MEREDITH S. GRABILL, UNITED STATES BANKRUPTCY JUDGE.
This Court held an evidentiary hearing over the course of two days, January 22, 2020, and February 7, 2020, to resolve the United States Trustee's Motion To Convert Case to Chapter 7, Or, In the Alternative, Dismiss Case (the "
Based upon the pleadings, the record, the arguments of counsel, and the testimony presented at the evidentiary hearing, and after due deliberation and sufficient cause appearing therefor, this Court GRANTS the Motion To Dismiss or Convert, converts this case to one under chapter 7, and finds as follows:
This Court has jurisdiction to grant the relief provided for herein pursuant to 28 U.S.C. § 1334 and the Order of Reference of the District Court dated April 11, 1990. The matter presently before the Court constitutes a core proceeding that this Court may hear and determine on a final basis under 28 U.S.C. § 157(b). The venue of the Debtor's chapter 11 case is proper under 28 U.S.C. §§ 1408 and 1409(a).
Notice of the Motion To Dismiss or Convert and its supplements was sufficient and constituted the best notice practicable. All persons affected by this Memorandum Opinion and Order were afforded a full and fair opportunity to be heard prior to and during the evidentiary hearing. Notice of the relief granted herein has been given to all persons affected by this decision and is in full compliance with due process.
The Debtor, Fleetstar LLC, was organized under the laws of Louisiana on or about June 28, 2018, "for purposes of owning and holding trucks and trailers used in
As explained by the Debtor, since the Debtor organized in late June 2018 until September 2019, the Debtor and Ackel Construction operated pursuant to an informal, unwritten arrangement, whereby the Debtor, in exchange for a commission, relied on Ackel Construction to solicit contracts using the Debtor's trucks, pay for certain truck-related expenses, and remit the net profit to the Debtor. [ECF Doc. 178, ¶¶ 6-7]. Approximately three months into the case, however, the Debtor had yet to present the Court, creditors, and the UST with an accurate accounting of its finances. At a status conference on July 29, 2019, the Court found the Debtor's financial submissions outlining post-petition transactions between the Debtor and Ackel Construction to be unclear, unverified, and inaccurate and instructed the Debtor as follows:
Transcribed from the July 29, 2019 hearing (min. 16:36-21:17) (emphasis added).
Based upon those statements by the Court, on September 15, 2019, the Debtor filed a Motion Pursuant to 11 U.S.C. §§ 105(a) and 363 for Authority To Enter Into, and Pay Insider Pursuant to Terms of Hauling Services Agreement. [ECF Docs. 178, 209 & 222]. The Hauling Services Agreement was supposed to memorialize the informal arrangement between the Debtor and Ackel Construction and shed light on the finances of the Debtor so that the Court and creditors could assess the Debtor's viability to operate as a going-concern. Specifically, regarding monthly reconciliation of expenses, the Hauling Services Agreement required Ackel Construction to allocate expenses "on a truck-by-truck basis, deduct[ing expenses] from gross revenue prior to payment to Fleetstar." [ECF Doc. 178-1, at 1]. The Hauling Services Agreement provided that "revenue and expenses shall be accounted for on a cash basis, with payments of net revenue to Fleetstar on a monthly basis." Id.
The record indicates that when the Debtor merged with A & Brothers in July 2018, the Debtor acquired all of the receivables of A & Brothers as well as assumed most existing payables, including the loans made to A & Brothers by lenders who held purchase-money security interests on various trucks and equipment acquired by the Debtor via the merger. [ECF Doc. 64, ¶¶ 8-16; ECF Doc. 51, ¶¶ 7-14 & Ex. C]; Hr'g Tr. 162:8-163:8 (Feb. 7, 2020). Then, between August and December 2018, the record indicates that the Debtor also financed the purchase of new trucks and equipment from certain lenders, granting them security interests in those trucks to serve as collateral for repayment of the
No independent, third-party valuation of the trucks, trailers, and equipment owned by the Debtor has been provided in this case; however, based on the record and representations of counsel for the secured lenders and George Ackel, all seem to agree that each secured lender in this case is undersecured.
