In re: Maria Virginia Santos Franco

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: July 27, 2012
• Docket: 10-09758
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: : CASE NO. 10-09758 (ESL) 4 : MARIA VIRGINIA SANTOS FRANCO : CHAPTER 11 5 : : 6 Debtor : ____________________________________: 7 OPINION AND ORDER 8 This case came before the court on July 17, 2012 for a hearing to consider the motion to 9 dismiss filed by secured creditor Mr. Tomás Céspedes (dkt. #176) (hereinafter “Céspedes”) and the 10 opposition thereto filed by the debtor (dkt. # 183). Céspedes alleges that the debtor has failed to 11 timely file monthly reports of operation (“MOR”), has failed to file a disclosure statement and plan, 12 and is administratively insolvent. The debtor alleges that the monthly reports of operation have been 13 filed and that the time granted by the court to file the disclosure statement and plan has not lapsed. 14 Since the time granted to file the disclosure statement and plan has not lapsed, this ground for 15 dismissal is hereby denied. However, after considering the pleadings before the court, the parties’ 16 proffers and the testimony of debtor’s state court counsel, the court finds that cause for dismissal has 17 been established, and, thus, grants the motion to dismiss for the reasons that follow. 18 Facts 19 1. The debtor filed the instant chapter 11 petition on October 19, 2011. 20 2. Céspedes is a secured creditor in the amount of $1,021,343,44, resulting from an 21 attachment on a commercial property of the debtor located at Bairoa Ward, Caguas, Puerto Rico, to 22 secure a judgment in his favor in case number KCD 03-0179 before the Superior Court of Puerto 23 Rico, Caguas Part. 24 3. The MOR for the month October 2010 was filed on December 13, 2010. An amended 25 report of operations corresponding to the month of October 2010 was filed on May 5, 2011. 26 4. The MORs for the months of November 2010, December 2010, January 2011, and 27 January 2011 were also filed on May 5, 2011. 28 5. The MORs for the months of November 2011, December 2011, January 2012, 1 February 2012, March 2012, and April 2012 were filed on June 15, 2012. 2 6. As of this date, the MORs for the months of February 2011 through October 2011, 3 May 2012 and June 2012 have not been filed. 4 7. The monthly reports of operations do not show that the debtor is paying all its post 5 petition taxes. 6 8. The debtor has four real properties. Two are being foreclosed after the corresponding 7 secured creditors obtained orders from this court lifting the automatic stay. Debtor’s residence will 8 be surrender to the secured creditor as the debtor is unable to comply with the monthly payments. The 9 fourth real property is the property attached by Céspedes. 10 9. Whether or not the debtor was able to lease or sell the commercial property serving 11 as collateral to Céspedes claim was not established. There was no evidence presented as to how the 12 debtor will repay the secured claim held by Céspedes. 13 10. Accrual of interest and litigation costs are continuously diminishing the equity, if any, 14 that the only remaining property of the estate may have. 15 Applicable Law 16 Section 1112(b)(1) of the Bankruptcy Code provides as follows: 17 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 18 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 19 that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. 11 U.S.C. § 1112(b)(1) (Emphasis ours.) 20 The Court’s discretion to dismiss or convert a Chapter 11 case is limited if cause is established. See 21 Gilroy v. Ameriquest Mortg. Co. (In re Gilroy), 2008 Bankr. Lexis 3968, 2008 WL 4531982 (B.A.P. 22 1st Cir. 2008); and AmeriCERT, Inc. v. Straight Through Processing, Inc. (In re AmeriCERT, Inc.), 23 360 B.R. 398, 401 (Bankr. D. N.H. 2007) (“Prior to its amendment, the statute provided that a court 24 ‘may’ dismiss the case upon finding cause, but amended section 1112(b) provides that a court ‘shall’ 25 dismiss if cause is found, absent unusual circumstances.”). The initial burden is on the movant to 26 argue and present evidence by a preponderance of the evidence standard to prove its position that 27 there is cause for either conversion or dismissal of the Chapter 11 case, whichever is in the best 28 2 1 |interests of creditors and the estate. See Alan N. Resnick & Henry J. Sommer, 7 Collier on 2 |Bankruptcy 41112.04[4] (16" Ed. 2011). “Thus, until the movant carries this burden, the statutory 3 |\direction that the court ‘shall convert the case to a case under chapter 7 or dismiss the case’ is not 4 operative.” Id. “Cause” is demonstrated through the preponderance of evidence standard. See 5 Keven, A. McKenna, P.C. v. Official Comm. of Unsecured Creditors Un re Keven, A. McKenna, 6 ||P.C.), 2011 U.S. Dist. LEXIS 57985 (D.R.I. 2011); Inre El Legado, 2010 Bankr. LEXIS 1676, 2010 7 |WL 1924439 (Bankr. D.P.R. 2010); Inre Woodbrook Assoc’s., 19 F.3d 312 (7" Cir. 1994); Colonial 8 [Daytona Ltd. Partnership v. American Sav. of Fla., 152 B.R. 996, 1001-1002 (M.D. Fla. 1993). 