ORDER ON MOTION TO CONVERT CHAPTER 11 CASE TO CHAPTER 71
On July 30, 2025, the court heard the Motion to Convert Chapter 11 Case to Chapter 7 ("Conversion Motion") brought by administrative claimant Larson & Zirzow, LLC ("L&Z") in the above-referenced proceeding. The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
BACKGROUND
On or about December 31, 2020, Las Vegas Lucky Investment LLC ("LVLI") as landlord, and LV Fortune, LLC ("Debtor") as tenant, entered into a lease agreement ("Lease"). The Lease provided for the Debtor to lease from LVLI the Fortune Hotel & Suites, which is a
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began January 1, 2021, and expired on December 31, 2023, with the option of two one-year extensions after its expiration. (ECF No. 60).
On or about September 1, 2022, LVLI sold the Property to Cathedral GD, LLC and Cathedral JD, LLC (collectively, the "Landlords"), with each holding a 50% interest as tenants- in-common. (ECF No. 60).
On or about September 7, 2022, the Landlords served the Debtor with a Five-Day Notice to Pay Rent or Surrender Premises, asserting the Debtor owed $347,428.89 in unpaid rent. (ECF No. 60).
On October 3, 2022, Debtor filed a voluntary "skeleton" Subchapter V Chapter 11 petition ("Petition") that includes a creditor matrix ("Mailing Matrix") containing the names and addresses of all creditors and other parties in interest for the bankruptcy proceeding, including Jeffrey Fleming ("Fleming"). (ECF No. 1). A Notice of Chapter 11 Bankruptcy Case ("Bankruptcy Notice") was issued, setting a deadline of December 12, 2022 ("Claim Deadline") for creditors to file proofs of claim. (ECF No. 3).2The Petition was signed by Fleming as the Debtor's manager. The Petition is accompanied by a copy of an Action by Written Consent of the Sole Manager and Member of LV Fortune, LLC, signed by Fleming as sole officer, director, manager, and member of the Debtor. Edward M. Burr was appointed as the Subchapter V trustee ("Trustee"). (ECF No. 8).
On October 5, 2022, Debtor filed an Application to Employ Larson & Zirzow, LLC as General Bankruptcy Counsel with an effective date of October 3, 2022. (ECF No. 17). On October 12, 2022, an order was entered designating Fleming as the responsible person for the Debtor. (ECF No. 32).
On October 17, 2022, Debtor filed its schedules of assets and liabilities ("Schedules") along with its statement of financial affairs ("SOFA"). (ECF No. 39). Part 13, Section 28 of the SOFA attests that Fleming is the sole manager, member, officer, and director who holds 100% of the interest in the Debtor. Secured creditor Schedule "D" lists three separate creditors having
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claims secured by property of the estate. Unsecured creditor Schedule "E/F" lists three creditors having priority unsecured claims and seventeen creditors having nonpriority unsecured claims. The Schedules and SOFA are signed under penalty of perjury by Fleming as the manager. On November 10, 2022, an order was entered granting the employment of L&Z as Chapter 11 counsel for the Debtor. (ECF No. 42).
On January 1, 2023, Debtor filed a proposed Chapter 11 plan of reorganization ("Plan"). (ECF No. 60). The proposed Plan was signed by Fleming as "Manager and Designated Responsible Person."
On January 5, 2023, Debtor filed amended schedules ("Amended Schedules"). (ECF No.
62). The Amended Schedules is signed under penalty of perjury by Fleming as its "Manager."
On January 6, 2023, the court entered an order granting Debtor's Ex Parte Motion Re:
Fixing of Deadlines and Procedures in Subchapter V Case Relating to Proposed Chapter 11 Plan Reorganization. (ECF No. 64). The order set the Plan confirmation hearing for March 7, 2023. On March 6, 2023, Debtor filed a Notice of Proposed Modifications (with the original Chapter 11 Plan, the "Plan"). (ECF No. 90). The Plan required Debtor to cure all outstanding lease arrears ("Cure Payment") by a deadline of April 7, 2023 ("Cure Deadline"). Among other things, that Cure Payment — valued at about $1.12 million — would allow Debtor to continue to operate the Property to generate revenue that Debtor would use to pay its creditors according to the Plan. If Debtor failed to make the Cure Payment, the Plan would be in default, the Lease would be automatically rejected and terminated in full, and the Landlords would take immediate control of the Property. No objections to confirmation of the proposed Plan were raised. On March 7, 2023, an order was entered confirming the Plan under Section 1191(a) ("Confirmation Order"). (ECF No. 95). Under Section 8.07 of the confirmed Plan, Fleming remained "as the sole officer, director and owner of the Debtor post-confirmation."