The Debtor filed its petition for chapter 11 bankruptcy relief on April 2, 2019, approximately nine months after assuming A & Brothers' debts to its secured lenders and less than six months after taking on new debt itself. As an initial matter, the merger did not go smoothly. According to the Debtor:
[ECF Doc. 244, at 12]. Also according to the Debtor: "Mr. Ackel and his companies have contributed hundreds of thousands of dollars to close the merger [with A & Brothers], to acquire equipment not originally owned by A Brothers and to otherwise capitalize the debtor[;] [i]nitially, the Debtor's dispute with Mr. Hamed caused significant strain on the Debtor." [ECF Doc. 244, at 13].
The Debtor also claimed that a primary reason it filed for bankruptcy centered on its dispute with Old River Leasing of Louisiana LLC ("
The bar date to filing proofs of claim for non-governmental creditors in this case was September 5, 2019. A review of the claims register reveals that eight of the Debtor's truck lenders have filed eleven proofs of claim, alleging secured claims in the aggregate amount of approximately $2 million. See Proof of Claim Nos. 1-4, 7-11. As stated above, this Court anticipates the secured lenders will hold significant deficiency claims. Additional creditors have each proofs of claim asserting unsecured claims:
The Debtor's assets listed on Schedule A consist of approximately $4 million in equipment and vehicles, $3500 in deposits, and $271.93 in cash. [ECF Doc. 38]. The Debtor also listed three lawsuits, but asserted each is of "unknown" value: (i) a Lemon lawsuit versus Ford Motor Credit; (ii) claims against Old River for breach of contract (the "
A review of the docket reveals that, in addition to filing its Schedules and attending the meeting of creditors pursuant to 11 U.S.C. § 341 in May 2019, the Debtor's activities early in this case were limited to
On June 7, 2019, approximately two months into the case, the United States Trustee ("
[ECF Doc. 67, at 1-2]. At the June 25, 2019 hearing on the Motion To Dismiss or Convert, the UST identified ongoing instances of the Debtor's failure to provide required information, such as proof of insurance on all vehicles and equipment owned by the Debtor and complete and accurate financial information. The Debtor represented that a former employee had sabotaged the Debtor's books and records, and, therefore, requested additional time to access its financial records to update the UST and its creditors with accurate information. The Court continued the hearing on the Motion To Dismiss or Convert and reconvened the parties for a hearing on July 26, 2019. [ECF Docs. 91 & 116].
Meanwhile, by the end of July 2019, the Debtor had either surrendered collateral trucks to certain lenders, [ECF Docs. 108 & 120], or had reached tentative agreements with lenders for monthly payment of adequate protection, [ECF Docs. 85, 107, 119, 175 & 256].
On August 8, 2019, the parties again appeared before the Court on the UST's Motion To Dismiss or Convert, among other motions. The Debtor presented a pro forma financial statement that identified costs and revenues associated with each truck asset of the Debtor and estimated that the Debtor would be generating significant free cash flow within twelve weeks. [ECF Doc. 143]. But upon scrutiny by the Court and considering testimony provided by George Ackel, it became clear to the Court that the Debtor's estimates and assumptions were unrealistic, given the number of trucks that had been surrendered to certain lenders and the timing and extent of repairs needed on the remaining revenue-producing trucks. The Court concluded that, at best, the Debtor would net zero revenue and, at worst, the Debtor would have a negative cash position at the end of twelve weeks.
To be able to operate in the black, the Debtor's trucks required major and minor repairs to be completed quickly. The Debtor attributed the difficulty in getting repairs completed timely to its ongoing disputes with Old River. By mid-August 2019, the Court granted on an interim basis the Debtor's application to employ special counsel to pursue litigation against Old River, [ECF Doc. 153], and the Debtor pursued injunctive relief against Old River, [ECF Docs. 145 & 156]. The Debtor continued to limp along, allegedly funded on an unsecured basis by George Ackel and/or Ackel Construction.