9 ||Once‘‘cause” is established, the burden shifts to the debtor to demonstrate “unusual circumstances” 10 establish that dismissal or conversion to Chapter 7 is not in the best interests of the creditors and 11 ||the estate. See Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy ¥ 1112.05[1] (16" 12 2011) and In re Dr. R. Samanta Roy Institute of Science Technology Inc., 2011 US App. Lexis 13 12148 at *8 (3% Cir. 2011) (once cause is found, the burden shifts to the opposing party to show why 14 |idismissal or conversion would not be in the best interests of the estate and the creditors). The 15 bankruptcy court retains broad discretion in determining whether unusual circumstances exist and 16 |fwhether conversion or dismissal is in the best interest of creditors and the estate. Gilroy v. 17 |Ameriquest Mortg. Co. (In re Gilroy), 2008 Bankr. Lexis 3968 (1* Cir. B.A.P. 2008). A 18 |\determination of unusual circumstances is fact-intensive and contemplates facts that are not common 19 Chapter 11 cases. See Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy 91112.05[1] 20 (16" Ed. 2011). If the Chapter 11 case is devoid of “unusual circumstances”, then the bankruptcy 21 must apply the Section 1112(b)(2) analysis to determine whether the Chapter 11 case should 22 dismissed or converted to a Chapter 7. 23 Although Section 1112(b)(4) of the Bankruptcy Code fails to define what “cause” means, 24 |lit does provide a list of circumstances that constitute “cause” for conversion or dismissal. The list 25 |lof causes is non-exhaustive and thus a case may be converted or dismissed for other causes. See 26 ||AmeriCERT, Inc. v. Straight Through Processing, Inc. In re AmeriCERT, Inc.), 360 B.R. at 401, 27 |jand Tuli v. US Trustee, 124 Fed. Appx. 830, 831 (5" Cir. 2005). See also 11 U.S.C. § 1112(b)(4) 28 |\(using the term “includes” before listing various reasons for dismissing a case).

1 Thus, for purposes of 11 U.S.C. § 1112, under the particular facts of this case, the term 2 |cause” includes, but is not limited to, the following: 3 (A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation; (F) unexcused failure to satisfy timely any filing or reporting requirement 5 established by this title or by any rule applicable to a case under this chapter [11 U.S.C. §§ 1101 et seq.] 6 (1) failure timely to pay taxes owed after the date of the order for relief or to file 7 tax returns due after the date of the order for relief. 8 (A) — Substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation 9 10 This cause entails a two-fold inquiry: (1) whether after the commencement of the case, the 11 has suffered or continued to experience a negative cash flow, or, alternatively, declining asset 12 and (2) whether there is any reasonable likelihood that the debtor, or some other party, will 13 be able to stem the debtor’s losses and place the debtor’s business enterprise back on a solid 14 |financial footing within a reasonable amount of time. Both tests must be satisfied in order for cause 15 exist under cause. See Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy 16 1112.04[6][a] (16" Ed. 2011). Also see In re Citi-Toledo Partners, 170 B.R. 602, 606 (Bankr. N.D. 17 1994) (“Section 1112(b)(1) contemplates a ‘two-fold’ inquiry into whether there has been a 18 |‘continuing diminution of the estate and absence of a reasonable likelihood of rehabilitation.’”) 19 |(citations omitted). To satisfy the first prong, “[a]ll that need be found is that the estate is suffering 20 some diminution in value”. In re Kanterman, 88 B.R. 26, 29 (S.D.N.Y. 1988)', also cited in In re 21 ||Citi-Toledo Partners, 170 B.R. at 606, and Taub v. Taub (In re Taub), 427 B.R. 208, 230 (Bkrptcy. 22 ||E.D.N.Y. 2010), aff'd at 2010 U.S. Dist. LEXIS 104805, E.D.N.Y. August 30, 2010). To consider 23 |Ithe diminution of the estate, the court must evaluate the current condition of the estate and look 24 |beyond financial statements. Canpartners Realty Holding Co. IV, L.L.C. v. Vallambrosa Holdings 25 fj 26 ' The case law prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (““BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23 (2005), is applicable to the analysis of Section 1112 of the 27 |! current Bankruptcy Code, especially since the new language in Section 1112(b)(4)(A) is almost identical to the one 28 pre-BAPCPA. See In re Gateway Solutions, Inc., 374 B.R. 556, 562 (Bankr. M.D. Pa. 2007).

