FILED JUN 15 2023 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. NV-22-1248-BCL NTI-NV, Inc., Debtor. Bk. No. 22-10460-NMC
NTI-NV Inc., Appellant. MEMORANDUM∗
Appeal from the United States Bankruptcy Court for the District of Nevada Natalie M. Cox, Bankruptcy Judge, Presiding
Before: BRAND, CORBIT, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Appellant NTI-NV Inc. appeals an order converting its chapter 11 case
to chapter 71 under § 1112(b). While the bankruptcy court's findings
supporting its decision to convert rather than dismiss the case are sparse, we
believe that the record supported conversion. Therefore, we AFFIRM. 2
∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532. 2 We exercise our discretion to take judicial notice of documents electronically filed
in the bankruptcy court, where appropriate. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 1 FACTS
A. Background of the parties
This case is essentially a dispute between two former business
partners, James Gleich and John Kindt. Gleich and Kindt were friends and
business associates for 30 years.
Debtor NTI-NV, a Nevada corporation, was formed in either 2019 or
2020 3 and was a subsidiary of a larger group of entities in the transportation
business in Nevada, New York, and California. NTI-NV's parent
corporation, National Transportation Inc. ("NTI"), was incorporated in
Nevada in 2018 by Gleich and Kindt who each held a 50% ownership
interest. A 10% ownership interest in NTI was later conveyed to Booty
Green, LLC, leaving Gleich and Kindt each holding a 45% interest in NTI.
NTI was the 100% owner of NTI-NV and two other subsidiaries –
NTI-CA Inc. and NTI-GROUNDTRANS Inc. (collectively, the "NTI
Entities").4 NTI would collect the accounts receivables of the businesses and
pay their expenses. Gleich ran the Nevada operations, while Kindt ran the
Los Angeles and New York operations. Gleich and Kindt were the directors
and officers of the NTI Entities. Gleich is the President and CEO of NTI-NV.
Marc Jacobi is (or was) also a director of NTI-NV.
////
3 The record reflected that NTI-NV was formed on either February 20, 2019, or April 17, 2020. 4 NTI also owned a 51% interest in NTI-NY, Inc., but it was never a debtor.
2 B. The bankruptcy matters
On February 10, 2022, Gleich caused the NTI Entities to file four
separate chapter 11 bankruptcy cases.
1. Kindt's motion to dismiss
Kindt promptly moved to dismiss the four cases under § 1112(b),
arguing that Gleich lacked authority to file them. Kindt alleged that he and
Gleich had a falling out in 2021 and that Gleich had taken acts to harm
Kindt's interests in the NTI Entities. For example, Gleich tried to dilute the
NTI shareholders' interests by issuing a 12% interest in NTI to 7235
Investments, LLC ("7235").5 In addition, alleged Kindt, Gleich and others
had failed to account for $950,000 of a $2.5 million loan to NTI. Kindt
explained that just before the bankruptcy filings, he filed actions in state
court against Gleich, the NTI Entities, and others individually and
derivatively regarding the alleged unlawful acts. Litigation as to the NTI
Entities ceased once Gleich filed the bankruptcy cases.6
Ultimately, the parties agreed to dismiss the chapter 11 cases for NTI,
NTI-CA, and NTI-GROUNDTRANS, but to ratify the chapter 11 filing for
NTI-NV. They further agreed to unwind the 12% NTI stock transfer to 7235.
As part of the settlement of Kindt's removed state court actions, the parties
5 NTI-NV stated in its schedules that 7235, a Texas entity organized by Jacobi in January 2022, held 99.82% of NTI-NV's shares and that NTI held only .18%. Kindt argued that there was no explanation how 7235 acquired a 12% ownership interest in NTI, or how 7235 acquired a 99.82% ownership interest in NTI-NV when NTI was its sole owner. 6 Kindt's state court actions were removed to the bankruptcy court and settled.
3 agreed that Gleich would own a 100% interest in NTI-NV; Kindt and Booty
Green, LLC would own NTI, which would own NTI-CA, NTI-NY, and NTI-
GROUNDTRANS.
2. NTI-NV's failed disclosure statements and proposed plans
NTI-NV filed its first set of schedules six weeks after filing the
petition, which was followed by some amended schedules three months
later.
NTI-NV also filed various disclosure statements and proposed plans.
