In re Tornheim

• Decision Date: 15 May 1995
• Docket Number: Bankruptcy No. 94-B-40031 (SMB).
• Citation: In re Tornheim, 181 B.R. 161 (Bankr. S.D.N.Y. 1995)
• Parties: In re Chaim TORNHEIM and Chaya Tornheim, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

181 B.R. 161 (1995)

In re Chaim TORNHEIM and Chaya Tornheim, Debtors.

Bankruptcy No. 94-B-40031 (SMB).

United States Bankruptcy Court, S.D. New York.

May 15, 1995.

Arthur J. Gonzalez, U.S. Trustee (Diana G. Adams, of counsel), New York City.

Ernest H. Hammer, New York City, for debtors.

Joseph Fischer, Alleged Creditor and Party-in-Interest, New York City.

MEMORANDUM DECISION GRANTING MOTION TO DISMISS THE CASE AND DENYING THE DEBTORS' MOTION FOR ALTERNATIVE RELIEF

STUART M. BERNSTEIN, Bankruptcy Judge.

The Office of the United States Trustee (the "Trustee") moves to convert, or in the alternative, dismiss this joint Chapter 11 case, which the debtors have done little to prosecute since they filed their petition in January, 1994. The debtors counter that their Chapter 11 case is one in name only, the Court should deem it a Chapter 13 case, and that any fault or failure lies with the Trustee. Alternatively, Mrs. Tornheim seeks to convert her case to a Chapter 13, and Mr. Tornheim seeks to dismiss or convert his case to a Chapter 13.

All the parties agree that this joint case does not belong in chapter 11. The Court further concludes that neither debtor belongs in bankruptcy under any chapter. As a result, and for the reasons set forth below, the Court grants the Trustee's motion to dismiss these cases, and denies the debtors' cross-motions.

FACTS

The debtors filed their pro se joint petition¹ on January 4, 1994. According to their schedules, their property consists of a jointly owned single family house in which they do not reside, $200 in cash and a $300 security deposit. The Federal Home Loan Mortgage Corporation (the "Mortgagee") holds a mortgage on the house, and its total claim exceeds the value of the property. Besides the Mortgagee, the debtors owe $314.27 to the Internal Revenue Service and $321.76 to the New York City Department of Finance. Mrs. Tornheim does not owe any other debts. Mr. Tornheim also owes the aggregate sum of $5,850.00 to two trade creditors, $571.33 to the New York City Parking Violations Bureau and a judgment debt in the sum of $13,834.49 to the Bank of New York.

The debtors filed their petition in order to stay the Mortgagee's pending foreclosure proceeding involving the single family house identified in the schedules. (See Affidavit of Chaim Tornheim and Chaya Tornheim pursuant to Rule 52 of the Local Bankruptcy Rules ("Rule 52 Affidavit"), at ¶ 4, sworn to January 4, 1994.) By the petition date, the Mortgagee had already submitted a final judgment of foreclosure and sale to the state court, but the state court did not sign it until after the petition date.² On June 16, 1994, and following an evidentiary hearing, the Court signed an order granting the Mortgagee relief from the automatic stay to continue the foreclosure proceeding. The debtors appealed from this order, and their appeal is still pending.

Following relief from the stay, the debtors continued to litigate with the Mortgagee, trying to stave off the foreclosure. As discussed below, the debtors removed the foreclosure proceeding to the bankruptcy court, but as a result of a separate proceeding, the Court remanded it. Other than continuing to litigate with their Mortgagee, the debtors have ignored their bankruptcy case.

Consequently, on or about March 1, 1995, the Trustee moved to convert the case to chapter 7, or in the alternative, to dismiss the case. The moving papers state that the debtors have not filed a plan or disclosure statement, have not filed operating reports for any period after April, 1994, and have not paid the quarterly fees called for by 28 U.S.C. § 1930(a)(6).

The debtors do not contest these failures, but nonetheless oppose the motion and move for alternative relief. Mrs. Tornheim, who now contradicts the schedules, contends she is the sole owner of the property,³ and seeks to convert her case to a chapter 13. Mr. Tornheim seeks to dismiss his case, or alternatively, to convert it to chapter 13.

DISCUSSION

A. The Trustee's Motion

1. Introduction

Section 1112(b) empowers the Court to convert or dismiss a chapter 11 case, depending on the best interest of the creditors and the estate, "for cause," including

. . . .

(2) inability to effectuate a plan;

(3) unreasonable delay by the debtor that is prejudicial to creditors;

. . . .

(10) non-payment of any fees or charges required under chapter 124 of title 28.