1 |Co., 419 B.R. 81, 88 (Bankr. S.D. Ga. 2009). If the court finds that there is in fact such diminution, 2 it must then consider the second prong: whether or not “the Debtor or another party [will] be able 3 ‘stop the bleeding’ and return the debtor to solid financial footing within a reasonable amount of 4 |Itime.” Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy § 1112.04[6][a] (16" Ed. 5 2011). For purposes of this cause, “likelihood of rehabilitation” does not equate “reorganization”. 6 Rehabilitation contemplates the successful maintenance and re-establishment of the debtors’ 7 |\business operations and “to put back in good condition; re-establish on a firm, sound basis.” In re 8 ||Vallambrosa Companies, 274 B.R. 721, 725 (Bankr. N.D. Oh. 2002) See also Loop Corp. v. United 9 States Trustee, 290 B.R. 108, 113 (D. Minn. 2003) aff'd 379 F.3d 511 (8" Cir. 2004), cert. denied 10 U.S. 1055, 125 S. Ct. 915, 160 L. Ed. 2d 778 (2005). To determine whether the debtor’s 11 |business prospects are sufficient to justify a finding of a reasonable likelihood of rehabilitation, the 12 must analyze if the causes for debtor’s continuing losses can be corrected, and if the debtor 13 lor some other party in interest is capable or willing to perform the necessary remediation. This is 14 a “technical [test] of whether the debtor can confirm a plan, but rather, whether the debtor’s 15 |lbusiness prospects justify continuance of the reorganization effort.” In re Original IFPC S’holders, 16 Inc., 317 B.R. 738, 742 (Bankr. N.D. Ill. 2004). Nevertheless, rehabilitation in a Chapter 11 begins 17 |}with a confirmable plan. It then requires, at minimum, the prospect of re-establishment of a 18 |lbusiness. See Loop Corp., 379 F.3d at 518; Loop Corp., 290 B.R. at 113-14. “Ifthe debtor or some 19 lother party in interest is unable or unwilling to put together a convincing business plan within a 20 |lreasonable amount of time, and can offer neither a valid justification for the failure to do so nor a 21 |reasonable prospect of being able to accomplish the task in the near future, there is often little reason 22 |Ito proceed with the reorganization.” Id. See also In re Winshall Settlor’s Trust, 758 F.2d 1136, 23 1137 (6" Cir. 1985) (“The purpose of Chapter 11 reorganization is to assist financially distressed 24 |business enterprises by providing them with breathing space in which to return to a viable state ... 25 |I‘[I]f there is not a potentially viable business in place worthy of protection and rehabilitation, the 26 ||Chapter 11 effort has lost its raison d’etre ...’”) (citation omitted); A. Iltum Hansen, Inc. v, Tiana 27 Motel, Inc. (In re Tiana Queen Motel, Inc.), 749 F.2d 146, 151 (2™ Cir. 1984) (dismissal 28 |[warranted where no prospect of rehabilitation because the debtor lacked the “wherewithal necessary

1 market their properties expeditiously, [an ability] to devise a reorganization plan grounded in 2 |lreality” and where secured creditors suffered as a result), cert. denied, 471 U.S. 1138, 105 S. Ct. 3 2681, 86 L. Ed. 2d 699 (1985); and Johnston v. Jem Dev. Co. (In re Johnston), 149 B.R. 158, 162 4 |(B.A.P. 9" Cir. 1992). “A plan for rehabilitation under Chapter 11 must be based on more than 5 speculative data.” In re Schriock Constr. Inc., 167 B.R. 569, 576 (Bankr. D.N.D. 1994). “If it is 6 |japparent that the debtor has no profitable core around which to structure a plan of reorganization, 7 the debtor is faced with continuing losses, and if the debtor’s assets are declining in value, the best 8 |linterest of creditors may require the court to dismiss or order liquidation of the