In re Sundale, Ltd.

• Decision Date: 13 February 2012
• Docket Number: No. 07–21016–BKC–LMI.,07–21016–BKC–LMI.
• Citation: 471 B.R. 300,23 Fla. L. Weekly Fed. B 305,56 Bankr.Ct.Dec. 21
• Parties: In re SUNDALE, LTD. and Kendall Hotel and Suites, LLC, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Florida

471 B.R. 300

56 Bankr.Ct.Dec. 21

23 Fla. L. Weekly Fed. B 305

In re SUNDALE, LTD. and Kendall Hotel and Suites, LLC, Debtors.

No. 07–21016–BKC–LMI.

United States Bankruptcy Court, S.D. Florida.

Feb. 13, 2012.

Daniel N. Gonzalez, Miami, FL, James C. Moon, Miami, FL, Peter D. Russin, Miami, FL, Jeffrey M. Berman, Miami, FL, Richard S. Lubliner, Miami, FL, for Debtors.

MEMORANDUM OPINION ON ORDER GRANTING CREDITORS' MOTION TO CONVERT

LAUREL MYERSON ISICOFF, Bankruptcy Judge.

This matter came before me on a request to convert case to Chapter 7 filed by Florida Associates Capital Enterprises and Ocean Bank (ECF # 1815). ¹ The issue that I must decide is whether and when a bankruptcy court may convert a chapter 11 case to a chapter 7 case after the plan has been confirmed and after substantial consummation, and, if so, what is the impact of that conversion on property that had been property of the chapter 11 bankruptcy case prior to conversion.

FACTUAL BACKGROUND

On December 12, 2007, Sundale filed a voluntary petition for relief under chapter 11 of title 11, United States Code (the “Bankruptcy Code”). On January 30, 2008, Kendall Hotel & Suites, LLC (“KHS”) (collectively, Sundale and KHS shall be referred to as the “Debtors”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On February 5, 2008, I entered the order jointly administering the Sundale and KHS cases (ECF # 80). During the course of their jointly administered cases, the Debtors operatedtheir businesses as debtors-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108. On March 7, 2009, the Debtors filed their Second Amended Chapter 11 Plan of Reorganization (the “Plan”) (ECF # 1150). The confirmed Plan substantively consolidated the Debtors' estates. Thus, hereinafter KHS and Sundale will be referred to as the “Reorganized Debtors.” The effective date of the Plan, as amended by the Order Confirming Debtors' Second Amended Chapter 11 Plan of Reorganization, entered May 26, 2009 (ECF # 1508) (the “Confirmation Order”), and the Order Granting in Part and Denying in Part Holiday Hospitality Franchising, Inc.'s Motion to Amend and Clarify Order Confirming Debtors' Second Amended Chapter 11 Plan of Reorganization (ECF # 1550) (collectively, the “Plan”), was July 10, 2009.

On August 2, 2010, the Reorganized Debtors filed an Emergency Motion for Entry of an Order Modifying the Second Amended Chapter 11 Plan of Reorganization and Confirmation Order to Allow Post–Petition Debtor–in–Possession Financing (the “Financing Motion”) (ECF # 1811). On August 5, 2010, Florida Associates Capital Enterprises, LLC (“FACE”) and Ocean Bank filed their Objection to Sundale's Financing Motion (the “Objection”) (ECF # 1815). The Objection included a request to convert the case to chapter 7 for cause, pursuant to 11 U.S.C. § 1112(b)(4)(A), (B), (E) and (N). At the hearing on the Financing Motion (the “Hearing”), I denied the Reorganized Debtors' request to obtain financing and ruled that the Plan had been substantially consummated. ² In addition, the Parties argued whether or not conversion to chapter 7 was in the best of interest creditors. The focus of the argument was whether any property of the Reorganized Debtors could be administered by a chapter 7 trustee, or stated differently, whether there would be any estate for a chapter 7 trustee to administer.

On August 19, 2010, I entered an order denying the Financing Motion (the “Order”) (ECF # 1820). Aside from denying the Financing Motion, the Order set a hearing to “hear and determine whether conversion of the above-captioned proceeding to Chapter 7 is in the best interests of creditors.” At the request of the parties the ruling on this issue was delayed for several months. ³

ANALYSIS

Three bankruptcy sections are involved in the resolution of this issue: 11 U.S.C. § 348, 11 U.S.C. § 1112(b), and 11 U.S.C. § 1141(b).

