No Free Appellate Stay: Tenth Circuit BAP Affirms Conversion Where Chapter 11 Was Used to Avoid a Supersedeas Bond Absent Immediate Financial Distress

Introduction

This commentary examines the Tenth Circuit Bankruptcy Appellate Panel’s unpublished decision affirming conversion of an individual chapter 11 case to chapter 7 for bad faith under 11 U.S.C. § 1112(b). The case arises from a long-running business dispute between debtor-appellant David W. McHugh and his former partner, Kenton Hopkins, which resulted in a state-court judgment exceeding $2.4 million including fees and interest. After collection efforts culminated in bank-account garnishments, McHugh filed chapter 11. The bankruptcy court converted the case to chapter 7, finding the filing (i) lacked “financial distress,” (ii) was undertaken to obtain a tactical litigation advantage—specifically, to substitute the automatic stay for a supersedeas bond—and (iii) concerned essentially a two-party dispute. On appeal, the BAP affirmed.

Notably, while Hopkins initiated the state-court suit, the chapter 7 trustee, Joli A. Lofstedt, was substituted as appellee on appeal. The opinion addresses recurring and unsettled questions in the Tenth Circuit: whether and how “financial distress” factors into § 1112(b) good-faith analysis; when using chapter 11 as a de facto appeal stay is impermissible; and what makes a bankruptcy case a “two-party dispute.” Although unpublished, the decision provides persuasive guidance for debtors, creditors, and courts on the boundaries of legitimate chapter 11 use after an adverse judgment.

Summary of the Opinion

The BAP (Judge Hall, joined by Judges Somers and Thurman) affirmed the bankruptcy court’s order converting McHugh’s chapter 11 case to chapter 7. Applying abuse-of-discretion review, the Panel held:

No financial distress: The debtor’s asserted liquidity crunch, precipitated by lawful garnishments, did not amount to “financial distress” where he was solvent by a wide margin, had substantial unencumbered or lightly encumbered assets, continued discretionary spending, and failed to utilize available state-law remedies or meaningfully pursue a supersedeas bond or stay pending appeal.
Improper litigation tactic: Although not per se bad faith, invoking chapter 11 primarily to avoid posting a supersedeas bond constitutes bad faith under the totality of the circumstances when coupled with an absence of immediate and apparent financial distress and a failure to take nonbankruptcy steps to secure a stay.
Two-party dispute: The case was essentially a two-party dispute notwithstanding the IRS’s estimated claim because no other creditors were pursuing collection, the debtor was current with others, and the IRS had not assessed or acted on the claim.

The BAP emphasized that neither insolvency nor prior exhaustion of state remedies is a statutory prerequisite to chapter 11, but both solvency and the debtor’s prepetition conduct may weigh heavily in assessing good faith. And while the Third Circuit’s “immediate and apparent” financial distress standard is not binding in the Tenth Circuit, the Bankruptcy Court’s findings would satisfy that standard as well.

Detailed Analysis

Factual context

After an eight-day bench trial, the state court entered a judgment of $1.658 million (later augmented by an attorneys’ fee award exceeding $675,000). With interest, the total approximated $2.43 million at the petition date.
Five months passed before the creditor pursued collection by liens and garnishments that froze seven bank accounts (two with earnings subject to partial exemption, four jointly titled with the debtor’s minor daughter from life insurance/GoFundMe proceeds).
McHugh filed chapter 11 on August 1, 2024, asserting a need to pause collections, pursue his state appeal, and resolve longstanding tax return delinquencies (roughly ten years). The IRS filed an estimated proof of claim exceeding $1 million.
Schedules reflected roughly $7.66 million in assets and $4 million in liabilities, with net equity exceeding $3.5 million. The asset base included multiple vehicles (11 unencumbered), heavy equipment, a warehouse, several parcels of real estate with equity, and an un-rented condominium with substantial equity.
Discretionary spending continued pre- and post-petition, including a new BMW lease two weeks before filing (for the debtor’s girlfriend), support payments to the girlfriend, travel, and significant credit card charges. The debtor sought to include some of these expenses in his emergency cash-collateral request.
He attempted to obtain a supersedeas bond once but was unable to do so, largely because he had not filed tax returns; he had not sought a stay pending appeal in state court; and he had not asserted exemptions or other objections to garnishments in state court.

