In re Pena, Case No. 12-13170-A-11
| Decision Date | 21 June 2012 |
| Docket Number | Case No. 12-13170-A-11 |
| Parties | In re AUGUSTINE PENA, III Debtor. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California |
NOT FOR PUBLICATION
DC No. (not assigned)
Having considered the debtor's Motion for Reconsideration of Order Converting Case to Chapter 7, Request to Stay Enforcement of Order Converting Case to Chapter 7 Pending Appeal, and Request to Use Limited Cash Collateral to Preserve the Bankruptcy Estate, as well as supporting documents, the motion is denied.
On April 9, 2012, the debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Voluntary Petition, ECF No. 1. Counsel for the debtor was J. M. Irigoyen. On the date of the petition the debtor owned 29 rental properties; 28 of those properties are encumbered by deeds of trust that contain assignment of rent clauses. Hr'g Tr. Mot. Use Cash Collateral at 5:3-14, May 30, 2012, ECF No. 50. Some have been vacant and some are or were "deemed nuisances," requiring repair. Id. at 14:2-7. The deeds of trust areheld by ten different creditors. Id. at 6:1-15. The deeds of trust that contain assignments of rents were in the possession of debtor's counsel at or near the commencement of the case. Id. at 11:6-12:2.
On April 12, 2012, the Clerk issued and served an order that scheduled a Status Conference for June 6, 2012. Order Re Ch. 11 Status Conf., Apr. 12, 2012, ECF No. 6-7. Paragraph 3 of this order informed counsel that among the subjects to be considered would be "[t]he status of any stipulations or motions for use of cash collateral . . . ." Id. It also included the sentence, "This is notice that the court may, sua sponte, at the status conference, order the case dismissed or converted to chapter 7, or may order the appointment of a chapter 11 trustee." Id.
In April and again in May 2012, the debtor collected rents from the occupied properties in the amount of $48,000-50,000. Hr'g Tr. 8:12-9:7, ECF No. 50. Without the involved creditor's consent or the approval of the court the debtor spent approximately $16,000 of the cash collateral (rents collected). Id. at 9:19-11:4.
Neither consent of the creditor, nor court order, was obtained prior to debtor's use of cash collateral because debtor's counsel was under the mistaken impression that the applicable deeds of trust did not provide for the assignment of rents. Id. at 10:24-11:16. The misapprehension stemmed from counsel's review of only the face pages of the deeds of trust, rather than the entire deeds of trust, and counsel's belief that the absence of the words, "and Assignment of Rents" in the titles of the documents indicated that the deeds of trust did not include assignments of rent. Id.
On May 21, 2012, the United States Trustee convened the meeting of creditors and, during the course of that hearing, suggested toIrigoyen that the deeds of trust likely contained assignment of rent clauses. Id. at 11:11-17. In response, Irigoyen examined the entire deeds of trust and learned of the presence of the assignment of rents clauses. Id.
In response, also on May 21, 2012, the debtor filed his first Motion to Use Cash Collateral. Mot. Use Cash Collateral and Grant Adequate Protection, ECF Nos. 38-43. Simultaneously with that motion, the debtor sought an order shortening time to May 23, 2012, for the hearing on the motion. Ex Parte Appl. Shorten. Time, ECF No. 39. The order shortening time was granted and the hearing was scheduled for May 23, 2012. Order Granting Ex Parte Appl. Shorten. Time, ECF No. 45.
On May 23, 2012, the court heard the Motion for Authority to Use Cash Collateral and warned debtor's counsel that it would consider conversion of the case to Chapter 7 at the Status Conference on June 6, 2012. Hr'g Tr. at 38:17-39:22, ECF No. 50. The court then continued the hearing on the motion to June 6, 2012.
At the status conference on June 6, 2012, after the continued hearing and argument from the debtor, the U.S. Trustee, and creditors on the issue of conversion, the court ordered the case converted to Chapter 7. Cont. Hr'g Tr. Mot. Use Cash Collateral, June 6, 2012, ECF No. 71; Order Convert. Case, April 12, 2012, ECF No. 70.
