California Palms Addiction Recovery Campus, Inc. v. Vara (In re California Palms Addiction Recovery Campus, Inc.)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
2 years 2 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

No. 23-3375 (6th Circuit, Nov 29,2023) Published

Tag(s):

Ruling:

The Sixth Circuit Court of Appeals held a bankruptcy court did not err in converting a chapter 11 case to chapter 7. The court explained a conversion order is final as it resolves a discrete proceeding, allowing appellate review. It determined the bankruptcy court did not abuse its discretion in finding cause to convert existed and concluding conversion was in the creditors' and estate's best interests. And the lower court did not commit reversible error by allowing the debtor's attorney-owner to act as its representative at the hearing on conversion as the debtor suffered no prejudice.

Procedural context:

The U.S. District Court for the Northern District of Ohio upheld the bankruptcy court's order converting the debtor's chapter 11-subchapter V case to chapter 7. The debtor and its owner appealed. The Sixth Circuit found the debtor had standing to appeal and thus did not address the owner's standing "'because the presence of one party with standing is sufficient to satisfy Article III’s case-or-controversy requirement.' Rumsfeld v. F. for Acad. & Inst. Rts., Inc., 547 U.S. 47, 52 n.2 (2006)." Before addressing the merits, the Sixth Circuit first explained why the conversion order was a final order for purposes of a bankruptcy appeal. It then reviewed the bankruptcy court's decision to grant the motion to convert for an abuse of discretion.

Facts:

Debtor California Palms Addiction Recovery Campus, Inc. operated a substance abuse treatment center. but its license to do so was revoked prepetition After the debtor and its owner, Sebastian Rucci (an attorney), "ran into legal and financial troubles" including the license revocation--which resulted in the debtor not having an operating business on the petition date--the debtor filed a bankruptcy petition in the U.S. Bankruptcy Court for the Northern District of Ohio. It elected to seek relief under subchapter V of chapter 11 with its "accelerated timeline." The debtor's reorganization plan would "depend[ ] almost entirely on the success of its pending lawsuits--but success was far from certain." The Office of the U.S. Trustee moved to convert the case to one under chapter 7 for cause owing in part to "[c]oncern[s] that the litigation would bleed the estate dry[.]" After a lawsuit seeking the return of $600,000 seized by the Department of Justice was stayed so the DOJ could investigate an indictment, and after the debtor failed to produce financial records to the U.S. Trustee as ordered, the bankruptcy court scheduled a show cause hearing along with a continued hearing on the conversion motion, giving five days' notice (instead of seven pursuant to Fed. R. Bankr. P. 9006(d)). At that hearing, the court granted the debtor's attorney's motion to withdraw, which Mr. Rucci (standing in at the hearing for the debtor) did not oppose. It then granted the Trustee's motion to convert, making factual and legal findings on the record. As to why cause to convert existed, the bankruptcy court found there was no reasonable likelihood of reorganization, gross mismanagement of the debtor, a failure to comply with a request by the U.S. Trustee, and a failure to comply with a court order. The court concluded conversion was in the best interests of the estate and the debtor's creditors, in part, because the debtor's largest creditor supported conversion. The debtor and Mr. Rucci appealed the conversion order.

Judge(s):

White, Thapar, and Bloomekatz

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