Standards applied on appeal

Abuse of discretion: Conversion under § 1112(b) is reviewed for abuse of discretion, disturbed only if the court applied the wrong legal standard, made clearly erroneous factual findings, or made a manifestly unreasonable judgment.
Deference to factual findings: If two permissible views of the evidence exist, the appellate panel cannot reverse merely because it would have weighed the evidence differently.

Precedents cited and their influence

The Panel drew on a body of Tenth Circuit and persuasive authorities to frame the “bad faith” inquiry under § 1112(b):

§ 1112(b) and bad faith as cause: While § 1112(b)(4)’s list is non-exhaustive, lack of good faith is “cause.” See In re Dahlstrom (10th Cir. 1992) (unpublished).
Totality of the circumstances: The Tenth Circuit directs courts to consider any factors indicating abuse of the Code or efforts to delay or frustrate legitimate creditor rights. See In re Winslow (10th Cir. 1991) (unpublished); In re Nursery Land Dev., Inc., 91 F.3d 1414 (10th Cir. 1996). The BAP also referenced its own recent articulation in In re Frontline Med. Servs. LLC, 665 B.R. 818 (10th Cir. BAP 2024), identifying common bad-faith indicators (e.g., few unsecured creditors, prepetition misconduct, evasion of court orders, lack of ongoing business, lack of reorganization prospects).
“Financial distress” as a factor: The opinion canvassed authorities recognizing that a “valid bankruptcy purpose” assumes a debtor in financial distress. The Third Circuit’s In re LTL Mgmt., LLC, 64 F.4th 84 (3d Cir. 2023) standard—requiring “immediate” and “apparent” distress—was cited as persuasive, though not binding in the Tenth Circuit; the BAP concluded the record would fail even that standard. The court also referenced Bestwall (Bankr. W.D.N.C. 2023) for general discussion.
Appeal-bond substitution as bad faith: The BAP’s analysis aligns with decisions warning that using the automatic stay as a substitute for a supersedeas bond can be a classic indicium of bad faith. See In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004); In re 15375 Memorial Corp., 589 F.3d 605 (3d Cir. 2009); In re Marsch, 36 F.3d 825 (9th Cir. 1994). Two bankruptcy court decisions, In re Boynton, 184 B.R. 580 (Bankr. S.D. Cal. 1995) and In re Davis, 93 B.R. 501 (Bankr. S.D. Tex. 1987), were discussed to show how courts weigh liquidity, asset coverage, and debtor conduct when chapter 11 follows a judgment. The Tenth Circuit’s Miami Int’l Realty Co. v. Paynter, 807 F.2d 871 (10th Cir. 1986), explains the supersedeas bond’s purpose: to secure the appellee against losses arising from a stay of execution; bankruptcy cannot be used to shift that risk without security.
Two-party disputes: While not rigidly defined in the Tenth Circuit, persuasive authorities conclude a case is essentially a two-party dispute where no threat exists from other creditors—even if others technically exist. See In re JKW Enters., LLC, 660 B.R. 296 (Bankr. N.D. Iowa 2024); In re Obstetric & Gynecologic Assocs. of Iowa City & Coralville, P.C., 651 B.R. 1 (Bankr. S.D. Iowa 2023); State St. Houses, Inc., 305 B.R. 738 (S.D. Fla. 2003), aff’d, 356 F.3d 1345 (11th Cir. 2004); and a local example, In re Ladouceur, 2017 WL 5054307 (Bankr. D. Colo. 2017).

The BAP also cited standard-of-review authorities (e.g., Vista Foods, Ortiz, Cruz, Jackson, Anderson v. Bessemer City) reinforcing appellate restraint in reweighing facts.

