In re TSP Industries, Inc.
| Decision Date | 09 August 1990 |
| Docket Number | Bankruptcy No. 85 B 10221. |
| Citation | 117 BR 375 |
| Parties | In re T.S.P. INDUSTRIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Karen H. Moore, Office of U.S. Trustee, Chicago, Ill.
Matthew E. Wilkens, Holleb & Coff, Chicago, Ill. for T.S.P. Industries, Inc.
The United States Trustee has moved to convert or dismiss this confirmed chapter 11 case pursuant to 11 U.S.C. § 1112(b). The U.S. Trustee has requested that this case be converted to a case under chapter 7, rather than dismissed, so that a trustee can investigate the Debtor's activities and determine whether it owns any assets "which could be liquidated for the benefit of creditors." Memo. of U.S. Trustee, 2. The Court finds that dismissal, and not conversion, would be in the best interest of the creditors because a chapter 7 trustee could not liquidate any assets he or she might locate.
The Debtor, T.S.P. Industries, Inc., filed a chapter 11 petition in 1985. This Court confirmed its amended plan of reorganization on August 10, 1988. Neither the plan nor the order confirming the plan specifies a remedy for a default under the confirmed plan.
The post-confirmation report filed pursuant to Bankruptcy Rule 2015(b) reflects that the Debtor made full payment to all priority creditors and made the first payment due under the plan to unsecured creditors in December, 1988. Since then, however, the Debtor has defaulted on his payments under the plan. Based on the default by the Debtor, the U.S. Trustee moved to have this case dismissed or converted to a case under chapter 7.
At the hearing on the U.S. Trustee's motion, the U.S. Trustee strongly urged conversion, rather then dismissal. Although the U.S. Trustee knows of no assets now in the hands of the Debtor, the U.S. Trustee wants a chapter 7 trustee to investigate the Debtor's activities and search for assets, including any claims the Debtor may have. At that and subsequent hearings, the Court expressed its considerable doubts about the wisdom of converting a chapter 11 case after a plan has been confirmed. In response, the U.S. Trustee filed a memorandum of law in support of conversion. Again, the U.S. Trustee asserts that the benefit creditors would derive from conversion would be the liquidation of any assets, including claims, a trustee might discover. The problem with that assertion is that, upon confirmation, the Debtor became owner of all property formerly in its bankruptcy estate, and a chapter 7 trustee would have no authority to liquidate assets or standing to sue on a claim now owned by the Debtor.
THE POWER TO CONVERT A CASE.
Section 1112(b) of the Bankruptcy Code provides:
11 U.S.C. § 1112(b)(8).
Under section 1112(b), a court must first decide whether "cause" exists to convert or dismiss a case. It is undisputed here that the Debtor has materially defaulted on its confirmed plan. Therefore, this Court finds that there is cause to convert or dismiss the case.
Now this Court must determine whether dismissal or conversion is in the best interest of the creditors and the estate. Courts have wide discretion in deciding whether or not to dismiss or convert a case. See In re Jartran, Inc., 71 B.R. 938, 943 (Bankr.N.D.Ill.1987), aff'd, 886 F.2d 859 (7th Cir.1989). To decide whether conversion would be in the best interest of the creditors, the ramifications of conversion need to be explored.
THE EFFECTS OF CONVERSION TO CHAPTER 7.
The effects of converting a confirmed chapter 11 case are not readily apparent from a quick reading of the Bankruptcy Code. To fully understand what would happen if this case were to be converted to chapter 7, we need to start at the beginning of the case.
Commencement of a Case. A case under the United States Bankruptcy Code is commenced by filing a petition with the bankruptcy court and the commencement of a voluntary case constitutes an order for relief. 11 U.S.C. § 301. The commencement of a case creates an estate. 11 U.S.C. § 541(a). The estate that is created consists of all the debtor's legal and equitable interests in property at the commencement of the case, any interest in property that the trustee recovers under the avoiding power provisions of the Bankruptcy Code and any interest in property that the estate acquires after the commencement of the case. 11 U.S.C. § 541(a).
Unless a trustee is appointed in a chapter 11 case, the debtor, as a debtor in possession, has the rights, power and duties of a trustee. 11 U.S.C. § 1107(a). In that capacity, the debtor, like a trustee, "is the representative of the estate." 11 U.S.C. § 323(a). See In re Grinstead, 75 B.R. 2, 3 (Bankr.D.Minn.1985) ()
Another important result of the commencement of a bankruptcy case is that it triggers the automatic stay under 11 U.S.C. § 362(a). That stay generally prohibits any act to obtain an interest in, or possession of, property of the estate (11 U.S.C. § 362(a)(2)-(4)), and any act to enforce or collect claims against the debtor (11 U.S.C. § 362(a)(1) and (5)-(8)). But the stay is not perpetual. "The stay of an act against property of the estate . . . continues until such property is no longer property of the estate;" and the stay against any other act, including acts against the debtor or property of the debtor, "continues until . . . the time a discharge is granted or denied." 11 U.S.C. § 362(c).
Effects of Confirmation. Section 1141 of the Bankruptcy Code, 11 U.S.C. § 1141 (emphasis added) defines the effect of confirmation as follows:
What is most important here is the effect of confirmation on the property of the estate. Once a plan has been confirmed, "in the absence of any contrary provisions in a plan title to property revests in the debtor along with normal ownership rights." Matter of Ford, 61 B.R. 913, 917 (Bankr.W. D.Wis.1986). The debtor is then no longer a debtor in possession and the bankruptcy estate ceases to exist unless the plan provides otherwise. E.g. In re W.R.M.J. Johnson Fruit Farm, Inc., 107 B.R. 18, 19 (Bankr.W.D.N.Y.1989) () citing U.S. v. Redmond, 36 B.R. 932, 934 (D.C.Kansas 1984); In re Grinstead, 75 B.R. at 3 (); but see, Abbott v. Blackwelder Furniture Co., 33 B.R. 399 (D.N.C.1983).
Another effect of confirmation, although not expressly stated in section 1141, is that the automatic stay is terminated. This is so because, as noted above, (1) the stay that protects property of the estate ends when that property is no longer property of the estate, which occurs when the property vests in the debtor upon confirmation; and (2) the stay that protects the debtor and property of the debtor ends when the debtor is discharged, which also happens upon confirmation under section 1141(d). See page 4, above.
A confirmed plan can only be revoked under section 1144 of the Bankruptcy Code. In re Longardner & Associates, Inc., 855 F.2d 455, 460 (7th Cir.1988), cert. denied, ___ U.S. ___, 109 S.Ct. 1130, 103 L.Ed.2d 191 (1989). Section 1144 allows revocation only in very limited circumstances:
On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud.
11 U.S.C. § 1144.
In this case, the Debtor's plan was confirmed more than 180 days ago, and the U.S. Trustee does not assert that T.S.P. fraudulently procured confirmation. Therefore, section 1144 is not applicable, and confirmation cannot be revoked.
Effect of Conversion. The question before this Court is whether conversion will benefit creditors and the estate. The U.S. Trustee says that it will because a chapter 7 trustee would be able to liquidate assets. But would he?
A chapter 7 trustee can "collect and reduce to money the property of the estate", 11 U.S.C. § 704(1), but there is nothing that authorizes a trustee to liquidate any other property. There are no provisions in the Bankruptcy Code that provide for the recreation of an estate upon the post-confirmation conversion of a confirmed chapter 11 to a case under chapter 7. Put another way, once property has vested in the Debtor, conversion will not revest that property in the estate.
Section 348 of the Code provides:
(a) Conversion of a case from a case under one chapter of this title to...
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