In re Hyatt

• Decision Date: 26 September 2012
• Docket Number: No. 11–11–10973 SA.,11–11–10973 SA.
• Citation: 479 B.R. 880
• Parties: In re Joe Michael HYATT, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

479 B.R. 880

In re Joe Michael HYATT, Debtor.

No. 11–11–10973 SA.

United States Bankruptcy Court, D. New Mexico.

Sept. 26, 2012.

Alice T. Lorenz, Albuquerque, NM, Clifford C. Gramer, Jr., Albuquerque, NM, for Debtor.

Alice Nystel Page, Office of U.S. Trustee, Albuquerque, NM, for U.S. Trustee.

MEMORANDUM OPINION IN SUPPORT OF ORDER DENYING RELIEF UNDER § 1112(b)

JAMES S. STARZYNSKI, Bankruptcy Judge.

The Motion of Cornelius Dooley, M.D. and Susanne Hoffman–Dooley [“Dooleys”] to Convert Debtor's Chapter 11 Case to One Under Chapter 7 or, in the Alternative, to Dismiss Debtor's Chapter 11 Bankruptcy (doc 59—motion to convert; doc 63—motion to dismiss) (“Motion”), and the objections thereto filed by creditors New Mexico Bank & Trust (doc 64), Farm Credit of New Mexico, FLCA (doc 65), Christie B. Cochrell (doc 66), and Debtor in Possession Joe Michael Hyatt (doc 68), came before the Court for trial on July 25, July 31 and August 2, 2012 (minutes—doc 116). The Court denies the Motion and instead sets a deadline for Debtor to file and notice out an amended plan and disclosure statement.¹

Background

On or about October 15, 2010, HDQ, LLC obtained a judgment in the amount of $1,835,107 following a jury trial in the First Judicial District Court, County of Santa Fe, State of New Mexico. The judgment was against Debtor and Quiet Title Company, LLC (“Quiet Title”), of which Debtor was both employee and manager. As of the date of the filing of the petition, the Dooleys assert the amount owed on the judgment was $1,944,458.75.² Debtor and Quiet Title perfected an appeal which is now pending before the New Mexico Court of Appeals. It is not clear when the Court of Appeals will issue a decision, but it appears likely that it will be sometime between February and June 2013. ³

Promptly after entry of the judgment, in the absence of a supersedeas bond, HDQ ⁴ initiated collection actions. See Debtor exhibits (H—for “Hyatt”) 3–6. On March 9, Debtor and Quiet Title (No. 11–10978–s11) each filed chapter 11 petitions. The filing of the bankruptcy petition resulted in an almost complete loss of business for Quiet Title, a real estate title company. Its chapter 11 case ended with a stipulated dismissal entered on July 18, 2011. No. 11–10978–s11, doc 95.

Prior to the sudden loss of business by Quiet Title, Debtor received a substantial annual salary from Quiet Title: $120,000 (gross) in 2009, $130,000 in 2010, and apparently on track for $150,00 in 2011. Statement of Financial Affairs, no. 1. Doc 1, at 29 of 40. Faced with the unexpected loss of his primary business activity, and with (more than) a little help from his friends, Debtor reconstituted the title business under the name of Prima Title, LLC, and continues his primary business activity running a title company. He has also continued to manage a number of mostly interrelated companies in such a way that the aggregate net value of the companies' assets is continuing to grow.

Debtor filed his schedules, statement of financial affairs, and numerous other documents timely. He attended the first meeting of creditors (§ 341 meeting), which the United States Trustee concluded at the end of the meeting. Debtor also, inter alia, obtained Court approval for various professionals (Mr. Gramer as chapter 11 counsel, Ms. Lorenz as special counsel for the state court appeal, Mr. Dickey as accountant for the estate); engaged the Dooleys in claim litigation; filed monthly operating reports (“MORs”) ⁵; amended his schedules B and C (docs 100 and 101 respectively); and obtained a modification of the stay to permit the state court appeal process to go forward (motion filed July 11—doc 34; default order entered August 22, 2011—doc 50).

And Debtor filed a chapter 11 plan and disclosure statement on July 7, 2011, the deadline for filing a plan and disclosure statement to avoid losing the benefit of the exclusivity period provided by § 1121(b). Docs 32 and 33. He did not, however, take any action to obtain approval of the disclosure statement or to obtain confirmation of the plan. Nor has he filed a substitute plan and disclosure statement, even at this late date.