On March 10, 2023, L&Z filed a Final Application for Compensation in the amount of $34,538.07 ("L&Z Fee Application"), that was noticed to be heard on April 12, 2023. (ECF Nos. 101-103). On the same date, a Certificate of Service was filed attesting the L&Z Fee
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Application and accompanying documents had been served by first class mail and electronic delivery to the Mailing Matrix. (ECF No. 104).
On April 13, 2023, an order was entered granting approval of L&Z's compensation and expenses ("L&Z Fee Order"). (ECF No. 109).3
On April 21, 2023, L&Z filed a Motion to Withdraw as Attorney of Record for Debtor ("L&Z Withdrawal Motion") which was supported by the declaration of Matthew Zirzow. (ECF Nos. 113 and 114). That Motion was noticed to be heard on May 24, 2023, and the Motion and supporting documents were served by first class mail and electronic means on the Mailing Matrix. (ECF Nos. 115 and 116).
On May 26, 2023, in absence of opposition or objection, an order was entered granting the L&Z Withdrawal Motion. (ECF No. 119).
On August 16, 2023, attorney Damon K. Dias ("Attorney Dias") filed a notice of appearance on behalf of the Debtor. (ECF No. 124).
On August 17, 2023, Debtor filed a voluntary motion to dismiss the Chapter 11 proceeding that was noticed to be heard on September 20, 2023. (ECF Nos. 126 and 127). On September 21, 2023, an order was entered granting Debtor's motion to voluntarily dismiss its Chapter 11 bankruptcy ("Dismissal Order"). (ECF No. 129).
3 Section 330(a)(1) allows a bankruptcy court to award "reasonable compensation" to professionals employed by a bankruptcy estate. Section 330(a)(3) generally directs the court to
"consider the nature, the extent, and the value of such services, taking into account all relevant factors…." 11 U.S.C. § 330(a)(3). Among those relevant factors, Section 330(a)(3)(E) requires the court to consider whether the professional demonstrate "skill and experience in the bankruptcy field." L&Z was authorized to be employed by the Debtor which did not object to the L&Z Fee Application. Notice of the compensation request was given to Fleming. The L&Z Fee Order was granted in April 2023 and was never appealed. Whether entry of the L&Z Fee Order bars subsequent pursuit of the Malpractice Claim under principals of claim preclusion or issue preclusion is not before the court. See, e.g., Matter of Intelogic Trace Inc., 200 F.3d 382,
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On October 19, 2023, an Order Discharging Chapter 11 Subchapter V Trustee was entered. (ECF No. 134).
On November 8, 2023, the Debtor's Chapter 11 Subchapter V bankruptcy case was closed. (ECF No. 135).
On March 27, 2025, Debtor filed a civil action in the Eighth Judicial District Court, Clark County, Nevada ("State Court Action"), denominated Case No. A-25-915543-C. Debtor's civil complaint ("Complaint") asserts a claim for legal malpractice against L&Z arising out of L&Z's representation of the Debtor during the Chapter 11 proceeding ("Malpractice Claim").4 On April 22, 2025, L&Z filed an application to vacate and grant relief from the Dismissal Order ("Vacate Motion"). (ECF No. 136). On the same date, L&Z filed a notice removing the State Court Action to the bankruptcy court, where it was assigned Adversary Proceeding No. 25- 01119-mkn. (ECF No. 137).
On April 23, 2025, L&Z filed an Ex Parte Motion to Reopen Chapter 11 Case to Allow Court to Hear and Consider Motion to Vacate and Grant Relief from Order Dismissing Chapter
11 Bankruptcy Case ("Reopen Motion"). (ECF No. 142). On April 29, 2025, an order was entered granting the Reopen Motion. (ECF No. 148). On May 16, 2025, Attorney Dias filed a motion to withdraw as counsel for the Debtor ("Dias Withdrawal Motion"). (ECF No. 154).
On May 23, 2025, Debtor filed a motion to remand the State Court Action. (ECF No.
157).
On May 28, 2025, a supplement to the Dias Withdrawal Motion was filed. (ECF No.
160).
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On June 3, 2025, a notice of appearance on behalf of the Debtor was filed by attorney Matthew I. Knepper ("Attorney Knepper"). (ECF No. 162).
On June 4, 2025, Debtor filed an opposition to the Vacate Motion. (ECF No. 163). On June 6, 2025, an order was entered granting the Vacate Motion, thereby reopening the Chapter 11 case. (ECF No. 164).
On June 10, 2025, the L&Z filed the instant Conversion Motion along with a Declaration of Matthew C. Zirzow ("Zirzow Declaration"). (ECF Nos. 167 and 168). A Notice of Hearing was filed, scheduling the Conversion Motion to be heard on July 9, 2025. (ECF No. 169). A Certificate of Service also was filed attesting that the Conversion Motion, the Zirzow Declaration, and Notice of Hearing were served by first class mail on all parties listed in the Mailing Matrix, as well as parties required to receive electronic notice. (ECF No. 172). By its Motion, L&Z seeks to convert the Chapter 11 proceeding to a Chapter 7 liquidation thereby allowing the Malpractice Claim to be administered by a panel Chapter 7 trustee. On June 13, 2025, a stipulated order was entered granting the Dias Withdrawal Motion and authorizing Attorney Knepper to substitute as bankruptcy counsel of record for the Debtor. (ECF No. 175).
