Quality Care DayCare at BUP, LLP v. U.S. Tr.

• Decision Date: 27 March 2023
• Docket Number: Civ. DLB-22-901
• Parties: QUALITY CARE DAYCARE AT BUP, LLP, Appellant, v. U.S. TRUSTEE, et al., Appellees.
• Court: U.S. District Court — District of Maryland

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QUALITY CARE DAYCARE AT BUP, LLP, Appellant,
v.
U.S. TRUSTEE, et al., Appellees.

Civ. No. DLB-22-901

United States District Court, D. Maryland

March 27, 2023

MEMORANDUM OPINION

Deborah L. Boardman United States District Judge

Debtor Quality Care Daycare at BUP, LLP (“Quality Care”) appeals an order of the United States Bankruptcy Court for the District of Maryland converting its Chapter 11 reorganization case to a Chapter 7 liquidation case. ECF 1. The matter is fully briefed. ECF 28, 29, 30, 31. Upon review of the parties' briefs and the record on appeal, ECF 20 & 21, the Court finds a hearing on the merits unnecessary. See Fed.R.Bankr.P. 8019(b); Loc. R. 105.6 (D. Md. 2021). For the following reasons, the Court affirms the bankruptcy court's order.

I. Background

The Court adopts the bankruptcy court's undisputed findings of fact and supplements with additional facts from the record where appropriate.^[1] Quality Care is the record owner of two adjacent properties in Baltimore City, 873 and 875 North Howard Street, from which it receives rental income. ECF 21-21, at 5; ECF 21-22, at 7. It has no employees. ECF 21-22, at 11. It previously operated a daycare facility, but it no longer does. ECF 21-21, at 5. Natalie Tao is either the sole or majority owner of Quality Care. Id. at 4. In 2011, the Maryland State Department of

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Assessments and Taxation cancelled Quality Care's charter due to its failure to maintain and file annual reports. Id. Ms. Tao sought to revive the registration in 2013, but the Maryland Department of Labor, Licensing, and Regulation issued a do-not-revive notice letter on the account, preventing revival. Id. at 5-6. Shortly thereafter, Quality Care voluntarily withdrew its LLP registration. Id. at 6. Nonetheless, it continued operating and leasing commercial space. Id. The registration remains withdrawn.

Appellee Lakeside National, LLC (“Lakeside”) holds liens on Quality Care's properties and all rents generated by them. ECF 21-22, at 9. Lakeside provided a loan for the purchase of the properties in 2006. ECF 21-21, at 4-5. Quality Care disputes the amount it owes to Lakeside. Specifically, it disputes whether “all payments have been properly accounted for and applied to the mortgage[.]” ECF 28, at 8. As a result of this dispute, Quality Care filed for Chapter 11 bankruptcy protection on February 3, 2022. ECF 20-3; see ECF 20-2 (docket in Bankr. Case No. 22-10546). It filed an amended voluntary petition on February 22, changing the debtor's business to single asset real estate. ECF 20-9. Alongside its petition, it filed a motion for relief from 11 U.S.C. § 363(c)(2), which prohibits debtors in Chapter 11 cases from using rents upon which a lien has been granted without the consent of the lienholder or court approval. ECF 21-3. Quality Care sought permission to use rental income to continue commercial operations and pay “expenses related to maintaining the premises in a proper fashion [that] are incurred in the ordinary course of the business.” Id.

Ms. Tao also has filed six personal bankruptcy cases. See Bankr. Case Nos. 99-55957, 0256901, 11-25227, 12-21747, 13-13812 and 19-18681. In her personal filings and in this proceeding, she has taken inconsistent positions about whether she or Quality Care owns the Howard Street properties, the value of the properties, and whether she intends to sell the properties.

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ECF 21-21, at 5-8. The judge in her most recent personal bankruptcy case stated that her “primary objective seem[ed] to have been protecting real property known as 873-875 North Howard Street, Baltimore, Maryland 21201 from mortgage and tax sale foreclosure sales.” ECF 20-49, at 2.

Lakeside moved to dismiss Quality Care's Chapter 11 petition on February 24.^[2] ECF 20-10. On March 4, the U.S. Trustee filed a motion to convert the case to Chapter 7 or, in the alternative, to dismiss. ECF 20-23. Lakeside and the U.S. Trustee argued that Quality Care's registration was withdrawn, rendering it ineligible for reorganization under Chapter 11. They contended that, under Maryland law, Quality Care could bring only actions related to winding up its affairs or liquidating its assets; it could not seek to continue its operations. See Md. Code Ann., Corps. & Ass'ns §§ 9a-803, 10-803; Thomas v. Rowhouses, Inc., 47 A.3d 625, 629-30 (Md. Ct. Spec. App. 2012) (explaining the impact of forfeiture of a corporate charter). Quality Care opposed both motions. ECF 20-26; ECF 20-34.

