In re Johnston, BAP No. NV-90-1789-ARP
| Decision Date | 16 December 1992 |
| Docket Number | BAP No. NV-90-1789-ARP,Bankruptcy No. BK-S 90-01317-RCJ. |
| Citation | 149 BR 158 |
| Parties | In re John Luther JOHNSTON, Debtor. John L. JOHNSTON, Appellant, v. JEM DEVELOPMENT CO., Neal McFarland, Bradley Enright, Thomas Enright, Keith Galliher, Colleen Eckman, Verlamae Rigby, Trustees of the Teamsters, Troy and Nichols, IRS, CSC Financial Services, Cenlar Federal Savings Bank, New Mexico Taxation Department, Arizona Department of Transportation, Martin J. Safko, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
George R. Carter, Las Vegas, NV, for John L. Johnston.
Paul V. Carrelli, Las Vegas, NV, for Jem Development Co. et al.
Before ASHLAND, RUSSELL and PERRIS, Bankruptcy Judges.
John Luther Johnston appeals an order of the bankruptcy court for conversion from a Chapter 11 bankruptcy case to one under Chapter 7 based on the inability of the debtor to propose an effective plan of reorganization. We affirm.
The debtor John Johnston owned a trucking and hauling company. In 1986 Johnston sold his business to his nephew Bradley Enright and Neal McFarland, both of whom were in the employ of Johnston prior to the sale, and Jem Development Company, a corporation created by Enright and McFarland. The terms of sale were set forth in an oral agreement between the parties on December 1, 1986, which was committed to writing in July 1987 and modified in November 1987. The sale price for the business was $553,736, which was allegedly the appraised value of the equipment. The purchasers assert that the assets of the business included the vehicles, equipment, Johnston's Certificate of Public Convenience & Necessity (also known as a common carrier certificate, which is required by the state of Nevada to allow trucks access to Nevada public highways), insurance paid from September 1986 through September 1987, and a contract with the federal government to load minerals once or twice a year in Las Vegas.
Johnston also advanced funds to the purchasers for the start-up of the business. A promissory note was executed on January 2, 1987 for $56,100.12 in connection with that debt.
The purchasers defaulted on the payments under the sale agreement and the promissory note. Johnston served a notice of default and intent to repossess the assets on November 23, 1987, and a second notice on March 24, 1988.
On April 21, 1988, the purchasers filed a complaint in state court against Johnston for, among other things, rescission and cancellation of the contract for fraud, or in the alternative enforcement of the first contract, and the appointment of a receiver. Johnston counter-sued the purchasers. The purchasers contend that as a result of the complaint, the court ordered the appointment of a receiver; Johnston contends that the court ordered all the assets of the business be delivered to him. Johnston states that he subsequently took possession of the accounts receivable, bank accounts and certain of the equipment.
On April 23, 1990, Johnston filed a petition for relief under Chapter 11 of the Bankruptcy Code. The purchasers formed a creditors committee and filed a motion to dismiss or convert the bankruptcy case on June 13, 1990. The Office of the United States Trustee joined in the motion to dismiss or convert.
On July 25, 1990, at the hearing on the conversion motion, the testimony of Johnston reflected, among other things, a failure to maintain adequate insurance on the vehicles, TR 57:15-59:3, a failure to file an annual report concerning Johnston's common carrier certificate, thereby subjecting the certificate to termination, TR 54:18-56:10, and insufficient income of Johnston to continue operations of the hauling and trucking business, TR 61:14-62:2. The court ordered the case converted to Chapter 7 and Johnston timely appealed.
The purchasers have advised this panel in their opening brief that subsequent to filing this appeal Johnston's common carrier certificate had been revoked, precluding continued operation of the business. They further advise that the trustee has sold the equipment and vehicles at auction for approximately $125,000 and that the trustee and purchasers have entered in to a settlement agreement, subject to bankruptcy court approval, resolving their claims against each other. For these reasons, purchasers question whether the appeal is moot.
Whether the bankruptcy court abused its discretion in granting the motion to convert the bankruptcy case from Chapter 11 to Chapter 7.