On July 2, 2025, L&Z filed a supplement to the Conversion Motion. (ECF No. 177). On July 2, 2025, Debtor filed its opposition to the Conversion Motion ("Conversion Opposition"). (ECF No. 178). No opposition to conversion of the case to Chapter 7 was filed by the Office of the United States Trustee ("UST"), creditors or other parties in interest. On July 23, 2025, L&Z filed a reply to the Conversion Opposition. (ECF No. 183).
DISCUSSION
The court has reviewed and considered the materials and written testimony offered by the parties as well as the written and oral arguments presented. Based on that review and resulting consideration, the court concludes that the Conversion Motion should be granted for the reasons discussed below.
I. Creditor Standing.
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To bring the Conversion Motion, L&Z must have standing in this proceeding. Under Section 1109, a creditor "may raise and may appear and be heard on any issue" in a bankruptcy proceeding. See 11 U.S.C. § 1109(b). A creditor is any "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(10)(a). The term "claim" includes a right to payment. See 11 U.S.C. § 101(5)(a); see also Johnston v. Jem Development Co. (In re Johnston), 149 B.R. 158, 161 (B.A.P. 9th Cir. 1992). In essence, a party is a creditor if it holds a right to payment, and a creditor has standing to request a conversion from a Chapter 11 case to a Chapter 7 case. Id. at 161.
This court entered the L&Z Fee Order on April 13, 2023, approving L&Z's payment of $34,538.07 for its expenses and fees incurred in representing the Debtor. That order was never appealed. As a result, L&Z became the holder of the right to that payment before the Dismissal Order was entered on September 21, 2023. There is no dispute that the Debtor has not paid the fees and expenses to which L&Z is owed.
Debtor argues that L&Z cannot bring the Conversion Motion because L&Z lacks good faith and has a conflict of interest since the malpractice claim is against L&Z. In making this assertion, Debtor relies on Little Creek Dev. Co. v. Commonwealth Mortg. Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068 (5th Cir. 1986), as well as Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007).
In Little Creek, the Fifth Circuit held that lack of good faith by a debtor could be cause for granting a conversion under Section 1112(b). 779 F.2d at 1072. The case does not provide guidance on whether a creditor has standing to bring a conversion, and even if it did, it would not be binding on this court.
In Marrama, the Supreme Court reaffirmed "the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate 'to prevent an abuse of process' described in § 105(a) of the [Bankruptcy] Code." 549 U.S. at 375, quoting 11 U.S.C. § 105(a). The Court concluded Section 105(a) allows a Chapter 7 debtor's motion under Section 706 to convert to Chapter 13 to be denied where the debtor attempted to "merely postpone[] the allowance of equivalent relief and… take action prejudicial to creditors." Id. The conclusion in
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Marrama is easily distinguishable from the facts in the instant case. First, Marrama involves an individual seeking to convert a Chapter 7 liquidation to a Chapter 13 debt adjustment where good faith is required to file a bankruptcy petition and to confirm a Chapter 13 plan. Id. at 371. Second, the debtor made several material misstatements about the property they owned in their bankruptcy schedules. Id. at 369-70. L&Z has not made any material misstatements to this court, nor is L&Z a debtor attempting to convert their own bankruptcy case. As L&Z correctly points out, nothing in Marrama suggests that bad faith arises when a properly supported motion is brought by a creditor under Section 1112(b).
Since L&Z is a creditor with an outstanding claim against Debtor, it has standing to request a conversion from Chapter 11 to Chapter 7.
II. Conversion or Dismissal.
"The decision to convert [a] case to Chapter 7 is within the bankruptcy court's discretion." Pioneer Liquidating Corp. v. U.S. Trustee (In re Consolidated Pioneer Mortgage Entities), 264 F.3d 803, 806 (9th Cir. 2001), aff'g, 248 B.R. 368 (B.A.P. 9th Cir. 2000). Under Section 1112(b)(1), a party in interest may request a conversion to a Chapter 7 or a dismissal based on "the best interests of the creditors and the estate." 11 U.S.C. § 1112(b)(1). "However, even if cause is established, Section 1112(b)(2) prohibits a bankruptcy court from granting relief under Section 1112(b)(1) if the bankruptcy '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 [one of two enumerated circumstances].'" Baroni v. Seror (In re Baroni), 36 F.4th 958, 965 (9th Cir. 2022), quoting 11 U.S.C. § 1112(b)(1). The appropriateness of conversion depends on "(1) whether cause exists for granting relief under Section 1112(b)(1); (2) whether granting relief is in the creditors' and the estate's best interests; and (3) if so, which form of relief best serves the creditors' and the estate's interests." Id.; see also Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 729 (B.A.P. 9th Cir. 2008), citing Nelson v. Meyer (In re Nelson), 343 B.R. 671, 675 (B.A.P. 9th Cir. 2006) (questions of conversion and dismissal involve a two-step analysis of whether cause exists and application of a balancing test based on the best interests of
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the creditors and the estate). Even a properly closed Chapter 11 case also can be reopened for conversion to a Chapter 7 case. See Greenfield Drive Storage Park v. California Para- Professional Services, Inc. (In re Greenfield Drive Storage Park), 207 B.R. 913, 918 (B.A.P. 9th Cir. 1997).
