In re Tyrone F. Conner Corp., Inc.
| Decision Date | 31 March 1992 |
| Docket Number | MC No. UST-1.,Bankruptcy No. 91-15036-A-11K |
| Citation | 140 BR 771 |
| Court | U.S. Bankruptcy Court — Eastern District of California |
| Parties | In re TYRONE F. CONNER CORPORATION, INC., Debtor. |
COPYRIGHT MATERIAL OMITTED
Carol D. Mills, for U.S. Trustee.
Robert J. Fletcher, for debtor.
Anthony G. Sousa, U.S. Trustee.
On September 19, 1991, Debtor, Tyrone F. Conner Corporation, Inc., filed a voluntary petition for relief under Chapter 11 of the Code1 by and through Robert J. Fletcher.
On December 16, 1991, the United States Trustee filed its Motion to Dismiss, Convert or Appoint a Trustee (MC # UST-1). That motion was subsequently noticed for hearing and heard January 23, 1992. At that hearing, this Court ordered the appointment of a Chapter 11 trustee pursuant to 11 U.S.C. § 1104(a)(1) and (2).2
The January 23, 1992 Minute Sheet reflects that the United States Trustee ("UST"), as is consistent with the mandate of 11 U.S.C. § 1104, was to submit the name of a proposed trustee to the Court for approval. Should no appointment occur, this matter was to be continued to February 26, 1992.
On February 14, 1992, the UST filed its Statement of Inability to Appoint Chapter 11 Trustee. Based upon the UST's inability to appoint a Chapter 11 Trustee, the Debtor's alleged inability and failure to comply with the reporting requirements set out under the UST Guidelines, Debtor's alleged failure to comply with its fiduciary obligations imposed under the Code, and the failure to retain counsel, the UST requests that this Court convert the corporate case to Chapter 7.
Debtor filed its Verified Statement of Tyrone F. Conner in reply to the UST's motion on February 21, 1992. Debtor requests that the Court deny the UST's request to convert the case and points to several factors for consideration and in support of its position. Debtor advances that reorganization is still viable, that its worker's compensation insurance problem has been remedied, and that as its January 1992 operating reports indicate, business is on an upswing showing that the Debtor can operate profitably. Debtor also contends that it would be unfair to convert the case, in that of the six potential trustees contacted by the UST, five are located in Fresno and only one in Bakersfield. Debtor submits that other qualified trustee candidates exist in the Bakersfield area, specifically Gary Goldstick, that should be contacted.
Following argument at the hearing, the Court allowed Debtor through March 4, 1992, at 2:00 p.m. to contact Goldstick and communicate to this Court whether Goldstick had an interest in serving as the Chapter 11 Trustee.
Debtor's telephone communication from Robert J. Fletcher was received by this Court at 1:45 p.m. on March 4, 1992. Mr. Fletcher indicated that Goldstick is unwilling to serve as Chapter 11 trustee.
This matter came on for hearing February 26, 1992. Carol D. Mills appeared for the United States Trustee. Although the Court previously ordered that Robert J. Fletcher could not represent the Debtor herein and two related debtors3 because of potential conflicts, Mr. Fletcher appeared on behalf of Debtor's sole shareholder in this matter, and the Court has considered his argument. Tyrone F. Conner was also present at the hearing.
After receiving argument from Mills and Fletcher, this matter was taken under advisement pending Debtor's communication reference Mr. Goldstick's desire to serve as Chapter 11 trustee.
Jurisdiction exists under 28 U.S.C. § 1334. Venue is proper under 28 U.S.C. § 1408. The District Court has generally referred these matters to the Bankruptcy Court for hearing pursuant to 28 U.S.C. § 157(a) and United States District Court, Eastern District of California General Orders 182 and 223. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (O). This Opinion constitutes this Court's findings of facts and conclusions of law.
Pursuant to this Court's directive at the February 26, 1992 hearing, communication was received from Debtor indicating that Gary Goldstick was not interested in serving as Chapter 11 trustee.
