In re Keener, Bankruptcy No. 14-01169

Decision Date10 April 2018
Docket NumberBankruptcy No. 14-01169
PartiesIN RE: JODY L. KEENER Debtor.
CourtU.S. Bankruptcy Court — Northern District of Iowa
Chapter 11
RULING ON SUPER WINGS' MOTION TO CONVERT

This matter came on for telephonic hearing on March 26, 2018. Robert Ginn and Robert Gainer appeared for Debtor Jody Keener ("Debtor"). Eric Lam appeared for Creditor Super Wings International ("Super Wings"). Jeff Taylor appeared with and for Chapter 11 Trustee Renee Hanrahan ("Trustee"). Before the hearing, the parties agreed to a telephonic hearing, that no witnesses would testify, and that Super Wings' exhibits would be admitted into evidence without objection. The Court received Super Wings' exhibits and heard argument. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

STATEMENT OF THE CASE

Super Wings seeks to convert this case to Chapter 7. Super Wings argues that there is cause to convert the case because Debtor has not complied with an Order from this Court and has not filed a plan. Super Wings also argues that other factors and equitable considerations warrant conversion. Debtor argues that conversion is not appropriate because he has followed the Court's Order and is ready to file a plan of reorganization. Trustee argues that Debtor has not complied with her efforts to follow the liquidation sequence set out in the mediated stipulation.

BACKGROUND, FACTS, AND ARGUMENTS

This case has a long history. It was original filed as an Involuntary Chapter 7 case in July 2013. Debtor filed a voluntary Chapter 11 in July 2014. There have been nearly 1200 docket entries and substantial litigation on a myriad of issues, including confirmation. In June 2016, after much of the litigation, Debtor and Super Wings entered into a mediated stipulation in an attempt to bring resolution to this case. Debtor agreed to pay Super Wings $3.7 million through a series of payments by the end of 2016. If Debtor failed to timely pay Super Wings in full then the Court would appoint a Chapter 11 Trustee. The Chapter 11 Trustee would then liquidate Debtor's estate in a specific sequence set out in the stipulation.

Debtor eventually defaulted on his agreement to pay under the mediated stipulation. On April 5, 2017, the Court appointed Renee Hanrahan, an experienced lawyer and bankruptcy trustee, to serve as Chapter 11 Trustee.

A few months after the Court appointed the Chapter 11 Trustee, Super Wings filed a motion to convert the case to Chapter 7. In general, Super Wings argued that Debtor had made inappropriate transactions with estate assets and failed to timely pay real estate taxes. Debtor responded that Super Wings was improperly attempting to get around the bargained-for liquidation sequence set outin the mediated stipulation. In general, the record showed Debtor's delays, lack of cooperation, and lack of transparency in his finances and those of his solely owned companies. In particular, the record showed that Debtor was slow playing the liquidation sequence and not cooperating with Trustee's efforts to follow it. Trustee joined Super Wings' Motion to Convert.

In spite of this record of continuing financial confusion and noncooperation, the Court found that there was not "cause" to convert and denied the motion. In re Keener, Bankr. No. 14-1169, 2017 WL 5054313, at *7 (Bankr. N.D. Iowa Nov. 2, 2017). In doing so, the Court stated:

The Court will consider presence of the stipulation, its liquidation provisions, and the background of this entire case in deciding whether "cause" exists here. The mediated stipulation and the fact that the Court has appointed a Trustee are considerations that color the entire record and weigh against a finding of "cause." The mediated stipulation provided a remedy for Debtor's nonpayment through the appointment of a trustee and direction on the order in which Trustee could liquidate estate assets. That remedy is now in place. The Court is hesitant to supplant that bargained-for remedy on the present record.

Id. The Court noted, however, that the liquidation sequence set out in the mediated stipulation was just that: a liquidation. The Court noted that "there was absolutely no prohibition on Chapter 11 Trustee engaging in normal bankruptcy liquidation techniques including auction" in order to move expeditiously through the liquidation sequence. Id. The Court did not find, however, that the existence ofthe mediated stipulation was a bar to converting the case to Chapter 7. In fact, the Court reiterated statements made at the hearing:

[T]he Court noted very clearly at the hearing that if it denies conversion on this motion, such denial would be without prejudice. Trustee or Super Wings may seek conversion again at any time. The Court remains very skeptical of Debtor's testimony and approach to payment of his debts in this case. This is functionally Debtor's last chance to proceed in Chapter 11.

Id.

