Kearney v. Unsecured Creditors Comm. (In re Kearney)
| Citation | 625 B.R. 83 |
| Decision Date | 12 March 2021 |
| Docket Number | Bankr. No. 17-12274,BAP No. NM-20-033 |
| Parties | Victor P. KEARNEY, Debtor. Victor P. Kearney, Appellant, v. Unsecured Creditors Committee, Louis Abruzzo and Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C, and Kevin Yearout, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit |
Debbie E. Green (Marcus A. Helt and Stacy Obenhaus with her on the brief) of Foley & Lardner LLP, Dallas, Texas for Appellant.
Thomas D. Walker (Chris W. Pierce with him on the brief) of Walker Law PC, Albuquerque, New Mexico for Appellee Unsecured Creditors Committee.
Paul M. Fish (Spencer L. Edelman with him on the brief) of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, New Mexico for Appellees Louis Abruzzo and Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C.
James A. Askew of Askew & White, LLC, Albuquerque, New Mexico for Appellee Kevin Yearout.
Before ROMERO, Chief Judge, SOMERS, and PARKER, Bankruptcy Judges.
A debtor, understandably, wants to choose the chapter in which he proceeds under the Bankruptcy Code. And sometimes things change, requiring a debtor to change his or her initial choice. Debtors talk about an "absolute right to convert" giving them this choice to convert, and generally, bankruptcy courts are happy to grant a debtor a conversion. But are there limits? When is an "absolute right" to convert not absolute?
The Supreme Court answered the question when considering conversion from chapter 7 to 13 under 11 U.S.C. § 706(a)1 in Marrama v. Citizens Bank of Massachusetts ,2 by relying on the statutory limit to conversion in § 706(d) that "a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter."3 Under a very similar statutory framework, we now address a debtor's attempted conversion from chapter 11 to chapter 7 under § 1112(a), and conclude that under § 1112(f), the Bankruptcy Court in this case was correct to consider whether Debtor Victor Kearney's case would be immediately reconverted, thereby adopting the procedural shortcut approved by the Supreme Court in Marrama .
We affirm the decision of the Bankruptcy Court denying Debtor's motion to convert his chapter 11 case to chapter 7. Section 1112(a) does not give debtors an absolute right to convert. The right to convert granted by § 1112(a) is cabined by § 1112(f)'s reference to qualifying as a debtor under the chapter to which the debtor seeks conversion. In this case, Debtor sought conversion to chapter 7, and the Bankruptcy Court did not abuse its discretion when it concluded Debtor's case would be immediately reconverted under § 706(b) and Debtor could not, therefore, "be a debtor under such chapter."4
Many years ago, Benjamin and Pat Abruzzo developed a ski complex and tramway in the Sandia Mountains in New Mexico under the Alvarado Realty Company (ARCO). The elder Abruzzos died in 1985, and were survived by their four children: Louis, Benny, Richard, and Mary. The children took over management of ARCO.
Debtor married Mary Pat Abruzzo Kearney in 1988. Shortly after her marriage, Mary executed a will that placed her share of the stock in ARCO that she owned during her life in two trusts (Trust B and Trust C). Mary then died in 1997. At her death, Mary owned approximately 18.5 percent of the stock interest in ARCO, which is now managed by Mary's brothers Louis and Benjamin.6
Mary's will named Debtor as the life beneficiary of the two trusts at issue and named Debtor and her brothers as trustees;7 Mary's brothers (or their children) are the residual beneficiaries of the two trusts. Mary's will contains a spendthrift clause protecting its corpus from Debtor's creditors, and Debtor's interest in the trusts is not part of the bankruptcy estate. Since Mary's death in 1997, Debtor has received distributions of about $16 million from the trusts, all generated by ARCO's successful business ventures.8 Debtor has no income other than from these trusts.
In 2013, Debtor sued the Abruzzos in New Mexico state court for breach of fiduciary duty in administering the trusts, and the Abruzzos filed counterclaims against Debtor for breach of fiduciary duty.9 After a jury trial on Debtor's claims in 2015, a directed verdict was entered against Debtor.10 In 2017, the state court tried the counterclaims against Debtor by the trustees. The Bankruptcy Court heavily discussed the factual findings from the state court litigation in its opinions in this case and, as relevant here, Debtor's behavior therein. Examples include:
Damages were awarded by the state court against Debtor, and the additional matter of the appointment of a successor trustee was to be determined at a separate hearing on September 5, 2017. (By this point, Debtor had resigned as co-trustee.)