debtor’s estate under 9 Chapter 7.” In re Macon Prestressed Concrete Co., 61 B.R. 432, 436 (Bankr. M.D. Ga. 1986). Also 10 In re Kors, Inc., 13 B.R. 676, 681 (Bankr. D. Vt. 1981). “However honest in its efforts the 11 may be, and however sincere its motives, the District Court is not bound to clog its docket 12 |lwith visionary or impracticable schemes for resuscitation.” Tennessee Publishing Co. v. American 13 Bank, 299 U.S. 18, 22, 57 S.Ct. 85, 87 (1936). “[T]here must be ‘a reasonable possibility of 14 successful reorganization within a reasonable time.’” United Sav. Ass’n v. Timbers of Inwood 15 Assoc’s., 484 U.S. 365, 376, 108 S.Ct. 626, 632, 98 L.Ed.2d 740 (1988) (citations omitted). 16 Courts usually require the debtor do more than manifest unsubstantiated hopes for a successful 17 ||reorganization.” In re Canal Place Ltd. Partnership, 921 F.2d 569, 577 (5" Cir. 1991); Inre Brown, 18 951 F.2d 564, 572 (3™ Cir. 1991). 19 The record of this case and the evidence presented demonstrate that Debtor’s estate has 20 diminished in value, which amply satisfies the first prong. See In re Kanterman, 88 B.R. at 29 (“[alll 21 need be found is that the estate is suffering some diminution in value”). Debtor’s cash flow has 22 llalso been inconsistent since the filing of the petition, as evidenced in Debtor’s MORs. The debtor 23 already lost two real properties to foreclosure proceedings after lifting the stay in favor of the 24 corresponding secured creditors and is about to surrender her residence. The Debtor has not 25 presented evidence to show that there is a viable Chapter 11 plan. Consequently, dismissal for cause 26 § 1112 (b)(4)(A) has been established. 27 28

1 (B) 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 [11 U.S.C. §§ 1101 et seq.]. 2 3 Pursuant to Section 1112(b)(4)(F) of the Bankruptcy Code, unexcused failure to report or 4 to file required information constitutes cause for conversion or dismissal. Sections 704(8), 5 1106(a)(1), 1107(a) of the Bankruptcy Court, Federal Rule of Bankruptcy Procedure 2015 and LBR 6 2015-2 require debtors in possession, such as Debtor, to file monthly operating reports within the 7 twentieth (20th) day of the subsequent month. “The non-filing of required reports must be 8 ‘unexcused’, therefore indicating that the court has discretion to determine whether the debtor’s 9 failure rises to the level of cause.” In re Landmark Atl. Hess Farm, LLC, 448 B.R. 707, 716 (Bankr. 10 D. Md. 2011). 11 The docket of this case shows that Debtor repeatedly filed tardy monthly operating reports 12 and has failed to file the monthly reports of operation corresponding to May 2012 and July 2012. 13 “Refusal or inability to provide financial disclosure sounds the death knell of a Chapter 11 14 case. The failure to file monthly operating statements ... ‘whether based on inability to do so or 15 otherwise, undermines the Chapter 11 process and constitutes cause for dismissal or conversion of 16 the Chapter 11 proceedings.’” In re Tornheim, 181 B.R. 161, 164 (Bankr.S.D.N.Y. 1995) (citations 17 omitted). Similarly, in In re Crosby, 93 B.R. 798 (Bankr. S.D. Ga. 1988), the court recognized, but 18 did not hold, that there is authority for dismissing a case for cause where a debtor did not file 19 monthly operating reports until the morning of a hearing on the failure to file the reports. Likewise, 20 in In re Whitehurst, 198 B.R. 981 (Bankr. N.D. Ala. 1996), the court found that failing to file 21 Chapter 11 operating reports is sufficient Section 1112(b) cause for dismissing or converting a 22 Chapter 11 case. In Babakitis v. Robino (In re Robino), 243 B.R. 472 (Bankr. N.D. Al. 1999), the 23 court dismissed the case inter alia due to debtor’s failure to file his monthly operating reports and 24 reasoned as follows: “the debtor left [the] Court and the parties without the information the reports 25 were designed to produce. The harm is both legal and practical. Neither can be ignored.” Id. at 26 486. The same reasoning is applicable to this case. Consequently, cause to dismiss under § 1112 27 (b)(4)(F) has been established. 