumstances” establishing that conversion or dismissal is not in the best interests of the creditors and the estate, and that it meets the other requirements of § 1112(b)(2). If no such unusual circumstances exist and/or the other requirements are not met, the bankruptcy court must convert or dismiss the case. Id. The bankruptcy court has broad discretion to determine whether unusual circumstances exist and whether conversion or dismissal is in the best interest of creditors and the estate. Id. (citing In re Colón Martinez, 472 B.R. at 144; In re Gilroy, 2008 WL 4531982, at *4). The U.S. Trustee sought dismissal of the Debtor’s case under § 1112(b)(4)(F) and (H) because of the Debtor’s failure to file timely monthly operating reports and other financial documents, and under § 1112(b)(4)(A) due to the continuing losses to the Debtor’s estate and the absence of a likelihood of rehabilitation. The bankruptcy court granted dismissal on both of these grounds. Pursuant to § 1112(b)(4)(F), an “unexcused failure to satisfy timely any filing or reporting requirement established by [the Bankruptcy Code] or by any rule applicable to a case under [chapter 11]” is cause for conversion or dismissal of a chapter 11 case. 11 U.S.C. § 1112(b)(4)(F). Pursuant to § 1112(b)(4)(H), cause also includes “failure to timely provide information . . . reasonably requested by the United States trustee . . . .” 11 U.S.C. § 1112(b)(4)(H). “Monthly reports and the financial disclosures contained within them ‘are the life-blood of the Chapter 11 process’ and are more than ‘mere busy work.’” In re Whetten, 473 B.R. 380, 15 383 (Bankr. D. Colo. 2012) (citing In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991)). “Monthly operating reports provide necessary information to the Court, creditors, and other parties in interest about the progress and prospects of a debtor’s reorganization efforts.” ABCD Holdings, LLC v. Hannon (In re Hannon), 512 B.R. 1, 19 (Bankr. D. Mass. 2014). On appeal, the Debtor’s sole argument with respect to the monthly operating reports is that it “demonstrated a reasonable justification for the tardily filed reports,” and “the failure to file the reports was cured within a reasonable period of time.” The record clearly establishes that the Debtor failed to file timely several monthly operating reports. Although the Debtor blames its late filing on its counsel’s email system and the U.S. Trustee’s failure to notify the Debtor that it was not in compliance, the bankruptcy court found these excuses were not sufficient or persuasive. It was the Debtor’s obligation to comply with its reporting requirements and to ensure that its counsel timely filed the reports with the U.S. Trustee and the bankruptcy court. The U.S. Trustee had no obligation to remind either the Debtor or his counsel of any failure to comply. Moreover, under § 1112(b)(4)(H), the Debtor’s failure timely to provide information reasonably requested by the U.S. Trustee does not need to be “unexcused” to constitute cause. Cause under § 1112(b)(4)(A) requires a two-part inquiry: (1) whether after the commencement of the case, the debtor has suffered or continued to experience a negative cash flow, or, alternatively, declining asset value; and (2) whether there is any reasonable likelihood that the debtor, or some other party, will be able to stem the debtor’s losses and place the debtor’s business enterprise back on a solid financial footing within a reasonable amount of time. To satisfy the first prong, “[a]ll that need be found is that the estate is suffering some diminution in value.” Id. (citations omitted) (internal quotations omitted). Courts have held that a debtor’s post-petition negative cash flow and/or an inability to pay current expenses satisfies the elements of § 1112(b)(4)(A). See In re Peña, No. 14-09799 (ESL), 2016 WL 1043736, at *5 (Bankr. D.P.R. Mar. 15, 2016) (citing cases). Once the court finds that there is a diminution of the bankruptcy estate, it must then consider whether the debtor has a reasonable likelihood of rehabilitation. “Rehabilitation” in this context means whether the debtor will be able to reestablish its business. In re Peña, 2016 WL 1043736, at *5. “Rehabilitation contemplates the successful maintenance and reestablishment of the debtors’ business operations and ‘to put back in good condition; re-establish on a firm, sound basis.’” Id. (citations omitted). “Rehabilitation” does not mean “reorganization.” In re Hoover, 2016 WL 3606918, at *3 (“[T]he question of rehabilitation under [§] 1112(b)(4)(A) is not synonymous with reorganization . . . .”) (citation omitted); In re Santiago, No. 15-06132 (ESL), 2015 WL 5919926, at *6 (Bankr. D.P.R. Oct. 9, 2015) (citing 7 19 Collier on Bankruptcy ¶ 1112.04[6] [a] [ii] (16th ed. 2015)). “Whereas, confirmation of a plan could include a liquidation plan, rehabilitation does not include liquidation.” In re Santiago, 2015 WL 5919926, at *6 (citation omitted) (internal quotations omitted). The Debtor argues that the bankruptcy court erred in holding that there was an absence of a likelihood of rehabilitation because the Debtor demonstrated that it intended to propose a liquidating plan, which is permissible in chapter 11. While it is true that a reorganization may include a liquidating plan, rehabilitation for purposes of § 1112(b) does not include liquidation. See In re Santiago, 2015 WL 5919926, at *6; 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.”); see also In re Gonic Realty Trust, 909 F.2d 624, 627 (1st Cir. 1990) (“[W]ith no business left to reorganize, Chapter 11 proceedings were not serving the purpose of rehabilitating the debtor’s business.”). “Rehabilitation is a different and . . . much more demanding standard than reorganization.” In re Brutsche, 476 B.R. 298, 301 (Bankr. D.N.M. 2012) (citation omitted) (internal quotations omitted). If “the debtor, or some other party, will be able to stem the debtor’s losses and place the debtor’s enterprise back on a solid financial footing within a reasonable amount of time,” then the debtor may have a reasonable likelihood of rehabilitation. In re Costa Bonita Beach Resort, Inc., 479 B.R. at 42 (citation omitted). There is nothing in the record that suggests financial viability for the Debtor was reasonably likely, or it would suddenly be able to increase its cash flow. Rather, the Debtor admitted it would not be able to generate sufficient cash flow to service its debts, even after Harvest Hill’s peak season. “‘A debtor who is unable to service its debt at the outset of the case and remains unable to do so for the foreseeable future does not have a reasonable likelihood of rehabilitation.’” In re Material Mgmt., Inc., No. 14-00478 (ESL), 2014 WL 2468313, at *7 (Bankr. D.P.R. May 28, 2014) (citations omitted). In addition, the Debtor failed to provide any specifics as to its plan to sell the Property and therefore, offered only “unsubstantiated hopes for a successful reorganization.” Thus, the bankruptcy court did not err in finding an absence of a reasonable likelihood of rehabilitation in light of the Debtor’s “speculative intention to liquidate and thus cease operations.” See In re Hoover, 2016 WL 3606918, at *3 (giving deference to bankruptcy court’s refusal to credit debtor’s speculative testimony about his plans for generating income when determining whether there was a reasonable likelihood of rehabilitation for purposes of § 1112(b)(4)(A)).
Feeney, Godoy and Harwood

ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!

About us in numbers

3495 in the system

3376 Summarized

5 Being Processed