On June 14, 2012, the debtor filed his motion to reconsider, stay enforcement of the order and for use cash collateral. Motion to Reconsider, June 14, 2012, ECF No. 79-87. Heard on shortened time, the matter was opposed by creditors Deutsche Bank National Trust Company, The Bank of New York Mellon and East West Bank.
The court may reconsider an order converting a case from Chapter 11 to Chapter 7. Fed. R. Civ. P. 59-60; Fed. R. Bankr. P. 9023, 9024. Reconsideration is appropriate if there is newly discovered evidence, clear error or the decision was manifestly unjust, or there is an intervening change in controlling law. All Hawaii Tours, Corp. v. Polynesian Cultural Ctr., 116 F.R.D. 645, 648 (D. Haw. 1987), rev. on other grounds, 855 F.2d 860 (9th Cir. 1988). In this case, the debtor argues under the second of the three grounds for reconsideration: clear error or manifest injustice. This court finds that no such error or injustice exists.
Bankruptcy courts have authority to dismiss a Chapter 11 case or convert it to Chapter 7, sua sponte. 11 U.S.C. §§ 105(a), 1112(b); cf. In re Rosson, 545 F.3d 764, 771 n.8 (9th Cir. 2008) (stating that in Chapter 13 case, "[a]lthough the statute provides for conversion
'on request of a party ... or the . . . trustee . . . there is no doubt that the bankruptcy court may also convert on its own motion." (citing 11 U.S.C. §§ 105(a), 1307(c))); Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (B.A.P. 9th Cir. 2004); C-TC 9th Ave. P'ship v. Norton Co. (In re C-TC 9th Ave. P'ship), 113 F.3d 1304, 1312 (2d Cir. 1997). The statute speaks clearly on this point:
Except as provided in paragraph (2) and subsection (c), 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.
11 U.S.C. § 1112(b)(1)(emphasis added). "Cause" includes the unauthorized use of cash collateral. 11 U.S.C. § 1112(b)(4)(D). Inthis case, without leave of court or consent of the implicated creditor, the debtor used cash collateral of $16,000 during a span of 42 days. Hr'g Tr. At 11:7-17, ECF No. 50. This is precisely the type of activity that § 1112(b) is designed to address. The court find substantial harm to at least one creditor. First, the debtor has spent $16,000 of cash collateral; some of the money went to business overhead and some to secured debt payment, though there was apparently no effort to use rent collected from a particular property to pay the deed of trust encumbering that property. Second, these funds have not been segregated. 11 U.S.C. §363 (c) (4) . The debtor has not provided an accounting of the precise expenditures of these funds. Third, and finally, the court notes that as late as June 20, 2012, only two of the required 29 debtor in possession accounts, 11 U.S.C. §363 (c) (4), accounts had actually been opened.
11 U.S.C. §1112(b)(2).
The court's authority to convert is thus limited by two exceptions: unusual circumstances specifically identified thatindicate that neither conversion, nor a dismissal is in the best interests of creditors, and a case in which the debtor is a family farmer or non-moneyed corporation, unless the debtor requests conversion. 11 U.S.C. § 1112(b)(2), (c). Neither is applicable in this case.
Though § 1112(b) provides the court with a choice of remedies, including conversion to Chapter 7, dismissal, appointment of a Chapter 11 trustee or the appointment of an examiner, the court finds that conversion to Chapter 7 is the remedy that is in the best interests of creditors. Dismissal is not an effective remedy as it leaves the debts unresolved. The costs of an appointment of a Chapter 11 trustee or examiner do not justify the benefits in this case. Both alternative remedies carry a heavy administrative cost burden that the estate will not bear in this case.
The debtor in this case is an individual. The court finds the debtor does not have meaningful equity or cash flow to carry the cost of a Chapter 11 trustee or an examiner. First, there is no meaningful equity. Other than a fully exempt 401(k) and an IRA, the estate's only assets are heavily encumbered real estate. Of the debtor's 29 properties, only 7 have equity. Schedule A, April 9, 2012, ECF No. 1. Without considering costs of sale, the equity in all properties totals $291,300. Priority Claims...
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