Under Bankruptcy Code § 1112(b) the bankruptcy court is given wide discretion to convert a case to Chapter 7 for cause. In re Koerner, 800 F.2d 1358, 1367 (5th Cir.1986). A bankruptcy court's order for conversion of a case is reviewed for an abuse of discretion. In re Klein/Ray Broadcasting, 100 B.R. 509, 511 (9th Cir. BAP 1987).
Johnston contends that the bankruptcy court's grant of the motion to convert his Chapter 11 case was an abuse of the court's discretion because (1) he was not given a reasonable time to file a plan (the Chapter 11 case was filed on April 23, 1990 and the case was converted less than four months later on August 8, 1990); (2) the purchasers did not meet their burden of proving the elements of Bankruptcy Code § 1112(b); and (3) the purchasers were debtors, rather than creditors of Johnston's estate, and not proper parties to bring a motion to convert.
Pursuant to 11 U.S.C. § 1112(b), a court may convert a Chapter 11 case to a Chapter 7 case for cause on request of a party in interest and after notice and a hearing. 11 U.S.C. § 1112(b); In re Rubenstein, 71 B.R. 777, 778 (9th Cir. BAP 1987). 11 U.S.C. § 1109(b) defines a "party in interest" as "including . . . a creditor . . .," and expressly authorizes a party in interest to raise, appear, and be heard on any issue in a case under Chapter 11. Accordingly, a creditor has standing to request the conversion from Chapter 11 to Chapter 7 pursuant to § 1112(b). See, In re Sullivan Central Plaza I, Ltd., 935 F.2d 723, 726 (5th Cir.1991) (); see also, In re Abijoe Realty Corp., 943 F.2d 121, 125 (1st Cir.1991) ().
Johnston contends, that although the purchasers are listed in his payment schedules and have filed proofs of claim, they are not creditors, but debtors. The bankruptcy court correctly held otherwise. Pursuant to 11 U.S.C. § 101(10)(A), a creditor is defined as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." In turn, § 101(5)(A) adopts the broadest possible definition of claim as including a "right to payment, whether or not reduced to judgment liquidated, unliquidated, fixed contingent, mature, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." See, In re Abijoe, 943 F.2d at 125.
Here, the purchasers are creditors pursuant to § 101(10)(A) because they are the holders of a right to payment. This right, although in dispute, is nevertheless a claim. Accordingly, the holder of this claim is a creditor of the debtor. "Thus, a `creditor' may move for dismissal under Bankruptcy Code § 1112(b) whether or not its claim has as yet been allowed." In re Abijoe, 943 F.2d at 125; see also, In re Stamford Color Photo, Inc., 105 B.R. 204, 206-207 (Bankr.D.Conn.1989) (); In re Palmer, 134 B.R. 472, 475 (Bankr.D.Conn. 1991) (); In re Welwood Corp., 60 B.R. 319, 321 (Bankr.M.D.Fla.1986) ().
Even though "the showing required to enable an entity to assert `creditor' standing under Bankruptcy Code § 1112(b) is minimal . . .," merely filing a meritless claim does not afford a claimant standing. In re Abijoe, 943 F.2d at 125. In this case, however, Johnston listed the purchasers in his payment schedules under contingent and unliquidated claims in the amount of $400,000. This amount stems from a pending state court claim by the purchasers against Johnston. Moreover, the purchasers submitted additional proofs of claim respectively valued at $50,000 and $114,000 for services rendered. The court, therefore, correctly found that these claims were sufficiently meritorious to confer standing.
Furthermore, the United States Trustee joined in the motion to dismiss or convert. The United States Trustee, pursuant to § 1112(b), is a recognized party in interest with standing to request after notice and a hearing the dismissal or conversion of a Chapter 11 case. See, In re Timbers of Inwood Forest Associates, Ltd., 802 F.2d 777 (5th Cir.1986); see also, In re Tiana Queen Motel, Inc., 749 F.2d 146, 150 (2nd Cir.1984), cert. denied, 471 U.S. 1138, 105 S.Ct. 2681, 86 L.Ed.2d 699 (1985). We therefore find that the motion to dismiss or convert was properly...
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