In re Smith, CV-S-96-133-PMP (RLH)
| Citation | 201 BR 267 |
| Decision Date | 10 October 1996 |
| Docket Number | BK-S-91-21026-RCJ.,No. CV-S-96-133-PMP (RLH),CV-S-96-133-PMP (RLH) |
| Parties | In re Darrell D. SMITH, Debtor. Darrell D. SMITH, Appellant, v. John Peter LEE, Ltd., Appellee. |
| Court | U.S. District Court — District of Nevada |
COPYRIGHT MATERIAL OMITTED
Darrel D. Smith, Las Vegas, NV, in pro. per.
John Peter Lee, Nancy Allf, Las Vegas, NV, for appellee.
Tom Grimmett, Trustee, Las Vegas, NV.
Appellant Darrell D. Smith ("Smith") appeals the Order entered by the United States Bankruptcy Court (D.Nev.) on February 6, 1996, converting his Chapter 11 Plan to a Chapter 7 liquidation. Smith's Motion for Reconsideration was denied on February 15, 1996. Smith filed his notice of appeal to the United States District Court on February 7, 1996, and objected to a referral to the Bankruptcy Appellate Panel on February 15, 1996. On February 20, 1996, this Court denied Smith's Emergency Motion for Stay of Order Granting Order to Convert. Smith appealed this decision, and on March 15, 1996, the Ninth Circuit Court of Appeals denied his appeal. On August 2, 1996, Smith filed his Opening Brief (# 594). Appellee John Peter Lee, Ltd., (# 596) and Trustee Tom Grimmett (# 595) filed Reply Briefs on August 16, 1996. Smith filed his Reply Brief (# 597) on August 26, 1996.
Appellant Smith originally filed his Voluntary Petition under Chapter 11 of the Bankruptcy Code in the District of Nevada on March 22, 1991. Smith's Third Plan of Reorganization ("Plan") was confirmed by an Order on January 11, 1994.1 The means of funding the Plan were Smith's litigation against his ex-wife for an interest in the Tropicana Hotel and Casino, and from the making and selling of prints of the Maxfield Parrish painting Daybreak, which Smith owned. (Third Plan of Reorg. p. 7).
On March 31, 1995, John Peter Lee, Ltd., ("Lee") moved to withdraw as Smith's attorney. Lee also moved to convert Smith's Chapter 11 case to a case under Chapter 7, and to require the sale of the bankruptcy estate's assets, most notably Daybreak. On May 10, 1995, the bankruptcy court granted Lee's Motion to Withdraw.
The preliminary hearing on the Motion to Convert was held on May 1, 1995. The bankruptcy court denied Lee's motion without prejudice, and set a status check hearing for October 3, 1995. In its ruling, the bankruptcy court stated that Smith could not simply stand on the litigation as the source of payment, but that Smith must produce prints of Daybreak with reasonable haste. (Trans. May 1 Mtn. to Convert, p. 15.) A second status hearing was set for October 24, 1995, to allow Smith to show that he was not in default of the Plan. At the October 24 hearing, the bankruptcy court ordered Smith to show at a third hearing on January 23, 1996, that he had made "reasonable efforts to start producing prints and marketing them." (Trans. Oct. 24 Status Hearing, p. 1). The bankruptcy court also stated its intention to convert the case to Chapter 7 if such efforts were not shown at the next hearing. (Trans. Oct. 24 Status Hearing, p. 1).
At the January 23, 1996, hearing, the bankruptcy court found that Smith had not made reasonable efforts to sell and market prints of Daybreak.2 A tentative ruling was made to convert the case to Chapter 7, but the court did not order a sale of Daybreak at that time. (Trans. Jan. 23 Mtn. to Convert, p. 12). The court indicated it would appoint a Trustee, but allowed Smith one week to file a Motion for Reconsideration.
Smith filed a Motion for Reconsideration which the bankruptcy court denied on February 15, 1996. A timely Notice of Appeal to this Court was filed on February 8, 1996.
The bankruptcy court's findings of fact shall not be set aside by a reviewing court unless those findings are clearly erroneous. In re Candland, 90 F.3d 1466, 1469 (9th Cir.1996). Conclusions of law are reviewed de novo. Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir.1995). A bankruptcy court is given wide discretion to convert a Chapter 11 case to Chapter 7 for cause, and such a conversion is reviewed under an abuse of discretion standard. Johnston v. Jem Development Co., (In re Johnston), 149 B.R. 158, 160 (9th Cir. BAP 1992). Legislative history indicates that cause is broadly defined, allowing a court to "consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases." H.R.Rep. No. 595, 95th Cong., 1st Sess. 405, n. 1 at 405-06 (1977).
