In re Brutsche

94 A.L.R. Fed. 2d 767, 476 B.R. 298, 2012 WL 3150353, 2012 Bankr. LEXIS 3695
CourtUnited States Bankruptcy Court, D. New Mexico
DecidedJune 8, 2012
DocketNo. 11-11-13326 SA
StatusPublished
Cited by18 cases

This text of 94 A.L.R. Fed. 2d 767 (In re Brutsche) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, D. New Mexico primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Brutsche, 94 A.L.R. Fed. 2d 767, 476 B.R. 298, 2012 WL 3150353, 2012 Bankr. LEXIS 3695 (N.M. 2012).

Opinion

MEMORANDUM OPINION IN SUPPORT OF ORDER CONVERTING CHAPTER 11 CASE TO CHAPTER 7 CASE

JAMES S. STARZYNSKI, Bankruptcy Judge.

The motion to dismiss this chapter 11 case (doc. 157) or to convert it to one under chapter 7 (doc. 156) pursuant to 11 U.S.C. § 1112(b) has come before the Court (“Motion”). The Court finds that it is in the best interests of the creditors and the estate that the case be converted to one under chapter 7.1

The Motion was filed by the Grevey-Liberman creditors, and joined by Los Al-amos National Bank (doc. 158) (“Bank”), the Rodriguez creditors (J. Bernardo and Carmen Rodriguez, et al.) (Doc. 172), Santa Fe Summit Homeowners Association (doc. 179), and Santa Fe County (doc. 207). The Debtor in Possession opposed the Motion to dismiss and to convert (doc. 180)2, joined by Felker, Ish, Ritchie & Geer, P.A. (doc. 178), and by Sommer, Karnes & Associates, LLP (by virtue of Karl Sommer’s testimony during the trial). The Court conducted an evidentiary hearing on February 22 and 29 and March 1, 2012, and took the matter under advisement.

ANALYSIS

The motion is brought pursuant to 11 U.S.C. § 1112(b), which provides in relevant part as follows:

(1) Except as provided in paragraph (2) and subsection (c), 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 [301]*301case 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.
(3) ....
(4) For purposes of this subsection, the term ‘cause’ includes—
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance that poses a risk to the estate or to the public;
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors; ...

Rehabilitation

On June 16, 2012, this Court entered orders denying Debtor further use of cash collateral (doc. 210) and granting stay relief to the Bank (doc. 208) and Grevey-Liberman (doc. 209). The effect of those orders, particularly the stay orders, was to gut the Debtor’s plan to continue his business of developing and selling the Summit real estate properties. See Memorandum Opinion Regarding Motions for Relief from Automatic Stay And Motion for Use of Cash Collateral (doc. 211) (“Stay Memorandum”).3 Debtor immediately pivoted and suggested a plan4 by which Debtor monetized his remaining nonexempt assets and paid his creditors. Nimble as this strategy was, it fails to provide Debtor what he needs; to wit, the opportunity for rehabilitation.

Section 1112(b)(4)(A) requires that a Debtor who has incurred substantial or continuing losses to have “a reasonable likelihood of rehabilitation”. “Rehabilitation” is a different and, unfortunately for Debtor, much more demanding standard than “reorganization”.

Significantly, the second part of the test under section 1112(b)(4)(A) requires a reasonable likelihood of “rehabilitation”, not “reorganization”. Thus, the standard under section 1112(b)(4)(A) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor’s business prospects justify continuance of the reorganization effort. [302]*302Rehabilitation is not another word for reorganization. Rehabilitation means to reestablish a business. Whereas confirmation of a plan could include a liquidation plan, rehabilitation does not include liquidation.

7 Collier on Bankruptcy ¶ 1112.04[6][a][ii] (Alan J. Resnick and Henry J. Sommer eds., 16th ed.) (footnotes omitted). See In re Great American Pyramid Joint Venture, 144 B.R. 780, 790 (Bkrtcy.W.D.Tenn. 1992).

Addressing the relevant statutory grounds, it is noted that under section 1112(b)(1), the debtor’s financial condition must be such as to permit the court to determine that there is no reasonable likelihood that the debtor will be rehabilitated. “Rehabilitate” has been known to mean “to put back in good condition; re-establish a firm, sound basis”. Webster’s New World Dictionary 1225 (World 1964). Rehabilitation, as used in section 1112(b)(1), does not mean the same thing as reorganization, as such term is used in chapter 11.

(Case citation omitted.)

As noted, Debtor’s business was developing and selling upscale real estate. That business is gone, so that Debtor is left, at best, with a reorganization plan by which he sells various assets and pursues litigation to generate funds to pay creditors. Debtor’s plan in effect is a liquidation/litigation plan. Such a plan is perfectly legitimate as a chapter 11 “reorganization” plan. “A plan may provide for the sale of all or substantially all of the property of the estate, and the distri-button of the proceeds of such sale among holders of claims or interests; ...” Section 1123(b)(4). And of course the Debt- or as debtor in possession continues to control the assets of the estate, including the right to pursue the estate’s choses in action. Sections 323 and 1107.

However, the liquidation/litigation plan is not a “rehabilitation”. Debtor’s business, before and during the initial stages of this chapter 11 case, only incidentally involved disposing of miscellaneous assets and litigating. Rather, the core business consisted of developing and selling real estate.5 Debtor can no longer do that, and thus is precluded from being able to “rehabilitate” his business.6 Debtor lacks a “profitable core around which to restructure a plan of reorganization.” In re Macon Prestressed Concrete Co., 61 B.R. 432, 436 (Bankr.M.D.Ga.1986).

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Cite This Page — Counsel Stack

Bluebook (online)
94 A.L.R. Fed. 2d 767, 476 B.R. 298, 2012 WL 3150353, 2012 Bankr. LEXIS 3695, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-brutsche-nmb-2012.