On October 23, 2019, the UST supplemented its Motion To Dismiss or Convert, informing the Court that the Debtor had failed to date to apprise the UST of the reasons for numerous and significant pre- and post-petition transfers from the Debtor to insiders and non-debtor affiliates of the Debtor, as required in completing the SOFA. [ECF Doc. 224, ¶¶ 9-12]. The UST further observed that the Debtor's MORs for April through August 2019 reflected a total of $2600 in income, with $31,000 in adequate protection payments due monthly as of August 31, 2019 (some of which it had not made). [ECF Doc. 224, ¶¶ 13-15 (citing ECF Doc. 217)]. The UST again requested that the Debtor's case be converted pursuant to 11 U.S.C. § 1112(b)(4)(A) and (F) for failure to satisfy timely reporting requirements, and also for the fact that the Debtor's MORs reflected that it continued to earn negligible revenue, remained unable to meet its business obligations, and had yet to demonstrate its ability to generate free cash flow. [ECF Doc. 224, ¶¶ 16-17, 20-23].
Pursuant to 11 U.S.C. § 1121 and this Court's Order of April 4, 2019, [ECF Doc. 2], the Debtor's exclusivity period in which to file a plan of reorganization expired on July 31, 2019. A subsequent Order of the
The proposed plan envisioned the emergence of a Reorganized Debtor, "revested with property of the Estate to the extent provided in the Plan, on or after the Effective Date." [ECF Doc. 244, at 8]. "Plan Assets" and "Truck Assets" would be transferred to the Reorganized Debtor upon the Effective Date, free and clear of all liens, claims, and interests. [ECF Doc. 243, at 30]. "Plan Assets" included, among other things, "all proceeds of Causes of Action." [ECF Doc. 243, at 8]. The proposed plan included a boilerplate definition of "Causes of Action," [ECF Doc. 243, at 4-5]; neither the proposed disclosure statement or plan identified the Old River Lawsuit or the Hamed Litigation specifically, but the plan envisioned unsecured creditors to receive a pro rata share of the Plan Assets. [ECF Doc. 243, at 16]. The proposed plan identified George Ackel as the manager of the Reorganized Debtor and specifically authorized him "to investigate, direct and compromise all retained Causes of Action." [ECF Doc. 243, at 16]. No liquidation analysis was filed into the record.
The UST, six secured creditors, and one unsecured creditor filed oppositions to the Debtor's proposed disclosure statement. [ECF Docs. 265, 274, 278, 280, 281, 284, 285 & 286]. Generally, those objections addressed the adequacy of information regarding the Debtor's current and future assets, the valuation of those assets, the liquidation of those assets, and the expected recovery to each creditor under the plan sufficient to allow each creditor to make an informed judgment regarding whether to accept or reject the proposed plan. The objections also addressed the failure of the Debtor to provide a liquidation analysis as well as the estimated total amount of claims in each class and the projected plan payments to each class. Finally, various objections alleged that the proposed disclosure statement and plan contain improper third-party releases and discharge/injunction language and propose to violate the absolute priority rule by allowing equity to retain its interest post-confirmation.
Contemporaneously with the filing of its objection to the disclosure statement, the UST supplemented its Motion To Dismiss or Convert, asserting, among other things, that the Debtor's proposed plan is unconfirmable on its face. [ECF Doc. 282, ¶¶ 4 &
At the request of all of the parties, the Court did not hold a hearing on the UST's Motion To Dismiss or Convert until January 22, 2020, to coincide with the hearing on the adequacy of the Debtor's proposed disclosure statement. In light of numerous concerns with the progression of this bankruptcy case since its inception, the Court elected to hear argument and testimony on the UST's Motion To Dismiss or Convert before it would consider other matters. Over the course of the multi-day hearing, the Court heard testimony from the Debtor's outside accountant and George Ackel, and considered arguments and exhibits provided by the parties.
On December 10, 2019, the Debtor had filed into the record revised MORs for the months of April through August, [ECF Docs. 245, 246, 247, 249 & 250], as well as its MORs for the months of July through October 2019, [ECF Docs. 249-252]. On January 21, 2020, the day before the scheduled hearing on the adequacy of the Debtor's proposed disclosure statement, the Debtor filed its MORs for the months of November and December 2019. [ECF Docs. 292 & 293]. To date, the Debtor has not filed MORs for January or February 2020. According to the Debtor's MORs and the testimony given on January 22, 2020 by the Debtor's accountant hired in this case, the Debtor has never generated free cash flow since the Petition Date. See Hr'g Tr. 52:15-6 (Jan. 22, 2020).
