Victor Kearney v. Unsecured Creditors Committee

Case Type:
Consumer
Case Status:
Affirmed
Citation:
BAP No. NM-20-033 (10th Circuit, Mar 12,2021) Published
Tag(s):
Ruling:
An individual who files a chapter 11 case does not have an absolute right under § 1112(a) to convert her bankruptcy case to a chapter 7 proceeding. Section 1112(a) of the Bankruptcy Code is drafted as an absolute right, but is limited by § 1112(f). Courts considering a motion to convert from chapter 11 thus should examine the standards to qualify as a debtor under the proposed chapter the debtor desires to convert the case to. If the debtor does not qualify under those standards or if the case would be reconverted (e.g., § 706(b)), then conversion should be denied.
Procedural context:
The debtor appealed the bankruptcy court's decision to deny the debtor's motion to convert his case from a chapter 11 to a chapter 7 proceeding.
Facts:
The debtor married an heiress (this sounds like a joke, but it's not) who owned interests in a family ski-resort business ("ARCO"). She placed her ownership interests in two spendthrift trusts. The trusts were managed by other family members and the debtor. After her death, the debtor received income from the trusts. Debtor has no other income. The debtor sued the other trustees of his late wife's spendthrift trusts in state court. They counterclaimed against the debtor, alleging breach of fiduciary duty. A directed verdict was entered against the debtor. The state court found that the debtor violated a confidentiality order entered in the state case and disclosed confidential business information of ARCO, failed to show up for cross-examination at trial, did not participate in mediation in good faith, and generally was not credible. The debtor filed his chapter 11 petition before the state court could rule on issues relating to the management of the spendthrift trusts. A creditors' committee (the "Committee") was formed. The debtor "battled" with the other trustees of his late wife's spendthrift trusts and the committee "early and often." The Committee filed a plan after exclusivity ended. The state court litigation continued. On the day before the state court was to hear issues relating to the spendthrift trusts, the debtor removed the state court litigation to US district court and filed a new lawsuit against the trustees in the United States District Court for Nevada, claiming he was a Nevada citizen. The courts subsequently ruled that the debtor's removal and new litigation were "frivolous" and a "sham litigation tactic." The state court litigation was remanded to state court. The state court approved the modifications to the spendthrift trusts. The bankruptcy court then approved the Committee's creditor's plan. In its confirmation order, the bankruptcy court found that the debtor lied about the citizenship of his late wife, failed to pay professional fees in the bankruptcy case, failed to alter his lifestyle while a chapter 11 debtor, and paid his home mortgage in violation of the automatic stay. The bankruptcy court also found that the Committee's plan was in the debtor's best interests because it pay off more than $8.6 million in claims against the debtor. In August 2019, the debtor was indicted for conspiring to commit fraud on the IRS. The criminal indictment followed a referral from the state court for criminal prosecution. The debtor attempted to hire a criminal defense attorney. The bankruptcy court refused to allow the debtor to use estate funds to pay for her fees. The debtor then filed his motion to convert his case from a chapter 11 case to a chapter 7 case. This motion was opposed by the Committee and the trustees of the spendthrift trust. The bankruptcy court denied the debtor's motion to convert, and found that the proposed conversion was an attempt to undue the Committee's plan that had been confirmed but not consummated. The bankruptcy court also concluded that conversion to chapter 7 would result to reconversion to chapter 11 under § 706(b).
Judge(s):
ROMERO, SOMERS, and PARKER

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