In its second amended disclosure statement, NTI-NV explained that, prior to
the bankruptcy filing, parent NTI was looking for financing, which 7235
agreed to provide in return for an equity position in NTI. Two of the three
directors were in favor of the deal; Kindt was not. This is what led to Kindt's
litigation in state court, which forced NTI-NV into bankruptcy. NTI-NV
further explained that it was the parent of several subsidiaries which were
owned by "Platinum LV", a Nevada series LLC owned by NTI-NV. So, NTI-
NV owned Platinum LV, and Platinum LV owned the subsidiaries. NTI-NV
proposed to fund its chapter 11 plan with cash from operations and
financing from SouthStar Financial LLC.
The bankruptcy court held a hearing on NTI-NV's second amended
disclosure statement and on a motion to approve financing ("November 15
hearing"). In opposition, creditor Bell Real Estate, LLC argued that NTI-NV's
financial projections did not match up with its monthly operating reports
and that the amounts NTI-NV claimed needed to be paid in Class 3 ($25,000)
4 did not match the amount of unsecured claims listed in its Schedule E/F
($205,031.39).
The court disapproved the second amended disclosure statement and
found that NTI-NV's proposed plan was "patently unconfirmable." In short,
the court found that the disclosure statement not only failed to address
problems raised with prior versions, but it also created more confusion with
additional, inconsistent information. The court noted that the case had been
"on shaky ground from the onset" given Kindt's immediate challenge to
Gleich's authority to file it, and that since Kindt's motion to dismiss and the
parties' settlement, NTI-NV had "slowly and incompletely trickled
information out." For example, there were discrepancies in the schedules as
to what nondebtor entities NTI-NV owned. While NTI-NV claimed in its
initial Schedule A/B to be the parent of several subsidiaries, in its amended
Schedule A/B it disclosed a 100% ownership interest in only one entity –
"Platinum LV Transportation." In the second amended disclosure statement,
NTI-NV again stated that it was the parent of several subsidiaries but
identified a 100% ownership interest in only a "Platinum LV" and did not
identify itself as Platinum LV's parent. Therefore, opined the court, if NTI-
NV's assertions were "to be believed" that it was a parent company, it was a
parent of only one company, not several.
The court also questioned NTI-NV's disclosures as to how many (if
any) vehicles it owned and why obligations of nondebtor entities were
included in the proposed plan. NTI-NV's plan ignored corporate formalities
5 and purported to reorganize the affairs of nondebtor entities without any
support for doing so. The court noted that counsel was told repeatedly at
hearings on prior disclosure statements that NTI-NV's disclosures were
inadequate and failed to establish that the vehicles listed in the schedules
were property of the estate, or whether the court had jurisdiction to
adjudicate assets and claims of nondebtor entities.
For these same reasons, the court also denied NTI-NV's financing
motion. With NTI-NV's comingling of assets and liabilities and disregard for
corporate formalities between itself and nondebtor entities, the court found
that it remained unclear what exactly was property or liabilities of the estate.
Indeed, noted the court, the loan agreement attached to the financing motion
included nondebtor entities, which implied that NTI-NV was incurring debt
to finance their operations. The court found that all of this information,
which it "had to drag out of the debtor," raised the question of whether
counsel had a conflict with and interest adverse to NTI-NV. After entering
its ruling, the court said it would issue an order to show cause ("OSC") why
NTI-NV's case should not be dismissed or converted to chapter 7 and why
debtor's counsel should not be sanctioned.
3. NTI-NV's motion to dismiss
Before the bankruptcy court had issued the forthcoming OSC, NTI-NV
filed its own motion to dismiss based on the substantial and continuing loss
to or diminution of the estate and its inability to show a reasonable
likelihood of rehabilitation. It was out of cash due to the court's denial of the
6 financing motion, but the proposed DIP lender agreed to finance NTI-NV if
it got out of bankruptcy and continued operations. Thus, argued NTI-NV,
dismissal was the only way to get creditors paid. NTI-NV asserted that after
the chapter 11 cases for NTI, NTI-CA, and NTI-GROUNDTRANS were
dismissed, Kindt drained the bank accounts, failed to pay creditors, and was
now missing.
9525 Hillwood, LLC ("Hillwood"), which held a lease agreement with
NTI for real property in Las Vegas, opposed NTI-NV's motion to dismiss.