The bankruptcy court held a virtual motions hearing on March 24. ECF 21-22 (hearing transcript). Ms. Tao, the debtor's representative, was the only witness at the proceeding. Nonetheless, she “was unprepared to answer questions about tax filings, employees, and inconsistencies between the debtor's schedule and monthly operating reports, as well as other operating details about the business.” ECF 21-21, at 9. She also failed to provide clear answers about insurance for the properties and about a $30,000 payroll protection program (“PPP”) loan Quality Care received in July 2020. Id. at 8-9.

At the close of the hearing, the U.S. Trustee argued that “cause” existed to dismiss or convert the petition for several reasons: (1) Quality Care's registration was withdrawn, (2) it had

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not established that there was sufficient insurance coverage for the properties, (3) it had failed to provide information requested by the U.S. Trustee, including information relating to insurance coverage and the use of proceeds from a PPP loan it had received, and (4) its case was filed in bad faith. ECF 21-22, at 77-84. It additionally argued that conversion to Chapter 7 was appropriate because there appeared to be misconduct and evasive actions by Ms. Tao, there was a concern that Quality Care would simply refile following dismissal, and a Chapter 7 trustee would protect the estate's interest and liquidate the real property for the benefit of creditors. Id. at 84, 97-98. Lakeside joined the U.S. Trustee's arguments that “cause” existed. Id. at 85-88. It also supported conversion to Chapter 7, even though it initially had argued only for dismissal. Id. Quality Care argued that no “cause” existed for dismissal or conversion. Id. at 88-96. It did not express a preference regarding dismissal or conversion if the court found “cause” existed. See id.

The Honorable Lori S. Simpson rendered an oral decision on March 28, 2022. ECF 21-21. She ruled that cause existed for dismissal or conversion to Chapter 7 and that conversion was in the best interests of the creditors and the estate. Id. at 4. On the former issue, she found several circumstances amounting to “cause,” including “gross mismanagement of the estate,” “failure [to] maintain appropriate insurance that poses a risk to the estate or to the []public,” and “failure timely to provide information . . . reasonably requested by the United States Trustee.” Id. at 10, 13. Regarding the choice between conversion and dismissal, she stated:

The Court finds and concludes that conversion to Chapter 7 will be in the best interest of the estate and its creditors A Chapter 7 trustee will be able to expeditiously market and then sell the entire property. The trustee will be able to navigate the charter issue quickly and determine if it is a true impediment to selling the property. In addition, a Chapter 7 trustee will be able to investigate and resolve the multitude of issues presented in this case, including potential claims against Ms. Tao, and determine what happened to the proceeds of the various PPP loans.

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Id. at 14-15. Underpinning this reasoning were findings that Ms. Tao's actions “over the past decade or longer, including this case, at a minimum, reflect gross mismanagement and at a maximum, dishonesty[,]” that she “was generally an unreliable witness[,]” and that “debtor and Ms. Tao have been inconsistent, misleading about their intentions in this case regarding reorganization and liquidation[.]” Id. at 4, 10, 14.

Accordingly, Judge Simpson granted the U.S. Trustee's motion to convert to Chapter 7 and denied Lakeside's motion to dismiss as moot. Id. at 15; ECF 20-54 (order). Quality Care timely appealed.

II. Standard of Review

This Court has jurisdiction to hear appeals from orders of the bankruptcy court. 28 U.S.C. § 158(a). The standard of review for a bankruptcy appeal in district court is the same standard used by the courts of appeals in reviewing a district court proceeding. See id. § 158(c)(2) (providing a bankruptcy appeal “shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts”). Thus, the Court generally reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. Tidewater Fin. Co. v. Williams, 498 F.3d 249, 254 (4th Cir. 2007).

III. Discussion

Quality Care challenges the bankruptcy court's decision pursuant to § 1112(b)(1) of the Bankruptcy Code to convert the Chapter 11 case to a Chapter 7 proceeding. It does not challenge any of the court's factual findings. Section 1112(b)(1) provides that, upon the request of a party in interest, the bankruptcy court “shall convert . . . or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause ....” 11 U.S.C. § 1112(b)(1).

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In deciding whether to convert a Chapter 11 case to Chapter 7, a bankruptcy court first must make a “threshold finding” that “cause” exists either to convert or dismiss the case. In re Superior Siding & Window, Inc., 14 F.3d 240, 242 (4th Cir. 1994). Quality Care concedes that such “cause” existed. Once a threshold finding of “cause” is made, the court turns to the second question and “must ascertain the impact on the creditors and on the estate of each of the options.” Id. at 243. The court's “decision to convert [or dismiss] will only be overturned for abuse of...