Thomas P. Agresti
Chapter 11
Hearing: January 29, 2013 at 9:30 A.M.
MEMORANDUM ORDER
Presently before the Court is a Motion to Convert ("Motion") that was filed by the United States Trustee ("UST") on December 20, 2012 at Doc. No. 281.
The Motion, which was filed pursuant to 11 U.S.C. §1112(b)(4)(F), asks that the case be converted to Chapter 7 because of the Debtors' failure "to file monthly statements of operations for three consecutive reporting periods ending September 30, 2012, October 31, 2012, and November 30, 2012." Motion at ¶8. The UST further notes in her Motion that the Debtors' Third Amended Plan of Reorganization dated July 24, 2012, provides for funding in part from future income, but the failure to file monthly reports "precludes an assessment of important post-petition financial information including payments of taxes and other administrative expenses, and feasability of any proposed plan of reorganization." Motion at ¶9.
The Debtors filed a Response in opposition to the Motion on January 2, 2013, at Doc. No. 291. The Response does not dispute the factual basis for the Motion, but makes two major points as to why it should be denied. First, the Debtors say that they have now filed the three missing reports, with the September and October reports having been filed on December 20, 2011 (subsequent to the Motion), and the November report having been filed on December 31, 2012. Second, the Debtors contend that they can file a further amended plan that would be: (1) viable; (2) unlikely to be followed by the need for additional reorganization; and, (3) in the best interest of creditors.
Argument on the Motion was heard on January 7, 2013. Both sides were given a full opportunity to present their positions and the Court indicated that it would take the matter under advisement. After having given the matter further consideration following the argument, the Court concludes that an evidentiary hearing must be scheduled at which time the Debtors will have the burden of convincing the Court why the case should not be converted to Chapter 7, or in the alternative, why a Chapter 11 trustee should not be appointed. The Court will briefly outline its reason for reaching this conclusion.
To begin with, the UST has met her initial burden of showing the existence of "cause" pursuant to 11 U.S.C. §1112(b)(4)(F), which provides that for purposes of Subsection 1112(b), "cause" includes "unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter." By Local Rule, Chapter 11 debtors in possession are required to file "Monthly Operating Reports" no later than the twentieth day of the following month. See, W. Pa. LBR 2015-1(f)(2). The Debtors admit that they had failed to file the September 2012 and October 2012 reports at the time the Motion was filed on December 20, 2011. Additionally, the November 2012 report, although technically not yet DUE at the time the Motion was filed, also was ultimately not filed by the required deadline.
The Debtors did file the 3 missing reports, apparently in response to the Motion, but all three were late. This after-the-fact action does not excuse the violation of the Local Rule. At the hearing on the Motion, the Debtors also attempted to excuse the failure to timely file reports by arguing that at the relevant time period they were involved in a dispute with a tenant that led to an irregular receipt of income, and necessitated a very careful review of any report prior to filing. This excuse rings hollow to the Court, as a review of the complete filing history of Monthly Operating Reports by the Debtors in this case reveals an established pattern of late filings.
+----------------------------------------------------------------+ ¦ Month ¦ Date Report Due ¦ Date Report Filed ¦ Filing Status ¦ +----------+-----------------+-------------------+---------------¦ ¦May 2011 ¦June 20, 2011 ¦July 1, 2011 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦June 2011 ¦July 20, 2011 ¦Sept. 8, 2011 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦July 2011 ¦Aug. 20, 2011 ¦Sept. 8, 2011 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦Aug. 2011 ¦Sept. 20, 2011 ¦Sept. 8, 2011 ¦ ¦ +----------+-----------------+-------------------+---------------¦ ¦Sept. 2011¦Oct. 20, 2011 ¦Oct. 7, 2011 ¦ ¦ +----------+-----------------+-------------------+---------------¦ ¦Oct. 2011 ¦Nov. 20, 2011 ¦Feb. 8, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦Nov. 2011 ¦Dec. 20, 2011 ¦Feb. 8, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦Dec. 2011 ¦Jan. 20, 2012 ¦Feb. 8, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦Jan. 2012 ¦Feb. 20, 2012 ¦March 6, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦Feb. 2012 ¦March 20, 2012 ¦March 30, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦March 2012¦April 20, 2012 ¦June 21, 2012 ¦Late ¦ +----------+-----------------+-------------------+---------------¦ ¦April 2012¦May 20, 2012 ¦June 21, 2012 ¦Late ¦ +----------------------------------------------------------------+
+----------------------------------------------------+ ¦May 2012 ¦June 20, 2012 ¦June 21, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦June 2012 ¦July 20, 2012 ¦Oct. 19, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦July 2012 ¦Aug. 20, 2012 ¦Oct. 19, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦Aug. 2012 ¦Sept. 20, 2012¦Oct. 19, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦Sept. 2012¦Oct. 20, 2012 ¦Dec. 20, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦Oct. 2012 ¦Nov. 20, 2012 ¦Dec. 20, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦Nov. 2012 ¦Dec. 20, 2012 ¦Dec. 31, 2012¦Late ¦ +----------+--------------+-------------+------------¦ ¦Dec. 2012 ¦Jan. 20, 2013 ¦Not yet filed¦Undetermined¦ +----------------------------------------------------+
Of the 19 monthly operating reports that have become due in this case since its filing, 17 have been filed late. In other words, the specific filings (or rather, failures to file) which are the subject of the Motion are not some kind of excusable aberration, but rather represent the norm for these Debtors. The Court thus finds the late filings to be unexcused, and finds that the UST has established cause in support of her Motion pursuant to Section 1112(b)(4)(F).