In addition to the UST's Statement of Inability to Appoint Chapter 11 Trustee, Mills advanced several other reasons at oral argument to support the UST's contention that conversion to Chapter 7 is warranted. They are as follows:
1) lack of and inability to obtain independent counsel for this corporate debtor;
2) unauthorized post-petition loans made to Debtor by insiders;
3) Debtor's unauthorized post-petition loans to related Chapter 11 debtors;
4) Debtor's inability to obtain worker's compensation insurance;
5) The loss of estate property through relief from the automatic stay and subsequent repossession and sale that Debtor contended was necessary to an effective reorganization;
6) Debtor's repeated and consistent failure to timely file monthly operating reports and provide copies to the UST;
7) Debtor's failure to pay the UST quarterly fees;
8) Lack of information as to whether the $3,500 retainer paid by Debtor to Mr. Fletcher has been refunded or transferred to new counsel;
9) Mr. Conner's unauthorized weekly draws of $780;
10) Failure to provide proof to the UST of a debtor-in-possession bank account; and
11) The assertion by the UST that some of the potential candidates for the Chapter 11 trustee position felt that this Debtor cannot operate profitably.
While the above factors independently or conjunctively certainly warrant appointment of a Chapter 11 Trustee as was initially sought by the UST and ordered, it does not necessarily follow that conversion is mandated at this juncture. As will be discussed in greater detail below, this Court is convinced that the UST has failed to diligently perform its statutory duties.
Addressing the UST's contentions mentioned above, it cannot be said the UST's inability to appoint a Chapter 11 Trustee warrants conversion, for there is insufficient evidence indicating that this would be in the best interests of creditors and the estate as mandated under 11 U.S.C. § 1112(b). In fact, the evidence before the Court indicates that net receipts for January 1992 were approximately $7,500. Debtor's principal also attests to having obtained worker's compensation insurance, thereby solving that problem for the estate. Moreover, he attests to, and the monthly operating reports show, that new receivables exceed current operations expenditures by $23,250.75.4 Similarly, the schedules also reflect a positive remainder of $24,531.34 from accounts receivable after payments on post-petition debt.5 These factors, at this early stage of the bankruptcy, are positive factors weighing favorably for Debtor's potential reorganization.
As to the remaining factors listed above, they collectively indicate that this corporate debtor is in need of competent management and counsel. While independent counsel has yet to be obtained, no evidence exists that debtor cannot obtain such counsel. The unauthorized loans certainly warrant appointment of a trustee, who upon taking control would undoubtedly cease such unauthorized practices. However, had Debtor been properly advised, such loans would most likely not have been made. As to the loss of estate property through relief from the automatic stay, repossession, and sale, and Debtor's alleged responses to those motions that such property was necessary for an effective reorganization, the Court has reviewed Debtor's only reply to a motion for relief (MC # DFB-1, filed December 16, 1991) and that reply is devoid of any such claim by Debtor. While potentially filed in the related cases, no such claim of need for an effective reorganization appears herein reference any property to which relief was granted.
As to Debtor's failure to timely file monthly operating reports, competent management and counsel could remedy this defect. Reference payment of the quarterly fees, again, competent management could easily remedy this failure, especially considering the modest sum of $1,250 that is allegedly past due. Similarly, trustee or competent business manager could determine the whereabouts of the $3,500 retainer through simple inquiry. (A review of the 2016(b) disclosure indicates that $500 of that amount was used to pay the filing fee for this Chapter 11 case.) As to Mr. Conner's unauthorized weekly draws, those will cease by virtue of this Court's order dated March 4, 1992. Schedule J(1) for each month since the inception of the case indicates the existence of a debtor-in-possession account. Any trustee appointed and subsequently approved by this Court could easily verify that all bank signature cards state the account is a "debtor-in-possession" account. Moreover, and most probably overlooked by the UST, is that the January 1992 operating reports clearly indicate the opening of two new bank accounts with Security Pacific National Bank, specifically designated as "DIP" accounts for payroll and general accounts of Central California Concrete Cutting Company, Inc.6 Accordingly, the Court is satisfied that approved debtor-in-possession accounts exist and this factor has no bearing on this Court's consideration of whether or not to convert this case.
Lastly, Mills indicated at the hearing that various people contacted as potential Chapter 11 trustees did, in some instances, indicate that this Debtor could not operate profitably. Review of the UST's Statement of Inability to Appoint Chapter 11 Trustee indicates that contrary to Mill's assertion at oral argument, only one potential candidate allegedly had this perception of the case. This assertion set forth in the UST's Statement at page 2:21 fails to set forth a sufficient basis for such a conclusion. Nothing is asserted as to what Allred relied upon in making such a determination. Additionally, "an enormous...
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