Legal reasoning

1) Financial distress

The BAP endorsed the bankruptcy court’s finding that McHugh was not in “financial distress,” a conclusion central to the bad-faith analysis. Key considerations:

Solvency and asset profile: The debtor held approximately $7.6 million in assets against $4 million in liabilities, with significant equity in multiple properties and valuable unencumbered personalty; he was current on all obligations other than the judgment and taxes.
Prepetition and postpetition conduct: Discretionary spending and the assumption of new luxury obligations (e.g., a BMW lease for his girlfriend two weeks pre-filing) undermined the narrative of urgent financial need.
Failure to pursue nonbankruptcy remedies: The debtor did not file tax returns necessary to secure a supersedeas bond; he sought a bond only once and never moved for a state-court stay; he did not assert exemptions or other challenges to the garnishments under Colorado law; and he did not pursue liquidation of available assets to address the garnishment or judgment risks.

The Panel stressed there is no insolvency requirement in chapter 11. But the absence of distress—and the debtor’s self-created liquidity problem by inaction—strongly supported the bankruptcy court’s judgment that the filing lacked a legitimate bankruptcy purpose. Even under the Third Circuit’s elevated “immediate and apparent” standard, the record did not show a justifying need for bankruptcy relief.

2) Tactical litigation advantage—using chapter 11 as a supersedeas substitute

The bankruptcy court found that the “entire reason” for the filing was to gain a litigation advantage, i.e., to stay enforcement without posting a bond. The BAP agreed this was not a per se rule but, on the facts, the totality supported bad faith:

Timing and posture: The debtor waited five months after the judgment, took no meaningful steps to bond the appeal or secure a state-court stay, and turned to bankruptcy only after garnishments froze his accounts.
Means and conduct: Given substantial assets and continuing discretionary spending, the debtor’s choice to invoke the automatic stay effectively shifted to the judgment creditor the very risk of loss a supersedeas bond is designed to cover.
No per se holdings: The BAP underscored that a solvent debtor is not categorically barred from filing chapter 11 after a judgment, and a debtor need not exhaust state remedies before filing. But in this case those features, taken together, showed the debtor was using bankruptcy chiefly as a “free” appellate stay rather than to reorganize or maximize value.

3) Two-party dispute characterization

The debtor argued the IRS’s seven-figure estimated claim prevented labeling the case a two-party dispute. The BAP affirmed the bankruptcy court’s contrary finding, emphasizing that:

Active pressure matters: No other creditor (including the IRS) was taking collection action. The debtor was otherwise current and had only five nonpriority unsecured claims.
Non-dispositive but relevant: The “two-party” characterization is not determinative standing alone but is probative of an improper bankruptcy purpose when the filing chiefly seeks to arbitrate or stay a bilateral fight more appropriately handled in another forum.

4) Remedy—conversion rather than dismissal

Section 1112(b) instructs the court to convert or dismiss “whichever is in the best interests of creditors and the estate.” Although the BAP did not detail that comparative analysis, affirmance of conversion is consistent with the record’s indication of substantial non-exempt assets available for administration. In such circumstances, conversion can better serve creditor interests than dismissal, which would simply restore a race to the courthouse without centralized liquidation.

Impact and implications

Doctrinal clarifications

Financial distress is a meaningful factor in the Tenth Circuit’s totality analysis: Without adopting a rigid test, the BAP confirms that lack of distress weighs heavily against good faith, particularly where the debtor is solvent, has significant unencumbered assets, and has not pursued state-law protections.
Automatic stay is not a supersedeas bond: Using chapter 11 to evade bond requirements can constitute bad faith when the filing’s primary function is to stall a single-claim enforcement effort instead of facilitating reorganization. Courts will scrutinize the timing of the filing, prepetition conduct, and the debtor’s efforts (or lack thereof) to secure a stay by bond.
“Two-party dispute” remains a viable lens: The presence of other creditors on paper— even a large, estimated IRS claim—does not forestall a two-party characterization where others are not pressing or threatened. That label, while not dispositive, supports dismissal or conversion when the bankruptcy forum is being used to litigate a bilateral fight.