28 7 11(C) Failure timely to pay taxes owed after the date of the order for relief or to file tax returns due after the date of the order for relief. 2 3 Section 1112(b)(4)(1) specifically establishes that “failure timely to pay taxes owed after the 4 of the order for relief or to file tax returns due after the date of the order for relief” constitutes 5 to dismiss or convert a Chapter 11 case. Thus, failure to file a tax return or pay taxes post- 6 ||petition is ground for dismissal. See In re Dr. R. C. Samanta Roy Inst. of Sci. Tech, Inc., 2011 U.S. 7 LEXIS 12148 (8" Cir. 2011). The monthly reports of operation show that the debtor is not 8 |lpaying all post petition state and federal taxes. Consequently, cause for dismissal under § 1112 9 }(b)(4)C) has been established. 10 Conversion or Dismissal 11 After the moving party establishes that there is cause to dismiss or convert the case to 12 Chapter 7, the court must choose between dismissal or conversion, “whichever is in the best interest 13 . . . of creditors and the estate.” 11 U.S.C. § 1112(b)(1). The standard for choosing between conversion 14 or dismissal based on “the best interest of creditors and the estate” implies application of a balancing 15 test by the bankruptcy court. See In re De Jounghe, 334 B.R. at 770, and In re Staff Inv. Co., 146 16 B.R. 256, 260 (Bankr. E.D. Cal. 1992). The legislative history shows that Congress intended to 17 invest the bankruptcy court with “wide discretion ... to make an appropriate disposition of the case” 18 and “to consider other factors as they arise, and use its equitable powers to reach an appropriate 19 gee result in individual cases.” In re De Jounghe, 334 B.R. at 770, citing H.R. Rep. No. 595, 95" Cong., 20 2d Sess, 406, reprinted in 1978 U.S.C.C.A.N. 5963, 6361-62. 21 After considering the ongoing litigation over the only remaining asset of the estate and the 33 amount of the secured claims encumbering the same, the court concludes that dismissal, rather than conversion to Chapter 7, is in the best interest of the estate. 25 Unusual Circumstances 26 The next phase of the analysis the court must engage in is whether Debtor has demonstrated 27 there are “unusual circumstances” that establish that the dismissal or conversion is not in the 28 interests of the creditors and the estate. The court finds that the Debtor has not demonstrated

1 alleged “unusual circumstances” in the instant case. Thus the Debtor has not established all of 2 |\the factual elements in conformity with this section. Debtor has failed to allege, and much less meet 3 burden, that there are unusual circumstances showing that conversion or dismissal is not in the 4 interest of the estate and creditors. > Conclusion 6 Based on the foregoing, and considering the totality of the circumstances, this court 7 concludes that dismissal is warranted and mandated pursuant to 11 U.S.C. § 1112(b)(4). Therefore, 8 Céspedes’ motion to dismiss is hereby granted. 9 10 Judgment shall be entered accordingly. 11 SO ORDERED. 12 In San Juan, Puerto Rico, this 27" day of June, 2012. 13 14 15 Oy the 16 ip ique $. Lamoutte 17 18 19 20 21 22 23 24 25 26 27 28