A. Cause
Section 1112 does not explicitly define cause, but instead provides a list of examples that would constitute cause. See 11 U.S.C. § 1112(b)(4). However, the court has broad discretion in determining cause under § 1112(b)(1). See Pioneer Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer Mortg. Entities), 248 B.R. 368, 375 (B.A.P. 9th Cir. 2000); Greenfield, 207 B.R. at 916; In re Johnston, 149 B.R. at 160. This circuit generally finds cause to convert when the debtor materially defaults on a plan, fails to effectuate the plan, or erodes the position of creditors. See Baroni, 36 F.4th at 967 (material default from failure to make required payments); Greenfield, 207 B.R. at 916-17 (material default from failure to make required payments despite making payments for several years prior); In re Johnston, 149 B.R. at 162 (inability to effectuate a plan and eroding the position of creditors); Smith v. John Peter Lee, Ltd., 201 B.R. 267, 274 (D. Nev. 1996), aff'd, 141 F.3d 1179 (9th Cir. 1998) (unpublished table decision) (inability to effectuate plan). The party seeking conversion bears the burden of persuasion to establish that cause exists. See Baroni, 36 F.4th at 966; Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 614 (B.A.P. 9th Cir. 2014).
L&Z maintains that cause exists because there was material default under a confirmed plan, inability to effectuate substantial consummation of a confirmed plan, substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation, and gross mismanagement of the estate. See Conversion Motion at 10:17-14:12, citing 11 U.S.C. §§ 1112(b)(4)(A), (B), (M), and (N). L&Z argues that the Debtor failed to make the required Cure Payment to the Landlord by the Cure Deadline, leading to a termination of the Lease. It maintains that the Debtor's failure to make that payment—and to any other creditors— constitutes a material default, an inability to effectuate a plan, and a substantial or continuing loss to or diminution of the estate inasmuch as the Debtor has almost no other assets with which
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to pay creditors without access to the Property. The court agrees. Failure to make the Cure Payment is a material default under the very Plan proposed by the Debtor and confirmed by the court. Substantial consummation of the confirmed Plan has not been effectuated, further resulting in a substantial or continuing loss to, or diminution of, the estate, as well as the absence of a reasonable likelihood of rehabilitation. The authorities cited by L&Z support these conclusions.
As shown in Baroni, "[a] failure to make a payment required under the plan is a material default and is cause." 36 F.4th at 966. There are circumstances where a missed payment is not a material default, and whether it is material depends on "the number of missed payments, the number of aggrieved creditors, and how long the default occurred." Id. at 967. Furthermore, when there is no possibility of effective reorganization and the ongoing delay would erode the position of creditors, the court may convert the case from Chapter 11 to Chapter 7. See In re Johnston, 149 B.R. at 162.
Here, the Cure Payment on the Lease was essential to effectuate the confirmed Plan. Without the Property, Debtor did not have a stream of revenue necessary to operate its business to pay creditors under the Plan. Absent any other source of revenue, Debtor's failure to make the Cure Payment ended its ability to pay its creditors, severely diminishing the estate and making the reorganization ineffective. As the Debtor did not have another source of revenue, the missed Cure Payment supports a finding of cause under Sections 1112(b)(4)(A), (M), and (N). Because L&Z have already proven cause under their first three arguments, this court need not address L&Z's argument under Section 1112(b)(4)(B).5
Even when cause is established, the court may not convert the case if it "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
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establishes" that there is a reasonable likelihood that a plan will be confirmed within a reasonable time and the grounds for cause have a reasonable justification and can be cured within a reasonable time. See 11 U.S.C. § 1112(b)(2). "[C]ircumstances inherently present in bankruptcy…are not 'unusual' for purposes of Section 1112(b)(2)." Baroni, 36 F.4th at 969. The circumstances "must be something beyond the inherent financial pressures and adversarial differences involved in a bankruptcy case to establish that the purposes of Chapter 11 or the creditors' interests are better served by continuing under that chapter." Id. The court finds no unusual circumstances in this case showing that conversion or dismissal of this case is not in the best interest of the creditors and the estate, nor does the Debtor offer any plan to cure, nor justification, to overcome the grounds for cause established by L&Z.