Section 1112 provides that the court shall convert a case under chapter 11 to chapter 7 or dismiss a chapter 11 case “whichever is in the best interests of creditors and the estate, for cause....” 11 U.S.C. § 1112(b)(1).⁴ Thus, in order to determine whether conversion is appropriate I must first find cause, and then second, determine what is in the best interests of creditors and the estate. The Reorganized Debtors argue that relief under section 1112 is not available because cause for such relief does not exist, and, moreover, conversion is not in the best interest of creditors since there will be no benefit to creditors. FACE and Ocean Bank (collectively the “Moving Creditors”) argue to the contrary.

Cause includes “material default by the debtor with respect to a confirmed plan.” 11 U.S.C. § 1112(b)(4)(N). There is no dispute that the Plan is in material default. Nonetheless, the Reorganized Debtors previously advocated that a court cannot convert a chapter 11 case once substantial consummation has occurred even where a material plan default has occurred, but this argument is directly contradicted by the clear language of section 1112. Section 1112(b)(4) includes in its list of those matters that would constitute cause for dismissal or conversion a debtor's “inability to effectuate substantial consummation of a confirmed plan.” 11 U.S.C. § 1112(b)(4)(M). If a plan were in material default prior to substantial consummation, the plan could not, logically, be substantially consummated, since it is highly unlikely that a plan in material default could be substantially consummated. Thus, if section 1112(b)(4)(N) only applied before substantial consummation of a plan, subsection (M) would be superfluous. Moreover, there is nothing in the statute that restricts material default to an event occurring only prior to substantial consummation. “It is a cardinal principal of statutory construction that ‘a statute ought, upon the whole, to be construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.’ ” Nunnally v. Equifax Information Services, LLC, 451 F.3d 768, 773 (11th Cir.2006) (quoting TRW, Inc. v. Andrews, 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001)). Accordingly, I hold that a bankruptcy court may convert a chapter 11 bankruptcy case after substantial consummation of a confirmed bankruptcy plan, if the plan is in material default.⁵

This still leaves the issue of whether conversion of this case is in the best interests of creditors and the estate. The Reorganized Debtors argue that conversion is not in the best interest of creditors because there will be no assets for a chapter 7 trustee to administer. The Reorganized Debtors refer to several cases in support of their argument that, upon confirmation of the Plan, all estate assets revested in the Reorganized Debtors, and conversion will not revest assets in the chapter 7 bankruptcy estate. The Moving Creditors rely on another body of case law which holds that conversion of a case does revest assets in the estate subject to administration by a chapter 7 trustee. There is clearly a split among the courts on this issue, however, for the reasons set forth as follows I hold that conversion of a substantially consummated post-confirmation chapter 11 case to a chapter 7 case does not necessarily revest assets in the estate. Nonetheless, I find that conversion is still in the best interest of creditors.

A chapter 11 bankruptcy plan is considered a contract and its terms govern the post-confirmation relationship of the reorganized debtor and its creditors.⁶ Once a chapter 11 bankruptcy plan is confirmed, the plan may only be modified prior to substantial consummation. 11 U.S.C. § 1127(b). A confirmation order may only be revoked within 180 days after confirmation and only if the “order was procured by fraud.” 11 U.S.C. § 1144. In some instances, however, after substantial consummation, as is this case here, the reorganized debtor defaults under the confirmed plan, triggering the question, what are the remedies of the creditors? Obviously, if the plan includes certain remedies, those plan provisions will govern, at least in part, the rights of the creditors upon default.

In this case, the Plan specifically provides that, upon default, “[r]emedies of Creditors are limited to Allowed Claims against the Sundale Consolidated Debtor or the Reorganized Debtors, as the case may be. Creditors may enforce their remedies in the same manner as they would otherwise pursue damages for breach of contract or other actions arising out of the Sundale Consolidated Debtor, or the Reorganized Debtors, as the case may be, default.” Plan at Article X(D). Clearly, then, the creditors may pursue state law remedies, which, in the case of the Moving Creditors, is pursuit of foreclosure of their liens on the property securing their claims against the Reorganized Debtors (the “Real Property”).

Are these the only remedies to which the creditors are entitled? The Reorganized Debtors argue that the creditors are limited to the Plan remedies—pursuit of their remedies for breach of contract as the Plan provides. The Moving Creditors argue that, in addition to what the Plan provides, they may seek dismissal or conversion as provided by the Bankruptcy Code so long as I find the Bankruptcy Code remedies are appropriate.

There is nothing in the Plan that suggests that the default provisions of the Plan constitute the creditors' exclusive remedy upon default. Nothing in the Plan precludes the creditors from seeking conversion or dismissal of the case upon default under the Plan. But the question is, if the Reorganized Debtors are correct, that conversion will not revest the Real Property in the bankruptcy estate, is conversion nonetheless in the best interests of the creditors.

11 U.S.C. § 1141(b) provides that “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtors.” The Plan in this case provides...