- United States Bankruptcy Appellate Panel for the First Circuit, No. EP 16-005, July 31, 2016
- Affirming the dismissal of a Chapter 11 proceeding, the First Circuit BAP examined the serial components of a motion to dismiss or convert under sec. 1112 of the Code. First, a court must examine if "cause" exists. Here cause existed because of (i) the numerous delays in filing monthly reports, as to which the U.S. Trustee had no duty of a default notification, and (ii) under sec. 1112(b)(4)(A), the diminution of the estate through unpaid debts and the absence of a likely "rehabilitation." Importantly, the court clarified that rehabilitation does not mean the ability ultimately to confirm some plan, notably the Debtor's offer to prepare a liquidation plan calling for an orderly sale; rather, it means "whether the debtor will be able to reestablish its business." In short, "reorganization" may contemplate liquidation, but "rehabilitation," as used here, may not. Second, a court must examine the exception - determining (i) whether there are "unusual circumstances" that should prevent allowance of the motion, and (i) that a "cause" for relief did not include, as here, the circumstances described in sec. 1112(b)(4)(A). And third, in its discretion by examining a list of factors a court must decide which option, dismissal or conversion, is in the best interest of creditors and the estate.
- Procedural context:
- This case involved an appeal from orders of the U.S. Bankruptcy Court for the District of Maine (i) granting a motion of the U.S. Trustee to dismiss a Chapter 11 proceeding, and (ii) denying the Debtor's motion to reconsider that order.
- A Chapter 11 Debtor owned real property which was used by various affiliates as a farm and amusement park. There were no leases and all debts were to be paid by the affiliates. No post-petition payments were made on either the first mortgage or real estate taxes, and the Debtor had no income or employees. While offering as an excuse that its counsel's spam filter blocked certain communications and that the US Trustee had never notified it of a default, the Debtor failed to stay current in its required monthly filings. The Debtor conceded that the operation's cash flow would not likely support a traditional restructuring, but wanted to file a liquidating plan, giving it time to sell the property, which allegedly had some equity. The U.S. Trustee filed a motion to convert or dismiss, arguing that "cause" existed because of the failure to file reports and the Debtor's inability to "rehabilitate" itself. The Court allowed the motion, dismissed the case, and denied a later motion for reconsideration. This appeal followed.
- Feeney, Godoy, and Harwood
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