But also concerning was the accountant's testimony that, in completing the MORs, he "didn't validate the revenue or expenses," and "just prepared the MORs, based on the information [he] was given." Hr'g Tr. 32:25-33:1; 54:11-12 (Jan. 22, 2020). The accountant testified that all information used in preparing the MORs came from George Ackel, with the exception of bank statements. See Hr'g Tr. 27:15-20 (Jan. 22, 2020). He also testified that, in this case, the reconciliation of the bank statements was performed by Ackel Construction's staff. See Hr'g Tr. 31:22-32:1-7 (Jan. 22, 2020).
The accountant also testified about a demonstrative presented by the Debtor purporting to detail the "due-to" and "due-from" amounts among the Debtor, Ackel Construction, and other related entities that he said he helped prepare for the UST. Hr'g Tr. 69:23-70:4 (Jan. 22, 2020). In the end, the accountant revealed that the sources of the information contained in the demonstrative were QuickBooks entries from Ackel Construction that he did not make and did not verify through comparison with Ackel Construction bank statements. See Hr'g Tr. 83:7-86:25 (Jan. 22, 2020).
Because of the lateness of the hour, the Court adjourned the hearing and scheduled the hearing to reconvene on January 29, 2020. On January 29, the Debtor informed the Court that it had proposed terms for a structured dismissal of the case and requested time to negotiate with all of its creditors. At the request of the parties, the Court adjourned the hearing
On February 7, the UST informed the Court that terms for a structured dismissal could not be reached unanimously among the creditors, but the parties agreed that the case could not remain in chapter 11 in light of the testimony from the Debtor's accountant that the Debtor was losing money, as well as the December MOR showing a negative cash position and that no adequate protection payments had been made to any secured creditor. Hr'g Tr. 8:17-9:10 (Feb. 7, 2020). Although the UST reported that the parties "are all on board that there's cause for dismissal or conversion under 1112(b)," Hr'g Tr. 8:19-20 (Feb. 7, 2020), the Debtor stated that it "didn't necessarily concede that this case could not proceed as a Chapter 11 [but had] reached an agreement with the primary, most vocal persons, which would be the U.S. Trustee and Midland Financial that we will accept a dismissal," Hr.g Tr. 11:15-18 (Feb. 7, 2020).
Accordingly, the arguments presented and testimony elicited at the February 7 hearing focused on whether this Court should dismiss or convert the case under 11 U.S.C. § 1112(b) in the "best interests of creditors and the estate." The Debtor pressed its case for dismissal over conversion. The Debtor asserted that dismissal is in the best interests of creditors, defining "creditors" to include not only secured creditors, but also insiders George Ackel and Ackel Construction, who have asserted prepetition unsecured claims against the Debtor and intend to assert significant administrative expense claims against the estate pursuant to their contributions under the Hauling Services Agreement, as well as professionals of the estate who are also administrative expense claimants. See Hr'g Tr. 11:19-16, 12:1-16, 14:3-13, 19:13-17, 20:14-24 (Feb. 7, 2020) (estimating the purported insider administrative expense claims to be approximately $100,000 and the professional fees accrued to be approximately $100,000).
Even though the parties had informed the Court that unanimous consensus on terms for a structured dismissal could not be reached, the Debtor, together with Midland States Bank, the most vocal secured lender in this case, advocated for a "dismissal order with terms." Hr'g Tr. 50:18-21 (Feb. 7, 2020); see also Hr'g Tr. 11:11-14 (Feb. 7, 2020). The Debtor urged the Court to dismiss this case with the following terms:
[ECF Doc. 317-1].
In support of its case for dismissal, the Debtor called upon George Ackel to testify; the substance of that testimony is discussed further below. Two non-insider unsecured creditors, Hamed and Old River, both objected to the proposed structured dismissal and favored conversion. See Hr'g Tr. 32:10-24, 69:10-71:4 (Feb. 7, 2020); [ECF Docs. 314, 318].