B. Creditors' and Estate's Best Interests
If the moving party establishes cause, the court must apply a balancing test to determine if converting or dismissing the claim would be beneficial to the creditors and the estate. See Baroni, 36 F.4th at 965; In re AVI, Inc., 389 B.R. at 729. When reaching that determination, the court must consider the interests of all creditors. See Baroni, 36 F.4th at 968; Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d 958, 961 (9th Cir. 2009). In this case, conversion to Chapter 7 is the most beneficial to creditors and the bankruptcy estate. If the case is converted, the appointed Chapter 7 trustee can administer the Malpractice Claim as an asset of the estate.6Any proceeds a Chapter 7 trustee might recover from litigating or settling the Malpractice Claim may provide a source of repayment to unsecured creditors, where no payments have been provided through the confirmed Plan. Furthermore, the appointment of a bankruptcy trustee would not significantly drain estate assets since the Malpractice Claim is the only asset remaining to administer. See Baroni, 36 F.4th at 970 (appointing a trustee in converting a case from Chapter 11 to Chapter 7 would not substantially detract from the estate and that creditors would not receive less in Chapter 7 than in Chapter 11). Moreover, neither the UST nor any creditors or other parties in interest have objected to
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conversion to Chapter 7 as an alternative to allowing the revested Debtor to remain in control. See Baroni, 36 F.4th at 970.
By contrast, dismissal of the Chapter 11 case offers even less opportunity for payment to creditors who have received nothing under the confirmed Plan. While dismissal might offer closure to the creditors, it would merely ensure that they will never be paid on their claims. Conversion to Chapter 7 rather than dismissal is in the best interests of creditors and the bankruptcy estate.
C. Form of Relief
Factors to consider in deciding whether to grant conversion or dismissal include, but are not limited to (1) whether some creditors received preferential payments, and whether equality of distribution would be better served by conversion rather than dismissal; (2) whether there would be a loss of rights granted in the case if it were dismissed rather than converted; (3) whether the debtor would simply file a further case upon dismissal; (4) the ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors; (5) in assessing the interest of the estate, whether conversion or dismissal of the estate would maximize the estate's value as an economic enterprise; (6) whether any remaining issues would be better resolved outside the bankruptcy forum; (7) whether the estate consists of a "single asset"; (8) whether the debtor had engaged in misconduct and whether creditors are in need of a chapter 7 case to protect their interests; (9) whether a plan has been confirmed and whether any property remains in the estate to be administered; and (10) whether the appointment of a trustee is desirable to supervise the estate and address possible environmental and safety concerns. See Rand v. Porsche Fin. Servs. (In re Rand), 2010 WL 6259960, at *10 n.14 (B.A.P. 9th Cir. Dec. 7, 2010), citing 7 Collier on BANKRUPTCY ¶ 1112.04[7] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed., 2010).7The court will address each of these factors in turn.
i. Whether Some Creditors Receive Preferential Payments, and Whether Equality of Distribution Would Be Better Served by Conversion Rather Than Dismissal
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Based on the record, no creditors have received preferential payments, and there are no preference claims that are avoidable and recoverable. However, equality of distribution would likely be served by conversion. The Malpractice Claim, if any, apparently is the only asset left to be liquidated. If the case is converted to Chapter 7, a new deadline will be established for creditors to file proofs of claim with the possibility of a payment from any litigation or settlement stemming from the Malpractice Claim. See FED.R.BANKR. P. 1019(b)(1)(B). On the other hand, dismissal of the case would ensure no additional payments to creditors from the Malpractice Claim as the Debtor's obligations arguably would have been discharged by confirmation of the Plan.8Because conversion would create potential payments for creditors from the Malpractice Claim, this factor weighs in favor of conversion.9
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ii. Whether There Would Be a Loss of Rights Granted in the Case If It Were Dismissed Rather Than Converted
Although the Debtor listed 23 secured and unsecured claims in its Schedules "D" and
"E/F," proofs of claim were timely filed by only 14 creditors. See note 2, supra. If this Chapter 11 proceeding is dismissed, creditors who might file a proof of claim under a new claim deadline established after a conversion would not be able to do so. If this Chapter 11 proceeding is converted to Chapter 7, the opportunity to file a proof of claim might permit receipt of a distribution from a Chapter 7 trustee's administration of the Malpractice Claim. This favors conversion over dismissal.
iii. Whether the Debtor Would Simply File a Further Case Upon Dismissal
The Debtor no longer has the Lease to the Property that it was using to operate the business. Since there is no business to operate, it is unlikely that the Debtor will file another Chapter 11 case. Since there is a low likelihood of another case upon dismissal, this factor is neutral.
iv. The Ability of the Trustee in a Chapter 7 Case to Reach Assets for the Benefit of the Creditors
If this case were converted to Chapter 7, the appointed trustee could reach the Malpractice Claim and could administer that asset to the creditors. Since the conversion might generate an additional asset in reach of the trustee, this factor weighs in favor of conversion.