Super Wings has now sought conversion again. Super Wings bases its motion on the entire record and the following additional facts:

In summer 2017, Alpha International (one of Debtor's solely owned companies) entered into a licensing agreement with Alex Toys, LLC. This transaction involved what has been referred to as Debtor's valuable rights under the "Big Wheel Contract." Alpha received a very large payment under the Contract at the time it was signed. On January 3, 2018, as a part of that agreement, Alpha received an additional $250,000.

The existence of the Contract between Alpha and Alex Toys (relating to the Big Wheel Contract) and payments made under it had not previously been fully disclosed to the Court or other interested parties. Super Wings has referred to this as a "secret contract" and requested Court approval of the agreement and Court ordered disclosure of payments received. Alpha, for all intent and purposes, is theonly company that provides revenue to Debtor. On January 10, 2018, the Court entered the following Order, which provides in relevant part that:

2. Any transaction (be it lease, assignment, sale, or otherwise) involving the so called "Big Wheel contract" held by the Debtor's solely-owned entity Alpha International, Inc. must be approved by the Chapter 11 Trustee (or any subsequently appointed Trustee) and this Court, pursuant to notice and hearing. Any and all proceeds of such a transaction henceforth must be deposited into the Chapter 11 Trustee's (or any subsequently appointed Trustee) account.
. . . .
4. Debtor is prohibited from making any cash withdrawals from any of his solely-owned companies (described above) or from transferring any cash or funds to any relative, associate, affiliate or third party in any amount.

Interim Order re Motion to Lift Stay, In re Keener, Bankr. No. 14-1169 (Doc 987), at 1-2 (Bankr. N.D. Iowa January 10, 2018) (hereinafter "the Order").

On January 23, 2018, Alpha sent $15,000 to Margaret Wong, the sister of Debtor's former spouse. Alpha also sent $51,000 to JK Manufacturing (another one of Debtor's wholly owned companies) on February 7, 2018. Super Wings points out these payments are not to Debtor's bankruptcy creditors. They have been authorized by Debtor from Alpha, even though Alpha owes Debtor over $700,000. Super Wings suggests Debtor is funneling cash to non-creditors and away from his bankruptcy estate.

Super Wings also produced uncontroverted evidence of Debtor's intent to escape the restrictions of bankruptcy. On February 22, 2018, Debtor sent a series of text messages to Dora Yip that reflect these intentions. Dora Yip is the sister ofTim Yip, who is the principal of Super Wings. See Super Wings Int'l, Ltd. v. J. Lloyd Int'l, Inc., 701 F.3d 870, 872 (8th Cir. 2012) (for background information on relationships of parties and the functioning of Debtor's companies). Those messages show Debtor proposes firing his attorney, bypassing Trustee and administrative bankruptcy expenses, and paying only Super Wings directly. Debtor also states that Trustee is asking for a tax audit, and suggests that if he pays Super Wings directly, the Trustee will not have authority to get a tax audit. Debtor specifically notes that, if he can pay Super Wings directly, he may be able to avoid paying the administrative claim of his previous lawyer, along with Trustee's fees. Debtor also notes that he fired his previous lawyer and that he likewise could fire his current lawyer. The Court agrees with Super Wings and finds these text messages illustrate Debtor's lack of regard for the requirements, protections, and responsibilities of Chapter 11.

Super Wing's motion to convert argues Debtor failed to comply with paragraphs 2 and 4 of the January 10, 2018 Order by: (1) failing to get court approval of an agreement with Alex Toys, LLC and failing to send money from that contract to the Trustee as required by paragraph two; and (2) sending $15,000 from Alpha to Margaret Wong and $51,000 from Alpha to JK Manufacturing, both non-creditors in this bankruptcy — in violation of paragraph four of the Order. Super Wings also argues that Debtor has failed to file a plan and disclosurestatement in the time fixed by prior Order of the Court. Super Wings notes that the mediated stipulation, which the parties entered and the Court approved by order into almost two years ago, says that Debtor will file a plan and disclosure statement "as soon as practicable." Debtor has not done so. Super Wings also argues that the text messages from Debtor to Dora Yip provides further "cause" and show that Debtor does not belong in Chapter 11. Super Wings notes that neither the United States Trustee nor any creditors in this case have objected to the motion. Super Wings asserts that the above reasons, coupled with the entire history of the case, requires conversion.

Debtor does not dispute any of the underlying facts that Super Wings relies on for its motion. Debtors argues that these facts do not warrant conversion. Debtor argues that between himself, counsel for his companies, and the Trustee, they could not figure...

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