Hillwood argued that it had an administrative claim for rent based on NTI's
improper sublease of the property to NTI-NV. Hillwood had obtained relief
from stay earlier in the case to evict NTI-NV. Hillwood argued that the case
should not be dismissed because NTI-NV might engage in concealment or
transfers of assets to thwart creditors' collection efforts if dismissal were
granted. Hillwood's concerns about asset transfers were based on statements
NTI-NV made in response to an earlier motion filed by Kindt. Hillwood
additionally argued that any existing preference or avoidance actions
against NTI-NV's former or current principal(s) would disappear if the case
were dismissed. Thus, conversion was in the best interest of creditors and
the estate.
4. OSC to dismiss or convert the case
The bankruptcy court then issued an OSC for why NTI-NV's case
should not be dismissed or converted to chapter 7 under § 1112(b). The OSC
was based on the findings the court made at the November 15 hearing.
7 In response, NTI-NV argued that dismissal was in the best interest of
creditors. If the case was converted to chapter 7, argued NTI-NV, there
would be no money for unsecured creditors; secured creditors and
administrative fees would consume all of its assets. The estate's outstanding
secured debt was close to the value of the vehicles NTI-NV owned, so
shutting down the business and selling the vehicles at auction would result
in nothing for unsecured creditors. In addition, argued NTI-NV, its
operating certificates had value that would be lost if the business closed.
Thus, it was in the best interest of creditors that NTI-NV continued to
operate outside of bankruptcy and generate revenue to pay its debts. NTI-
NV further argued that no preference or avoidance actions were warranted
against Gleich in regards to NTI-NV or NTI. Moreover, while Kindt had
taken cash from NTI and disappeared, leaving creditors with uncollectible
default judgments against him, NTI-NV asserted that there were no assets
for a chapter 7 trustee to pursue.
At the hearing on the OSC, Hillwood argued in favor of conversion so
that a chapter 7 trustee could investigate the estate's assets and any potential
claims for recovery against former and current principals and insiders of
NTI-NV. Hillwood's counsel further noted that, although NTI-NV claimed
to have low overhead and was generating a monthly profit, NTI-NV had not
paid Hillwood anything for use of its property since the bankruptcy filing in
February 2022. Thus, it was questionable whether creditors would be paid
by NTI-NV following dismissal.
8 After hearing argument from the parties, the bankruptcy court entered
its oral ruling converting the case to chapter 7. The court found that cause
existed to dismiss or convert for the reasons stated at the November 15
hearing, in NTI-NV's motion to dismiss, and Hillwood's opposition to that
motion, which the court considered a response to the OSC. The court then
found that it was in the best interest of creditors to convert the case to
chapter 7 so that a "true fiduciary" could review the case and determine
whether any claims could be pursued against Kindt or others. This timely
appeal followed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion in converting NTI-NV's
chapter 11 case to chapter 7?
STANDARDS OF REVIEW
The bankruptcy court's decision to convert a chapter 11 case to chapter
7 is reviewed for an abuse of discretion. Pioneer Liquidating Corp. v. U.S. Tr.
(In re Consol. Pioneer Mortg. Entities), 264 F.3d 803, 806 (9th Cir. 2001);
Johnston v. JEM Dev. Co. (In re Johnston), 149 B.R. 158, 160 (9th Cir. BAP 1992).
"We will reverse the bankruptcy court only if its decision was based on an
erroneous conclusion of law or when the record contains no evidence on
which the bankruptcy court rationally could have based its decision." Baroni
9 v. Seror (In re Baroni), 36 F.4th 958, 965 (9th Cir.) (cleaned up) (converting
chapter 11 case to chapter 7 under § 1112(b)), cert. denied sub nom., 143 S. Ct.
424 (2022).
DISCUSSION
A. The bankruptcy court did not abuse its discretion in converting NTI-NV's chapter 11 case to chapter 7.
1. Legal standards under § 1112(b)
The statutory authority for conversion of a chapter 11 case is found in
§ 1112(b), which provides that the bankruptcy court shall convert or dismiss
a case, whichever is in the best interests of creditors and the estate, for cause.
§ 1112(b)(1). The bankruptcy court may sua sponte dismiss or convert a case
under § 1112(b). See Leeward Subdivision Partners, LLC v. GDR Lending, LLC
(In re Leeward Subdivision Partners, LLC), BAP No. WW-10-1060-HRuJu, 2010
WL 6259983, at *6 (9th Cir. BAP June 11, 2010) (citing cases)).
