Our local bankruptcy court recently issued an interesting ruling on case conversion from Chapter 11 to Chapter 7. While Chapter 11 is reserved for businesses, its purpose is similar to personal Chapter 13 bankruptcy filings in that it is a reorganization and creates a repayment plan to pay back debts over time. On the other hand, Chapter 7 bankruptcy (for individuals and businesses) is liquidation.
For businesses a Chapter 7 bankruptcy will bring the business to an end, liquidate all assets, and pay back as much debt as possible. Under Chapter 11 a business has the opportunity to reorganize and remain operational. Let’s take a look at what this ruling means for case conversion to Chapter 7.
Brief Overview of The Bankruptcy Court’s Ruling
In In Re: Global Emergency Resources, LLC the Court found that converting the Chapter 11 case to Chapter 7 is in the best interests of creditors and the bankruptcy estate. The “bankruptcy estate” is the interest of the debtor in property of the estate at the time of the bankruptcy filing.
This means that the Court determined the parties would be better served by liquidating all assets under Chapter 7 and appropriately dividing those proceeds among the creditors, instead of an ongoing repayment plan that would make payment to the creditors over time.
This is an interesting conclusion. It seems counter-intuitive to think that ceasing operations and selling all assets would be of greater benefit to all parties than reorganizing and paying back some or all debt over time.
The United States Trustee Moves for Case Conversion
In Global the United States Trustee (UST) filed a Motion to Convert Case seeking to convert Debtor’s Chapter 11 case to a Chapter 7 case. For the following reasons, the Court grated UST’s Motion to Convert.
The Court found that the UST met its burden of proof of establishing cause to convert. The UST successfully argued cause existed for two reasons:
- The Debtor did not comply with the Court’s order when it issued payments from its bank account without express permission from the Court, or express permission from creditor Security Federal who holds a lien on the bank account. Debtor argued that it was only a “technical violation” of the Court order. The Court was unmoved by Debtor’s argument.
- The Debtor failed to comply with the duty to timely pay post-petition taxes. At the time of UST’s Motion Debtor owed approximately $20,000 in post-petition taxes. While Debtor claimed that non-payment was “reasonably justified,” the Court reasoned that justification was inadequate. (Id. 13)
For these two reasons, the Court found that the UST showed cause to convert the case to Chapter 7.
Debtor’s Burden of Proof
At that point, the burden then shifted to Debtor to prove two things: (1) to identify “unusual circumstances” that would establish that conversion is not in the best interest of the creditors or bankruptcy estate; and (2) that there is a reasonable likelihood that a Chapter 11 plan will be confirmed within a reasonable time period. (Id. 14)
The Court found that the Debtors failed to prove either of these two things. First, Debtor failed to show any compelling “unusual circumstances” to establish that case conversion is not in the best interest of all parties. Second, given the facts of the case, the Court found that the debtor was facing contentious issues among Debtor’s management. In this case the Debtor is not one person, it is a business, operated by many people and a Board of Directors. The Court reasoned that the internal turmoil of Debtor would either severely delay, or make impossible, the confirmation of a Chapter 11 plan. (Id. 14)
Issue: What Is In The Best Interests of The Creditors and The Estate
The Court held that converting the bankruptcy case to Chapter 7 is in the best interest of the creditors and the bankruptcy estate. The Court concluded this based on a number of factors.
First, Global had no business to reorganize or rehabilitate, as it had already sold all of its assets to another entity. Granted the buyer was making large monthly payments to Global, which would fund its Chapter 11 plan. Given these facts the Court determined that no Chapter 11 purpose would be served. (Id. 16)
Further, the Court listed four other benefits to the creditors and the bankruptcy estate of Chapter 7 liquidation: “A Chapter 7 will streamline the process and will avoid a costly and perilous confirmation process, avoid continued accrual of quarterly fees, and avoid any further Debtor’s attorney fees being paid from the chapter 7 bankruptcy estate.” (Id. 17)
The Bankruptcy Code creates various chapters for a reason. For some reorganization and a repayment plan is best, for others liquidation is best. (However, know that individuals filing for bankruptcy get to keep most or all of their belongings! Here’s why.)
Even though the Global case was adversarial, this holding demonstrates that bankruptcy is designed to be cooperative in nature. The Court was not looking out solely for the interests of the creditors, but rather keeping an eye toward the best outcome for creditors and the bankruptcy estate, the Debtor’s.
If you’re considering bankruptcy, you may feel overwhelmed or scared of the bankruptcy process. We’re here to tell you that generally it isn’t an adversarial process, but rather a cooperative process with the goal of getting you out of debt and being fair to your creditors.
Bankruptcy is Confusing, We’re Here to Help
At the Law Office of Barbara B. Braziel we file hundreds of Chapter 7 and 13 bankruptcy cases every year. But our clients are never just a number. You will not be left in the hands of a paralegal. You will have access to your attorney throughout your bankruptcy case.
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.