At trial, three creditors supported Debtor in resisting the Motion. One was Christie Cochrell (“Cochrell”), personal representative of the estate of June Cochrell, owed $92,700 on a 2005 note. Proof of claim no. 8. Debtor and that creditor appear to have reached an accommodation that has Debtor paying interest but relatively little principle each year. Another was New Mexico Bank & Trust (“NMBT”), which holds a mortgage on Debtor's home in Tesuque, New Mexico, as well as a deed of trust on the Plaza Rojo [sic] house. According to Schedules A and D (doc 1), the first mortgage on the Tesuque propertyof about $1,200,000 is fully secured by the property worth $1,300,000. The Plaza Rojo numbers are considerably smaller: a $154,000 mortgage secured by collateral worth $190,000.⁶ Debtor has also guarantied to NMBT debts of Trestle Ranch Corporation (“Trestle”) and Poohbah Corporation (“Poohbah”) in the amounts of $130,00 and $190,000 respectively. Third was Farm Credit of New Mexico, FLCA (“Farm Credit”), which has a note for what Farm Credit says is a debt of about $2,528,000 (Proof of Claim No. 9)and Debtor says is a debt of $2,666,000. Farm Credit and Debtor both agree the note is fully collateralized by the Trestle land and improvements, which Farm Credit values at $3,982,000. Farm Credit asserts it is worried about a decrease in value of the collateral such that it might in the future find itself needing to call on Debtor's guaranty of the Trestle debt.

Analysis

As noted, on January 23, 2012, Dooleys filed their motion to convert the chapter 11 case to a case under chapter 7 (their preference) or to dismiss the chapter 11 case. In closing argument, Dooleys' counsel also offered the alternatives of the appointment of a chapter 11 trustee or an examiner.

Dooleys in the Motion and in the course of the trial alleged the following to be the bases for the Motion:

1. Substantial and continuing losses to, and diminution of, the estate, and there is no reasonable likelihood of rehabilitation ⁷;

2. Gross mismanagement of the estate (through the transfers among various entities and extravagant, lavish and/or exorbitant lifestyle and spending);

3. Failure to confirm a plan within the time fixed by the Bankruptcy Code and inability to feasibly [sic] confirm the plan on file;

4. Case filed in bad faith because this is a two-party dispute and the Bankruptcy Court is an improper venue for such dispute;

5. Filing the case in bad faith in attempting to use a chapter 11 filing in lieu of posting a supersedeas bond in the state court action; and

6. Not moving toward confirmation of a plan.⁸

Congress significantly amended § 1112 when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), and then again when it passed the Bankruptcy Technical Corrections Act of 2010 (“Technical Corrections Act”) ⁹. The statute, including the applicable parts of § 1112(b), now reads as it did on the petition date, as follows:

Conversion or dismissal

(b)(1) Except as provided in paragraph (2) and subsection (c) [prohibiting conversion of farmers' or eleemosynary entities' cases to chapter 7 cases], 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 unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.

(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes that—

(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and

(B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)—

(i) for which there exists a reasonable justification for the act or omission; and

(ii) that will be cured within a reasonable period of time fixed by the court.

(3) ....

(4) For purposes of this subsection, the term ‘cause’ includes—

(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;

(B) gross mismanagement of the estate;

...

(J) failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court....

Most of the examples of “cause” cited in the statute are on their face not applicable in this case (and therefore not set out above). On the other hand, the term “includes” that leads off § 1112(b)(4) means that there can be bases for relief other than those specifically identified in that subsection. See § 102(3); e.g., In re Alton Telegraph Printing Co., 14 B.R. 238, 240 (Bankr.S.D.Ill.1981); Orbit Petroleum, 395 B.R. 145, 147–48 (Bankr.D.N.M.2008); In re Borges, 440 B.R. 551, 560 (Bankr.D.N.M.2010) (citing Orbit Petroleum ); 7 Alan N. Resnik et al., Collier on Bankruptcy ¶ 1112.04[4] (16th ed. 2011). The allegations of bad faith based on this being a two-party dispute and the use of a chapter11 filing in lieu of a supersedeas bond are examples of the latter.

[T]he movant bears the initial burden of demonstrating that cause exists to convert the chapter 11 case to chapter 7, or to dismiss the case, whichever is in the best interest of creditors and estate. If cause is established and unusual...