v. In Assessing the Interest of the Estate, Whether Conversion or Dismissal of the Estate Would Maximize the Estate's Value as an Economic Enterprise
As noted previously, the estate cannot operate as an economic enterprise because it no longer has access to the Property it was using to generate income. However, conversion would create potential payments for creditors based on the outcome or settlement of the Malpractice Claim while dismissal would produce no additional funds. Since conversion has at least the potential to generate additional funds to pay creditors, this factor weighs in favor of conversion.
vi. Whether Any Remaining Issues Would Be Better Resolved Outside the Bankruptcy Forum
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The pending Malpractice Claim would likely be more efficiently resolved by dismissal. The State Court Action was removed to bankruptcy court in light of the re-opened Chapter 11 proceeding. If the Chapter 11 case is dismissed, the litigation likely would be pursued, if at all, in State Court but with no payments on creditor claims. If the case is converted, a Chapter 7 trustee can independently determine whether the Malpractice Claim, if any, should be pursued or settled. Any settlement by a Chapter 7 trustee would be subject to bankruptcy court approval under Bankruptcy Rules 9019. While prosecution of the Malpractice Claim in the State Court arguably would be more efficient, without more it offers little or no benefit to creditors of the bankruptcy estate. This factor appears to be neutral.
vii. Whether the Estate Consists of a "Single Asset"
This factor is implicated in cases where there is a single real estate asset and a plan that provided veto power of that plan to a claimant if that claimant would not have its claim paid in full by the proposed plan. See, e.g., Lumber Exc. Bldg. Ltd. P'ship. v. Mutual Life Ins. Co. of New York (In re Lumber Exc. Bldg. Ltd. P'ship), 968 F.2d 647, 650 (8th Cir. 1992); Matter of Woodbrook Assocs., 19 F.3d 312, 321 (7th Cir. 1994). Because the estate no longer consists of a single real estate asset and the plan does not provide such veto power, this factor is not implicated in this case.
viii. Whether the Debtor Had Engaged in Misconduct and Whether Creditors Are in Need of a Chapter 7 Case to Protect Their Interests
While the Debtor failed to make the required Cure Payment by the Cure Deadline, the court is hesitant to characterize that failure as misconduct without additional evidence. Nevertheless, as discussed above, the creditors are in need of a Chapter 7 case because liquidating the Malpractice Claim gives them a chance to recover some funds and thereby protect their interests. Therefore, this factor weighs in favor of conversion.
ix. Whether a Plan Has Been Confirmed and Whether Any Property Remains in the Estate to Be Administered
This court confirmed the original plan, and as previously discussed, the estate still includes the Malpractice Claim. Because the estate still has that asset to be administered, this factor weighs in favor of conversion.
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x. Whether the Appointment of a Trustee Is Desirable to Supervise the Estate and Address Possible Environmental and Safety Concerns
The appointment of a trustee allows the Malpractice Claim to provide some repayment to creditors. Moreover, a neutral bankruptcy trustee can independently evaluate the merits of Malpractice Claim taking into account the information obtained from both Fleming as the sole member and responsible person of the Debtor as well as the members of L&Z, in addition to the documentary evidence available. Based on the record, there is no concern over environmental and safety concerns. Since the Trustee could provide value to creditors upon administration of the Malpractice Claim, this factor weighs in favor of conversion.
xi. Based on the foregoing, the majority of the relevant factors weigh in favor of conversion. Under these circumstances, the court concludes that conversion is the appropriate form of relief because it will best support the interests of the creditors and the estate by providing creditors with the potential for some repayment.
III. Property of the Chapter 7 Estate.
When a bankruptcy case commences, an estate is created. See 11 U.S.C. § 541(a). The estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. §541(a)(1) (emphasis added). The bankruptcy estate also includes "any interest in property that the estate acquires after the commencement of the case." 11 U.S.C. §541(a)(7) (emphasis added). "[F]or the after-acquired interest to be considered property of the estate under § 541(a)(7), the interest (1) must be created with or by property of the estate; (2) acquired in the estate's normal course of business; or (3) otherwise be traceable to or arise out of any prepetition interest included in the bankruptcy estate." MacKenzie v. Neidorf (In re Neidorf), 534 B.R. 369, 371-72 (B.A.P. 9th Cir. 2015). The party that wants to include the property in the estate bears the burden of showing that the asset is property of the estate. Id. at 372; see also Krohn v. Glaser (In re Glaser), 816 Fed. Appx. 103, 104-05 (9th Cir. 2020). Legal claims may be included in the bankruptcy estate based on when they accrue.
"Whether a cause of action has accrued turns on state law," and for Nevada, legal malpractice claims accrue when damages are incurred. See Glaser, 816 Fed. Appx. at 104, citing Hewitt v.