At the close of the hearing, the Court took the matter under advisement to consider the full record in deciding whether conversion or dismissal is in the best interests of creditors and the estate.
Section 1112 permits a party in interest to move to convert or dismiss a chapter 11 debtor's case for "cause." See 11 U.S.C. § 1112(b). The Bankruptcy Code does not expressly define "cause," but does set forth a non-exhaustive list of examples of events that may constitute cause, including "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation," "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," and "failure timely to provide information or attend meetings reasonably requested by the United States trustee." Id. § 1112(b)(4)(A), (F) & (H). "Although section 1112(b)(4) does not list administrative insolvency as a cause to convert or dismiss a chapter 11 case, a court may still consider this factor." In re BH S & B Holdings, LLC, 439 B.R. 342, 349 (Bankr. S.D.N.Y. 2010) (citations omitted).
Based on the record, including the testimony of the Debtor's accountant on January 22, 2020, this Court finds cause exists to convert or dismiss the Debtor's case. The Debtor has filed its MORs consistently late or not at all and the Debtor has yet to provide accurate and complete financial information regarding pre- and post-petition transactions among the Debtor and related companies reasonably requested by the UST. The Debtor is not operating and has no income—although the lack of transparency to date regarding the relationship of the Debtor to insiders and related companies surely contributes to and influences that condition. And certainly, if this case were to be allowed to continue in chapter 11, the amount of unpaid professional fees would continue to grow, increasing the amount of administrative expense claims against the estate.
"Once cause is established under § 1112(b), a court must either dismiss the case or convert it to chapter 7." In re Babayoff, 445 B.R. 64, 81 (Bankr. E.D.N.Y. 2011). "There is no bright-line test to determine whether conversion or dismissal is in the best interest of creditors and the estate." Id. (internal punctuation and citations omitted). The decision between those two remedies is left to the "wide" discretion of the Court. In re Koerner, 800 F.2d 1358, 1367 (5th Cir. 1986) (citing S. REP. NO. 989, 95th Cong., 2d Sess. 117 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5903); see also In re Delta AG Grp., 596 B.R. 186, 200-01 (Bankr. W.D. La. 2019) (citing In re Del Monico, No. 04-B-28235, 2005 WL 1129774, at *3 (Bankr. N.D. Ill. May 13, 2005)).
The phrase "best interests of creditors and the estate" is not defined expressly in the Bankruptcy Code. And although courts generally accommodate the parties' choice when they all agree upon one course of action over the other, the test for what is in the "best interests of creditors and the estate" is not one of majority rule. See Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding
In re BH S & B Holdings, LLC, 439 B.R. at 346-47 (citing 7 COLLIER ON BANKRUPTCY ¶ 1112.04[7] (Richard Levin & Henry J. Sommer eds., 16th ed.)); see also In re Babayoff, 445 B.R. at 81-82 (same). "Essentially, the above factors help the court compare how creditors fare inside, as opposed to outside, bankruptcy." In re Green Box NA Green Bay, LLC, 579 B.R. 504, 511 (Bankr. E.D. Wis. 2017) (citing In re Helmers, 361 B.R. 190, 197 (Bankr. D. Kan. 2007)). "So, a key question the court must ask is: what assets would be available for a chapter 7 trustee to liquidate and administer for the benefit of unsecured creditors if this case were converted?" Id.
But the text of § 1112(b) not only requires this Court to convert or dismiss the case based on the best interests of creditors—the Code also requires the Court to consider the best interests of the estate. See 11 U.S.C. § 1112(b)(1). This Court agrees with other courts and "is of the view that protecting the best interests of the estate includes protecting the bankruptcy process under which the estate is administered." In re Capra, 614 B.R. 291, 299 (Bankr. N.D. Ill. 2020).