Smith alleges that the bankruptcy court erred in determining that the failure to sell and market prints of Daybreak justified conversion of Smith's Chapter 11 Plan to Chapter 7. This Court finds that the basis for the bankruptcy court's decision to convert is clearly articulated in the record and well supported by factual findings, and therefore upholds the decision of the bankruptcy court.
The bankruptcy court interpreted the Plan as a matter of fact and law as requiring that the Plan be funded through Smith's state court litigation and the publishing, printing, and making of prints of Daybreak. (Trans. Jan. 23 Mtn. to Convert p. 7). The Plan states, "The Debtor has two means upon which to fund his Plan of Reorganization, litigation and making and selling prints of the painting Daybreak, which he owns." (Third Plan of Reorg. p. 7). On page nine, the Plan states, "Smith will use the proceeds of the litigations and the funds from the sales of prints of Daybreak to pay all creditors in full with 8% interest." Id. at 9.
The bankruptcy court interpreted the Plan as encompassing two deadlines, one a 60-month time period in which to pay creditors, and the other a requirement that Smith make reasonable efforts towards producing and marketing prints. (Trans. Oct. 24 Mtn. to Convert p. 1). The court explicitly stated that it was removing the ambiguity and that Smith was to return in January and show strong efforts towards the beginning of production and marketing of prints. (Trans. Oct. 24 Mtn. to Convert p. 1). Given the plain language of the Plan, the bankruptcy court's interpretation requiring reasonable efforts to sell and market prints was entirely appropriate.
The Plan on page nine provided that if creditors were not paid or if Smith lost both litigations and there were insufficient profits from the prints of Daybreak to pay all claims, Smith would arrange to sell Daybreak to pay creditors. (Third Plan of Reorg. p. 9). Smith claims this imposed a duty on him to engage in a Chapter 11 liquidation of Daybreak in the event other funding sources failed. Therefore, Smith claims, the bankruptcy court had no grounds to convert his Chapter 11 Plan, since a Chapter 11 sale was the final option for funding the Plan. Smith alleges he would only be in breach of the Plan if he refused to sell once the litigation, the sale of prints and the sale of Daybreak itself had failed.
Smith alleges that the bankruptcy court interpreted the Plan as creating an absolute duty to sell prints of Daybreak, and that such an absolute duty is not within the plain language of the Plan. However, the bankruptcy court did not convert the Plan because Smith failed to sell or market prints, but because he failed to make reasonable efforts to sell or market prints. The court did not reinterpret the plan to include an absolute duty to sell, as Smith alleges, rather it held that there were two deadlines, one of reasonable efforts to sell and market prints and the 60-month calendar deadline. (Trans. Oct. 24 Mtn. to Convert p. 1). The court ruled that Smith had failed to meet the threshold showing of reasonable efforts, and was in material default of the Plan. Therefore, this Court holds that the bankruptcy court appropriately interpreted the Plan to require reasonable efforts to sell and market prints of Daybreak.
The bankruptcy court was correct in concluding that cause existed to convert Smith's Chapter 11 Plan to Chapter 7. The court's conversion of Smith's case was justified under 11 U.S.C. § 1112(b)(7) and (8).3 Section 1112(b) provides for a conversion of a Chapter 11 case to a Chapter 7 case for cause, which includes the inability to effectuate substantial consummation of a confirmed plan and material default by the debtor. The finding that Smith had defaulted on the plan and was unable to effectuate the Plan are factual issues that will be overturned only if clearly erroneous.
The bankruptcy court held four status hearings to allow Smith to show that he was making reasonable efforts and that he had the ability to sell and market prints of Daybreak.4 After the court preliminarily granted the motion to convert, Smith was given a further opportunity to file a motion for reconsideration before Daybreak was sold pursuant to Chapter 7. (Trans. Jan. 23 Mtn. to Convert p. 12). Smith had ample opportunity to make a showing of reasonable efforts to sell and market the prints.
The record is clear that Smith was unable to effectuate a substantial consummation of the confirmed plan under section 1112(b)(7). The court found that making prints was impractical due to over-production and the complications of having the painting tied up in a bankruptcy case, and that Smith did not have the funds necessary to undertake the effort to sell and market prints himself. (Trans. Jan. 23 Mtn. to Convert p. 9-10). The litigation method of funding the Plan was also impractical, since Smith lost the community property claim in the Tropicana Hotel and is waiting for an appeal to the Nevada Supreme Court. Even if the Nevada Supreme Court remands the case, it was not an abuse of discretion for the bankruptcy court to conclude that Smith would not recover his...
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