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Allen, 118 Nev. 216, 43 P.3d 345, 347-48 (Nev. 2002) (en banc).10The Ninth Circuit has held that a legal malpractice claim arising after a Chapter 7 case is commenced is not part of the Chapter 7 estate. Id. On the other hand, the Ninth Circuit has held that legal claims are property of the estate if the claims arise during the post-petition management of the Chapter 11 estate. See East Coast Foods, Inc. v. Dev. Specialists, Inc. (In re East Coast Foods, Inc.), 2025 WL 1419901, at *1 (9th Cir. May 16, 2025). See also In re Consolidated Pioneer Mortgage, 248 B.R. at 382 & n.12 ("case law would suggest that such claims against professionals for their conduct during the case, in which the recovered funds would be part of the assets for distribution to the investors, would be property of the chapter 7 estate").
Debtor argues that the Malpractice Claim is a post-petition asset that is not part of the property of the estate. See Conversion Opposition at 8:19-11:28. It asserts that the Malpractice Claim did not accrue until the Plan failed in April 2023, which is well after the Chapter 11 case commenced in October 2022. In doing so, Debtor relies on Neidorf and Glaser, both of which concluded that certain legal malpractice claims that accrued post-petition in Chapter 7 cases were not part of the Chapter bankruptcy estate. See Neidorf, 534 B.R. at 372; Glaser, 816 Fed. Appx. at 104. Debtor maintains that these cases require the court to find that the alleged Malpractice Claim in the current case also is a post-petition asset and therefore not part of the estate.
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While this court is bound by those decisions, the cases are clearly distinguishable from the instant proceeding. Put simply, both Neidorf and Glaser are Chapter 7 cases. Chapter 7 cases require a strict cutoff upon the filing of the bankruptcy petition so that there is a clear delineation between assets that existed before the bankruptcy petition and those that were acquired after. The delineation allows the Trustee to fairly and impartially liquidate the pre- petition assets.
The instant case was commenced by the Debtor under Chapter 11 which allows for post- petition acquired assets to be included in the estate. See 11 U.S.C. § 541(a)(7). As the Debtor notes, the Malpractice Claim accrued after the Plan was confirmed and during the Chapter 11 case. See Conversion Opposition at 1:26-2:8. Reopening the Chapter 11 proceeding and vacating the Dismissal Order did not affect the timing of when the allegedly negligent acts occurred or when the failure to make the Cure Payment resulted in the loss of the Property: all of the relevant acts occurred while the Debtor was in Chapter 11. The damage occurred at that time, and the liquidation of the amount of the resulting damages is all that remains.11 Debtor also argues that the plan confirmation revested assets of the bankruptcy estate in the Debtor.12Since the Malpractice Claim arose when the Debtor was a debtor in possession, Debtor asserts that the Malpractice Claim revested in the Debtor upon plan confirmation and is no longer property of the estate. The court disagrees.
The Ninth Circuit provides a test for how to treat assets of the estate when converting a case from Chapter 11 to Chapter 7 after a plan has been confirmed. See Baroni, 36 F.4th at 972. The court is instructed to ask "whether the [p]lan's 'language, purposes, and context' changed
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the effect of the general vesting provisions" and perform a "holistic analysis of the plan to determine whether its provision deviate from the default vesting rule." Id. Notably, the "plan does not need to explicitly state that assets revest in a converted Chapter 7 estate for this to happen." Id. at 971, citing Consolidated Pioneer Mortgage, 264 F.3d at 807. In other words, if a plan were confirmed, the debtor may not receive the assets "free and clear of all claims and interests of creditors" and may actually only hold them subject to the restrictions of the plan. See
11 U.S.C. § 1141; Baroni, 36 F.4th at 973. In Baroni, the court held that assets acquired after plan confirmation were part of the Chapter 7 estate upon conversion. 36 F.4th at 973. The plan stated that the assets were vested from the estate to the debtor upon confirmation. Id. That gave Baroni access to the rental property, which was the source of income that would be used to repay creditors. Id. The court interpreted this to mean that the property had not revested in Baroni because the property was still subject to the claims of creditors through the plan and that holding otherwise would frustrate the purpose of the plan. Id.
Similarly, in the current case, the Plan vested the Property in the Debtor for the purpose of generating income to repay creditors. Debtor does not have the estate assets free and clear, and it is still subject to the Plan even though it failed to make the Cure Payment. The Malpractice Claim accrued during that period when Debtor did not have the assets free for the purpose of the Plan resulting in the alleged Malpractice Claim being property of the estate, not the Debtor.