"A dismissal typically `revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case'—in other words, it aims to return to the prepetition financial status quo." Czyzewski
Structured dismissals "can have the effect of avoiding the procedural and substantive requirements involved in prosecuting a chapter 11 plan, [and] therefore have. ... `emerged as a cost-effective exit strategy from Chapter 11 bankruptcy.'" In re Positron Corp., 556 B.R. 291, 294 (Bankr. N.D. Tex. 2016) (quoting Richard A. Bixter, Jr., Structured Dismissals: Saving Time and Money in Corporate Bankruptcy, J. OF BANKR. L. 2016.06-3 (2016)). "[W]hile not expressly provided for in the Code, a structured dismissal may be an appropriate resolution to a case where the process includes sufficient guarantees that fundamental rules and principles governing the administration and distribution of estate assets are upheld." In re Biolitec, Inc., 528 B.R. 261, 269 (Bankr. D.N.J. 2014) (citing In re Buffet Partners, L.P., No. 14-30699-HDH-11, 2014 WL 3735804, at *3 (Bankr. N.D. Tex. 2014)). "And they have curried favor with some courts because they facilitate efficient case resolutions and often represent the least bad alterative when neither confirmation nor conversion to chapter 7 would benefit creditors." In re Positron Corp., 556 B.R. at 295 (internal quotations and citations omitted). But there are limits to their use. The United States Supreme Court recently held in Jevic that a structured dismissal is not a permissible means for ending a chapter 11 case if (i) distributions do not follow the Bankruptcy Code's priority scheme and (ii) the affected creditors do not consent. 137 S.Ct. at 983-84.
Here, the Debtor's proposed dismissal scheme envisions the Debtor "approving certain distributions" to secured lenders (i.e., surrendering collateral), although no information is available regarding the value of the trucks and the amount of the deficiency claim each secured lender will wind up holding. It "enjoin[s] certain conduct by creditors" (i.e., prohibits entities that receive property of the estate from filing for bankruptcy relief for a period of time); and it contains a jurisdiction-retention provision. Therefore, to the extent the Debtor's proposed "dismissal order with terms" seeks to depart from the "restorative consequences" of § 349 and does not return all parties to the "prepetition status quo," it is a structured dismissal, albeit a thin one. It is actually the result of a deal or settlement offered by the Debtor to its secured lenders in the hope that none would advocate for conversion over dismissal. See Hr'g Tr. 47:23-51:3 (Feb. 7, 2020) ("[W]e don't have unanimity for the two unsecured creditors so
The Debtor's unencumbered assets include, at a minimum, certain trucks and equipment, as well as the Old River Lawsuit, the Hamed Litigation, and the Lemon lawsuit. Although the Debtor valued all three causes of action it possesses as "unknown" on its Schedules, it has come to light over the course of the hearings in this case that the Debtor's principal, George Ackel, believes the Old River Lawsuit to be valued at $1 million or more. See, e.g., Hr'g Tr. 12:16-18 (Jan. 22, 2020) (identifying the Old River Lawsuit as "the primary asset for unsecured creditors"); [ECF Doc. 317] (referring to the Old River Lawsuit as "the largest asset of this estate").
The facts here are not unlike those in In re Biolitec, Inc., a case in which the chapter 11 trustee filed a motion to approve a settlement agreement with one major creditor under Bankruptcy Rule 9019 and to dismiss the debtor's case "subject to a number of conditions." 528 B.R. 261, 265 (Bankr. D.N.J. 2014). Those conditions included the transfer of most of the estate's assets, including causes of action, to a liquidating trust for liquidation by a trustee "whose actions are subject to the direction or consent of [a major unsecured creditor]." Id. at 271. In considering the best interests of creditors, the Biolitec court had this to say regarding that sort of arrangement:
Id. (emphasis added).
The court's reasoning in Biolitec applies here. If this case is dismissed as
Further, the terms of the structured dismissal/settlement agreement ask this Court to preemptively bar
The decision whether to convert or dismiss is left to the discretion of the Court under § 1112(b). Interpreting the Debtor's structured dismissal proposal to include not only the written terms of the settlement between the Debtor and some of its secured lenders, but also the oral testimony of George Ackel and the arguments of counsel to fill in the gaps of the proposal regarding distribution of assets and a claims-reconciliation process, for the reasons above, this Court finds that it is not in the best interests of creditors or the estate. Further, to the extent the proposed "dismissal with terms" provides for distributions that disturb the absolute priority rule designated in the Bankruptcy Code
That said, even if the Court were to interpret the Debtor's proposal to consist of a settlement providing for surrender of certain collateral trucks to secured lenders followed separately by a more traditional dismissal under § 349, this Court finds that, in addition to the reasons above, it is in the best interests of creditors and the estate—which "includes protecting the bankruptcy process under which the estate is administered"—to convert this case to one under chapter 7. In re Capra, 614 B.R. at 299.