The establishment of cause triggers Section 1112(b)(1) and (2), which provide in relevant part:
(b)(1) Except as provided in paragraph (2) ..., on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes that-
(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and
(B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)--
(i) for which there exists a reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
11 U.S.C. §1112(b)(1) and
(b)(2). Thus, the Court "shall" convert or dismiss this case unless it finds that appointment of a Chapter 11 Trustee would be in the best interests of creditors, or unless it finds the existence of unusual circumstances, that there is a reasonable likelihood of a plan being confirmed within a reasonable period, and that there was a reasonable justification for the failures to file the reports.
The Debtors bear the burden of proving that they fall within the "unusual circumstances" exception of Section 1112(b)(2). See, e.g., DCNC N. Carolina I, L.L.C v. Wachovia Bank, N.A., 2009 WL 3209728 (E.D. Pa. 2009), In re Gateway Access Solutions, Inc., 374 B.R. 556, 561 (Bankr. M.D. Pa. 2007). They attempted to do that through argument at the hearing on the Motion by pointing out that it is an unusual circumstance that there is a companion corporate bankruptcy case involving much the same creditor pool. See Creditron Financial Corporation, Case No. 08-11289-TPA. That, however, is hardly an unusual circumstance since the Court has had many "paired" cases involving an individual Chapter 11 debtor in one case and a corporation owned by the individual debtor in its own separate case. The Debtors will need to do better than that to convince the Court that unusual circumstances exist.
The Debtors also argued at the hearing that it was reasonably likely they could get a plan confirmed within a relatively short period of time. However, based on unrebutted statements at the hearing from counsel for one of the taxing entities that is a creditor in this case, it would appear the Debtors would have to make a monthly plan payment in excess of $30,000 to the taxing bodies alone to obtain a confirmable plan, something that based on the current record is well beyond even their anticipated means. Failing that, the only options available to these Debtors would be a liquidating plan, or a voluntary agreement by the taxing entities for a huge reduction in their claims. As to the former, the Court has significant doubt that it would be in the best interest of the creditors to have a liquidation carried out by the Debtors given the history of delay and failed expectations in the case. As to the latter, the Court has only been provided with "speculation" that the creditors might go along with such a proposal. Again, the Debtors must do better than this to meet their burden of proof to avoid conversion or dismissal.
See, e.g., the Orders dated August 31, 2012, Doc. No. 244, noting that if no satisfactory progress was shown by the next hearing the case would either be converted to Chapter 7 or a Chapter 11 Trustee would be appointed, and, the Order of November 7, 2012, Doc. No. 266, in which the Court stated that it was giving the Debtors a "final opportunity" to show they were capable of proposing a feasible plan. The January 7, 2013 hearing was technically that final opportunity but the Debtors failed to show "satisfactory progress" toward confirming a feasible plan since no signed sale agreement existed as of the hearing, and only a possible sale existed that at best would be for less than one-half of the list price on one of three parcels they have been attempting to sell along with a possible lease of another one. Moreover, the proposed Third Amended Plan had been solely based on the Debtor's income potential going forward. Since its original filing in July 2012, that Plan had informally "morphed" into a plan whereby the Debtor's assets would be sold eliminating all debt. After the January 7, 2013, evidentiary hearing any potential for such a result obviously no longer exists.
For all of these reasons, the Court finds that it is necessary to schedule an evidentiary hearing for the purpose of determining whether the Motion should be denied even though the UST has established cause.
AND NOW, this 10th day of January, 2013, it is ORDERED, ADJUDGED and DECREED that,
(1) Unless the UST promptly objects and seeks an earlier hearing date pursuant to 11 U.S.C. §1112(b)(3), an Evidentiary Hearing on the Motion is scheduled for January 29, 2013 at 9:30 A.M. in the Erie Bankruptcy Courtroom, U.S. Courthouse, Erie, Pa. 16501. The UST having already established cause for its Motion, the sole purpose of the hearing is to determine whether the Motion should nevertheless be denied, with the Debtors bearing the burden of proof on the issue.
(2) On or before January 25, 2013 , any Party planning to present evidence at the hearing shall provide a witness list, an exhibit list, and a copy of the exhibits to the Court as well as to the opposing party. Three additional sets of exhibits, properly marked, shall also be provided to the Court at the time of the hearing pursuant to the Court's procedures, as stated on its web site.
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Thomas P. Agresti, Chief Judge
United States Bankruptcy Court
Case administrator to serve:
Guy Fustine, Esq.
Joseph Fornari, Esq.
John Melaragno, Esq.
Lawrence Palmer, Esq.
Debtors