Section 1112(b)(4) sets forth a nonexclusive list that establishes "cause"
to convert or dismiss, but the bankruptcy court can consider other factors,
and it has broad discretion in determining what constitutes cause adequate
for conversion under § 1112(b). First Found. Bank v. Pourteymour (In re
Pourteymour), BAP Nos. SC-22-1008-GFB, SC-22-1009-GFB & SC-22-1010-
GFB, 2023 WL 2929323, at *5 (9th Cir. BAP Apr. 12, 2023) (citing Sullivan v.
Harnisch (In re Sullivan), 522 B.R. 604, 614 (9th Cir. BAP 2014)).
Once the bankruptcy court has determined that cause exists, it must
convert or dismiss the case, whichever is in the best interest of creditors and
10 the estate, unless the court "specifically identifies unusual circumstances"
establishing that such relief is not in the best interest of creditors and the
estate. § 1112(b)(1); see also In re Sullivan, 522 B.R. at 612.
2. Analysis
The bankruptcy court found that "cause" existed under § 1112(b)(1). It
did not articulate which paragraph under subsection (b)(4) supported cause,
but the record supports a finding of cause under § 1112(b)(4)(A): there was
(1) a substantial or continuing loss to or diminution of the estate, and (2) an
absence of a reasonable likelihood of rehabilitation. NTI-NV conceded as
much in its own motion to dismiss. NTI-NV argued that it lacked
postpetition financing to maintain operations due to the court's denial of the
financing motion, and its operating reports for the months of April 2022
through September 2022 indicated there was a continuing loss to the estate.
NTI-NV was also unable to propose an approvable disclosure
statement or confirmable plan, which the court found at the November 15
hearing. In disapproving the second amended disclosure statement and
proposed plan as "patently unconfirmable," the court found that NTI-NV's
schedules, disclosure statements, and proposed plans contained inconsistent
information and created only more confusion with each amended version. It
was not clear what vehicles were property of the estate or property of
nondebtor entities and what liabilities were NTI-NV's or the nondebtor
entities'. It appeared that NTI-NV's proposed plan was trying to reorganize
11 and address debts for nondebtor entities, which may or may not have
owned the vehicles.
In further support of cause, the court found that there was a lack of
candor and transparency by NTI-NV throughout the case. NTI-NV was not
fully disclosing assets and liabilities, it was seemingly commingling assets
with nondebtor entities, it was failing to observe corporate formalities, and,
based on its own statements, there were possible avoidance actions against
Kindt. A paramount requirement of bankruptcy, and particularly as to a
chapter 11 debtor in possession, is disclosure and transparency. See In re Dr.
R.C. Samanta Roy Inst. of Sci. Tech. Inc., 465 F. App'x 93, 97 (3d Cir. 2011) (lack
of candor to the court can establish cause to dismiss or convert under
§ 1112(b)(4)(H) as "failure timely to provide information"); Cal. Palms
Addiction, Recovery Campus, Inc. v. Vara, No. 4:22-CV-0812, 2023 WL 2664284,
at *6 (N.D. Ohio Mar. 27, 2023) (commingling of estate and non-estate assets
can establish cause to dismiss or convert under § 1112(b)(4)(B) as "gross
mismanagement of the estate").
After finding that cause existed under § 1112(b)(1) and that there were
no unusual circumstances under § 1112(b)(2), the bankruptcy court
determined that conversion was in the best interest of creditors and the
estate. The court believed that converting the case to chapter 7 provided the
best possibility of recovery for unsecured creditors. A "true fiduciary" could
determine the extent of NTI-NV's assets, which was still unclear, and
investigate any potential claims for recovery against Kindt or other insiders.
12 NTI-NV contends there was no evidence to support the bankruptcy
court's decision to convert the case. NTI-NV argues that the court based its
decision upon two unsupported facts: (1) the disapproval of the second
amended disclosure statement, which NTI-NV disputes; and (2) speculative
fraudulent transfer claims that may not be collectible.
Specifically, NTI-NV takes issue with certain factual findings the court
made with respect to the second amended disclosure statement, which NTI-
NV contends shaded the court's view and caused it to incorrectly rule that
conversion, as opposed to dismissal, was in the best interest of creditors and
the estate. First, NTI-NV argues that there was no evidence to support the
court's finding that the case was "on shaky ground" from the start. NTI-NV
argues that Kindt's motion to dismiss was unfounded and that NTI-NV
demonstrated by clear and convincing evidence that Gleich had authority to
file the bankruptcy cases for the NTI Entities. But there was evidence in the
record to support the court's finding that NTI-NV's case was on shaky
ground from the start. Upon Kindt's immediate challenge to Gleich's
authority to file the cases, which was supported by a declaration and
documentary evidence, Gleich agreed to dismiss the cases for NTI and NTI-
GROUNDTRANS. Ultimately, the parties agreed to dismiss all cases but
NTI-NV's.