The factors listed in section 1112(b) are not exhaustive, and the Bankruptcy Code affords a bankruptcy court wide discretion to determine if cause exists. In re Koerner, 800 F.2d 1358, 1367 (5th Cir.1986); In re Gateway North Estates, Inc., 165 B.R. 427, 428 (E.D.Mich.1994); In re Sal Caruso Cheese, Inc., 107 B.R. 808, 817 (Bankr. N.D.N.Y.1989); H.Rep. No. 595, 95th Cong., 1st Sess. 405-06 (1977) ("House Report"); S.Rep. No. 989, 95th Cong., 2d Sess. 117-18 (1978) ("Senate Report") U.S.Code Cong. & Admin.News 1978, pp. 5787, 5903, 5904, 6361, 6321. The bankruptcy court can consider other factors that may arise, and use its equitable powers to reach a proper result. House Report 595; Senate Report 989. Any party in interest, as well as the Trustee, can make the motion⁴, 11 U.S.C. § 1112(b), and the proponent bears the burden of proof. In re Martin, 113 B.R. 949, 961 (Bankr.N.D.Ill. 1990), vacated and remanded on other grounds, 124 B.R. 69 (N.D.Ill.1991); In re Sal Caruso Cheese, Inc., 107 B.R. at 817.

2. The Trustee's Prima Facie Case

The debtors concede the truth of the Trustee's factual allegations, and therefore, the Trustee has sustained his burden of proof. First, the debtors admit that they have not paid the quarterly fees required under 28 U.S.C. § 1930(a)(6). This omission, without more, provides cause to dismiss or convert the case. 11 U.S.C. § 1112(b)(10) (quoted supra).

Second, the debtors concede that they have not filed operating statements in over one year. The filing of the petition gives rise to a fiduciary relationship between the debtor and his or her creditors, and the law imposes the same obligations on the individual and corporate chapter 11 debtor. In re Cohen, 173 B.R. 950, 954 (Bankr.S.D.Fla. 1994); In re Heald, 140 B.R. 817, 818-19 (Bankr.M.D.Fla.1992); In re Canion, 129 B.R. 465, 470 (Bankr.S.D.Tex.1989). To reap the benefit of chapter 11, the debtor must pay the price of disclosure; he or she needs to provide financial and other relevant information to the creditors to inform them and the Court about the progress and status of the case:

Neither the court nor creditors should have to coerce or implore a debtor into fulfilling the obligations imposed upon it. In re McClure, 69 B.R. 282, 290 (Bankr. N.D.Ind.1987). Quite to the contrary, when a debtor seeks protection from its creditors, it is constrained to observe both the letter and the spirit of the orders granting it protection and allowing it to operate unless and until it seeks and obtains a modification of those orders. In re Prime, Inc., 26 B.R. 556, 560 (Bankr. W.D.Mo.1983). Timely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor\'s post-petition operations. In re Chesmid Park Corp., 45 B.R. 153, 159 (Bankr.E.D.Va.1984). As such, their filing is very high on the list of fiduciary obligations imposed upon a debtor in possession. McClure, 69 B.R. at 289.

In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D.Ind.1991); accord In re Wilkins Inv. Group Inc., 171 B.R. 194, 197 (Bankr. M.D.Pa.1994); In re Citi-Toledo Partners, 170 B.R. 602, 608 (Bankr.N.D.Ohio 1994).

Refusal or inability to provide financial disclosure sounds the death knell of a chapter 11 case. The failure to file monthly operating statements required by the Trustee's operating guidelines, "whether based on inability to do so or otherwise, undermines the Chapter 11 process and constitutes cause for dismissal or conversion of the Chapter 11 proceedings." In re Roma Group, Inc., 165 B.R. 779, 780 (S.D.N.Y.1994); accord In re Wilkins Inv. Group, 171 B.R. at 196; In re East Coast Airways, Ltd., 146 B.R. 325, 338 (Bankr.E.D.N.Y.1992); In re Berryhill, 127 B.R. at 433; In re Vallejo, 77 B.R. 365, 367 (Bankr.D.P.R.1987); In re McClure, 69 B.R. 282, 289 (Bankr.N.D.Ind.1987); see In re Cohoes Indus. Terminal, Inc., 65 B.R. 918, 921 (Bankr.S.D.N.Y.1986); In re Chesmid Corp., 45 B.R. 153, 159 (Bankr.E.D.Va.1984). Consequently, the debtors' failure to file monthly operating reports after the April, 1994 period justifies conversion or dismissal.

Third, the debtors do not dispute that they have failed, despite sixteen months in chapter 11, to file a plan and disclosure statement. While the complexity and nature of the case often dictate its pace, a debtor cannot wallow in chapter 11. The debtor must prosecute his or her case to a prompt and successful conclusion through confirmation of a plan. Under section 1112(b)(2), the court may convert or dismiss the case if the debtor lacks the ability to formulate a plan or to carry one out. In re Hall, 887 F.2d 1041, 1044 (10th Cir.1989); In re Martin, 113 B.R. at 961.

This chapter 11 case is not complex. The individual debtors have no free assets, no business to reorganize, and few creditors to pay. Under the circumstances, the failure to file a plan after sixteen months shows both unreasonable, prejudicial delay and an inability to effectuate a plan, requiring conversion or dismissal. See Hall v. Vance, 887 F.2d at 1044 (failure to file a plan within eight months); In re Koerner, 800 F.2d at 1368 (failure to file feasible plan after sixteen months); In re Canion, 129 B.R. at 470 (failure to file a plan and disclosure statement within ten months); In re Cohoes Indus. Terminal, Inc., 65 B.R. at 921 (failure to file a plan for more than five months).

3. The Debtors'...