As the Supreme Court has observed, "bankruptcy causes fundamental changes in the nature of corporate relationships[;] [o]ne of the painful facts of bankruptcy is that the interests of shareholders become subordinated to the interests of creditors." Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 355, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985). When "a debtor remains in possession—that is, if a trustee is not appointed—the debtor's directors bear essentially the same fiduciary obligation to creditors and shareholders as would the trustee for a debtor out of possession," that is, "th[e] obligation to treat all parties, not merely shareholders, fairly." Id. at 355-56, 105 S.Ct. 1986. As part of that fiduciary obligation, "the debtor is obligated to protect and conserve property in its possession, as well as to provide voluntary and honest disclosure of financial information—a reasonable `quid pro quo' for its temporary relief from substantial financial obligations." In re Sal Caruso Cheese, Inc., 107 B.R. 808, 817 (Bankr. N.D.N.Y. 1989) (citations omitted). Indeed, "[t]he debtor-in-possession is viewed as a separate legal entity from the pre-petition debtor and is empowered to take all steps necessary to solve the problems created by the debtor's operation of the business in the past." In re Chateaugay Corp., 102 B.R. 335, 354 (Bankr. S.D.N.Y. 1989) (internal quotations and citations omitted).
It has become clear to this Court that George Ackel neither views the Debtor as a separate legal entity from the prepetition Fleetstar or the related company, Ackel Construction, nor recognizes the Debtor's independent fiduciary duty to provide "voluntary and honest disclosure of financial information" to this Court, the UST, and the Debtor's creditors. Although the accountant's testimony that the Debtor consistently failed to generate free cash flow over the course of the case deeply concerned this Court, perhaps just as concerning was his testimony that the instruction he received from the Debtor upon his retention excluded any requirement that he independently verify the veracity of the internal accounting between Ackel Construction and the Debtor. See Hr'g Tr. 31:20-33:1 (Jan. 22, 2020). Per the instructions of the Court and the commitment given by the Debtor on July 29, 2019, an independent third party should have been verifying the Debtor's accounting.
The execution of the Hauling Services Agreement between the Debtor and Ackel Construction was supposed to be the first step in achieving transparency and accuracy in the Debtor's finances. The Hauling Services Agreement required Ackel Construction to allocate expenses "on a truck-by-truck basis, deduct[ing expenses] from gross revenue prior to payment to Fleetstar," and provided that "revenue and expenses shall be accounted for on a cash basis, with payments of net revenue to
Hr'g Tr. 160:2-6 (Feb. 7, 2020). Essentially, George Ackel testified to this Court, the UST, and creditors that he and Ackel Construction internally reconcile the amounts due to and from the Debtor—so trust him. "[T]hese are accurate numbers that can be verified through all the correct sources. I mean I'm an open book. You can come to my office, anybody that wants to see any truck or anything we have." Hr'g Tr. 122:20-23 (Feb. 7, 2020).
Despite assurances to the Court that information regarding the Debtor's finances would be complete, disclosed timely, and independently verified, the Debtor has not been forthcoming with information on its assets and expenses, or its transactions with related entities, leaving all interested parties with no choice but to take the word of an insider. To this day, this Court does not have a clear, confident picture of the pre- and post-petition finances of the Debtor. And yet, the Debtor, and by relation, George Ackel and Ackel Construction, have enjoyed the benefits of bankruptcy, receiving "temporary relief from substantial financial obligations." In re Sal Caruso Cheese, Inc., 107 B.R. at 817. This Court believes that it is time for the Debtor's finances, pre- and post-petition, to be reviewed by a disinterested professional. See, e.g., In re Domiano, 442 B.R. 97, 109 (Bankr. M.D. Pa. 2010).