Practical guidance

For debtors: If filing post-judgment, be prepared to demonstrate immediate and concrete financial need tied to a reorganization purpose, not merely a desire to delay enforcement. File delinquent tax returns promptly, seek a supersedeas bond or stay pending appeal, assert exemptions where available, pare back discretionary spending, and move quickly toward a confirmable plan that maximizes long-term value to all creditors.
For creditors: Build a record of the debtor’s solvent balance sheet, asset base, discretionary expenditures, failure to pursue state-law remedies, and the absence of pressure from other creditors. Emphasize the risk-shifting inherent in a “free” stay via the automatic stay and seek § 1112(b) relief early.
For courts: The decision reinforces that evidentiary proffers (as permitted by local rules like Colorado L.B.R. 2081-3(c)) can suffice to decide § 1112(b) motions when detailed and uncontested—expediting resolution of clearly tactical filings.

Likely downstream effects

High-asset individual filings: Bankruptcy courts in the Tenth Circuit will look skeptically at chapter 11 filings by solvent, high-income individuals following adverse judgments where nonbankruptcy stay mechanisms were ignored and where substantial assets could be marshaled.
Alignment with national trend: The BAP’s endorsement of “financial distress” as a significant factor—citing LTL—adds Tenth Circuit weight to a broader inter-circuit consensus that legitimate chapter 11 use requires more than a litigation pause.

Complex Concepts Simplified

Bad faith under § 1112(b): “Cause” to dismiss or convert a chapter 11 case includes bad faith. Courts assess bad faith under the “totality of the circumstances,” considering factors like the debtor’s financial condition, timing of the filing, prepetition conduct, the presence of a reorganization purpose, and whether the case is a two-party dispute.
Financial distress vs. insolvency: Insolvency means liabilities exceed assets; “financial distress” focuses on a debtor’s immediate need for bankruptcy relief to preserve value or reorganize. A solvent debtor can be in financial distress, but where the debtor is stable and has sizable unencumbered assets, courts often find no distress.
Supersedeas bond: A bond posted by an appellant to stay enforcement of a judgment during appeal, protecting the appellee against loss from the stay. Bankruptcy’s automatic stay should not be used as a cost-free substitute for such a bond.
Two-party dispute: A case where the debtor’s financial problems essentially involve one main creditor, with little or no pressure from others. While not dispositive, this supports dismissal or conversion because the dispute can be resolved in nonbankruptcy forums.
Conversion vs. dismissal: Under § 1112(b), courts must choose the remedy in the best interests of creditors and the estate. Conversion to chapter 7 centralizes and liquidates assets for distribution; dismissal returns parties to state law remedies.
Abuse-of-discretion review: Appellate courts give substantial deference to the bankruptcy court’s judgment calls and fact findings, reversing only for legal error, clearly erroneous facts, or a manifestly unreasonable decision.

Conclusion

The Tenth Circuit BAP’s affirmance delivers a clear message: chapter 11 is not a vehicle for a “free appellate stay.” Where a debtor is solvent, has ample unencumbered assets, continues discretionary spending, and forgoes state-law avenues to secure a stay or protect exempt property, a chapter 11 filing made primarily to thwart enforcement of a judgment will likely be deemed a bad-faith tactic under § 1112(b). The opinion solidifies three practical guideposts for the Tenth Circuit:

“Financial distress” meaningfully informs the good-faith inquiry, even if not a mandatory element.
Using the automatic stay as a surrogate for a supersedeas bond, absent immediate and apparent need for bankruptcy relief and diligent pursuit of nonbankruptcy remedies, supports conversion or dismissal.
Labeling a case as a two-party dispute remains a powerful indicator that bankruptcy is being used inappropriately to manage a bilateral fight best resolved elsewhere.

Though unpublished, the decision is likely to be cited persuasively in future Tenth Circuit cases to police the boundary between legitimate reorganization and tactical filings aimed at delaying a single creditor. It underscores a familiar but essential principle: chapter 11 exists to preserve going concerns and maximize value for all creditors—not to provide judgment debtors with a costless appeal stay.