Before that September 5, 2017 state court hearing occurred, on September 1, 2017, Debtor filed a chapter 11 bankruptcy petition.17 An Unsecured Creditors Committee was appointed by the U.S. Trustee to represent Debtor's unsecured creditors.18
Debtor battled with the Abruzzos and the Unsecured Creditors Committee early and often, and little progress was made in his reorganization.19 The Bankruptcy Court ultimately denied Debtor's request for a second extension of the exclusivity period to file his own plan (and reconsideration thereof) in June 2018.20 A proposed plan by the Unsecured Creditors Committee (the "UCC plan") required the Bankruptcy Court to grant stay relief for a return to state court to allow that court to separate Debtor from ARCO and the trusts.21 The UCC plan provided that the Abruzzos would sell the trusts' ARCO stock back to ARCO for about $12 million, and would pay $3 million to the bankruptcy estate in exchange for releases of claims against the trusts, the Abruzzos, ARCO, and related parties. As a result, the state court had to approve trust modifications necessary to complete these transactions.22
The state court set a hearing for these issues on October 3, 2018. The day before the hearing, Debtor did two things: (1) he removed the state court action to the United States District Court for the District of New Mexico, claiming diversity jurisdiction, and (2) he filed a new lawsuit against the trustees in the United States District Court for the District of Nevada, again claiming diversity of citizenship, and alleging Debtor was a citizen of Nevada.23 Multiple courts concluded Debtor's actions were "frivolous,"24 a "sham litigation tactic,"25 and dubious.26 The Bankruptcy Court expressly found that Debtor engaged in "questionable and fruitless attempts to remove the case"27 from the state court's jurisdiction. The state court action was remanded to the state court after being transferred to the Bankruptcy Court,28 and the status of the Nevada action is not apparent from the record.
Ultimately, the state court approved the trust modifications and the ARCO share buyback on October 31, 2018.29 After a two-day trial on the confirmability of the UCC plan, the Bankruptcy Court confirmed the UCC plan on February 28, 2019.30 The Bankruptcy Court noted in its written opinion on confirmation of the UCC plan multiple "questionable or improper"31 actions by the Debtor, some of which have already been mentioned herein, and additionally included:
The Bankruptcy Court also made specific findings about Debtor's reorganization, and the likely success thereof, finding that Debtor had a "mistaken belief that only he should be allowed to control the reorganization process, whatever the cost, delay, or acceptability of payment proposals."38 The Bankruptcy Court noted that Debtor's most recently amended plan received a majority of votes against it, while the UCC plan received a majority of accepting votes.39 The Bankruptcy Court viewed the UCC plan as the only way to prevent continuous litigation,40 and concluded that the UCC plan was the best deal creditors could get to pay unsecured creditors as much as possible.41 The Bankruptcy Court also concluded that confirmation of the UCC plan would benefit Debtor's domestic support obligation creditor, "substantially increasing [Debtor's] ability to pay alimony and child support."42 And finally, the Bankruptcy Court concluded the UCC plan was in Debtor's best interest, because his debts of...
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...particular adversary proceeding or discrete controversy pursued within the broader framework cast by the petition").29 In re Kearney , 625 B.R. 83, 93 (10th Cir. BAP 2021) (findings of fact reviewed for clear error); Victorio Realty Grp., Inc. v. Ironwood IX , 713 P.2d 424, 425 (Colo. App. ......
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...denial of a motion to convert is not final but rather interlocutory, where the court below gave leave to appeal. See In re Kearney , 625 B.R. 83, 92 (B.A.P. 10th Cir. 2021)The Supreme Court and Ninth Circuit have issued opinions addressing the concept of finality in other types of bankruptc......
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...Alaska 2015). Nonetheless, a bankruptcy court clearly “has broad discretion to make conversion decisions under § 706(b).” In re Kearney, 625 B.R. 83, 99 (B.A.P. 10th Cir. 2021) (citations omitted). In making its discretionary conversion determination under § 706(b), a bankruptcy court consi......