Several of the factors articulated in Collier and cited by bankruptcy courts support conversion, namely the ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors, the maximization of the estate's value as an economic enterprise, and the need of a chapter 7 case to protect the interests of creditors. Creditors here will benefit from the appointment of a chapter 7 trustee to serve as an independent fiduciary to evaluate quickly the estate (including the merits of the Old River Lawsuit), prosecute that action and any avoidance actions, if they exist, and make a distribution. According to the UST, counsel for George Ackel and Ackel Construction provided that office with a log of prepetition insider transactions on the morning of January 22, 2020—ten months after the Petition Date and still containing incomplete information. See Hr'g Tr. 17:12-24 (Jan. 22, 2020). Even incomplete, that log "shows $64,000 that was transferred to an insider entity six
At the hearing on February 7, the UST declined to take a stance on whether to convert or dismiss as it worried about this case being administratively insolvent. See Hr'g 63:14-17 (Feb. 7, 2020). But the UST also expressed concerns regarding the ongoing lack of timely and independently verified information regarding the Debtor's pre- and post-petition finances. See Hr'g 60:4-63:4 (Feb. 7, 2020). And the UST confirmed for this Court that it is not unusual for a chapter 7 trustee to retain counsel on a contingency basis to prosecute claims belonging to the estate. See Hr'g 68:18-69:2 (Feb. 7, 2020). Although this Court is cognizant of the UST's concerns regarding administrative insolvency, the Court is also encouraged by the UST's statements that chapter 7 trustees routinely work with counsel on a contingency basis and believes a chapter 7 trustee can work with the Debtor's secured lenders quickly and efficiently to resolve claims. After all, as the UST phrased it in the hearing on January 22, a chapter 7 trustee "is in the job of liquidating assets [and] can figure out if a turnover is in the best interests of the estate, or they can hire an auctioneer to auction that property." Hr'g Tr. 19:10-15 (Jan. 22, 2020). On that day, the UST was of the opinion that a chapter 7 trustee "is in a better position to liquidate these assets than Mr. Ackel." Hr'g Tr. 19:15-16 (Jan. 22, 2020). This Court agrees. "A chapter 7 trustee can certainly move to dismiss the case subsequently, if the trustee concludes that such relief is in the best interests of the estate." In re FRGR Managing Member LLC, 419 B.R. at 580.
Based on the foregoing findings of fact and conclusions of law, this Court (1) GRANTS the United States Trustee's Motion To Convert Case to Chapter 7, Or, In the Alternative, Dismiss Case, as supplemented, [ECF Docs. 67, 224 & 282], and (2) CONVERTS this case to one under chapter 7 of the Bankruptcy Code.
The undersigned's term began on September 9, 2019, when this case was approximately five months' old. Since then, George Ackel and his counsel have made multiple statements at various hearings that the Court "ordered" George Ackel to fund the case on an unsecured basis. On July 3, 2019, the Debtor filed a motion for post-petition financing (the "
Transcribed from the July 29, 2019 hearing (min. 34:25-35:30).
At a subsequent hearing on August 26, 2019, the previous judge observed on the record that the Debtor had yet to demonstrate that it could generate free cash flow and stated that she would not grant a motion which would give priority status to an insider of the Debtor; rather, the Court left the decision of whether to fund the company on an unsecured basis going forward to George Ackel. See Hr'g Tr. Aug. 26, 2019 (min. 45:22-46:10). The Court, however, did not issue an order denying the DIP Motion and, therefore, that motion remains pending. Other than those statements of the Court, the undersigned cannot find any statements or documents on the record that indicate that George Ackel has been ordered by this Court to fund the Debtor on an unsecured basis.
[ECF Doc. 317, ¶ 3] (emphasis added). But the plain text of § 1112(b) simply instructs this Court to consider the "best interests of creditors and the estate." "Creditors" is defined in the Bankruptcy Code, in pertinent part, as an "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). And "claim" is defined broadly in the Code to include any "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). The non-insider unsecured creditors' claims may be unliquidated and disputed, but they are "claims" nonetheless and must be considered by this Court in evaluating whether dismissal or conversion is in the best interests of creditors and the estate.