Debtor further argues that under Section 349(b)(3), dismissal should revest the property of the estate to the entity in which such property was vested immediately before the commencement of the case. Section 349(b)(3) is not implicated in this case, however, because the Malpractice Claim, as Debtor itself notes, was not a pre-petition asset. Since the asset did not exist before commencement of the case, it is illogical to vest it in Debtor because that result contradicts the language of the statute. While the court is not persuaded by the Debtor's arguments, the onus still is on L&Z to demonstrate that the Malpractice Claim is part of the estate.
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L&Z maintains that the court should apply the test in Neidorf rather than simply following the conclusion reached in that case. L&Z relies chiefly on the recent decision in East Coast Foods. Therein, the circuit panel held that claims against the trustee from post-petition management of the Chapter 11 estate arose in the normal course of business under the Neidorf test and therefore were property of the estate. 2025 WL 1419901, at *1. L&Z acknowledges that East Coast Foods is not perfectly analogous, as the claims in that case were against the trustee, while the claim in the current proceeding is against the Debtor's former attorney. Nevertheless, L&Z correctly observes that East Coast Foods is most analogous, as both cases involve legal claims against estate professionals stemming from their post-petition work during non-individual Chapter 11 proceedings. 2025 WL 1419901, at *1. This court is persuaded that the Malpractice Claim, if any, arising from L&Z's services during a Chapter 11 case is property of the Chapter 11 estate.
Application of the Neidorf test yields the same result. The common purpose of a Chapter 11 bankruptcy is to allow the entity to reorganize and continue to operate as a business. The L&Z Fee Order granted L&Z's request for allowance of its administrative claim for attorney's fees and costs. The Plan allowed the Debtor to pay L&Z's allowed compensation from funds produced by its continued operations. The funds generated post-petition are property of the estate used to pay creditors, including L&Z's approved compensation for its postpetition services. The funds therefore facilitated the work performed by L&Z during the Chapter 11 case. In other words, the Malpractice Claim was generated by the property of the estate, satisfying the first prong of the Neidorf test. Moreover, post-petition operation of the same business is in the "normal course of business" so that it can generate assets to repay creditors. The alleged Malpractice Claim arises from L&Z's actions during the Chapter 11 proceeding to reorganize the Debtor's operations. See discussion at note 4, supra. This satisfies the second prong of the Neidorf test.
The alleged Malpractice Claim also is property of the estate under Glaser. There, the court recognized that a cause of action for legal malpractice accrues when the damage is sustained. 816 Fed. Appx. at 104. In this instance, the damage occurred when the Debtor failed
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to make the Cure Payment by the Cure Deadline established under its confirmed Plan, resulting in rejection and termination of the Lease. The damage having occurred, the Malpractice Claim, if any, accrued before the Chapter 11 proceeding was dismissed. All that remains is to liquidate the amount of the damages. See note 11, supra. Property of a Chapter 11 estate includes post- petition property under Section 541(a)(7), and the Malpractice Claim was acquired by the Debtor during the Chapter 11 proceeding.
In short, the court concludes that the alleged Malpractice Claim is property of the Chapter 11 estate because it was acquired post-petition and in the normal course of business. Under the considerations discussed in East Coast Foods, Neidorf, and Glaser, the court concludes that the Malpractice Claim is included in the Chapter 11 estate under Section 541(a)(7).
CONCLUSION
As discussed above, the court concludes that L&Z holds an unpaid, court-allowed claim against the estate and therefore has standing to pursue the Conversion Motion. Cause for relief under Sections 1112(b)(4)(A), (M), and (N) have been established primarily based on the Debtor's failure to make the Cure Payment required to retain the essential Property under the Lease.
Relief in the form of conversion to Chapter 7, rather than dismissal of the bankruptcy case, is in the best interest of the creditors and the estate because it will allow a bankruptcy trustee to administer the Malpractice Claim for the benefit of creditors — whether through litigation or settlement — which creditors have received no distributions whatsoever under the confirmed Plan.
Finally, L&Z has demonstrated that the Malpractice Claim is property of the Chapter 11 estate. All of the acts on which the alleged claim depends occurred during the Chapter 11 proceeding. All of the damage occurred during the pendency of the Chapter 11 proceeding when the Debtor failed to meet the requirements of its confirmed Plan. Based on the considerations discussed in East Coast Foods, Neidorf and Glaser, the court concludes that the Malpractice Claim, if any, accrued during the Chapter 11 proceeding and is property of the Chapter 11 estate under Section 541(a)(7).
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IT IS THEREFORE ORDERED that the Motion to Convert Chapter 11 Case to Chapter 7, brought by Larson & Zirzow, LLC, Docket No. 167, be, and the same hereby is
GRANTED.
IT IS FURTHER ORDERED that the Office of the United States Trustee shall proceed with the assignment of a Chapter 7 trustee.
Copies sent via CM/ECF ELECTRONIC FILING
Copies sent via BNC to:
LV FORTUNE, LLC
ATTN: OFFICER OR MANAGING AGENT
2659 COMMERICAL ST. SE, SUITE 210
SALEM, OR 97302
# # #
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