NTI-NV next takes issue with the court's statement that NTI-NV had
"slowly and incompletely trickled information out," and argues that
requesting an extension of time to file its schedules did not mean that
13 information was being withheld. The court did not say that the request for
an extension of time to file schedules was the basis for its statement. Rather,
the court was concerned about discrepancies between the original and
amended schedules and the various disclosure statements and proposed
plans regarding the corporate structure, what vehicles and entities were
owned by NTI-NV, and which obligations were NTI-NV's. Rather than
getting clarity on this information, which the court said it had to "drag out"
of NTI-NV, the information only became more confusing.
NTI-NV next disputes the court's comment that it was still unclear if
the vehicles were property of the estate when the court had recently ruled in
a turnover motion that they were not. The turnover order upon which NTI-
NV's relies for its argument contains no such finding. The court made its
findings with respect to the vehicles in an oral ruling. NTI-NV did not
include a transcript of the hearing in the record on appeal. We, as a result,
cannot determine whether the court clearly erred as to this finding. Even if it
did, other factors supported its finding of cause.
NTI-NV also disputes the court's finding that there was a lack of
transparency. NTI-NV argues that the problem may be that too much
information was provided. The court did not see it that way, and the record
supports its finding. Based on the ever-changing story from NTI-NV
regarding its corporate structure, what assets/liabilities it had, and what
assets/liabilities belonged to nondebtor entities, it was not illogical for the
court to find a lack of transparency throughout the life of the case. Whether
14 there was a lack of transparency on NTI-NV's part or it was simply ignorant
of fundamental corporate management principles is immaterial; either of
those findings supports cause.
Along this same line, NTI-NV argues that the second amended
disclosure statement had adequate information and the court's position to
the contrary was unsupported. The bankruptcy court has broad discretion in
determining what is adequate information in a disclosure statement under
§ 1125(a)(1). Computer Task Grp., Inc. v. Brotby (In re Brotby), 303 B.R. 177, 193
(9th Cir. BAP 2003). The court found that the second amended disclosure
statement suffered from several infirmities: (1) it failed to remedy issues
with prior versions and created only more confusion; (2) it was still not clear
what vehicles were property of the estate or property of nondebtor entities
and what NTI-NV's liabilities were; and (3) NTI-NV was trying to
reorganize and address debts for nondebtor entities without any authority
to do so. Contrary to NTI-NV's argument, the court's finding that the second
amended disclosure statement did not contain adequate information was
supported by the record.
Finally, NTI-NV argues that no evidence supports the court's finding
that Kindt absconded with NTI-NV's funds or that the supposed funds
might be recoverable. Rather, argues NTI-NV, Kindt took funds from NTI
and such funds would not be recoverable, particularly given the court-
approved settlement between the parties. Further, argues NTI-NV, there
was no evidence, nor claim or proof of any cause of action against Gleich
15 and the current management. While NTI-NV asserted that Kindt took
money from only NTI and not NTI-NV, and Kindt was no longer part of
NTI-NV, he was an insider of NTI-NV prepetition and it is plausible that
preference or avoidance claims could exist against him or other insiders of
NTI-NV given how the companies operated and the accusations made by
NTI-NV and its creditors in other filings. Moreover, according to the
settlement, the only party released from any claims was 7235; no other
releases were exchanged between the parties. Thus, there was evidence to
support the court's finding that conversion was in the best interest of
creditors and the estate so that a chapter 7 trustee could investigate any
potential claims for recovery against Kindt or other insiders.
NTI-NV has not identified any legal error by the bankruptcy court
and, taken individually, any of these disputed findings if clearly erroneous
would not constitute reversible error. The record supports the bankruptcy
court's finding that the interests of NTI-NV's creditors and its estate were
best served by conversion.7
CONCLUSION
For the reasons stated above, we AFFIRM.
7 The bankruptcy court did not discuss the option of appointing a chapter 11 trustee. See § 1112(b)(1). However, since there was no reorganization in prospect to pursue, appointing a chapter 11 trustee was not a feasible option. 16